Hi all!
It’s been an eventful few days.
Bakkt’s physically settled derivatives launched to much fanfare and (very) little action. In THE BRIEFING, my colleague Galen Moore looks at the launch in context of market developments and institutional involvement. And I’ve set apart some of the sector commentary in a separate section, because no doubt you are as fascinated by the prospect of watching a market evolve in front of your very eyes as I am.
Meanwhile, the collective hand-wringing over the global macroeconomic situation is increasingly offset by what seems to be a swell of conviction that bitcoin will benefit. You’ll find some links below that probe this issue.
And, related, we have a new report for you: Is Bitcoin a Safe Haven? You can download it for free here.
If you weren't able to make our Invest: Asia event in Singapore earlier this month, you can now watch the videos of most of the major panels here.
Read on…
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Bakkt to the Futures
It's a lively week for bitcoin derivatives – or at least for those writing about them. For those trading them, it may be business as usual.
The Chicago Mercantile Exchange (CME) last Friday announced it is preparing to offer options trades on its bitcoin futures contract. It's a surprising move, because options volume to date rounds to zero, as a percentage of reported volume in futures and swaps. Still, nobody in crypto has had an options counterparty as reliable as CME before.
The announcement gives CME a way to offer options without having to build much anew. Why should they? Their bitcoin futures market represents a tiny percentage of their overall volume. Nevertheless, CME may be feeling a shade of anxiety about its leadership position in regulated crypto derivatives markets, with Bakkt rolling out a regulated, physically delivered bitcoin futures contract this week. After all, other people in Chicago who trade a lot of bitcoin seem to think physically settled futures are important. Maybe their announcement lets them steal a little of Bakkt's thunder.
Speaking of Bakkt, their October 2019 monthly and daily contracts launched Monday. First-day volume in the monthly contract was just 71 BTC. That's rather anemic, compared with the start of the CME product in December 2017, which isn't necessarily apples to apples, given CME futures launched near bitcoin's all-time highs.
The Bakkt one-day futures contract is the more intriguing product of the two. It could be anything from a CFTC-regulated fiat onramp, to a duplicate of the popular BitMEX perpetual swap, if traders use its T+2 settlement to build a forward curve and continue to roll the contracts. So far, traders aren't. Volume in Bakkt's one-day futures was all of 2 BTC on Monday.
The first regulated bitcoin futures came in December 2017, just before bitcoin's price began a long slide down 83 percent from its all-time high. With volumes under $100 million, however, it would be hard to argue that futures trading brought sanity to the markets. Instead, it's more likely that slow demand for the new product punctured the myth of institutional demand for bitcoin exposure, pent up behind compliance departments' insistence on a regulated product.
That myth is alive and well today among retail-focused crypto "analysts," as a search for "bakkt volume fail" will show you. If you were around in 2017, you didn't need time travel to know to short bitcoin this Monday: you had seen this movie before. Even the least-sober among us in 2019 recognize the obvious , that institutional investors' interest in bitcoin is developing slowly, when it is developing at all.
For institutional investors, derivatives offer readily understood solutions to operational obstacles related to custody, investability and risk. (Regulated bitcoin futures are structured the same as futures in, say, orange juice concentrate.) Still, today the lion's share of volume is on unregulated exchanges that don't operate as clearinghouses and offer leverage up to 100X.
These products could not be interesting to any regulated asset manager, but they are interesting. Despite persistent doubts as to the reliability of their reported volumes (especially with OKEx and Huobi), bitcoin traders on the largest over-the-counter (OTC) trading desks know there is liquidity in these markets. Their hedging strategies rely on that liquidity. Other than that, volume on these leveraged trades is probably all crypto hedge funds and, as one trader put it to me, "degenerate gamblers," trading on their own accounts.
Bitcoin futures are structured much like orange juice concentrate futures, but everyone knows that orange juice concentrate, when mixed with more volatile things can become rather flammable. There are important qualities that set bitcoin apart from other asset categories and these qualities of the underlying are taken into account by institutional investors evaluating bitcoin derivatives. For example, there may not be natural hedges in a bitcoin futures market. If you don't believe that, look at global operating expenditures of gold miners to those of bitcoin miners. This isn't Kansas.
Derivatives may be gold bricks paving the road to institutional investment in bitcoin, but it's a long way to the Emerald City. Right now, the CME futures volume is as good a guide as any to investors' progress along that road. You may have seen charts showing the rise in CME volumes in May this year. That rise also coincided with a twofold increase in the price of bitcoin. Measured in bitcoin terms, CME futures volume had a surge in July and is back trading at modest growth over its Q1 levels at the end of Q3.
Meanwhile, no fewer than four other startups are readying new derivatives offerings for the U.S. institutional and other regulated markets. All are focused on physical settlement. It remains to be seen whether physical delivery will be a feature that compels market participation. (It's not always very important in derivatives built on other asset categories.) One thing appears certain: no new financial instrument is likely to "unlock" institutional demand, as most institutions are only beginning to answer the question of why they would invest in bitcoin, in the first place.
– Galen Moore
(Special thanks to www.sk3w.co for their data and input.)
This analysis draws on a forthcoming white paper on the state of crypto asset derivatives. Look for it later this week here and at coindesk.com/intro-to-crypto-investment.
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* so many links, so little time - these starred ones are especially important for a deeper understanding of the sector, but get to the rest when you can
BAKKT
Bakkt Exchange’s Bitcoin Futures See Slow Start on First Day of Trading (CoinDesk) – Demand for the monthly contract was tepid, and the first daily contract did not trade until 18 hours after launch.
Bakkt’s Bitcoin Futures Already Open to Retail Investors, COO Says (CoinDesk) – In spite of the anticlimactic launch, Bakkt’s COO Adam White reiterated in an interview that the availability of physically delivered futures contracts was a step forward for price discovery.
Bitcoin Is Growing Up as Deliverable Futures Start Trading (Bloomberg, paywall) – Bakkt’s road to its derivatives launch, and the impact on the crypto derivatives sector as a whole.
*Will the Bakkt Launch Help Bitcoin Go Mainstream? (Fortune) – That’s the eventual aim, but meanwhile, no-one is clear on what the market impact of physically delivered bitcoin futures will be.
Bakkt to the Future :: Pantera Blockchain Letter, September 2019 (Pantera Capital) – Why physically delivered bitcoin futures represent a step forward for the sector as a whole.
Economist and trader Alex Kruger (@krugermacro) compared Bakkt’s launch to that of the CME bitcoin futures in 2017.
Investor Su Zhu (@zhusu) pointed out that most futures launches start with a trickle of interest as brokers slowly onboard.
BIG IDEAS
*Four Really Confusing Topics Affecting Crypto (Arca Funds) – As well as putting an intriguing spin on the ubiquitous topics of central bank independence and weird things happening in repo markets, Jeff Dorman flags the Bakkt launch and ether’s performance as indicative of larger trends.
*What Billions in Fed Repo Injections Reveal About the Promise of Bitcoin (CoinDesk) – A glimpse of how blockchain-based assets could impact the financial system.
Privacy Coins Face Existential Threat Amid Regulatory Pinch (Bloomberg, paywall) – Since the FATF anti-money laundering guidance for cryptocurrency firms, some exchanges are worried about listing privacy coins such as zCash, although the team insists that the technology is compliant.
How Facebook’s Libra fuelled push for central bank-run digital currencies (Financial Times, paywall) – Notable that bitcoin never worried central banks nearly as much as Libra does.
Crypto Traders Need To Grow Up Before Crypto Markets Can Grow (Joseph P. DiPasquale) – The pernicious traps of hype, myths and bias.
MARKETS
Crypto and the Latency Arms Race: Crypto Exchanges and the HFT Crowd (CoinDesk) – Max Boonen of B2C2 continues his deep dive into the emerging structure of high frequency trading in crypto markets.
*Bitwise updated the SEC on the evolution of the bitcoin market since its last report, showing that the quality of reported volume is improving and the market is increasingly efficient.
Path to first SEC-approved bitcoin ETF diverges as VanEck withdraws and Bitwise charges ahead (The Block, paywall) – The SEC’s standards are criticized by many as being harsher for bitcoin than other asset classes, but the reasoning process behind the lack of approval for an ETF is as yet unclear.
In the crypto Wild West, a dose of Wall Street law and order might lure institutional investors (The Block, paywall) – Registered agency brokers are newcomers to the fragmented crypto markets, and could possibly change the character of institutional involvement in crypto assets.
Understanding the Internals of Crypto-Exchanges Using Machine Learning and Data Visualizations: Binance and Poloniex Explained (Jesus Rodriguez) – A deep dive into how crypto exchanges interact with blockchains.
Traders Could Lose Weekends in Digital Age, BitMex’s Hayes Says (Bloomberg, paywall) – Yet another way in which crypto assets could affect capital markets.
CME Group Is Launching Bitcoin Options Early in 2020 (CoinDesk) – These will be options on the bitcoin futures contracts, and are pending regulatory review.
Cryptocurrency market appears to be in bad health as volumes tank by 60% (The Block, paywall) – The average daily volume on Binance and Coinbase has fallen 60% since June, while price has remained steady.
IEOs Gain Traction as Crypto Exchanges and Digital Custodians Boost Investor Security (TabbFORUM) – How Initial Exchange Offerings are different from the blockchain-based financing forms that came before.
Weekends Are for Altcoins When It Comes to Crypto Market Gains (Bloomberg, paywall) – Bitcoin may dominate crypto trading, but that doesn’t mean that altcoins should be totally ignored.
Seed CX Slashes Rates as Crypto Trading Fee War Looms (CoinDesk) – Fee compression could be a harbinger of sector consolidation.
PROFILES
‘The Drexel of Crypto’: An inside look at Galaxy Digital (The Block, paywall) – More detail on its four main activities: trading, asset management, principal investing and advisory services.
Ether is the Best Model for Money the World has Ever Seen (The Defiant) – David Hoffman highlights the role of ether as a trustless form of collateral in an organically emerging economy.
*Institutional Crypto in 2019: Interview with the First Crypto Fund Manager, Tim Enneking (SFOX) – In a sweeping interview, the Managing Director of Digital Capital Management talked about bitcoin as a currency, the concept of money, and the role of cryptocurrencies in investment portfolios.
CRUNCHING NUMBERS
*Michiel Lescrauwaet (@MLescrauwaet), co-founder of Adamant Capital, discusses the flaws in crypto indices, the advantages in using just bitcoin as a benchmark and the questions investors should ask of crypto hedge funds.
How Bitcoin can benefit a traditional portfolio (Alex Woodard) – Modern portfolio theory, efficiency frontiers and capital allocation lines applied to bitcoin positions in a diversified portfolio.
ETH is Overtaking BTC in Daily Transaction Fees, Driven by Tether (Coin Metrics) – This isn’t the first time, but it coincides with a fall in BTC fees and an increase in ether demand due to the migration of stablecoin tether from the Omni network to ethereum.
CryptoCompare’s August 2019 Exchange Review (CryptoCompare) – A detailed breakdown of crypto market activity by venue, product and relative volume.
REGULATORS AT WORK
SEC Chair Clayton: Bitcoin Needs ‘Better Regulation’ Before Major Exchange Listing (CoinDesk) – These statements weren’t quite as negative as usual.
CoinShares to Lobby Against UK Ban on Crypto Exchange-Traded Notes (CoinDesk) – Crypto asset manager CoinShares is asking for public opposition to an impending ban by the UK’s Financial Conduct Authority of crypto-based exchange-traded notes for retail investors.
Crypto lawyer lex_node (@lex_node) weighs in on whether a currency can be a security, and whether token issuers need to register as money transmitters.
SEC Chair, Commissioners to Talk Crypto at Congress Hearing Next Week (CoinDesk) – The U.S. House Financial Services Committee plans to question the SEC about cryptocurrencies and Facebook’s Libra project, among a host of other topics, later this week.
Germany Passes National Policy to Explore Blockchain But Limit Stablecoins (CoinDesk) – Approved by Chancellor Angela Merkel’s cabinet on Wednesday, the strategy sets the government’s priorities in the blockchain space, such as the digital identity and securities, but makes clear that it won’t tolerate the threat to state money from stablecoins.
SECURITY TOKENS
Complete List of Security Token Exchanges & Marketplaces (Security Token Market) – What it says on the tin.
The State of Security Tokens in Asia (CoinDesk, video) – The video of a panel at our recent Invest: Asia event which looks at the growth in blockchain-based security issuance.
Swiss Stock Exchange SIX Launches Digital Assets Exchange Prototype (CoinDesk) – The prototype platform, launched under its digital assets subsidiary SIX Digital Exchange (SDX), will pilot its exchange and central securities depository for digital assets, and aims to add more functionality as it approaches a full launch in Q4 2020.
Security token blockchain Ownera has partnered with Amazon blockchain services at a hackathon to test digital security issuance.
STABLECOINS
Suddenly Facebook’s Libra is all about defending “the Free World” from China (FT Alphaville) – Because God forbid a digital currency should be subject to surveillance.
Facebook’s Obstacles in Europe Mount as Germany Opposes Libra (Bloomberg, paywall) – Finance Minister Olaf Scholz expressed the government’s opinion that blockchain technology has great potential, but should not be used to develop private forms of money.
Facebook Reveals Libra Crypto’s Currency Basket Breakdown: Report (CoinDesk) – The basket will consist of liquid currencies including the dollar (50%), euro, yen, British pound and Singapore dollar, but not the yuan or the Swiss franc.
Garrick Hileman (@GarrickHileman), head of research at crypto wallet Blockchain, takes a closer look at the allocations.
Binance Is Pitching Its Stablecoin as a Government-Friendly Libra Competitor (CoinDesk) – Not long after positioning itself as a complement to Libra, the firm seems to have decided to take a more competitive stance.
PODCASTS
HIDDEN FORCES: Demetri Kofinas and Michael Casey, CEO of Streambed Media and chairman of CoinDesk’s advisory board, chatted about the potential macroeconomic role of bitcoin against a backdrop of distorted flows of funds and pervasive surveillance.
THE SCOOP: Frank Chaparro spoke to Mike Novogratz, founder and CEO of crypto asset manager and platform Galaxy Digital, about the firm’s origins, the evolution of tokenisation and politics.
OFF THE CHAIN: Anthony Pompliano interviewed Kevin Kelly, co-founder of crypto research boutique Delphi Digital, about the overall economic outlook, the role of the dollar, the potential evolution of central bank digital currencies and more.
THE FLIPPENING: Part 2 of Clay Collins’ chat with Sam Bankman-Fried, CEO of FTX and Alameda Research, on the differences between leveraged volume and spot volume, and the evolution of the crypto derivatives space.
BLOCKCHAIN INSIDER: This week Simon Taylor's guest was me :) and, unsurprisingly, we ended up in a rambling chat on recent crypto developments, on volatility, security tokens and, of course, Libra.
A-HA!
In search of the real Edward Snowden (Financial Times, paywall) – Regrets? None.
The Coming Currency War: Digital Money vs. the Dollar (Wall Street Journal, paywall) – The post-dollar world seems to be getting closer.
The limits of the pursuit of profit (Financial Times, paywall) – The profit motive in moving the focus away from profits.
‘Decomputerize?’ Over My Dead Laptop! (Jeff Jarvis) – The smoke screen of blaming “data” on society’s woes.
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FUNDING
Mars Finance, a Chinese-language crypto news company, has closed a funding round – participated in by Binance Holdings, Ceyuan Ventures and Matrixport (part of the Bitmain group) – that values it at $200 million.
FIRMS
Binance.US, the U.S. arm of crypto giant Binance, starts trading today (Tuesday) with fiat-crypto and crypto-crypto trading pairs for bitcoin, Binance coin (BNB), ethereum, XRP, bitcoin cash, litecoin and Tether’s USDT.
Also, Binance is planning to add over-the-counter trading to its platform in a month to provide users with fiat currency gateways, starting with the Chinese yuan.
Börse Stuttgart, Germany’s second-largest stock exchange, has opened a regulated trading venue for digital assets and currently trades the bitcoin-euro pair.
Crypto asset platform Tagomi, which launched an electronic-trading service last year, now allows clients to lend or borrow bitcoin and ethereum from multiple counterparties on a single platform, to facilitate long or short trades on the digital tokens.
Digital currency trader and lender Genesis has acquired New York-based quantitative investment firm Qu Capital.
Cboe BZX Exchange withdrew its VanEck/SolidX bitcoin exchange-traded fund proposal on Tuesday.
Hong Kong-based venture capital group CMCC Global has launched its Liberty Bitcoin Fund to provide crypto currency access to accredited investors in Asia.
Crypto custodian Kingdom Trust, itself involved in a suit against competitor BitGo and BitcoinIRA, is being sued by five clients who accuse it of intentionally delaying transfers to BitGo.
Crypto asset manager Wave Financial has launched the Wave BTC Income & Growth Digital Fund, one of the first crypto derivatives-based yield funds on the market.
The Swiss branch of Arab Bank, one of the top financial institutions in the Middle East, is launching a suite of cryptocurrency-based services including custody and brokerage of bitcoin and ether.
PEOPLE
Former CFTC chairman J. Christopher Giancarlo has joined the advisory board to the Chamber of Digital Commerce, a trade group focused on blockchain and crypto policy in the U.S.
Dorothy DeWitt, a former lawyer from Citadel Securities and crypto exchange Coinbase, will join the CFTC to oversee its division of market oversight.
Have a tip? Drop me a line at [email protected]. |
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| CRYPTO WEBINARS
Crypto podcasts have long been a staple of market education (see links above, for example), but I’ve noticed that there is a growing stable of informative webinars out there that don’t get enough air time in my opinion (I think there’s a pun in there somewhere).
On an experimental basis, I’ll list here the crypto market webinars that I know about and that I think you might find interesting. If you’d like your webinar listed here, let me know at [email protected] (no guarantee of inclusion, though).
Global Macro is on Fire- Is Now the Time for Digital Assets? – Arca Funds – September 25, 11am-12pm ET
Trends in the Privacy Asset Sector – Digital Asset Research – September 26, 11am ET
Understanding Crypto Exchanges Using Data Science – intotheblock – October 2, 12pm ET
The State of Crypto Custody – Gemini Trust – October 7, 12pm ET
FATF Guidelines & developing industry led AML & KYC best practices – Global Digital Finance (GDF) - October 9, 9am ET
The Path to Clean Prices in Crypto – Digital Asset Research – October 10, 11am-12pm ET
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We have a new report for you: "Is Bitcoin a Safe Haven?", appropriate for the intensifying macro discussions swirling around the sector. You can download it for free here.
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And if you weren't able to make our Invest: Asia event in Singapore earlier this month, you can now watch the videos of most of the major panels here. |
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