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Stop Blindly Accepting False Narratives About Digital Assets

Jeff Dorman, CFA
Jul 20, 2020
What happened this week in the Digital Assets markets?
Week-over-Week Price Changes (as of Sunday, 7/19/20)
 
 
WoW
YTD
Bitcoin
-1.0%
+27%
Bloomberg Galaxy Crypto Index
-1.3%
+36%
S&P 500
+1.2%
flat
Gold (XAU)
+0.5%
+19%
Oil (Brent)
flat
-34%
Source: TradingView, CNBC, Bloomberg
 
“Crypto Benchmarks” Continue to Tell the Wrong Story
It’s the middle of July, so we’re not at all shocked by the muted price action across global markets last week.  The only problem is this couldn’t be further from the truth in the digital assets space. The real digital assets, those that actually accrue economic value and have been issued by companies with real customers, continue their remarkable ascent higher, even while Bitcoin and other “cryptocurrencies” that are widely represented in passive “crypto indexes” have gone nowhere.  The publicly available crypto products simply underrepresent the growth happening in this asset class.
 
According to Messari, of the top 25 digital assets by market capitalization, 17 moved less than 2% last week.  But looking at tokens 26-50 by market cap, 12 gained more than 5%, 7 of which gained over 10%.  Overall, 37 tokens with market caps north of $25 million gained over 10% last week, led once again by companies built on Ethereum that powers Decentralized/Open Finance.
 
Speaking of “DeFi”, the market cap of ERC20 tokens (those built on Ethereum) now exceeds the market cap of ETH itself.  To some, especially ETH bulls and those that still believe in the outdated “Fat Protocol Thesis”, this is a huge surprise.  But in our opinion, this was and has been inevitable. As Bill Gates once said, “A platform is when the economic value of everybody that uses it exceeds the value of the company that creates it”.  Ethereum the platform has done its job.  The projects built on Ethereum have better token value capture mechanisms than ETH itself. For most platforms (Facebook, Etsy, Ebay, Twitter, Amazon, etc.) --- there is no way to monetize the economic value around it.  Only the individual companies selling on these platforms can monetize.  But as a result of blockchain, everyone can now monetize the individual components.
 
We’ve always believed that investing in the digital assets space is a research-intensive process, not an algo/quant driven trading vehicle focused on the most liquid legacy assets.  This has never been more true than it is today.
 
More Misrepresentations
The big news last week was the Twitter hack. Not the Bitcoin scam, the Twitter hack. On Wednesday, there was a large breach of an authorized employee on Twitter using social engineering to backdoor into the automated system(s) of Twitter. The hacker used that opportunity to blast out a “give 1, get 2” scam, asking for Bitcoin from 130 of the biggest accounts on Twitter, netting a little over $120,000 worth of Bitcoin.  Of course, the media declared that this was a Bitcoin scam, including some of the least informed takes we’ve ever seen.
 
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Fortunately, we know a lot about digital assets at Arca, so we were able to see past the media narrative.  So did the market, as the price of BTC went nowhere.  But most people know very little about Bitcoin and digital assets, and you wonder what kind of effect this may have on future adoption and the educational process
 
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As we are educated on the topic, we were able to look past the Bitcoin noise, however, many who are not educated on the topic are taking these headlines at face value and ruling digital assets out of their minds. What about the other topics that we are not immersed in that are rife with misinformation?  For example, Piper Sandler just raised its Tesla (TSLA) price target from $939 to $2322, Credit Suisse raised its price target from $700 to $1400, and Morgan Stanley set a bull price target of $2070 (despite an actual target of $740).  These price targets were all increased AFTER the price of TSLA skyrocketed 50% MTD, and +300% since the March lows, despite no relevant new information from the “largest” car maker.  Are we to believe that anything has changed for Tesla in the past few weeks other than a few embarrassed equity analysts with horrible forecasts? Or how about this former Cigna employee, turned whistleblower, who admitted recently that Cigna purposefully spread misinformation about health insurance? We could go on and on, from cigarette studies commissioned by lobbyists, to the infamous Harvard sugar study, misinformation has been the norm for decades.  
 
While misinformation is nothing new, the ability to find the truth has never been easier either with access to the world wide web.  And no one is better at online research than millennials.  The US government deficit just hit $864 billion in June, the largest monthly deficit in history.  Anthony Pompliano of Morgan Creek Digital had a great take regarding trust and US Government spending:
 
“Government spending is a black box to most people, but once you start to dig into the details it can become fairly crazy almost immediately. For example, 40% of the $3.8 trillion spent in fiscal year 2018 was for Americans over the age of 65. As the US population continues to get older, we will spend 50% or more on people over the age of 65 by the end of the 2020s.  Additionally, as the national debt continues to increase, so does the amount of money needed to service the debt. The current US national debt sits at over $26 trillion. Absolutely mind blowing. The cost of servicing this debt is over $400 billion on an annual basis.  So the United States is spending almost half a trillion dollars to service the ever-expanding national debt that has no end in sight.”
This is an election year, and the younger generations have access to all of this outrageous spending data, which has accelerated beyond belief in the past three months and may get another shot in the arm when the CARES act payments expire at the end of this month.  The boomer generation reaped the benefits of a USD reserve currency and easy money for four decades, and are now benefitting further at the expense of younger generations through Social Security, Medicare and even the COVID-19 response. 
 
No one needs to blindly accept narratives anymore, which will likely lead to further mistrust, social unrest and alternative solutions to Wall Street, the Federal Reserve, and Fiscal irresponsibility.
 
Diversification
It’s been over two months since Paul Tudor Jones made an announcement that his fund was buying Bitcoin futures.  Since the announcement on May 7th, Bitcoin is up … um, BTC is down 1%. 
 
But don’t forget, the point of his investment memo was not Bitcoin.  The point was identifying the best inflation trades, of which Bitcoin was one of many items on the list.  The others included:
 
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While Bitcoin is -1% since May 7th, the other 3 have fared much better:

  • Gold is +7.5%
  • The 2s/30s Treasury curve has steepened by 2 bps
  • The Nasdaq is +17.5%
While many of us believe Bitcoin will ultimately prove to be the “fastest horse”, as Tudor Jones predicted, it’s a good reminder that diversification is still king.   Identifying the theme is one thing; finding the best way to express that theme is still more important.
 
Notable Movers and Shakers
As has been the norm lately, Bitcoin finished the week on a tepid note (-1%, BTC.D down 30 bps). As has also been the norm lately, Decentralized Finance (DeFi) continues to make new highs at a blistering pace. The weekly returns in the alternative digital asset landscape have been jaw dropping, well deserving of the title: “Summer of Alts”.
 
  • Decentralized Finance (DeFi) is currently in the process of one of the hottest cumulative streaks a sector has had in this market: BAND (+105%, +2156% YTD), KAVA (+52%, +220% YTD), LEND (+54%, +2172% YTD), SNX (+19%, +233% YTD). There are some names that didn’t make the list because they are “only” up a paltry 3% this week (600%+ YTD). With over $2.8B locked in DeFi (TVL), the analytics seem to be backing up the price action: this sector has seen enormous growth in all observable metrics, and doesn’t seem to be slowing down in pace any time soon.
  • Two weeks ago, Binance announced an acquisition (and subsequent partnership) of/with Swipe (SXP) in an effort to bridge digital assets and commerce. M&A has been Binance’s modus operandi of late (acquired CoinMarketCap in April), with Swipe being their 7th notable acquisition. However, this is only the second acquisition that comes with a digital asset (WazirX, WRX in November 2019) - which only came after the acquisition (February 2020). With all of the hustle and bustle, SXP seemed to be in DeFi’s shadow last week when it listed on Binance. Not to be outdone in consecutive weeks, SXP burst onto the scene with gains of over 195%.
What We’re Reading this Week
Last week the SEC and CFTC settled charges against crypto app Abra with a $300k penalty for illegal swaps. Abra, which started as a Bitcoin remittance company in 2014, added the ability for its retail users to gain synthetic exposure to stocks and other securities last year. The SEC charged the company with selling security-based swaps without registering or selling them on a national based exchange and the CFTC charged them with entering into illegal off-exchange swaps. These charges are the latest in a string from the SEC forcing companies within digital assets into compliance.
 
China’s digital Yuan, DCEP, will soon be tested out by Meituan Dianping, the food delivery giant backed by Tencent. Meituan joins Didi Chuxing, China’s biggest ridesharing company, in testing out applications for DCEP that will live in a digital wallet. As a platform that processes billions of dollars in transactions for food delivery and online travel booking, Meituan stands to broaden acceptance and adoption of DCEP should it start utilizing the currency on its platform. Such a move would cement China as the global leader in digital currencies.
 
PayPal has confirmed its intent to add crypto features to its platform after a letter to the European Commission on the matter was published. Originally news was unofficially reported that PayPal intended to add crypto trading abilities for its user base but last week’s published letter confirmed these intentions. The letter is part of a broader conversation that PayPal has been engaging in with the Commission on how to develop a crypto-asset framework. PayPal’s approach is markedly different than Facebook’s Libra, which did not engage with regulators prior to introducing the project. PayPal, which left the Libra Association last year, is taking a different approach.
 

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
Alex Woodward- Analyst
  
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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