“That’s Our Two Satoshis” — What We Got Right & Wrong with Digital Assets in 2019

Jeff Dorman, CFA
Jan 6, 2020
The digital asset industry went through many ups and downs in 2019, and that’s without even taking prices into consideration. But let’s first address price. 2019 was a tale of two halves (first half of the year was good; the second half of the year was bad). But price is fickle, impossible to forecast, and a lagging indicator. Instead, this piece will focus on the bigger picture themes and narratives that shaped 2019, and what we expect in 2020 and beyond. 

2019 Recap: What we got right / What we got wrong in Digital Assets

First, let’s look back quickly at our 2019 predictions, in digital assets and how close we got:

Prediction #1: Valuation metrics for crypto will become more mainstream
FALSE. Crypto valuations has made a lot of progress this past year , including: 

However, the masses have certainly not caught on yet. We rarely see crypto valuations cited in mainstream media like we do with equities and debt.  

Prediction #2: The ICO “Distressed” opportunity will emerge
FALSE. We expected there to be M&A, tender offers, activist campaigns (we even unsuccessfully attempted one) and just plain distressed value investing (like buying tokens where cash value in Treasury was greater than token value). But none of these have materialized yet. This is partially due to lack of transparency from token projects, but is mainly due to a lack of capital into funds dedicated to these strategies - the legal bills alone will be massive. There is a still a huge opportunity here, and only a select group of former Wall Street-run crypto funds are positioned to take advantage of these dislocations.


Prediction #3 Bitcoin and Bitcoin Cash will not become a Medium of Exchange
TRUE.  Thus far (at least in developed countries). Stablecoins have and will become mediums of exchange, whereas Bitcoin will continue to be a store of value, and other select digital assets will simply be quasi-equity like assets. We believe this can change in the far distant future once tax consequences are loosened, mobile “banking”-like apps become more user-friendly, and volatility subsides. As such, Bitcoin’s progression will be SoV->MoE->UoA.

Prediction #4: Value accretion will switch from service providers to applications
MIXED. On the one hand, equity valuations of crypto service providers (exchanges, miners, data providers, trade systems, custodians, OTC desks) have been trending down because the market has way too many service providers relative to the people/firms that they service. On the other hand, we still haven’t seen many “killer apps” develop. This shift is starting to happen - it’s just taking longer than expected and there are fewer success stories. For example, companies like Brave, Flexa, HXRO, and Lolli are growing users at a rapid clip and have increased their equity valuations, but this is still a small sample size of everyday crypto apps that have penetrated the market. 


Prediction #5: The market will separate into “Haves versus Have nots”
TRUE. We’ve been pretty vocal on this topic, and it has been quite accurate. There are far more losers than winners in 2019, and this has largely been based on themes. Bitcoin aside, most of the legacy decentralized digital assets that took the market by storm in 2017 have largely died out or moved out of favor with the possibility of never recovering, while new up-and-coming companies that utilize tokens have moved into favor. We think this trend will continue. 


Prediction #6: ETH will underperform ETH-related tokens
TRUE. We made this argument pretty succinctly, and took a lot of heat for it from Ethereum fans, but we were pretty accurate. Ethereum is one of the most important developments in all of crypto, with so much of the ecosystem built on top of, or connected to the Ethereum blockchain. But the ETH token itself has failed to capture this value (negative 2019 return), while tokens of projects that are derivatives of the ecosystem (MKR, SNX, LINK, etc) have performed much better. 


What else happened in 2019 affecting the Crypto Markets?

Aside from our predictions, 2019 added several new narratives that affected the crypto markets:

Bitcoin officially entered the Global Macro spotlight 

  • The Federal Reserve, Treasury Secretary, US President, G7 and every major global central bank talked about Bitcoin, and now every macro hedge fund is involved in some capacity. 
  • Geopolitical instability (Venezuela, Argentina, Hong Kong, Lebanon, Iran, etc) has increased use of Bitcoin in these locations.
  • China introduced its own Digital Currency (DCEP), that led to a series of copycats from other Central Banks. This will lead to tighter controls on monetary policy and flow of capital within borders.
  • Facebook’s Libra project woke up US regulators creating a short-term negative effect for digital assets,  but will lead to a long-term positive outcome on adoption and interest.
  • Bitcoin dominance grew from 53% to 70% in 2019 (meaning Bitcoin represents 70% of the value of all digital assets). The “Have Nots” took the brunt of this Bitcoin explosion, and will likely continue to fall versus Bitcoin, but new versions of digital assets backed by real assets are on their way which should help the overall asset class grow.

Rise of innovative token uses cases beyond currency 

  • In fact, we think the word “cryptocurrency” is one of the most misleading terms, because Bitcoin is the only true “currency” while every other use case of blockchain and tokens is completely different and potentially more innovative.  
  • In 2019, we’ve seen the rise of digital contracts:  DeFi, equity-like features with a burn model (i.e. LEO), traditional bond settlements, legal contracts, voting rights, and more. 
  • On the horizon, even more interesting tokens are on their way, like a token representing future interests in NBA player salaries (thank you Spencer Dinwiddie).

Infrastructure Boom 

  • Newcomers to crypto, but powerhouses in the traditional world (Fidelity Digital Assets, State Street, Bakkt / ICE, the CME, State Street), are now challenging the crypto incumbents (Coinbase, Binance, Deribit, Bitmex).
  • The rapid rise of derivatives exchanges has come with consequences, as we’ve seen the “tail wagging the dog” where futures markets drive spot prices, leading to market manipulation.
  • The US has been left behind, as Binance and others have officially shut out US customers after skirting the law for years on the KYC/verified account front. 
Next week, we'll return to our regular format of "That's Our Two Satoshis". To read of 2020 predictions, click here.


And That’s Our Two Satoshis! 
Thanks for reading everyone!   
Questions or comments, just let us know.  
The Arca Portfolio Management Team
Jeff Dorman, CFA - Chief Investment Officer
Katie Talati - Head of Research
Hassan Bassiri, CFA - PM / Analyst
Sasha Fleyshman -  Trader  
Wes Hansen -  Head of Trading & Operations
To learn more or talk to us about investing in digital assets and cryptocurrency
call us now at (424) 289-8068.




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