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“That’s Our Two Satoshis”—  Crypto Market Recap 8/20/18 (BTC, ETH, XRP, VET)

Jeff Dorman, CFA
Aug 20, 2018
What happened this week in the Crypto markets?
 
A winding road to nowhere
For those of you who spent the tail-end of the summer on vacation, this past week might have looked relatively flat at first glance. Bitcoin was $6400 last Monday, and it currently sits at $6500 (as of Sunday night). What you would have missed, however, was an incredibly violent intra-week swing, with 15–30% trading ranges from peak to trough in most large-cap cryptocurrencies. The week began with an enormous influx of Bitcoin short positions opened on Monday, coupled with long positions closed concurrently (as shown in the chart below) which caused the price of Bitcoin to fall below $6000, near the YTD lows. A moment of panic spread across the crypto community, with sentiment quickly turning negative, as many feared that this was the next big leg down towards new lows. However, $6000 proved to be a solid support level yet again (4th test of this level in 2018), and by the end of the week the market was back to largely unchanged. A swift move even for those of us used to the volatility in this immature market.
 
Ethereum has lost its way
The head-fake felt even more real in Ethereum (ETH), as the 2nd-largest cryptocurrency dipped heavily to a low of $254, a price not seen since September of 2017. While ETH bounced 20% off the lows as well (finishing the week -5%), this move raised fundamental uncertainties regarding whether or not Ethereum would survive as a competent platform for new tokens to build on, with some prominent figures in the space calling for the downfall of Ethereum altogether (price predictions in the single digits included). Ethereum Co-Founder Joe Lubin has since come out and reiteratedthat the recent slumps in prices would not curtail the development of infrastructure for the ecosystem. It’s worth noting that Ethereum competitor, EOS, has faired just as poorly, with both coins now down 35% over the past 30 days (though EOS has begun to outperform ETH over the past few days).
 
Ethereum’s fate aside, we did began hearing whispers this week among crypto participants who are beginning to doubt the Fat Protocol Thesis — which states that the protocol layer will accrue more value than the application layer (a theory originally presented by Union Square Ventures). Many believe this to be the path blockchain will take, however a much different scenario played out with the formation of the Internet not so long ago. HTTP and TCP/IP are fundamental protocols that dictate how the Internet functions; applications such as Google, Facebook, Amazon and Twitter would not exist if not for these base layer implementations. However, all of the value of the Internet has been generated on the applications themselves, not the underlying protocols. As the most recognized protocol in the crypto space, Ethereum’s demise has pundits voicing their doubts more than ever that blockchain will mirror the path the Internet took. Though it remains to be seen which applications (dApps) will rise to the occasion. (Read more on this argument here)
 
Where do we go from here?
Looking ahead, it wouldn’t surprise us to see more selling pressure in Ethereum relative to other tokens, partly due to fundamentals, and partly due to selling pressure from ICO project conversions (read our thoughts on ICO Treasury Mismanagement here). Additionally, we believe another potential overhang is approaching the market as well. A majority of crypto-dedicated funds were launched in 2017, almost all of which had 1-year investor lockups. While the funds that launched prior to 3Q17 may still be above water, many funds launched in 4Q17 and those launched in 1Q18 have almost universally seen negative returns. This could lead to a string of redemptions and forced selling over the next few quarters, and excellent entry points for those funds ready and waiting with capital.
 
Source: Autonomous Next
 
In other news, Coinbase had a very busy week. On Thursday, Coinbase enabled Ethereum Classic (ETC) for live trading across all products (Coinbase Pro, Coinbase, and Coinbase mobile). This marks the 5th token available on their exchange/brokerage service; another important milestone as Coinbase focuses on reaching full compliance with SEC regulations. Coinbase also recently acquired a San Francisco startup Distributed Systems Inc., working on creating decentralized identity verification services across all Coinbase products. This move solidifies Coinbase’s expansion into offering customers control of their identity and other PII in addition to their wallet and exchange products.
 
Notable Movers and Shakers
  • VeChain (VET) was on a tear last week, up 61%. With a successful mainnet launch and a token migration from VEN to VET/VTHO, the price action finally caught up. It should be noted that even with the 61% gains this week, VET is still at the same USD notional price it was at the beginning of this month.
  • Ripple (XRP) gained 16.5% last week, moving up on news that Ripple Inc. has partnered with three preferred exchanges (Bitso, Bittrex and Coin.ph). This would allow financial institutions associated with Ripple Labs to create accounts and trade fiat for XRP to begin utilizing cross-border payments on the blockchain.
  • Ontology (ONT) finished the week up 75.6% following a successful mainnet launch on Saturday. Ontology has been an interesting development, as it was the most noteworthy token (now coin) built on NEO, a Chinese-based platform token that rivals the likes of ETH and EOS.
What We’re Reading This Week
In a 69-page complaint filed in U.S. District Court in Los Angeles, Michael Terpin claims that because of “AT&T’s willing cooperation with the hacker, gross negligence, violation of its statutory duties, and failure to adhere to its commitments in its Privacy Policy” he lost nearly $24 Million in cryptocurrency. He is suing for $224 Million, stating that AT&T, or a 3rd party representing AT&T, assisted the thief, knowingly allowing a SIM swap for an unauthorized user. There are massive risks associated with storing cryptocurrencies on exchanges (versus cold storage) and using SMS 2-factor authentication. For more on Arca’s best practices in security and custody, join our Arca Hedge Fund Update Group.
 
A recent report from the National Bureau of Economic Research concluded that every portfolio should contain at least 1% Bitcoin (with 6% being optimal) as a diversification strategy against traditional assets. They argue that even with Bitcoin’s inherent volatility, it offers a higher risk/reward than traditional assets.
 
As the crypto space continues to develop, the movement from an Initial Coin Offering (ICO) towards a Security Token Offering (STO) seems imminent. This will bring a new level of legitimacy to the growing space, and may accelerate the decentralization of venture capital.
 
In an Ask Me Anything session, IBM’s head of blockchain solutions, Jesse Lund, stated that they have been aggressively working with central banks on digital currency projects, noting that a digital currency token will be issued in the near future. This further adoption of the Stellar network, at the hands of IBM, bodes well for the longevity of the project. Stellar (XLM) token was flat week-over-week.
 
Following the likes of Crypto Kitties, Major League Baseball has created a dApp for collectible baseball cards to be sold on the blockchain. By holding certain baseball cards through smart contracts, people will be able to accrue rewards for good performance in real time. Arca’s Head of Research, Katie Talati, opines “Terrible idea. Baseball is a dying sport” while Portfolio Manager and former Division III baseball player, Jeff Dorman, responded “You bite your tongue!” The research process works!
 
Arca in the News
Crowdfundinsider.com published thoughts from Arca CIO Steven McClurg regarding the selling pressure in ETH, caused by poor (or non-existent) Treasury Management by startups who raised money via ICOs.

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 — Portfolio Manager
Katie Talati — Director of Research
Hassan Bassiri , CFA — Junior PM / Analyst

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Statements in this communication may include forward-looking information and/or may be based on various assumptions. The forward-looking statements and other views or opinions expressed herein are made as of the date of this publication. Actual future results or occurrences may differ significantly from those anticipated and there is no guarantee that any particular outcome will come to pass. The statements made herein are subject to change at any time. Arca Funds disclaims any obligation to update or revise any statements or views expressed herein.

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©2018 by Arca Funds Past performance is not indicative of future results. Investors should carefully consider the investment objectives, risks, charges and expenses of Arca "(The "Funds"). This ad other important information about the Funds are in the respective Fund's offering documents which can be obtained by entering Arca Private Investor Portal. All of the offering documents should be read carefully before investing. Disclaimer: This commentary is provided as general information only and is in no way intended as investment advice, investment research, a research report or a recommendation. Any decision to invest or take any other action with respect to the securities discussed in this commentary may involve risks not discussed herein and such decisions should not be based solely on the information contained in this document.