Hi all!
Well, that was interesting.
I mean, we all know the price is not the most important thing about bitcoin, it’s all about the network, and just look at all the building going on, etc., etc. But wow. Just wow.
Whether or not China was the trigger for the price surge, it sure gave us a lot to talk about. I’ve created one of this newsletter’s signature Special Sections for it below, to summarize the announcements and some of the comments. Politics can move markets, even in crypto.
And the Libra hearings also gave the perennial conversation around the stablecoin project an added urgency, even though not much has changed.
In THE BRIEFING I muse about the likelihood of ether futures coming to market soon. In a nutshell: I don’t think so, and it’s not just because of the relative lack of demand.
And some other news is also worth checking out – links below.
Read on…
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Regulated ether futures? Not any time soon
Earlier this month, Heath Tarbert – the new Chairman of the U.S. Commodity Futures Trading Commission (CFTC) – declared that ether, the token of the ethereum blockchain, was a commodity.
This is significant, coming from the regulator of one of the largest derivatives markets in the world. Why? Because it opens the door to the possibility of regulated ether derivatives in the near future. The chairman was even more specific: “I’d say it is likely that you would see a futures contract in the next six months to a year.”
The market got excited because this would enhance the token’s appeal to institutional investors. Derivatives enable hedging, a significant part of portfolio management and a solid support for long positions. A lively derivatives market, the reasoning goes, will encourage more investment, which will boost the price, which will encourage more investment, and so on.
Yet, with respect, I believe the chairman is mistaken. We will not see ether futures in significant volume on a regulated U.S. exchange any time soon. If ever.
Reputational risk
Although it’s not just about the lack of demand, let’s look at that first.
Ether futures currently trade on exchanges based outside the U.S., but volumes have been thin relative to the spot market. On BitMEX, Huobi and Deribit, three of the largest crypto platforms that offer ether futures, the average 24hr volume is less than 10% that of bitcoin, while the equivalent ratio in the spot market is almost 25%.
The difference could be due to ethereum’s relative youth, and the gap could close as the network matures. Or it could be that bitcoin will always be the institutional-grade asset of choice, rendering ether derivative demand too insignificant for major markets to profitably develop.
Either way, demand can be flexible. The real barriers to a successful launch of ether derivatives go much deeper.
Underlying risk
Last week ethereum developers announced the target date for the next system-wide upgrade: December 4. This will be executed via a hard fork, in which the entire ecosystem needs to change – blocks processed on the old version will not be valid on the new. There are several of these coming up.
This introduces an additional element of risk into the market. Earlier this year, an upgrade was delayed just 48 hours before it was due to launch, due to a “critical vulnerability.” And while it is extremely likely that bugs will be found and fixed in time, there is always the “what if?” that risk-takers have to focus on.
Even more worrying for ether derivative watchers is the upcoming consensus algorithm shift. Ethereum currently runs on a proof-of-work consensus algorithm similar to that of bitcoin. It has long been working on a migration to a different system, called proof-of-stake, in which the amount of ether you “stake” determines the say you have in the blockchain’s governance.
This is like changing the motor of your car while it is speeding along the highway. No matter how much testing is done and no matter how many parallel systems are in operation, it’s risky.
True, risk is precisely what derivatives were invented to mitigate – but the creators of derivative products like to have that risk reasonably quantifiable. While derivatives can help investors control risk, they don’t eliminate it; they redistribute it. The extra risk for exchanges will need to be compensated, and uncertainty of this magnitude could make ether derivatives prohibitively expensive.
What’s more, when ethereum hard forks over to its new algorithm, there is always a risk that not all miners will switch. The current ethereum network could continue to exist and perhaps even thrive if enough participants wish it. Which token would derivative contracts track?
Existential risk
Another risk looming over ethereum is that of a network rewind. In 2016, in response to a ~$60 million hack of an ethereum-based application, ethereum’s core participants decided to rewind the blockchain to its pre-hack state, restoring the stolen funds and creating a split in the ecosystem that persists to this day.
This was a few years ago, when ethereum was still young and many believed that such a large hack would stunt its growth prospects – few expect it to be able to successfully execute something similar today. But this past weekend, ethereum’s creator Vitalik Buterin posted the following poll on Twitter:
Thankfully, the “never rewind” majority should reassure the market of the blockchain’s integrity and stability. But almost 40% of voters think ethereum should be able to, and the fact that Vitalik is even asking the question is a reminder that it is possible.
Ether may be a “commodity” in the eyes of the CFTC – but, traditionally, commodities don’t split or change their history. Has the regulator ever approved derivatives based on such a malleable asset? How would you even start ensuring that there is no information asymmetry and the risk is fairly priced in?
But there’s an even more existential question.
Regulatory risk
Ethereum’s proposed algorithm change could lead to a bigger adjustment: ether could stop being a commodity and become a security.
Under proof-of-stake, ether holders can “stake” their tokens in order to influence the protocol’s governance. In exchange for doing so, they earn an income.
Is this enough to make ether a security rather than a commodity? Maybe.
This would not invalidate any outstanding ether derivatives. It would, however, move them into the joint jurisdiction of the CFTC and the U.S. Securities and Exchange Commission (SEC).
This becomes significant when you compare the two securities regulators’ views towards crypto assets. The CFTC has long championed the innovation behind cryptocurrencies – former chairman Chris Giancarlo is affectionately known in the blockchain sector as “Crypto Dad.”, and the new chairman’s recent comments referenced earlier show that he seems to feel the same.
The SEC, on the other hand, has repeatedly blocked the issuance of ETFs based on bitcoin, on the grounds that it is too immature a market. If it thinks bitcoin is not ready, it’s a stretch to conclude it will think differently about ethereum.
This is likely to give any regulated derivative platform pause.
Investment risk
So, given ethereum’s development stage and outlook, as well as little evidence of unsatisfied demand, ether derivatives on a U.S.-based regulated exchange are unlikely any time soon. There are a lot of issues to work out, in a sector that is already giving regulators and infrastructure providers more than enough to worry about.
This shouldn’t affect the phenomenal amount of work underway on the platform. It is, however, likely to affect broad institutional acceptance of ether as an investment asset. Large investors rarely take unidirectional bets.
Does that matter? Not necessarily – development will continue, and ethereum could still end up being a new operating system for the economy. Ether was not created as an investment asset.
Then again, nor was bitcoin. Markets have a way of latching on to and commoditizing ideas, and ethereum may one day become the darling of the alternative investment world. It’s still very young, though, has many teething pains ahead of it, and a while to go before traditional financial infrastructure supports its entrance into the mainstream.
– Noelle Acheson
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* six especially interesting entries - I'm all about saving you time, but do at least skim the rest.
CHINA
Kicking things off, China’s President Xi Jinping, speaking as part of the 18th collective study of the Political Bureau of the Central Committee, said the country needs to “seize the opportunity” afforded by blockchain technology, which was an “important breakthrough for independent innovation.”
As if there were any doubt that they mean it, details of over 500 enterprise applications were then published by the Cyberspace Administration of China (all entities developing blockchain technologies have to register for supervision).
Speaking at a forum in Shanghai, Li Wei, an official at the PBoC, encouraged commercial banks to increase investment in the development of blockchain technology.
Shortly after, the Standing Committee of the 13th National People’s Congress passed a law that aims to encourage research and development on commercial cryptography technologies, while building up an inclusive standardized regulatory system for the market.
To show they’re not messing around, the government has apparently banned any article claiming that blockchain technology is a scam.
And, why not, China’s Communist Party has released a blockchain-based app for pledging loyalty.
According to @cnLedger, President Xi rarely discusses a particular technology, and has only done so previously for the internet and artificial intelligence. This implies that, to the Party, blockchain is a big deal.
Dovey Wan dug into local internet searches as a proxy for the interest trigger – we expected a bump, but geez. She also pointed out that the most likely market beneficiaries will be stocks and lower-price tokens, as bitcoin is seen as “too expensive” in a culture that likes to own things whole.
The investing frenzy that resulted prompted a warning from Chinese media: “Support for the sector does not equal an endorsement of speculative trading.” Ok. Apparently even non-tech firms are dusting off their vocabulary, on the theory that saying the word “blockchain” will boost their share price.
Amid the excitement, Michael Casey stressed that complacency on blockchain development will put the U.S. at an economic disadvantage. And Alex Gladstein reminded us of the dark side: that blockchain technology can be used as a tool of surveillance and control.
Many take the pronouncements to mean that the launch of the Chinese digital currency is close. Huang Qifan, Vice Chairman of China Center for International Economic Exchanges, a Chinese think tank with strong ties to the Chinese government, said that he believes China will be the first "central bank in the world to issue sovereign digital currency", and expressed his concerns with the “outdated, inefficient and costly” SWIFT payment system and Facebook's Libra stablecoin.
BIG IDEAS
*Bitcoin as a Hedge: Hype or Fiction? (SFOX) – Um, both? Bitcoin may be seeing some use today as a hedge against inflation and uncertainty, and its role here is likely to grow, but it is still a highly speculative asset class.
*Demystifying Social-News Analytics for Crypto-Assets (intotheblock) – A replay of last week’s webinar.
*Clean Prices: A Required Step for Crypto to Mature (Digital Asset Research) – The importance of pricing quality on asset valuations, and how to tell the good from the bad.
Bitcoin and the Denationalization of Money (Mises Institute) – The virtues of sound money, and the potential role of bitcoin in a new central banking system.
Digital Money (Phil Bonello) – Bitcoin is a put option on dominant fiat currencies.
Crypto Convergence: From Decentralization to Direct Listings (CoinDesk) – The recent SEC action against Telegram points to a shift in focus in token regulation, and hints at a way forward.
MARKETS
A look at exchange activity surrounding Friday's BTC price spike (The Block, paywall) – A detailed look at the run-up timeline, and where most of the activity was concentrated (hint: not China).
Willy Woo pointed out that the ramp up was dominated by “trader games,” not fundamental buy-in, and that markets don’t surge up just because of news.
Alex Krüger pointed out that bitcoin’s relative illiquidity does leave it vulnerable to manipulated price swings.
JP Koning reminded us that cryptocurrency volatility is not necessarily tied to overall trading volume.
*James Todaro posted a riveting animated graphic that shows the evolution of the crypto exchange sector over the past few years – Binance just came out of nowhere, fast.
Fiat-to-Crypto ‘Carry Trade’ May Tempt Traders Tired of Negative Interest Rates (CoinDesk) – The increasing differential in returns between holding fiat and bitcoin could boost volumes in the latter as traders borrow in fiat to invest in crypto.
Bitcoin Speculators Gain Upper Hand as Derivative Trading Surges (Bloomberg) – The leverage and flexibility of the derivatives markets are fueling strong volume growth.
How Bakkt Bitcoin options could change the crypto market (Decrypt) – With most derivatives activity taking place outside the U.S., will Bakkt’s options offering make a difference?
Paxos Wins SEC ‘No-Action’ Letter to Settle Equities on a Blockchain (CoinDesk) – Credit Suisse and Société Générale will be the first companies to use the new Paxos Settlement Service, which will operate on a private and permissioned network.
Securities Numbering Body Launches Task Force to Standardize Digital Assets (CoinDesk) – The Association of National Numbering Agencies (ANNA) wants to investigate the creation of uniform digital asset labels to enhance compatibility with traditional exchanges.
Grayscale sees inflows up by 200% in Q3, but where are its competitors? (The Block, paywall) – The relatively high premiums point to a lack of attractive alternatives in the market.
Avalon Bitcoin Miner Maker Canaan Officially Files for $400 Million US IPO (CoinDesk) – Finally, a relatively liquid way to bet on bitcoin’s growth via the traditional stock market.
PROFILES
Fidelity has quietly rebranded its crypto VC — here's a look inside the business (The Block, paywall) – Recently rebranded to Avon, the firm invests in equity rather than tokens, and has so far backed BlockFi, Flipside Crypto, and Elementus.
CRUNCHING NUMBERS
Glassnode introduced a metric that measures how old bitcoin are that move in the network.
Tuur Demeester shared some calculations of how much net buying needs to happen over the next few months to maintain the current price.
REGULATORS AT WORK
US Financial Regulators Join UK FCA’s ‘Global Sandbox’ (CoinDesk) – The SEC, CFTC, OCC and FDIC have joined the Global Financial Innovation Network, an international alliance of government regulators led by the UK’s Financial Conduct Authority seeking to encourage collaboration on fintech development.
Ontario Regulator Lets Security Token Startup Test Secondary Trading (CoinDesk) – The Ontario Securities Commission is allowing TokenGX, an affiliate of TokenFunder, to facilitate secondary-market trading of its tokens by giving the firm regulatory relief for a short time.
New York’s Financial Regulator Is Reviewing the Controversial BitLicense (CoinDesk) – Speaking at Georgetown University’s Institute of International Economic Law, NYDFS Superintendent Linda Lacewell acknowledged that the sector has evolved since the law was originally passed.
SECURITY TOKENS
Blockstack’s STX Token Now Traded on Binance and HashKey Pro (CoinDesk) – These are the first exchanges to list the Reg A+ token, which should expand the access of investors in Asia.
Ava Blockchain Founder Plans to Launch in December (CoinDesk, video) – Christine Kim talks to Emin Gün Sirer, creator of the Avalanche blockchain, which aims to create a modular blockchain infrastructure capable of tokenizing assets, implementing decentralized applications and replacing legacy financial technology (with some eye-opening observations on bitcoin as a bonus).
STABLECOINS
Regulate Stablecoins: Don’t Squash Them (CoinDesk) – Nathan Kaiser, founder of Eiger Law and a fellow at the Berkman Klein Center for Internet & Society at Harvard University, argues that geopolitical and technological developments highlight the need to embrace financial innovation.
US Lawmaker Introduces Bill Classifying Stablecoins as Securities (CoinDesk) – Rep. Sylvia Garcia (D-Texas) has introduced legislation to the House Financial Services Committee to regulate stablecoins under the Securities Act of 1933, since their value is determined by a basket of assets.
LIBRA WATCH
Facebook CEO Mark Zuckerberg’s testimony in front of the House Financial Services Committee gave birth to some excellent and entertaining (and long!) tweet storms, such as that of my colleague Nik De, the Guardian’s Laurence Dodds and Nathaniel Whittemore.
Zuckerberg’s main message during the session was about the need to compete in financial innovation, to avoid ceding the playing field to China (see above). Separately, Libra’s leader David Marcus warned that China was on the verge of “re-wiring” a large part of the global economy.
Su Zhu synthesized Libra’s different marketing messages to different constituents, from “banking the unbanked” to “diversifying from USD hegemony”, while warning that trying to be too many things to too many people usually ends in failure.
One startling revelation: Zuckerberg assured the regulators that the company would pull out of the project were it to launch before getting the needed regulatory approvals.
This statement is likely to be remembered, as Beatrice Weder di Mauro, president of the Centre for Economic Policy Research, believes that the project is unlikely to ever get approved (she’s not the only one).
In spite of six hours of testimony, there is still a notable lack of clarity, unlikely to dissipate any time soon. In response to a petition by Congressman Emanuel Cleaver II, the U.S. Department of the Treasury has recognized that there are many “unanswered questions” over Libra.
Elsewhere, statements made by Sun Tianqi, chief accountant of China’s State Administration of Foreign Exchange, imply that the project will not be welcome in China, as it could threaten capital controls and enable illegal transfers. Tencent, the Chinese internet giant and parent of messaging app WeChat, believes that Facebook’s token is a “prudent and rational” move, but is worried about the impact on existing digital payment systems. And in an interview with the Financial Times, ING’s CEO Ralph Hamers said the Libra project’s unresolved regulatory issues place a degree of risk on banks, as “gatekeeper[s] to the financial system.”
PODCASTS
BITCOIN MACRO: We’re trying something new – here are the first three episodes of a pop-up podcast series focused on bitcoin as an investment asset, in which we look at broader macro trends and what they say about cryptocurrencies.
Join us for conversations with Travis Kling on why bitcoin is a “baby X-man”, Caitlin Long on bitcoin as insurance against financial collapse, and Nic Carter on bitcoin’s evolution as a safe haven asset .
*THE SCOOP: Frank Chaparro chats to Jay Biancamano, Managing Director at State Street, about the bank’s interest in digital assets, why its clients are not yet interested in crypto custody and how all assets will eventually be traded on a blockchain.
*FLIPPENING: Parts one and two of a series on exchanges, in which Clay Collins of Nomics talks to Nathaniel Whittemore about the history of crypto exchanges, the emergence of a huge long tail, and what institutional traders are actually looking for (hint: it’s not institutional status markers).
WHAT BITCOIN DID: Peter McCormack talks to investor and entrepreneur Dan Tapeiro about the power of Twitter, the migration of talent into the space and how many people don’t understand that bitcoin didn’t just come out of nowhere.
MONEY NEVER SLEEPS: Peter Townsend interviews Coinbase’s Zeeshan Feroz on stage at the BFC EU 2019 conference in Dublin about the exchange’s institutional plans (there’s a cameo by me at the end!).
A-HA!
Money Buys Some Happiness; Health Buys You More (Ritholtz) – The title says it all.
The 5-Hour Workday Gets Put to the Test (Wall Street Journal, paywall) – It seems that it works. Just sayin’.
Memos (Sriram Krishnan) – Just that, memos, but iconic, meaningful, interesting ones.
The Huge Trend That Realigned the Media Industry Is Over (The Atlantic) – Things are grim in media-land. Digital helps, but still…
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FUNDING
Trading software provider CoinRoutes has received $3 million in investment from cryptocurrency brokerage and custodian Bitcoin Suisse.
Decentralized P2P crypto trading platform SIBEX has raised a seed round of 1.78m Swiss francs (~$1.8m) from investors such as Chinese venture firm Fenbushi Capital, Swiss stock exchange group SIX and blockchain-focused investment firm Accomplice VC.
Huobi Japan has received almost 500 million yen ($4.6 million) in investment from Financial Products Group, a Tokyo-listed company involved in leasing, real estate, insurance brokerage and mergers and acquisitions.
FIRMS & PRODUCTS
Galaxy Digital Asset Management, a division of the crypto merchant bank Galaxy Digital, is launching two bitcoin funds in November to give accredited investors low-fee, institutionally managed bitcoin exposure.
ICE-backed crypto exchange Bakkt will launch options on its bitcoin monthly futures contracts on December 9. It also announced plans to launch a consumer-facing app within the next few months to help retail customers transact with cryptocurrencies.
Crypto asset manager Morgan Creek Digital has raised $60.9 million for its second venture fund, including investment from two public pension funds, an insurance company and a university endowment.
Binance has launched a fiat-to-crypto gateway for Nigeria’s naira, and plans to add the South African rand and the Kenyan shilling in the near future. The U.S. arm, Binance.US, has announced the listing of dogecoin under the DOGE/USDT trading pair.
Institutional cryptocurrency custody provider Anchorage has launched Anchorage Governance, an on-chain governance voting platform for MakerDAO’s token holders.
Cryptocurrency exchange Bittrex has announced it is moving headquarters from Malta to Liechtenstein.
Delaware-based Kryptoin Investment Advisors, together with the former managing director of the World Gold Council and the portfolio manager behind SPDR Gold Shares Jason Toussaint, has filed a proposal with the SEC for a bitcoin ETF.
Australian digital asset exchange Mine Digital has launched with an Australian Financial Services License, which allows for markets in crypto asset spot and derivatives products.
Digital asset trading platform ErisX will use FIS back-office services to support its crypto futures contracts.
Trustology, the digital asset custody provider built by former bankers from UBS, BNY Mellon and Bank of America, has released a custodial wallet compatible with decentralized exchanges.
The Algorand blockchain has been given a sharia-compliant certificate by the Bahrain-based Shariya Review Bureau.
Bitcoin IRA is partnering with digital currency trader and lender Genesis Trading to offer interest on cryptocurrency and cash holdings, starting on an incremental basis in November.
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.
Our first webinar of the new series, on crypto OTC trading, had a few sound glitches, but some great content! We’ll be posting the recording soon.
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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