 March 14, 2020  Weekly insights, news and analysis for the professional investor Sponsored By:  By Noelle Acheson Managing Director of Research If you were forwarded this newsletter and would like to receive it, sign up here.
Hi everyone,
As I'm sure you've been reminded already, this week marked the one-year anniversary of the declaration by the World Health Organization that COVID-19 was a pandemic. For us at CoinDesk, it's one year since we were all asked to work from home, one year since we said goodbye to our WeWork headquarters, one year since we were last together in one place with our teams.
We've been sharing memories of what we were doing this time last year, and where we were when we realized the pandemic was a threat to our daily life. I live in Spain, one of the early lockdown countries, and I wrote this piece about how surreal but at the same time very real it all felt. While reminiscing is cathartic and uplifting, as it reminds us that we not only collectively coped but also achieved even more than we expected, it is even more motivating to take stock of the year as a whole.
Personally, I will remember this year not so much for the change in social habits and spending patterns, or for the new event formats and the marvel of zoom filters. I'll remember it as the year we all gave more thought to how the economy works, what money is and why things are the way they are. Over the past 12 months the conversation around privacy, the influence of social media and the power vested in platforms left the realm of the theoretical and touched pretty much everyone, in one way or another. This past year, what we in the crypto industry have been thinking and writing about for years, got real.
And we can see this by looking around and comparing where we are as an industry today to where we were 12 months ago. The market infrastructure, institutional involvement, asset prices, wacky narratives and sober ones … It feels very, very different, even in the context of a very different world.
And yet in spite of the rapid change we have witnessed, it still feels like we're just getting started.
This week, I really tried to resist the pull to talk about NFTs – I've never seen a concept take off so fast, not even in our meme-driven crypto universe. My daughter excitedly brought them up at the dinner table because they've been flooding her TikTok feed. Earlier this week I counted seven simultaneous Clubhouse rooms talking about the topic. So, I gave up trying to resist, because the concept represents a more profound change than most realize and will have a more significant impact on investment than it at first seems. I talk about this more in THE BRIEFING below.
With that, 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.)
NFT Abstraction and Tomorrow's Markets
With NFT talk flying at us from all corners, I was tempted to write about how, yes, there is a lot of hype but the main message is the cultural shift supported by technology. And that is the case – our lives are now digital, so it was inevitable our cultural spending would be, too, and for younger generations the concept of ownership is more about experience than possession.
But while that is interesting, and ties into what I've written before regarding the massive impact the younger lens will have on our concept of investing, there is more going on here. So instead of a cultural/generational take, I'm going to look beneath the froth to what this trend says about how markets are evolving. It matters.
It's not just the new markets springing up for digital artwork, video clips, music, tweets, etc. It's not just the new types of financial assets that can benefit from the NFT tailwinds, such as tokenized securities and liquid insurance contracts. Those are all potentially transformative, but what I'm especially intrigued by is the emergence of a market for something that hasn't been possible to value before: emotion.
This could give rise to much more than a new market as well as a new way of communicating and relating to peers. It could change entire business models, not just of culture but of any service, and could solve some of the inequities and vulnerabilities of the current web stack.
Getting frothy?
First, for a primer on what NFTs are, check out my colleague Ollie's excellent explainer, and Jeff Wilser's compelling synopsis of the cultural forces at work. In brief, they are non-fungible blockchain-based tokens that can represent just about anything digital that has unique characteristics.
CryptoKitties ignited mainstream interest in 2017 with collectible and breedable cats, and the concept's developer Dapper Labs has recently been making headlines with the success of its NBA Top Shots packs and its recent $250 million raise at a $2 billion valuation. Just over the past seven days, we've seen athletes, fast-food joints and mainstream media join the expanding throng of NFT creators. And on Thursday, a digital masterpiece was sold by the 250-year-old auction house Christie's for over $69 million.
Many have likened this level of froth to the ICO craze of 2017, which saw crowdsourced token sales hailed as the next revolution in capital markets. With projects raising millions on ideas that hadn't even made it to the back of an envelope, who needs stock markets or bank loans?
Although reminiscent of those hectic times, with the same aura of disbelief from some quarters and excitement from others, this froth is different. It isn't about blockchain, tokens and functionalities we barely understand. It's about culture, and the mainstream market is paying even more attention on a relative basis than it did three years ago.  Why? In part because art, music and sports are much easier to relate to than new technology crowdfunding. And, in part, because blockchain and cryptocurrencies are not the totally foreign concept they were back in 2017.
Abstraction
Another way this trend is different from that of 2017 is in what is being tokenized. Here things get even more interesting.
The range of assets is broad, but most attention so far is on digital art, video and music. Now, why would anyone pay for something they can probably look at for free online? It's not that the original is better – there may be some resolution or feature differences, but probably not enough to justify significant prices. These are driven by the desire to "own." Art has drawn from this well for centuries but has not had a liquid marketplace on which to trade. And in the physical realm, often part of the appeal is being the only one to be able to enjoy a painting or sculpture.
With NFTs, pride of ownership is abstracted from exclusivity.
If I buy an NFT of one of my colleague Nik's tweets, for example, I'm not the only one that can see it – my pixelated version is not noticeably better quality than the original. But I have quantified my pride in owning that, and have exchanged the relevant amount of currency to do so.
And if one day Nik annoys me (this is a bad example as I can't imagine that ever happening), then in theory I have a liquid marketplace on which to exchange my pride of ownership for a probably different amount of currency.
In theory, we're looking at price discovery for feelings. This could give rise to an entirely new business model for platforms and services that could impact how future markets work.
Price discovery for what?
Markets in their purest form offer price discovery by enabling a consensus value to emerge. Never before have we had the technology to be able to abstract intangible constructs and place them on a global marketplace.
If NFTs in theory give us price discovery on feelings such as "pride of ownership," we're but a step away from price discovery on feelings such as "I enjoy using this service," or "this platform has taught me a lot," or "I appreciate being able to connect with my friends."
This gives us a glimpse of a whole new way of valuing companies, and a potential upending of the traditional ad-based business model of internet services that is the root of so many issues around privacy, incentives, manipulation and more.
Let's take Twitter as an example. Does its share price reflect the value it contributes to society? No, not really. It's more a reflection of the advertising revenues. Yes, these are related to the traffic which is indirectly related to the value people glean from using the platform. But a lot of the traffic is from bots and scammers, so the relationship is tenuous.
What if we, the users, could value Twitter? What if Twitter's market value was the sum of the price discovery contributed by those who appreciate the learning, connections, community, memes and cute furry animals? Some interesting token projects functioning today are shaped around the idea that market value is decided by users. Imagine that elevated out of the niche to everyday utility. Imagine a realignment of corporate incentives.
This has nothing to do with NFTs the vehicle, but everything to do with a new type of "value," and a way to reach a consensus price, however variable that price may be. And it has a lot to do with growing awareness that this new type of value is quantifiable.
Noise vs. substance
We're still a long way from that. And NFTs still have a long road ahead of them, with new marketplaces, asset types, services, creativity and communities yet to emerge and consolidate. I'm looking forward to witnessing the short-term impact on financial markets of this concept, which is likely to come in the form of new types of tradeable products.
It's fun to look further ahead though, through the lens of the new cultural language that younger generations are introducing to established social and financial structures. And it's intriguing to see the shape of what the new era of online connectivity could look like, especially given growing concerns around the current vulnerabilities. Even more, it's exciting to realize that the changes are already underway.
Whatever you think about the prices paid for digital art with verified authenticity and ownership, however concerned you may be that the hype will implode, and no matter the strength of your conviction that this is yet another strong sign there's too much money sloshing around unmoored markets – remember that noise is not the same as substance. We saw this in 2017. When the noise quietens down, either because we all get tired or because the regulators step in, the substance will become more apparent. Then a new type of building can begin.
"Turning challenges to opportunities"
Early this week, listed Norwegian industrial conglomerate Aker ASA announced that it has set up a new company called Seetee AS, dedicated to investing in bitcoin companies. The company will use bitcoin as its treasury asset, and has partnered with Blockstream to work on bitcoin mining and sidechain projects.
Aker's majority owner Kjell Inge Roekke – one of the richest men in Norway – wrote a shareholder's letter which is one of the most exciting explanations of a crypto investment thesis I've seen in a while.
The whole thing is an enriching read, but if you're in a hurry, here are some highlights (all direct quotes):
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Chain Links JPMorgan Chase is planning to issue a debt instrument – the J.P. Morgan Cryptocurrency Exposure Basket – linked to cryptocurrency-focused companies such as MicroStrategy, Square and Riot Blockchain. TAKEAWAY: Not quite a cryptocurrency fund from one of the oldest and largest banks in the world, but close …
Goldman Sachs CEO John Waldron said in an interview this week that bitcoin demand among the bank's clients was rising. TAKEAWAY: It feels significant that the CEO, who is also the bank's president, would say that publicly. Goldman's clients include blue-chip Wall Street firms with significant AUM – even a teensy tiny allocation from these funds would be meaningful.
Crypto asset platform and investment firm NYDIG has raised $200 million from Stone Ridge Holdings Group, Morgan Stanley, New York Life, MassMutual, Soros Fund Management, FS Investments, Bessemer Venture Partners and FinTech Collective. TAKEAWAY: These are some high-powered institutional names to have on a cap table. And since the CEO has said that they "are more than investors – they are partners," we can expect some interesting market infrastructure development to come of this.
That was not the only significant raise in the crypto market infrastructure segment this week:
Two European private banks revealed plans to allow clients to trade and custody cryptocurrencies: NPB Beue Privat Bank AG in Switzerland, and Donner & Reuschel in Germany. TAKEAWAY: While it's tempting to conclude that this is due to growing client demand for crypto assets, profits have been declining in what has traditionally been banking's most profitable segment. The possibility of attracting new clients and the growing acceptance of a need to modernize the industry's image are also powerful drivers. Either way, this is good for the crypto industry in that clients of the growing list of private banks offering crypto services will find it more convenient to add crypto exposure to their portfolios.
Two new crypto products were listed on Deutsche Borse's Xetra market this week: 21Shares listed ether and bitcoin cash ETPs under the symbols 21XE and 21XC respectively, and ETC Group listed an ether ETP under the ticker ZETH. TAKEAWAY: Interesting that the universe of European listed crypto products beyond those based on BTC is expanding – a counterpoint to the lack of listed crypto-based product activity in the U.S.
Three new crypto-related ETF proposals were filed with the U.S. Securities and Exchange Commission (SEC) this week:
And the pressure on the SEC keeps on building: Canada's third bitcoin ETF – CI Galaxy Bitcoin ETF (BTCX) – listed on the Toronto Stock Exchange this week.
Digital asset manager CoinShares has begun trading on Nasdaq Nordic after an oversubscribed public offering. TAKEAWAY: This adds to the growing pantheon of listed crypto companies that are not bitcoin miners. The jump in the share price in the first day of trading points to built-up demand for portfolio exposure to the industry.
Digital assets management firm Grayscale has halted inflows to its Grayscale Bitcoin Trust (GBTC). Earlier this week, Grayscale's parent DCG revealed plans to purchase up to $250 million of GBTC in the market. TAKEAWAY: These two developments may be related to the market price of GBTC, which traditionally has traded at a significant premium to NAV but has recently moved to a discount. The reasons for this shift could have to do with the listing of three BTC ETFs in Canada, as well as some potential competitors in U.S.-based listed trusts. With no premium to sell into, institutional inflows have dried up. DCG's investment may be a sign that the firm expects to be able to convert GBTC into an ETF at some point in the future, which would bring the GBTC price back up to NAV. This scenario, incidentally, is supported by the posting of several ETF-related jobs at Grayscale. (Note: DCG is CoinDesk's parent, but due to thick separation of communications I have no insight into what Grayscale's or DCG's plans are.)
Bitcoin mining companies are taking advantage of the bull market and record miner revenue to diversify their activities:
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Podcast episodes worth listening to:
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Crypto Long & Short: NFT Abstraction and Tomorrow’s Markets