Hi all!
Two big announcements today:
1) Later today we’re hosting a LIVE WEBINAR to go through our first CoinDesk Quarterly Review – Galen and Christine will pick some of their favorite takeaways and charts, explain the implications and look at the further questions they raise. I’ll be hovering around the edges to feed them the questions that you send in. It’ll be fun. Come join us! You can sign up here (and download the report here ).
2) We have a new report for you! “Crypto Lending 101” looks at the evolution of the crypto-backed lending and borrowing markets, what that means for market liquidity and infrastructure, and where this could take future use cases. You can download the report for free here.
And below, a look at options, the mainstream view of bitcoin, reporting season and much more.
With that, read on…
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Bitcoin needs options
Last month I wrote about the frenetic activity in crypto options, with a slew of launches that have attracted reasonable volumes. Yet one of the recent launches – Bakkt’s monthly bitcoin options – has seen little interest, trading zero contracts over the past two weeks.
(Source: skew.com)
Does that mean there is little interest from institutions in regulated exchange option offerings? Not quite – as you can see in the chart above, CME bitcoin options have fared better, in spite of (or because of?) having higher contract terms (five underlying bitcoins per contract vs Bakkt’s one) and settling into a cash-settled future (whereas Bakkt’s options settle into a physically delivered future contract).
Yet the CME’s volumes dwindle in comparison with the lightly regulated exchanges such as Deribit, OKEx and FTX.
(Source: skew.com)
One reason is perhaps the greater flexibility. Last week Deribit (in the process of moving its base from the Netherlands to Panama) launched daily bitcoin index options. While it remains to be seen if the spreads prove attractive, the shorter term should allow traders to take more flexible positions, as well as create more custom hedging strategies.
Rich Rosenblum, co-founder and co-head of trading at crypto liquidity provider GSR, referred to this strategy in a recent op-ed for CoinDesk, in which he pointed out that focusing on listed options volume growth is missing the bigger picture. Miners – the sector’s “natural hedgers” – are more interested in bespoke hedging instruments than the off-the-shelf variety currently offered on exchanges, which in turn rely on listed “vanilla” derivatives.
Rich also points out that this is likely to consolidate as the pressure to maintain healthy balance sheets intensifies due to shareholder pressure and market consolidation. “Lenders will also begin to mandate that miners hedge,” he says, “so they will still be able to meet their obligations as borrowers in the event of a bear market.”
Which segues nicely into the report released last week by crypto lender Genesis Capital (more on this below). One of the expected drivers of growth, according to the company, is demand from miners for cash backed by crypto assets. Miners tend to be long crypto assets, and – especially with the halving rapidly approaching – will need cash with which to upgrade their installations to ensure they stay profitable.
If borrowers can show that the underlying collateral is sufficiently hedged, this could affect the loan-to-value rate and the fees, which could fuel further demand for loans and options. Beautifully circular.
Crime needs bitcoin
Nathaniel Popper of The New York Times managed to get the crypto community riled last week with his article “Bitcoin Has Lost Steam. But Criminals Still Love It.”
We generally see this kind of coverage as unfair because it focuses on a very, very small subset of potential use cases. We often retort with the reminder that cash has been used for crime for centuries but no-one criticizes it for that. And the glass-half-full contingent insists that criminal use is a good sign, it shows that the coin works as currency.
This kerfuffle may come down to underlying tension over the role and incentives of media, rather than cryptocurrency. Readers of this newsletter are no doubt fascinated by the intricacies of bitcoin’s potential role in monetary policy, as indeed you should be (because it is one of the most important and yet overlooked shifts in the sovereignty conversation in a generation). Mainstream publications, however, have to cater to a much broader and more easily distracted audience, in a much more competitive field.
Let’s face it, readers are probably more likely to click on a crime story than on a nuanced take on monetary policy. No disrespect meant – it’s simply human nature, and our reports on the QuadrigaCX drama and ongoing mystery are still among our most visited articles. But few publications enjoy the bandwidth and the focused audience that CoinDesk and other crypto publications do.
This does not mean that we should give mainstream media a break and stop asking them to contemplate coverage that goes beyond price movements and scandal. Those are good things to report on – but they should not be the only aspects deemed newsworthy enough for mainstream interest.
According to Nathaniel, the advent of bitcoin has given rise to new types of online crime, and this should be news. He’s not wrong to report on this – but the community’s frustration is with his lack of reporting on the possible benefits and transformational potential. And it matters – if this is what The New York Times (and other influential mainstream media) deems the most newsworthy aspect of cryptocurrencies, this will contribute to a negative public perception, which will in turn influence lawmakers.
Analysts rejoice
It’s that time of year, when company analysts up their coffee intake even further in order to mentally process and analyze the flood of earnings announcements from the companies they cover. Mercifully, crypto analysts have been spared that quarterly ordeal, since the tokens they look at don’t have earnings, let alone the obligation to report them.
That may be beginning to change. It’s not that tokens that will start spinning off cash flows in clean, reportable formats. It’s that companies with a high degree of crypto exposure are starting to get stock exchange listings – and with those, comes earnings statements.
This is one of the most intriguing developments of the crypto ecosystem over the past year, not because it’s surprising – it isn’t – but because of the vast amount of information that gets revealed. This information will give us a deepening insight into the inner workings of crypto businesses, and with that, a better grasp of crypto economics and sector health.
Among those companies reporting last week is Silvergate Bank, which added crypto clients in Q4 but saw deposits and fee income from those clients drop. Why? Apparently institutional investors trade less during a stable market. Yes, a business whose profits are inversely related to crypto market volatility. Does that make it a volatility hedge?
Competitor Metropolitan Commercial Bank also saw deposits from crypto customers decline over the year, by a whopping 52% (vs. a 22% drop at Silvergate). A sign that competition is heating up? This would indeed be surprising, given that the lack of reliable banking relationships has for years been one of the main pain points for crypto businesses. Has the demand been overstated? Or are there other factors in play, such as a waning interest on the part of mainstream banks to service the crypto sector?
Could this mean that Silvergate, which has made a push to develop treasury management and settlement services for crypto investors, could grab even more market share over the next few quarters? The fun part is, now we get to find out.
The information flow is only going to improve. As Frank Chaparro of The Block pointed out (paywall), large crypto-first names (as opposed to traditional businesses that have embraced the potential of the crypto asset sector) such as Coinbase, Ripple and Blockchain.com could come to market soon. I personally would LOVE to see the detailed financial statements of a crypto market infrastructure company.
One aspect to keep an eye on, as Frank hints at, is the allure of a straightforward IPO with full regulatory approval and a potentially vast investing public, vs. the also-expensive issuance of security tokens into a more limited market with post-sale restrictions. I have a feeling we’ll end up with several companies trying both, either simultaneously or in short succession. Now that should allow for some fun untangling of the financial statements.
– Noelle Acheson
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BIG IDEAS
Conner Brown shares why bitcoin’s relative simplicity (compared to other crypto networks such as ethereum) is a strength, not a weakness. TAKEAWAY: One of the criticisms often leveled against bitcoin is that you can’t “do” much with it. It doesn’t allow for great flexibility in smart contracts, and even building efficient second layers is proving challenging. Ethereum was created to offer a more programmable alternative. And that’s fine, and potentially powerful, but – as Conner points out – when it comes to alternative monetary systems, slow and steady wins the race. The greater the simplicity, the fewer the number of attack vectors and things that can go wrong. When it comes to our money, that’s a good thing.
Joel Monegro of Placeholder Ventures outlines how his theory of value capture in crypto networks has evolved since he published his Fat Protocol theses. TAKEAWAY: It’s not just about value accrual (where the blockchain protocol deserves a much greater share of a network’s value than the applications built on top, in contrast to internet-based networks), it’s about value distribution. Introducing: P2B2C (protocol-to-business-to-consumer).
Crypto investment firm Pantera Capital looks back on the evolution of crypto scalability, adoption and institutional interest in 2019. TAKEAWAY: Investing is all about coming up with your own theses, or at least making informed decisions as to whose theses to buy into. Pantera has been coming out with monthly investor letters for a few years now, and whether you agree with them or not, their mix of top-down and bottom-up perspective (as well as their extensive yet useful reading list) will no doubt remind you of crypto developments that you had forgotten about.
Another review from Ikigai Asset Management uses the fun format of singling out their good, bad, interesting and TBD calls from 2019 monthly reports, and concludes with alarm over the monetary policy “generational theft.” A thought-provoking read.
MARKETS
Crypto lender Genesis Capital* reported a Q4 increase in outstanding loans of 21%, with over $1 billion in new originations. TAKEAWAY: Most of the increase came from cash loans (up from just under 10% of loan book in Q1 to almost 40% at the end of Q4), largely a result of the premium in the futures market which incentivizes borrowing for the basis trade. Going forward, as the halving approaches, working capital needs from miners upgrading machines could start to play an increasing role in cash demand. Regardless of where demand comes from, growth of the lending market is fundamental for the health of the crypto sector, even though it does add risk. (*Genesis Capital and CoinDesk are both subsidiaries of Digital Currency Group.)
(Note: for background on the crypto lending sector, check out our recently published “Crypto Lending 101” report.)
U.S.-based crypto exchange Bittrex has insured digital assets held in its cold storage to up to $300 million, the highest coverage yet offered by a cryptocurrency exchange. TAKEAWAY: This is good news, but comes up yet again against the “big names” barrier. The underwriter is Arch Syndicate 2012, which in turn is managed by Arch Underwriting at Lloyd’s, and has a 2019 stamp capacity of £300 million. Could it handle a “worst-case scenario”?
The Proof of Stake Alliance (POSA), a lobbying group pushing for legal clarity for staking services, has brought its membership count up to 18 with the addition of Coinbase Custody. TAKEAWAY: There has been substantial push-back on the current policy of taxing staking rewards as income. While these do represent an inflow, they are unlike dividends in that they compensate for the maintenance of the network . A high tax burden would discourage participation in staking networks, which would reduce their resilience, which would mean that a government can influence network health through fiscal policy. Not exactly the censorship-resistance that crypto creators originally envisioned…
Following on from the above, Ceteris Paribus crunched some numbers and detailed the impact a change in tax policy could have on staking rewards. TAKEAWAY: The need to sell the underlying tokens to meet the tax liability will act as a drag on token prices.
My colleague Galen summarized some of the main insights in the webinar he recently hosted with Kyle Samani of MultiCoin Capital and Jordan Clifford of Scalar Capital. TAKEAWAY: Institutional investors are wary of DeFi lending platforms – the returns may be higher, but so is the counterparty risk. This highlights the misconception (and mis-use) of the term “DeFi.” If one organization, team or even person has access to locked funds, how resilient is it?
(NOTE: We have another webinar later today - join Galen and Christine at 2:00pmET for a walk-through our Quarterly Review.)
NEW PRODUCTS
Crypto exchange Bitfinex has launched margin trading with up to 5x leverage for Tether Gold (XAUt) against USDT, BTC and U.S. dollars. TAKEAWAY: XAUt, launched at the end of January, is still trading on relatively low volumes (although with some early growth). Leverage, still relatively scarce on crypto exchanges, could make it more attractive. Many exchanges are reluctant to offer leverage on crypto trading, given the inherent volatility in most of the assets – but XAUt is a so-called stablecoin linked to the price of gold, a less risky proposition but one that could still produce attractive returns for traders (and losses, too, of course).
Binance US has added support for staking rewards for algorand (ALGO) and cosmos (ATOM). TAKEAWAY: What’s notable here is not that a U.S.-based exchange is offering staking management – Coinbase and Kraken also do that. The notable part is the assets: Coinbase and Kraken only support staking on Tezos so far, which Binance US does not yet list. According to its CEO, the exchange is waiting for “regulatory clarity.” This highlights how young and fragmented the concept still is.
Nomura Research Institute has launched a benchmark crypto index for the Japanese market, calculated using the MVIS index platform and with data supplied by CryptoCompare. TAKEAWAY: While the “local” aspect of the index may make the potential impact seem small, we should not underestimate the importance of the Japanese market. It’s not just the relative regulatory clarity and the support for institutional investment – according to figures from CryptoCompare, the yen is the third most significant base currency for bitcoin purchases.
Base currencies for 24hr bitcoin volume:
(Source: CryptoCompare)
MERJ, the stock exchange of the Seychelles (and one of the first licensed stock exchanges in the world to list its own tokenized equity), will list tokenized luxury cars for retail and institutional investors. TAKEAWAY: The idea of tokenized assets sounds good on paper, but we have yet to see any meaningful demand from institutional investors. Does tokenization add a real benefit? One oft-cited benefit is speed (even for fast cars, heh… sorry), but it is not clear how much of an improvement there is practical, or that investors would value it above the convenience of relying on more conventional (and tested) methods of settlement and storage. One day an obvious use case for asset tokenization will emerge – but so far, it doesn’t feel like the incremental benefits offered so far are enough to overcome investors’ general reluctance to change their behavior.
CRUNCHING NUMBERS
Crypto analytics firm Glassnode argues that using the number of bitcoin addresses as a proxy for the number of users is wrong – bitcoin addresses can hold funds for more than one individual, and one individual can hold many addresses. TAKEAWAY: The “new entities” line (green) may look flat to you, but remember that it’s new entities, which means user growth is clipping along at a steady pace. At face value, this is strongly bullish, especially given the lackluster price performance over the second half of 2019. The sharper increase in number of addresses (blue line) implies more activity from existing users – also bullish.
(Source: Glassnode)
ADOPTION
Months after introducing a cryptocurrency mining bill that legalizes operations that have gone through the licensing process, Iran's Ministry of Industries, Mining and Trade has issued more than 1,000 permits to cryptocurrency miners. TAKEAWAY: The demand for cryptocurrency in Iran will be worth watching closely, and not necessarily because of a regime that represses financial and social freedom (although that is indeed a compelling reason). It’s also interesting from a monetary policy angle: Iran’s inflation rate is almost 30%. Yet a directive issued last August banned the use of bitcoin for internal payments, so it seems like the government wants bitcoin mining to become an export industry.
Bitcoin usage among merchants is up, according to data from service providers. It turns out that he most common purchases are for luxury items such as jewelry and high-end tech. TAKEAWAY: This article highlights a reason why merchants may prefer to transact in bitcoin than other rails such as PayPal – costly and sometimes fraudulent chargebacks. It also feeds a niggling question that I have not yet found an answer to: why is Starbucks an investor in crypto exchange Bakkt? Does it really think we’ll end up buying coffee with crypto?
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As you saw above, our first CoinDesk Quarterly Review is out, and invite you to join us for a LIVE WEBINAR in which we will discuss the charts, conclusions and lingering questions. Sign up for free here – it’s on Tuesday, February 4 at 2:00pm ET. Come along, share your questions and tell us what you want to hear more about – we’ll be doing more of these, and your opinion matters.
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Previous newsletters: 57, 58, 59, 60, 61, 62, 63, 64, 65, 66, 67, 68 |
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