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“That’s Our Two Satoshis”—  Crypto Market Recap 8/27/18 (BTC, ETH, VET)

Jeff Dorman, CFA
Aug 27, 2018
What happened this week in the Crypto markets?
 
Should we really be watching the crypto market every second?
Every new technology has its ups and downs. However, most of them don’t give you minute-by-minute updates on how the experiment is progressing. Imagine if Thomas Edison was giving you real-time progress updates while inventing the light bulb. As an inventor, Edison made 1,000 unsuccessful attempts at inventing the light bulb. When a reporter asked, “How did it feel to fail 1,000 times?” Edison replied,
“I didn’t fail 1,000 times. The light bulb was an invention with 1,000 steps.”
The cryptocurrency market comes with 24/7 trading and pricing, and a whole slew of media outlets trying to predict its future. Sometimes, it’s best to just have a long-term view and avoid everything else in between.
 
Okay, but since we’re watching, where’s the volatility?
It was actually a relatively calm week, with Bitcoin rising 3% while most other large-cap coins and tokens traded in a fairly tight range (+/- no more than 10%). In fact, much of the daily volume throughout the entire space has been sucked out, with Coinbase trading volume down 83% from its January highs. Some of this can be attributed to August, but it’s also a sign of where we are in the technology cycle. Many crypto projects have just gone dark, with numerous ICO’s now down over 90% from all time highs. Bitcoin volatility has been muted recently, holding prices relatively steady to its history. There seems to be a stand still between the bears and bulls, as both parties are fighting hard to hold key levels of resistance/support.
 
The SEC decision on Bitcoin ETFs
One central piece of news has a few holding their breath — the VanEck Bitcoin ETF proposal. Many in the space view a rejection of this proposal as a catalyst to new lows, while an approval would be the eutectic point that turns the market around. Meanwhile, on Wednesday, it was announced that the SEC rejected a total of 9 ETFs (ProShares, GraniteShares, Direxion), citing a concern of fraud and manipulation in the cryptocurrency markets in general. However, the next day, the SEC stated that they will review the disapproval orders on all of the ETFs, on the grounds that the decision was made by SEC staffers, not senior officials. Encouragingly, the market barely budged on the news, showing a sign of maturity or fatigue. While the Arca teams continues to be outspokenly against a Bitcoin ETF, it nevertheless will be a topic of conversation for the foreseeable future.
 
Taking a Long-term View
The price of Bitcoin remains at $6700. While some market participants are exhausted waiting for the bull market to return, we feel it is important to recognize that the bull market has, in fact, never left. What we are experiencing is an exponential uptrend, one that traditional finance has yet to see on such an accelerated timeline. When looking at the charts over the last year, it is easy to look at an 8-month snapshot, and focus on the downtrend signaling a significant bear market. However, zoom out, and the thought process shifts towards that of a continuous overall uptrend stemming from as recently as 2016.
 
Bitcoin Price chart — YTD
 
Bitcoin Price chart — Since Inception
 
In this era of unprecedented growth, it is easy to label Bitcoin a ‘bubble’: mass speculation with little adoption. But we stress caution when comparing the digital asset class to that of a traditional financial asset class. In fact, we continue to believe it isn’t an asset class at all, but rather a technological architecture that will support and underpin all asset classes in the future (see the World Bank Bond-i bond news).
 
As Bakkt gears up to launch their federally regulated market for Bitcoin in November, it is important to discuss the difference between their Futures market and that which is currently available (CBOE). Bakkt plans to launch physically backed Futures, whereas the CBOE currently does not offer a physically backed market, instead settling on spot price in US notional currency. What Bakkt offers allows institutional investors to physically purchase Bitcoin-backed Futures.
The ramifications of this on the market are unknown, but seem positive. One potential shortfall could be found in mining Bitcoin. Since Bakkt must back their contracts with physical Bitcoin, a sizable quantity will be removed from circulation. Since these assets will no longer exchange hands, miners will not be able to process transactions on the blockchain and therefore will receive less rewards (denominated in BTC). However, this may bode well for the price of Bitcoin itself, as miners would not mine Bitcoin if it were not a profitable endeavor. Therefore, the price of Bitcoin should equilibrate towards a region of profitability.
 
Is Ethereum still 2nd Banana?
In other news, Ethereum had an important developer call on Friday regarding its system wide upgrade in October 2018. Three major points of contention for this call were:
 
  1. difficulty bomb (increasing the difficulty of finding an ETH block)
  2. ether issuance (amount of ETH issued) and
  3. ASIC resistance.
Each one of these points has an immense impact on the future of the Ethereum blockchain — as such, developers, large stakeholders, and miners were all in attendance, with many incompatible viewpoints from each respective party. After two hours of deliberating, it was decided that all members should reconvene on August 31st — we will be listening closely for the outcome of this important meeting.
 
The negative price action of Ethereum and all ERC-20 tokens YTD suggests not just a downturn in crypto sentiment, but perhaps a fundamental move away from this protocol in favor of other platforms. But is ETH really dead?Getting this call right will be one of the key drivers of creating alpha in 2019 and beyond, as ETH is still the 2nd largest cryptocurrency by market cap. For now, when it comes to “app stores”, Ethereum is still the leader in the clubhouse, and one of the reasons that Ethereum has been viewed as such a promising cryptocurrency and blockchain protocol to date is that no other blockchain has attracted such a large army of developers. That could be changing, but it takes a lot of time, money and focus. Ethereum has been able to attract so many developers largely because Joe Lubin and ConsenSys have educated developers, given them a home, put them to work on practical use cases, and evangelized the decentralized world like crazy.
 
For a look at some of the “success” stories built on Ethereum, check out 40 Ethereum Apps You Can Use Right Now. Popular apps such as Metamask (1 Million+), Augur (43 daily users) and IDEX (1,565 daily users) all post extremely low user bases compared to traditional applications. Arca CIO, Steven McClurg, worked at Electronic Arts Mobile when the iPhone launched in 2007. According to McClurg, “Apps are a commodity. They are only successful when they are properly marketed to the right user base”. Despite billions of dollars spent on Ethereum Apps, there have been fewer active users in total than in the first 3 days of Apples iOS launch in July 2008 (10mm downloads).
 
The reason?
  • Many Ethereum apps don’t need a blockchain?
  • They clumsily require their own token to use, damaging User Experience?
  • An extremely slow Ethereum network?
Likely all three.
 
Notable Movers and Shakers
  • VeChain (VET) (+23%) and WaltonChain (WTC) (+55%) both finished the week strong as they each announced that they have begun manufacturing RFID chips for beta testing. VeChain is building enterprise-focused IoT systems, whereas WaltonChain aims to tackle retail IoT systems. With production kicking into gear, an exasperated market found a pair of horses to bet on this week.
  • Lisk (LSK) gained 28% last week, in anticipation of their mainnet release on August 29th. Lisk, a Javascript based smart contract platform, allows developers to deploy and develop their own blockchain and dApps.
  • Nano (NANO) finished the week up 68.2% on news that they hired their first official advisor, Andy Woolmer. However, it looks like this was a volume spurred price surge, as daily volume ($100MM+) reached its highest levels since May, surpassing the tepid $7M daily volume of late.
What We’re Reading This Week
The World Bank has implemented the first full issue of public bonds via smart contracts utilising blockchain technology. As a result, a complete securities lifecycle was carried out using a private Ethereum blockchain — from placement, to the issuer’s performance of its obligations to investors, including settlement. This is the future of blockchain in financial services, and why Arca views Crypto not as an asset class, but as an infrastructure that will ultimately support all other assets classes.
 
We mentioned the positive implications of the Bakkt project earlier, but this op-ed from the new CEO of Bakkt goes into more detail regarding physical settlement. Importantly, the new daily Bitcoin contract will not be traded on margin, use leverage, or serve to create a paper claim on a real asset.
 
The fact that Deloitte is even conducting this survey is reason enough to be bullish on this technology, but the results speak for themselves. “Even though blockchain is rolling out in a more moderated fashion than expected, its adoption remains promising. The view further down the road is an inspiring one. We see blockchain enabling a completely new level of information exchange both within — and across — industries.
 
Caitlin Long does a masterful job discussing the difficulty Wall Street will have applying traditional methods of leverage, rehypothecation and margin to Bitcoin and other cryptoassets. While some solutions are easier than others, this is an opportunity for much of the bad practices on Wall Street to be reset via careful thought and planning.
 
Self-regulation and best practices is a positive for the industry
 
Per the Ethereum discussion earlier, it’s easy to see why the pendulum has swung so far negative, as the dAPPs built on Ethereum have just not performed. That said, anyone remember using LinkedIn for the first time in 2003? Most of the crypto problems can be traced back to poor UI and UX, which is a solvable problem over time.
 
Arca in the News
Crowdfundinsider.com published thoughts from Arca CIO Steven McClurg regarding the SEC’s decisions on Bitcoin ETF proposals. As Steven eloquently puts it, “Bitcoin was created to decentralize and disintermediate. ETFs are the opposite of that. They centralize and intermediate.” Needless to say, we are not excited about Bitcoin ETFs.

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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©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.