Hi all!
Greetings from Lisbon, where I’m moderating a couple of crypto asset panels at the tech conference Web Summit. It’s fascinating to see how the digital asset and fintech sectors are still so different, but getting closer.
Below you have your usual long list of compelling articles on sector development. With so many new crypto products hitting the market, I’ve set up a new section in CHAIN LINKS called, originally, “New Products.”
In THE BRIEFING, I ask why crypto enthusiasts are so convinced the upcoming bitcoin halving will produce a bull run, when the relevant information is already known to all.
Did you miss our webinar on crypto OTC trading, with Martin Garcia of Genesis Trading and YinFeng Shao of Reciprocity Trading? It's now up on YouTube.
I hope to see some of you next week at our event Invest: NYC, where you can learn more about the legal aspects of custody, the perils of indices, the drama of data and much more. If you’re there, be sure to say hi!
With that, read on…
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Halving-full or halving-empty? Why this time could be different
Whether you call it the “halving” or the “halvening,”* one of the few things we can be sure of in crypto is that the conversation around the upcoming programmed protocol change will intensify over the next six months.
Why? Because previous halvings have coincided with bull runs. And who doesn’t like a bull run?
Many are convinced that the next one will have the same market effect, and it’s not just a belief that history repeats itself – models have emerged to support this theory.
But if the bull run is expected, why hasn’t it already happened? Why isn’t it already priced in?
Because the halving is much more than an event – it is also a narrative, and an uncertain one at that.
What and why
First, a review of what the halving is and why it happens. To keep inflation under control, the bitcoin protocol was programmed with a hard limit of 21,000,000, with new bitcoins entering the system as incentive for network processors (“miners”) in a gradual and controlled rhythm. The rate at which they are created is reduced by half every four years, ostensibly to mimic the increased difficulty of gold mining. On November 28, 2012, the initial reward of 50 new bitcoins was halved to 25, and as of July 9, 2016, miners have been receiving 12.5 bitcoins for each block successfully processed.
The next reduction, after which the network incentives will be 6.25 bitcoins per block, is expected in May 2020.
(chart by Digital Asset Research - statistical model, NOT price predictions)
The above chart shows that the price started moving up before each of the previous halvings, and continued for some time after. Yet the data set is limited – the market has only experienced two of these events, and it could be a stretch to assume that the pattern will repeat itself.
That’s where some fundamental supply/demand analysis comes in.
Supply shock
Crypto investor and analyst Tuur Demeester recently pointed out that, for bitcoin to maintain a price of over $8,000 until the next halving, the market would need to see $2.9 billion of investment inflow to offset the deflationary effect of new bitcoins entering the system. Even assuming that investment growth remains constant, the reduction in selling pressure after the halving (with fewer new coins hitting the market) would lead to a price boost.
Pseudonymous trader Plan B has gone a step further and used the stock-to-flow (S2F) ratio – which divides current inventory by annual production – to create a model that retroactively predicts past price movements for bitcoin with a high degree of accuracy, using gold and silver as a benchmark. This model predicts a bitcoin price of almost $60,000 after the next halving (the black line in the chart above).
While this model has its critics, it has undergone rigorous cross-examination, and it seems that the regression holds up . It also makes intuitive sense: a reduction in supply should enhance value, all else being equal. So why isn’t the price already heading up to that lofty level?
This is where narrative comes in.
Technically, the halving isn’t a “fundamental” event, in that it does not represent a value driver in traditional investment terms. “Fundamental” in asset analysis refers to variable yet quantifiable features that can drive a valuation, such as profit, market size and balance sheet. In this sense, pre-programmed scarcity is not fundamental, it’s factual.
We can hope that facts themselves are not open to interpretation, but their impact almost always is. No-one doubts the halving will happen – yet the narrative around its influence is not clear.
Let’s look at why.
Reasons for skepticism
First, some argue that the halving is already priced in. The move from $3,300 to $12,000 earlier this year? That was it. The market is relatively efficient in terms of information distribution, the argument goes, so smart investors would obviously have incorporated the supply adjustment into their models and taken positions accordingly.
Second, models tend to fit until they don’t. The bitcoin ecosystem today is arguably very different from previous halvings: four years ago, crypto derivative markets were in their infancy, institutional involvement was slim and valuation frameworks were practically non-existent. It’s not unreasonable for investors to believe that “this time it’s different.”
Some industry insiders have hinted that the halving could be negative if it reduces miners’ profitability and forces many of the smaller ones out of the market. True, this could be offset by a price increase, but if that turns out to not be proportional, increased network centralization could trigger concerns about security.
Also, in traditional markets, price is rarely a function of supply. It’s more influenced by demand, which the S2F model does not take into account. In the absence of an established and widespread fundamental use case (for now), demand in crypto markets is narrative-driven.
Bull run ahead?
Yet in recursive logic, demand could be affected by the halving narrative. The widely held expectation that it will influence the price could stimulate demand for bitcoin as an investment asset, which will influence its price, especially as new investors – attracted by the supply models and historical correlation – enter the sector.
And asymmetric risk comes into the picture: the chance that the models are wrong and I lose everything, will have less of an impact on my portfolio than the possibility the models are right and I make a 500% return.
So, even if the supply-driven models are trying to re-write traditional investing principles, it doesn’t mean that we won’t see a price rally.
If that happens, the narrative will coalesce around the confirmation that the supply-based models were right, even if they weren’t the cause. We could end up with the head-spinning cycle of narrative influencing price, and price influencing narrative.
Even so, this would not be the only head-spinning feature of the crypto markets over the coming months. The buzz around bitcoin’s supply schedule will highlight its unique economics, which in turn should awaken even more investor interest.
If this leads to more inflows at a time when new supply falls, the charts that predict a post-halving rally will turn out to have been right all along.
Then again, narratives can be fickle, and brave is the investor who assumes they’ll hold. They also rarely thrive in isolation – and, let’s face it, there are a lot of things going on out there that can have as great an influence on bitcoin’s price.
Either way, it’s hard to deny that the emergence of forecasting models is a positive step that will help us all better understand market dynamics and bitcoin’s role in a broader financial market. Sophisticated investors will no doubt both welcome these and treat the underlying assumptions with a healthy dose of skepticism.
*(I’ve said it before, this sector is notorious for its confusing vocabulary – I choose to go with "halving" because I generally prefer shorter words)
Disclosure: the author holds small amounts of bitcoin and ether, with no short positions.
– Noelle Acheson
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* six especially interesting entries - I'm all about saving you time, but do at least skim the rest.
BIG IDEAS
*Bitcoin, 11-years in (Moneyness) – JP Koning manages to poke holes in the marketing hype while still sounding optimistic about bitcoin’s prospects.
*What kind of assets are cryptocurrencies: an empirical evaluation (Nic Carter) – What sort of payments system are cryptocurrencies?
How Well Do Americans Understand Money? (Genesis Mining) – Crypto mining firm Genesis Mining surveyed 1,000 U.S. residents and uncovered some deep misconceptions about how money works (for instance, almost 30% believe the dollar is still backed by gold).
The Quality Minus Junk Quant Thesis in Crypto-Assets (intotheblock) – Factor investing and the Quality Minus Junk factor applied to the digital asset market.
A surprising number of traditional investors are already in crypto (Decrypt) – A recent study shows that over 70% of investors in the digital security ecosystem are traditional venture capital firms or investment managers.
*Ethereum is now unforkable, thanks to DeFi (Dragonfly Research) – An intriguing thought experiment on what an ethereum fork today could look like.
Lex Node expanded on what the growth of decentralized finance means for public blockchain forks, and on blockchain governance more broadly.
Bitcoin Needs ‘Real Use Cases’ to Become Digital Gold, Says ICE Chief (CoinDesk) – During a quarterly earnings call, ICE chairman and CEO Jeffrey Sprecher said that he doesn’t see bitcoin becoming a store-of-value asset until it is actually used for real-world applications, such as payments.
When Will We See Asset Class Rotations Into Crypto? (AltCoin Magazine) – Jeff Dorman highlights the advantage non-crypto focused investors have when it comes to spotting sector trends.
Stop Calling Bitcoin Deflationary (Conner Brown) – A deeper look at what we actually mean by “deflationary” and the misunderstanding is significant.
‘Magic Internet Money’ May Be Too Volatile to Attain Gold Status (Bloomberg, paywall) – Bitcoin is not proving to be a good payment token; yet can it at this stage be considered a store of value?
MARKETS
Futures Are Pulling Cryptocurrencies Out of the Dark (Bloomberg, paywall) – Rather than add volatility and feed speculation, the emerging derivative markets add depth and maturity.
Bitcoin Price Slides 2% After Deribit, Coinbase Flash Crash (CoinDesk) – It’s not yet clear what happened.
Deribit flash crash: a letter from the founders (Deribit) – …but Deribit has accepted responsibility, apologized and will reimburse losses.
Genesis Clocks Quarterly Surge in Cash and Stablecoin Lending (CoinDesk) – The crypto lending and OTC trading firm published its Q3 figures, which show the highest absolute growth in loan originations in the firm’s history, and highlight the increase in fiat and stablecoin loans to over 30% of the total.
Another Credit Bubble Grows: the $5 Billion Crypto-Loan Market (Bloomberg, paywall) – According to blockchain data company Graychain, the crypto credit market has expanded too quickly, under lax controls.
Lone Bitcoin Whale Likely Fueled 2017 Price Surge, Study Says (Bloomberg, paywall) – An as-yet-unpublished academic paper claims that the 2017 bitcoin price run-up was the result of manipulation by one user on Bitfinex.
The article generated a considerable amount of controversy – CoinDesk hasn’t covered it yet, we’d rather see the paper first.
BitMEX exposed thousands of client emails, but big OTC traders say they're unfazed (The Block, paywall) – In spite of potential security breaches resulting from the accidental sharing of client emails, so far few market participants plan to change their trading habits.
NEW PRODUCTS
CME Reveals Details of Upcoming Bitcoin Options Contracts (CoinDesk) – Each contract will be based on one of CME’s bitcoin futures contracts (which in turn consists of five bitcoin); will be quoted in USD per bitcoin with a tick size of $25 (or $5 for reduced tick sizes); will trade from 5:00 P.M. Central Time Sunday to 4:00 P.M. Central Time Friday; and will settle into one CME bitcoin futures contract upon expiry.
There’s a New Way to Get Your Stolen Crypto Back (CoinDesk) – ReclaimCrypto, a joint venture between blockchain analytics startup Confirm and global investigations firm Kroll, is part of a growing focus on crypto recovery and forensics.
FTX Launches Futures on Index of 8 China Cryptos Amid Xi Blockchain Pump (CoinDesk) - The perpetual futures contracts are based on the Dragon Perpetual Futures Index (DRGN-PERP) tracks a basket of coins including BTM, IOST, NEO, NULS, ONT, QTUM, TRX, and VET, based on a weighted average of their respective prices.
Polychain, Web3 to Back Polkadot Projects With New Ecosystem Fund (CoinDesk) – Polychain Capital is partnering with the Web3 Foundation to launch a new investment fund for projects building atop the interoperable proof-of-stake Polkadot network, which is expected to go live later this year.
CoinGecko Now Tracks Data From 20-Plus Crypto Derivatives Markets (CoinDesk) – The cryptocurrency data aggregator has added a new service that publishes data on about 100 derivative products such as perpetual swaps and futures from over 20 derivatives exchanges.
Canadian Fund Manager to List Bitcoin Fund on Major Stock Exchange (CoinDesk) – 3iQ received initial approval from the Ontario Securities Commission to launch a closed-end bitcoin fund on either the Toronto Stock Exchange or the TSX Venture Exchange later this quarter.
Bitmain Seeking US IPO With Confidential SEC Filing: Report (CoinDesk) – The China-based mining giant is said to have confidentially filed for an IPO with the U.S. SEC, before a recent management shake-up saw the ousting of co-founder Micree Zhan.
Blockstack Will Pay Liquidity Provider GSR to Trade Its STX Token (CoinDesk) – Digital asset trading firm GSR will provide liquidity for the STX token, one of the first to be registered with the SEC, for traders outside the U.S.; they join Binance and Hashkey.
PROFILES
*State Street, the $2.7 trillion custodian, is quietly diving into crypto – but don't expect bitcoin custody (The Block, paywall) – Their clients are not investing in cryptocurrencies.
"We built the success in China early on and kept the momentum," a close look at Huobi’s global business layout (The Block, paywall) – The business model and the apparent strategy of one of the world’s largest exchanges.
ICE CEO: 'all kinds of financial institutions' are talking to Bakkt (The Block, paywall) – Insight into the upcoming options launch.
European (sic) is leading in crypto but no one knows about it: A data-driven analysis of the London ecosystem, Part I (Etienne) – An overview of London’s crypto investment scene.
CRUNCHING NUMBERS
*Seeking Uniform Valuation for Crypto (Hash Cib) – An attempt to apply traditional valuation frameworks to blockchain networks.
What Real Deep Learning Applied to Social Media Tells Us About the Crypto Market (intotheblock) – Digging deeper into the accuracy-simplicity tradeoff in analyzing social signals for sentiment indicators.
REGULATORS AT WORK
Global banking watchdog to study capital requirements for crypto assets (Reuters) – The Basel Committee, which includes banking regulators from the United States, Europe and Japan, has agreed to publish a discussion paper on the prudential treatment of digital assets.
Swiss-based securities dealer charged by SEC and CFTC for failing to register security-based swaps (The Block) – The SEC and the CFTC are accusing XBT Corp., a Switzerland-based securities dealer, with offering unregistered security-based swaps, as well as using marketing methods to target U.S. bitcoin users.
SECURITY TOKENS
tZERO, Tezos Foundation to Tokenize £500 Million in UK Real Estate (CoinDesk) – The blockchain startups will tokenize and distribute portions of properties financed by U.K.-based Alliance Investments, starting in Q1 2020 with £20 million in equity of a water-front development currently under construction in Manchester.
Japanese Merchant Bank Signs Deal to Tokenize Estonian Properties (CoinDesk) – MBK, a Tokyo-based merchant bank, will work with BitOfProperty, a Singapore-incorporated, Tallinn-operating enterprise selling fractional real estate ownership.
STABLECOINS
The stablecoin anathema (FT Alphaville) – Gobbledygook skewered.
PODCASTS
*THE VENTURE COINIST PODCAST: A recording of a panel moderated by Luke Martin at the Compound Finance Thesis II event with Nic Carter of Castle Island Ventures, Tom Lee of Fundstrat and Marc Bhargava of Tagomi, on the evolution of institutional involvement in crypto markets. Favorite quote, from Tom Lee: "People have a 2008 hammer, and they're looking for a 2008 nail."
ON THE BRINK: Tom Lee, co-founder of research house Fundstrat, talks about the parallels between crypto and the wireless industry, the frustrating lack of a valuation framework and how investing approaches change over time.
STATE OF CRYPTO: In a new podcast series from crypto asset manager Amun, Laurent Kiss is joined by Amun founders Hany Rashwan and Ophelia Snyder, Matt Hougan of Bitwise and Barry Pershkow of Chapman and Cutler LLP, to discuss the SEC’s approach to ETFs, the recent dismissal and a potential way forward.
BISNESS: Agustin Carstens, general manager of the Bank of International Settlements, underlines that central banks are not anti-innovation but that stablecoins need to be handled carefully, and that there are still many holes in what Libra represents.
INVEST LIKE THE BEST: Patrick O’Shaughnessy interviews Paxos CEO and co-founder Chad Cascarilla about the technology stack of the current financial system (money is a protocol, the banks are middlemen), the potential of stablecoins and the future of digital assets.
CHAIN REACTION: Tom Shaughnessy of Delphi Digital talks to crypto analyst Kevin Kelly and macroeconomic analyst Luke Gromen about the macro environment, the de-dollarisation of commodity markets and the potential role of bitcoin as a neutral reserve.
THE CRYPTO STREET PODCAST: Crypto traders discuss the recent Deribit drawdown.
A-HA!
Why It’s So Hard to Overthrow the Mighty U.S. Dollar (Bloomberg, paywall) – The dollar’s use in international payments tracked by financial institutions has risen since the start of the decade; replacing it will be very hard work.
Status of Continued Unconventional Monetary Policy Tools (CoinShares) – The first in a series of papers on macro perspectives in investing.
Bryan Callen: Cracking Wise (The Portal, podcast) – An engrossing and entertaining conversation between Eric Weinstein and Bryan Callen on life, comedy, conflict and freedom. Favorite quote: "A gentleman is someone who is never rude by accident." |
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FUNDING
Token offering platform CoinList has raised $10 million with backing from Twitter and Square CEO Jack Dorsey, Polychain Capital and Collaborative Fund.
FIRMS
Estonia-based digital asset platform DX.Exchange is ceasing operations as it pursues a merger or sale. (Frank Chaparro of The Block is doing some digging.)
Chainstone Labs, led by Satoshi Roundtable founder Bruce Fenton, has registered its subsidiary Watchdog Capital with the SEC and FINRA, to potentially engage in securities underwriting, investment banking, crowdfunding, Reg A+ offerings, real estate investment trusts and over-the-counter trading for retail and institutional business.
Malta-based cryptocurrency exchange Binance, the largest in the world in terms of volume, is opening an office in Beijing, to complement its office in Shanghai.
Binance has registered a new subsidiary with Korean authorities, which could point to an imminent launch in the region.
It has also said that it plans to expand in Russia, although it is not clear whether this means a local exchange launch.
Crypto derivatives exchange BitMEX will adjust weights of some of its indices on November 22, introducing Huobi, Gemini and itBit.
Cryptocurrency markets group Huobi plans to establish a new international team and business line focused on institutional clients, including fiat desks, derivatives and custody.
U.S.-based Poloniex customers can no longer trade on the platform, and should withdraw their assets as soon as possible.
Digital asset custodian Koine has secured an electronic money license from the U.K.’s FCA, and has applied for a Luxembourg license.
London-based cryptocurrency exchange Luno is reopening its Singapore office, after two local banks agreed to open bank accounts for the firm.
Security token startup Harbor has secured a transfer agent license from the U.S. SEC, to complement its broker-dealer license granted by FINRA last month.
Crypto trading technology provider Mercury Digital Assets has joined forces with crypto custodian UniCrypt to create a new institutional liquidity pool based in Switzerland and Liechtenstein.
Have a tip? Drop me a line at noelle@coindesk.com. |
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| Our annual Invest: NYC is fast approaching. On November 12th, at the Marriott Marquis in New York City, you can hear institutional investors, infrastructure builders and sector participants discuss the trends in and outlook for crypto markets.
This year will focus on bitcoin’s role in institutional portfolios in an environment where macro indicators are telling conflicting stories and uncertainty seems to be the new normal.
Come join us! It would be great to say hi.
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.
Here you have 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 noelle@coindesk.com (no guarantee of inclusion, though).
Crypto Market Data 101 – Nomics - Every weekday, 3pm ET
How to choose the right crypto-asset to invest in? – IntoTheBlock – Nov 20, 12pm ET
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