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Why The Cryptocurrency Market Enters The National Spotlight

Jeff Dorman, CFA
Jul 22, 2019
What happened this week in the Crypto markets?
Monetary Policy and anti-Monetary Policy are Colliding
Let’s start with Monetary Policy.  The Fed committed to patience and flexibility at the beginning of this year, but global economic conditions are now deteriorating so fast that the yield curve remains inverted, effectively forcing policymaker’s hands.  Global PMIs are signaling contraction, and in China, 2Q GDP just posted a 27-year low. Over in Europe, Deutsche Bank is imploding, and while we’re not alarmists, it’s never great to see comparisons to Lehman.
So here we are, 10 years into a global economic expansion, and central banks around the world are set to ease, with the Fed expected to cut rates by at least 25 bps and maybe even a 50 bps cut this week.
Oh, by the way, US stocks hit all time highs last week.
US Stocks All Time High: Is Bitcoin Cryptocurrency Market The Enemy?
In the anti-Monetary Policy camp, recall that Bitcoin started as a grassroots effort in 2008 as a way to circumvent inflationary monetary policy and protect consumers from the unintended consequences of levered banking.  The goal was pure, the fervor was religious, and Bitcoin became a household name almost a decade later. Now that monetary policy is once again the driving narrative in global economics and politics, it’s natural that Bitcoin cryptocurrency market becomes thy enemy.
Last week, no matter how you feel about Bitcoin or the many digital asset spin-offs, crypto officially and undeniably entered the national spotlight for good:  
Crypto is volatile enough when investors and developers live inside their own myopic crypto bubble.  But now that mainstream macro and political news is driving price action as well, the volatility has moved to an even greater level.  Last week, the crypto market once again moved in a 20% intra-week range (peak-to-trough), with many days experiencing 10% intraday volatility.  As such, people within the crypto community are naturally shouting “Everyone must care so much about Bitcoin right now!!!”, yet in all practicality, 99% of people in the world who don’t live and breath BTC prices like we do simply turn CNBC on once in awhile and say "Oh, Bitcoin is unchanged this month". 
We try to keep this in perspective -- it’s a marathon, not a sprint.  The reality is, institutional money isn’t pouring in for a while, and the different blockchain technology spinoffs are all akin to very early stage technology “companies” that need at least 2-5 years before creating sustainable long-lasting value.  
But while we wait, don’t lose sight of how little it takes to move the needle.  Our friends at B2C2 gave us some insights last week that were pretty enlightening (we’re paraphrasing):

“We had a meeting with a very large Macro Hedge Fund ($6 bn AUM).  They have decided to start trading the crypto asset class (via Futures) for a couple of reasons:  1) because it’s very volatile 2) they see it much more like a Commodity that is very easy to store  3) they agree with Powell on the wealth 'storage' aspect. Think about it, a 1% allocation for a fund like this is $60,000,000.  Using margin, the market impact would be $180,000,000 (0.10% of BTC market cap). Now multiply that by the other traditional macro funds who are thinking of starting.”

Why Crypto Investors Generally Hate the Banks
With the news of Deutsche Bank’s recent layoffs and the closing of their entire equity division, a symbolic picture is making its way around the crypto community (notice the word “Bitcoin” on the bag carried by the well dressed banker).
Deutsche Bank Recent Layoffs & Bitcoin Cryptocurrency Market

At Arca, we’ve shown over and over again that we think blockchain can “disrupt without destroying”, and therefore it gives us no pleasure to pile on the struggles of a large global bank.  But it does give us a reason to help people understand where this animosity comes from. It’s not just related to the events of 2008, rising income inequality, or the “jocks vs the nerds” culture clash between developers and bankers.  There are real inefficiencies and hypocrisies when it comes to global banking. 

Let’s start with Wells Fargo, a company that has almost $2 trillion in assets, and has been the subject of numerous scandals in its long history.  Most recently, Wells Fargo announced that its customers cannot buy Bitcoin, effectively telling customers “You don’t actually control what you can and can’t do with your money”.  It’s not surprising that this leads to responses like this:

Wells Fargo Not Offering Bitcoin Cryptocurrency Market

Moving on to JP Morgan, their wealthiest clients via JP Morgan Asset Management indirectly own a ship through a JP Morgan Fund that was seized with $1.3 bn worth of Cocaine.  Now of course this does not mean JP Morgan did anything wrong, but it does mean that due diligence, AML/KYC and other policies meant to protect investors and consumers don’t always work.   Treasury Secretary Mnuchin with a straight face even said that the US Dollar was not used at all for illicit activities in his rationale for why Bitcoin must be stopped (El Chapo disagrees).  Regulators and banks are still trying to lump all crypto activity together as criminal enterprises, which is just as foolish as calling Jamie Dimon a drug dealer. 

At the end of the day, blockchain technology via distributed ledger technology and decentralized cryptocurrencies can make the global banking system more efficient and cheaper.  Recently a $200mm+ transaction occurred using Bitcoin that cost the sender only $3.93. Many will be shocked by how low these transaction fees are, but soon, people will be more shocked by how high their existing fees were (banks, credit cards, brokerage).  Think about email versus the post office -- it’s hard to find anyone who is nostalgic about paying $300 in shipping fees to send documents.

But until this technology truly becomes mainstream, and the political propaganda changes, the crypto community will continue to pile on the banks in an effort to point out some of the hypocrisy.  Movements like this are hard to stop - and I’m not sure anyone (other than Governments and Banks) should want to stop them.

Screen Shot 2019-07-22 at 10.06.36 AM

Notable Movers and Shakers
What was a boring week for casual investors (BTC +4%) was hellfire for those in the trenches - Bitcoin ranged 20%+ peak-to-trough. Other digital assets enjoyed a well deserved breather from the beatdown Bitcoin handed them in the weeks preceding, as Bitcoin dominance finally screeched to a halt (BTC now represents 65% of the total crypto market cap). In this market environment, real news causes price movement, and there was plenty of news to go around:

  • Zcash (ZEC) fell 10% as its well awaited (friendly) hardfork resulted in a new digital asset - Ycash (YEC). As is the norm with hardforks resulting in new assets, price action climbed into the event, and fell sharply post event as many investors/traders were speculating on the distribution of YEC.
  • Bitcoin SV (BSV) is moving on the expected release of its ‘Quasar’ upgrade, which is increasing the blocksize limit from 128MB to 2GB. The black sheep of cryptocurrency is aiming to unlock on-chain scaling, and this upgrade has supporters feeling bullish (+39%). It remains unlikely that their proposed solution will have any significant long-term impact, however this update will fall directly in line with what they set out to do in the first place.
  • Tron (TRX) recent performance has been directly tied to Tron founder and CEO Justin Sun’s lunch meeting with Warren Buffet on July 25th. This week, Justin Sun has announced that Jeremy Allaire (co-founder and CEO of Circle), Helen Hai (Head of Binance Charity Foundation), and Yoni Assia (Founder and CEO of eToro) will be accompanying him to what looks to be like a sales pitch on why Warren Buffet should pay attention to Bitcoin and the rest of the digital asset space. With news streamlining out of Justin Sun’s twitter profile, the price of TRX acted in kind (+15%). This lunch may be the most newsworthy event of the upcoming week.
What We’re Reading this Week
Blockchain innovation has been hailed by large corporations as a breakthrough technology that will change the way business is conducted. However, a review of 33 blockchain projects from large companies over the last 4 years shows that these projects have yet to bear anything tangible. The majority of projects remain in the testing phase and while some have moved to actual usage, usage is reportedly low. Although this may feel disheartening, it’s important to keep perspective regarding how long innovation like blockchain can take to adopt, especially by large corporations.
Famed investor Ray Dalio shares his views on the coming “paradigm shift” - what he defines as a period of 10 years where the markets operate a certain way. In this piece, he traces the history of paradigm shifts over the last 100 years and explores the current paradigm of “easy money” that began in 2009. Dalio explains the end of the current paradigm will be marked by tax cuts, rate cuts, quantitative easing, the widening wealth gap, and technological innovation. A new paradigm is likely to start marked by stalling equities and debt, coupled with increasing inflation. While he explicitly states Gold will benefit, implicitly, he is describing all of the reasons Bitcoin will benefit. 
Facebook and Libra Go To The Hill
The headlines last week were dominated by coverage of Libra’s Senate hearing and David Marcus’ testimony regarding the yet-to-be created digital asset. TechCrunch discussed the flaws in Libra’s plan including issues with the Libra Association and the centralization around Calibra, the proposed wallet app created by Facebook. Other interesting tidbits: analysis from The Block shows that Democrats are more negative on Facebook than Republicans and Rep. Patrick McHenry (R-N.C.) stated that “there is no capacity to kill Bitcoin”
Last week SWIFT announced  its blockchain plan “to make cross-border payments real-time, 24/7 and as seamless, convenient, cost-efficient and accessible as domestic payments”.  An announcement that was likely buried in the noise of Libra headlines, SWIFT’s plan does not actually include the creation of its own cryptocurrency. Rather, the payments provider plans to build infrastructure to work with all existing and future tokens, offering interoperability between systems instead of another siloed digital asset.
Last year, France proposed new rules for how to handle cryptocurrency businesses and ICOs in response to the 2017 boom. These rules, which are to become effective this month, make France the first major economy to adopt crypto-specific legislation. Rules will require businesses to abide by capital requirements and provide consumer protections in addition to paying tax. The initial tranche of businesses to be approved under this framework include an Initial Coin Offering (ICO) by LGO, a US-based cryptocurrency platform. 

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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