“That’s Our Two Satoshis” — We’re Thankful for Digital Assets in the Crypto Markets

Jeff Dorman, CFA
Dec 2, 2019
What happened this week in the Crypto markets?

|A 10% Short-Covering Rally to End the Month
The digital assets market rebounded heading into month end, attempting to salvage an otherwise awful month in the crypto markets.  Bitcoin and other digital assets gained 10%+ during the final week of November, though still finished the month down 15-20%.  The rally last week had little to do with fundamentals, and everything to do with market conditions. November options expiry (which included the unwind of large hedge fund shorts at the CME), month-end window dressing, and thin trading around Thanksgiving led to a short cover rally that was quickly met with fresh selling after month-end concluded.  Meanwhile, just like the VIX (until this morning), crypto volatility is nearing all-time lows, which is odd since equities are sitting at all-time highs while Bitcoin is approaching 6-month lows.
Speaking of volatility, while Bitcoin gets all of the headlines, we’d like to point out exhibit B:  Hong Kong.  While crypto’s $200 billion market cap industry gets all of the media attention, cracks in the $5 trillion Hong Kong stock market have begun to show, with 80-90% declines recently. More importantly, this affects way more investors than crypto due to its impact on the MSCI Index. While there are a lot of excuses as to why some investors have yet to invest in digital assets, it’s a bit ironic that Vanguard, State Street and others willingly lose money in Hong Kong simply due to a (misconstrued) rules-based index. 

Digital Assets in the Crypto Market Verses Declining Equity Derivatives
For those new to the digital assets space, and those still working on declining equity derivatives desks at large banks who pay you in increasingly worthless Barclays and Deutsche Bank stock, it’s worth noting that the Bitcoin market is becoming quite efficient.  Bitcoin spot market, futures market, and options market liquidity is now high enough that arbs are quickly eliminated. The only limiting factor continues to be higher funding costs and a lack of prime brokerage, which makes it difficult to take advantage of these dislocations in real-time.  But market participants are also much savier, with plenty of Wall Street refugees now seeking shelter from automation in this growing asset class, willing to take advantage of wider spreads and higher volatility than what is offered in equities and fixed income. While the rest of the digital assets space still has a long way to go, Bitcoin and the crypto market should see more and more converts in 2020 and beyond. 

Bitcoin Implied Volatility & Futures Volume
Digital Assets in the Crypto Markets - BTC, ATM And IV Graph Digital Assets in the Crypto Markets - BTC Futures Aggregated Daily Volumes

A Tug-O-War between Fundamentals and Technicals
The past few months have been much less about price and more about infrastructure. Bitcoin ATM's have been deployed across the nation, less developed nations are flocking to Bitcoin as their local currencies implode, and pipes have been laid by financial incumbents that will last decades.  Meanwhile, although the news has been largely negative, the regulatory picture is becoming more clear for digital assets.   

This is part of the fundamental story for digital asset adoption, and ultimately price.  In the meantime, the technical analysis has been far more negative. Looking just at charts alone would make any investor feel uneasy, as Bitcoin and other digital assets retrace gains made earlier this year and continue to push below support levels.  But with the block halving under 6 months away, and all of the above infrastructure in place, it becomes difficult to stay bearish for long. Ultimately, this is a new asset class that won’t go away, and like a call option, the value is enhanced by time.

We’re Thankful For Digital Assets
If you’re like us, you spent your Thanksgiving setting cooking times with Alexa, reading your recipe off your iPad, posting pics of your turkey on Instagram, and using Apple Maps in your Tesla on your way to Thanksgiving dinner.  Reminder, none of these existed 10 years ago (except turkey).


Digital Assets That Didn’t Exist 10 Years Ago

Venture capital investing has exploded over the past 10 years, fueling the growth of many of your favorite companies.  It’s common knowledge though that for every one of the unicorns listed above, 99 fail.  In fact, they often fail spectacularly.  But venture capital is now part of every serious investor’s portfolio -- from high net worth individuals backing a friend’s startup, to family offices investing in direct deals, to pensions and endowments investing in top venture funds. 
Owning equity in startups is easy to value.  The value is 0 for the majority of the life-cycle of these investments.  But once in awhile, the company meets expectations and the equity value grows into its lofty expectations. This model has been widely accepted by investors.  Paying something for nothing in the early days, with the expectations of future acceptance and growth.
Companies and projects utilizing digital assets as a form of capital formation and project utility often don’t have clear value propositions.  These are largely experimental projects. But make no mistake about it, the risk profile is very similar to the already widely accepted venture capital model.  It will take 7-10 years, just like the unicorns listed above, before these companies and projects become household names. Many companies and projects will fail, while a small sample will exceed the already high bar.  Just because digital asset analysis and value capture mechanisms are new and different compared to equities does not mean it can’t work. The growth of digital assets is about value transfer. Over the last 10 years, the value captured from technology growth has largely accrued to a handful of innovative companies and the equity investors who backed them.  A bet on digital assets is one where value accrues to the users of technology, not the creators. And given a general lack of trust in governments, banks, and large technology companies, this is a bet many are willing to make.  Mozilla even released a “Creepiness” website to help consumers understand which technology products and companies are the least trustworthy. 
Take a moment and think about Trust.   We trust people and machines all the time, but we almost never trust the institutions behind them. 
  • We assume the ATM will give us the right amount of money, but we also assume our bank is trying to screw us with high fees and low rates. 
  • We assume the person driving the car won’t veer off and hit us, but we also assume Uber is a corrupt organization. 
  • We assume the individual seller online will deliver what they sold, but we also assume Amazon is selling our data.
  • We assume maps will give us directions to the correct location, but we also assume Google is spying on us. 
Digital Assets are giving people what they trust…. people and machines.  It is eliminating the institutions, organizations and middle-men that we fear and mistrust. 
In ten years, it’s very likely that the largest value accrual occurs in a different form than startup equities.  The biggest risk is not betting on this outcome; it’s assuming previous outcomes will continue.
Notable Movers and Shakers
After a painful week across the board, Bitcoin managed to finish the week +10%, with select high caps slightly outperforming. In what was a slow news week due to the American holidays, there were two events that stood out:

  • Algorand (ALGO) announced, via the Algorand Foundation, that their Improvement Proposal (EIP-11252019AF) is scheduled to go to a vote around December 2nd, finishing on December 4th. This proposal would extend the vesting period of Node Runners from 2 to 5 years (with a 25% bonus as compensation for the time delay). This is a significant supply strangle (prolonging the emission schedule), but the real value driver came at the end: the vesting schedule accelerates on a price-dependent basis. Node Runners who are already being delayed are incentivized to potentially limit their selling on emission in order to capture the full vesting schedule as fast as possible. The proposal is expected to pass this week. The first Daily Acceleration Base was set at $0.30, which led ALGO to trade up from $0.22 to $0.315 intraday on Thursday. ALGO finished up 32% on the week.
  • Binance IEOs traded as significant outliers last week, with many  (MATIC, FET, BAND, CELER, ERD) receiving a sustained rally (77%, 51%, 30%, 28%, 26%), others (ONE, GTO, BRD, BTT) experiencing an open to peak burst (33%, 26%, 18%, 15%)  before finishing weaker (3%, 7%, 12%, 13%) and two outliers (WIN, KAVA) never gaining traction (-8% , -11%). While there was no news explaining the broad rally across all exchange based initial offerings, the timing falls right in line with Binance’s announcement on Monday for its newest Launchpad token - TROY. The lottery for BNB holders begins tonight.
What We’re Reading this Week
Charles Schwab’s purchase of TD Ameritrade for $26b has been the talk of the town the last few weeks, but those of us in digital assets are wondering what this acquisition means for TD’s crypto ambitions. The platform already offered trading of bitcoin futures and was deliberating rolling out spot trading in the near future. Schwab, which is a publicly-held company, has stated that it has no intention of offering crypto to its customers. Many believe that this spells the end of TD’s crypto ambitions. On the other hand, Fidelity, still a privately-held business, is making strides into the crypto space, and will continue to outpace Schwab and TD Ameritrade.
In a bill introduced to Congress last week, stablecoins are defined as securities in instances where they are “managed”. The impetus for this new piece of potential legislation is from the introduction and subsequent hearings around Libra, Facebook’s proposed cryptocurrency. In addition, the G20 in October focused much of its attention on stablecoins and what it could mean for world economies and money laundering. The recently introduced bill appears to begin to address some of these concerns, forcing stablecoins to conform to regulation. While the bill may take some time to pass the House, it is the first step in regulation for crypto.
Security token issuance platform, Securitize, announced it had received an undisclosed, seven-figure strategic investment from SBI Holdings. The move should inject some fresh interest in the security token issuance space, which has received lukewarm success since its inception in 2017. SBI’s investment is indeed bullish on the space, with its president stating his company, “strongly believes in the future of digital securities”. We have always believed that security tokens would be the logical next step in the evolution of digital assets and SBI’s investment may mark the turning point for the space.
India’s minister of state for electronics and information technology announced last week that it was developing a “National Level Blockchain Framework” that would evaluate different blockchain use cases that could be applied across governance, banking, finance and cybersecurity. Already, initiatives are underway to use blockchain technology for authenticating documents and property ownership. Despite the new stance on blockchain, the central bank still has a country-wide ban on cryptocurrency trading and use. 
Online booking platform Travala partnered with Booking.com to bring its listings to Travala’s booking platform. Travala is an online travel agency that allows users to pay for travel with 20 cryptocurrencies and Travala’s token AVA. With this partnership, Travala is hoping to further mainstream adoption of cryptocurrency especially when traveling, where crypto can break down the borders of foreign exchange rates and transaction fees.
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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