 January 31, 2020  Weekly insights, news and analysis for the professional investor Sponsored By:  By Noelle Acheson Director of Research If you were forwarded this newsletter and would like to receive it, sign up here. PRICES (01/31/21 @ 12 p.m. UTC): BTC - $34,035.35 | ETH - $1,362.24
Hi everyone,
In our corner of the market, there are weeks that are busy, weeks that are hectic, even weeks that are epic. And then there are weeks like this one.
What happened this week, when retail investors flexed their collective muscle and shattered some market precedents, may temporarily simmer down, or it may escalate from here. As I write, the new market forces don't look like they plan to run out of energy any time soon. And even those hoping it will all go away can't unsee what they saw, which is that the power balance in markets is shifting.
Those of us in the crypto industry have known this for a while. We've seen what used to be a trickle and is now a steady stream of traditional market players either join our industry or try to meet us halfway. We've watched thoughtful legacy players understand where the forces of individual empowerment supported by technology are heading. And now, we've watched much of mainstream finance and media gasp in horror at their first glimpse of a new landscape that was being built under their noses.
Below in THE BRIEFING I talk about one likely impact of this week's developments on capital markets: a re-thinking of market fundamentals.
There's also a summary of other notable developments, and why I think they're important. And my colleague Damanick gives some insight into what we should be watching on the macro scene.
Read on …
– Noelle
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The Briefing (Note: We use Bitcoin with uppercase when referring to the protocol, and bitcoin with lowercase, or BTC, when referring to the asset.)
GameStop, Dogecoin and a new market paradigm
It's hard to do justice to the symbolism and significance of the Reddit-Robinhood-GameStop drama of this past week.
That's not to say it hasn't been overblown in some quarters. I've heard it compared to the Capitol riots – no, that was sedition, this is rebellion, very different. I've seen calls for the regulators to step in and shut down retail trading platforms, even though it's not clear a crime has been committed. And I've read takes painting the leaders of this charge as "misfits." That condescension itself is part of the problem.
The protagonists are not misfits - they are retail investors flexing their collective muscle, the very same muscle that the "establishment" encouraged them to develop.
Retail investors were encouraged to invest their savings in the stock market. They were offered mobile apps that made it easy. They were bombarded with advice and ideas from mainstream media. They were given money to spend. And low yields pushed them up the risk curve. Making way
While the attention has been focused on a handful of stocks that have seen astronomical gains on the back of retail enthusiasm, the origin and the result (whatever that ends up being) have a lot to do with the crypto markets.
We're not trying to steal anyone's thunder. The WallStreetBets channel that galvanized the troops and led the charge did not welcome crypto traders or even chatter. Their drivers are not decentralization or fair access. They seem to be glee at their newfound power, and anger.
The anger runs deep. The 139% short position against GameStop signaled heavy hedge fund involvement – but this was a trigger, not a cause. This rebellion feels like an expression of pent-up frustration at the skewed rules of capital markets that entrench the power of the "elite," combined with residual resentment over the 2008 bailouts, the lack of market transparency and a long list of generational grievances.
A similar "old" vs "new" mindset drives the crypto markets.
Many of us were drawn to bitcoin out of concern for the impact on individual prosperity from defensive decisions taken by entrenched interests. Others were attracted to the concept of decentralized finance as an antidote to the potential damage done by consolidated power. And there's the strong vote for financial sovereignty and commercial freedom.
All of us watched how traditional finance initially rejected the notion that a programmable token could ever have value or that code could produce yield. The success of crypto markets has forced much of the "old guard" to gradually recognize that things are changing. The events of this week will no doubt drive home that message.
What's more, the very same platforms that sold themselves on the democratization of finance ended up restricting users' access to certain trades this week, with the market in full swing. Can you think of a more public spotlight on the vulnerabilities inherent in the current market infrastructure? Google Trends shows that searches for "defi" (short for decentralized finance) are growing.
There is a risk that the new administration will use the retail investor rebellion as an excuse to over-regulate. Yet popular sentiment seems to be with the rebels, as legislators are no doubt aware (I don't recall ever seeing Ted Cruz agree with Alexandria Ocasio-Cortes before).
What's more, the nomination of Gary Gensler, who is both knowledgeable and generally supportive of crypto markets, to the post of Chairman of the U.S. Securities and Exchange Commission could hint at the beginning of a structural reform in favor of more "democratic" access.
It could also move the needle on investor understanding of some of the underlying qualities of blockchain-based assets and their markets. True, access to these markets has some hurdles, such as jurisdiction and familiarity with technology. But investor choice and user experience has never been better, and, with some large market infrastructure players intending to go public this year, will continue to improve.
Back to basics
It's not just market structure that is likely to be re-examined as a result of this week's events. Market understanding needs a rethink, too. This also has a lot to do with crypto assets.
I lost count this week of the number of mainstream commentators that spluttered about "fundamentals," and how the price shouldn't move so much when GameStop's situation hasn't changed. They're wrong – whether the stock is currently overvalued or not (I have no opinion on that), the company's situation and fundamentals have changed.
One, there's the massive publicity. Two, aside from the potential future revenue from selling games, there is probably a merchandising opportunity through branded mugs and pitchforks. Three, there's a groundswell of support for the share price – only this is not traditionally considered worthy of consideration in asset evaluation. It should be.
Investopedia defines business fundamentals as "information such as profitability, revenue, assets, liabilities, and growth potential." I would add to that list "public support." Critics of this idea will say that sentiment is ephemeral, impractical to estimate and therefore impossible to value, while traditional fundamentals are tangible and can be discounted.
These days, though, even the tangible ones are mere estimates, which – as we have seen – can vary wildly and be rendered useless by unforeseen events. We have also seen how sentiment moves markets, and not just on a short-term basis. No analyst can reasonably ignore its power, and insisting that portfolio decisions "stick to the basics" is assuming that things will go back to the way they were 50 years ago when investors parked their money in safe securities and forgot about them until retirement.
The power unleashed this week may remind some of us oldies of 1999, when market fever crested before crashing. But back then we didn't have the power of social media, a generation stuck indoors and helicopter money from the government. We also weren't looking at an unprecedented level of social dislocation, loss of trust in institutions and belief in the strength of community. Today's markets may turn south at any moment, and when they do, it is likely to be ugly. But, in contrast to the turn of the century, retail participation is unlikely to fade – this cultural shift is about more than making money.
The new-found power of retail investors has showed that sentiment not only trumps earnings forecasts, it can impact them. The very same investors piling into the stock are the same demographic that GameStop's future business will target. The collective power showed that market mood is a fundamental characteristic of markets, now more than ever. Some of the price jumps this week may have been driven by hedge funds who understand this and were placing buy orders accordingly.
While volatility is likely to eventually quieten down and business analysis should always have a significant role in investment decisions, we can no longer say that sentiment isn't a fundamental component of an asset's price outlook.
This is especially relevant with crypto assets. Critics have often accused bitcoin of having no "fundamental value," by which they mean no cash flow, balance sheet or potential earnings growth. True, it doesn't have these things, but it does have widespread belief in its utility, monetary policy and eventual adoption by an even broader community. That faith should be considered a fundamental characteristic, as it is now obvious it drives price appreciation.
Bitcoin is not the only clear example of that. This week saw the price of Dogecoin (DOGE) at one stage surge ten-fold (up 500% at time of writing), briefly pushing the cryptocurrency into the list of top 10 crypto assets by market capitalization. DOGE doesn't do anything special. It has a cute dog as its logo. Its founder disavowed the project ages ago. Some people have hyped it as a joke which then became part of its narrative – in other words, its unpretentious lack of fundamentals has become part of its value. We may deride people who put savings into a purely sentiment-driven asset – but that sentiment has kept DOGE alive for over six years now, and has attracted a smattering of high-profile followers.
New language
As an analyst trained in "old school" valuations and portfolio allocation techniques, I understand the reluctance to let go of comfortable heuristics – personally, I miss discounted cash flows, so nice and clean. But as market components and participants change, so must market analysis. Does anyone even remember when last "value stocks" were in favor?
Crypto markets have for some time been pushing the boundaries of what "value" means. The new generation of investors is showing us that old rules need re-examining.
They are also permanently blurring the boundaries between institutional "smart money" and retail "dumb money." What's more, they are showing that reform can be initiated by those that previously have had little influence on how profits are made.
This is the crypto market origin and ethos in a nutshell: new rules for a new type of investor. The crypto asset market was born in the retail world and cultivated from the ground up. It attracts investors looking for an alternative to the traditional system. It has given birth to new metrics and valuation paradigms.
All of us who work in this industry have watched this week's power shift with the feeling that what we've been expecting is finally starting to happen: a new type of investor is insisting on new rules and a new language, and mainstream markets are starting to take note. This new type of investor – be they angry at elites and unequal rules, fascinated by the emergence of a new type of asset, or both – will force a rewrite of some long-established rules of investment, and in so doing, push the philosophy behind the term "value" towards a more flexible definition for our changing times.
Macro currents
All hail the Fed! This week, US Federal Reserve officials reaffirmed their commitment to ultra loose monetary policy.
This means rising inflation will not trigger an immediate reduction in Fed asset purchases. The reach for yield (and speculative fervor) will continue so long as the Fed keeps the punch bowl flowing.
Fed Chairman Powell is correct in saying that tapering asset purchases is "premature." After all, more money does not equal more inflation. Despite rising inflation expectations and unprecedented growth in money supply, the actual flow of money through the economic system has been anemic.  The M2 money velocity, which is a ratio of nominal GDP to broad money supply, is in a structural downtrend. This is because an artificial boost to money supply and persistent decline in rates does very little to encourage lending and productivity.
Instead of sustainable economic growth, we get long cycles of capital market appreciation. What does this mean for cryptocurrencies? Investment flows could continue to chase high uncorrelated returns in alternatives such as digital assets.
It was another volatile week for cryptocurrencies, but both BTC and ETH remained in positive territory. In traditional markets, the S&P 500 and Nasdaq Composite ended the week in red. And despite wild swings, cryptocurrencies have easily outperformed traditional assets month-to-date.  – Damanick Dantes
 Introducing State of Crypto, a CoinDesk Newsletter About Policy
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Chain Links Investors talking:
Ray Dalio, founder of Bridgewater Associates, the world's largest hedge fund, published a document laying out his thoughts on bitcoin. This is remarkable, given that not long ago he publicly expressed skepticism that it would succeed.
Some excerpts:
Elon Musk now has "bitcoin" and its logo in his Twitter bio, and flagged this with the tweet: "In retrospect, it was inevitable."
Scott Minerd, chief investment officer of Guggenheim Partners, told Bloomberg television this week that he does not believe that bitcoin's institutional investor base is "big enough" or "deep enough" to justify its current valuation.
In an interview with Yahoo Finance, ARK Investment Management CEO Cathie Wood revealed that recent conversations with large companies leads her to believe that more will follow Square's lead and allocate a portion of their treasury to bitcoin. She also said at this week's ETF Big Ideas Event that she doubts that a bitcoin ETF will be approved until the asset's market cap hits $2 trillion.
Bank of Singapore, a private banking arm of OCBC Bank (the second largest bank in Southest Asia by total assets), said in a research note that cryptocurrencies have the potential to partially replace gold as a store of value if they can overcome the hurdles high volatility, reputational risk and lack of regulatory acceptance.
Takeaways:
According to sources, some of the largest university endowment funds in the U.S., including Harvard, Yale, Brown and the University of Michigan, have been quietly buying cryptocurrency since 2019. TAKEAWAY: This is notable, given endowments' traditionally conservative investor profile. The allocations are most likely relatively small, but even so, the AUM of college endowments is in the hundreds of billions of dollars – small can go a long way. It will also be worth keeping an eye on endowment activism – some universities, especially Harvard, have come under criticism for their investment in fossil fuel companies. Bitcoin's (misconstrued) reputation as bad for the climate might attract their attention.
According to Genesis Capital's latest quarterly report, its total volume of active loans outstanding increased by over 80% in Q4, to $3.8 billion. Loan originations increased by 46% to $7.6 billion, the average loan size doubled from $2 million to $4 million, and the average loan size for first-time lenders increased from $0.6 million to $3.2 million. TAKEAWAY: These growth figures highlight the growing awareness amongst institutional investors of the yields possible in crypto lending, and as long as yields remain low in traditional markets, growth should continue to be strong. This supports healthy liquidity in crypto markets, which in turn should help strengthen market infrastructure and could gradually mitigate asset volatility. (Note: Genesis Capital is owned by DCG, also parent of CoinDesk.)
On business intelligence company MicroStrategy's (MSTR) latest earnings call, CEO Michael Saylor pledged to keep pouring the business intelligence company's excess cash into bitcoin, telling investors his team will also "explore various approaches" for additional buys. TAKEAWAY: They really are working on becoming a bitcoin ETF.
Cryptocurrency mining company Marathon Patent Group (MARA) bought $150 million in bitcoin during the crypto asset's recent price rout. TAKEAWAY: Here we have a bitcoin mining company buying BTC on the open market in order to become even more of a "pure play" for the asset. And yet a bitcoin ETF is still deemed too risky.
The city of Miami on Wednesday uploaded a copy of the Bitcoin white paper to its website, joining a growing chorus of governments and companies now hosting bitcoin's original blueprint. TAKEAWAY: A U.S. municipal government website is hosting the Bitcoin white paper. Let that sink in.
Over the past few months Grayscale Investments (owned by DCG, also parent of CoinDesk) has filed to register over 10 new trusts based on smaller cap crypto assets such as aave, chainlink, polkadot and others. TAKEAWAY: Grayscale currently manages a suite of market-leading trusts, including GBTC (bitcoin) and ETHE (ether), as well as some smaller ones based on horizen, litecoin, stellar and others. While Grayscale is not necessarily signaling intention to act on these new filings, they do hint at a growing breadth of choice for institutional investors in the months ahead.
Canadian investment firm Ninepoint Partners' bitcoin fund (BITC.U and BITC.UN) started trading this week, having completed a C$230 million (US$180 million) initial public offering on the Toronto Stock Exchange. TAKEAWAY: The considerable amount raised not only makes this Canada's largest new crypto fund and the second in two months (the CI Galaxy Bitcoin Fund started trading on the TSX after a $72 million public raise in December), it also points to significant and growing demand from Canadian investors.
India's parliament is considering a government-backed bill that would ban "private cryptocurrencies" and provide a framework for creating an official Reserve Bank of India digital currency. TAKEAWAY: The potential impact of the proposed bill is as yet unclear – for instance, what does it mean by "private" cryptocurrency? Technically, bitcoin and others are public cryptocurrencies. Nevertheless, this would set a worrying precedent. It would also be an interesting case study on how effective government bans of crypto assets are.
If you're looking for some bird's eye perspective on monthly market performance, my colleague Shuai Hao put together this table of returns. If you squint, you can see that summer months are traditionally weaker, and the end of the year is usually stronger. Furthermore, we can see that volatility has declined a bit (fewer dark colors of either shade). 
 Introducing Valid Points, a CoinDesk Newsletter
CoinDesk is staking 32 ETH in Ethereum's historic upgrade, and research analyst Christine Kim and tech reporter Will Foxley are breaking down Ethereum 2.0 and its sweeping impacts on crypto markets, weekly. Using data direct from CoinDesk's own Eth 2 validator node, Valid Points features original insights about what the future of Ethereum looks like for industry stakeholders and investors.
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