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“That’s Our Two Satoshis”—  Crypto Market Recap September 17, 2018

Jeff Dorman, CFA
Sep 17, 2018
What happened this week in the Crypto markets?
 
Was Wednesday the Capitulation?
This past week was a bit strange, even for the crypto market. Ten days ago the market began to show some bullish signals that made it seem like the worst might be behind us after a brutal first week of the month, but crypto is never as it seems. Instead of moving higher or even simply stabilizing early in the week, we instead saw decisively negative price action over the entire first half of the week, culminating once again in a large selloff; this time on Wednesday morning. Many tokens reached new YTD lows, including the one-time market darling Ethereum (ETH).
 
But as quickly as the selloff began, it ended, and by Wednesday evening the whole market had recovered with some coins and tokens moving in a full 20% peak-to-trough-to-peak range. Somehow, when it was all said and done, the market was left basically unchanged week-over-week.
There may have been a big short squeeze in ETH that led the move from $173/USD up to $220/USD in a hectic 48 hour span. But it wasn’t just ETH that bounced. Litecoin (LTC), which has historically traded at a fairly consistent percentage of between 1 and 2% of the price of BTC, had largely decoupled from Bitcoin in recent months. But LTC also bounced from $48/USD at the lows up to $58/USD in under 48 hours, outpacing BTC by a large margin.
 
Ethereum (ETH) Chart — Wed 9/12/18 
 
Litecoin (LTC) Chart — Wed 9/12/18
 
The Good, The Bad and the UNDER-Reaction
Despite the heavy volatility, the news this week in crypto was positive. If this were a bull market, we would probably have been off to the races and reaching new highs. But in today’s market environment, we instead see fairly muted and delayed reactions. Let’s explore a few of these:
First, there was a cloud of judicial and regulatory smoke that on the surface could have been interpreted negatively, but upon reflection, is actually quite positive for the future of crypto regulation. Tuesday’s rulings felt like a big step forward in the government’s efforts to clean up crypto. The fact that both the DOJ and SEC are not only upholding the rules established, but are actively seeking out bad actors, will ultimately help those firms operating strictly on the level. Basically, regulators and law enforcement are doing their jobs (protecting investors) while allowing the rest of the industry to continue to experiment and flourish.
 
  1. The DOJ in the Eastern District of NY charged a man in November 2017 on three counts of securities fraud in connection with two ICOs: “REcoin” and “DRC”. The judge ruled this week that, assuming all of DOJ’s allegations are true, REcoin & DRC are securities & the laws are not so vague as to be unconstitutional. In essence, the judge said that ICOs are securities, and securities laws must be followed.
  2. The SEC halted trading in two Swedish ETNs, CXBTF and, CETHF, which track the prices of BTC & ETH. The SEC cited confusion, as these are retail products and it wasn’t explicitly clear in the documents what type of securities they really were (ETFs or ETNs).
  3. The SEC then charged a hedge fund manager for misrepresentations of his fund, and also charged an ICO advisor for allegedly selling ICOs without a broker/dealer license.
Wall Street also hopped on the news train, once again validating crypto’s potential and strengthening its staying power by announcing new product offerings for their clients. In our opinion, most of these products are probably not necessary and just demonstrate the traditional financial service sector’s lack of willingness (or ability) to produce value-add products that actually help their clients. Yet, the fact that they want to be perceived as having offerings in the crypto space is notable.
 
  1. Citigroup announced the launch of “Digital Asset Receipts ”, which will work much like ADRs, giving Fiat investors a synthetic way to own Bitcoin.
  2. Morgan Stanley announced “ Bitcoin Swaps ”, another synthetic vehicle that offers long and short exposure to Bitcoin without physically owning the asset.
  3. Bank of America also announced the launch of a Bitcoin investment product, though details remain murky.
  4. The Nasdaq is reportedly experimenting with adding information about digital assets to its Analytics Hub. The tools that the Nasdaq are hoping to incorporate will take data from a variety of sources and will be used by investors to make trading decisions.
And finally, the crypto world itself released some encouraging announcements of their own.
 
  1. A Blockchain lobbyist group was formed with the goal of educating and persuading government officials. This group is led by industry giants Circle, Coinbase, Digital Currency Group, and several others.
  2. Three new groups came out with regulated Stable Token offerings. The Winklevoss Twins’ launched the first, called “Gemini Dollar”, while Paxos Group and CarbonUSD closely followed Gemini with products of their own.
All things considered, there is a reason to be optimistic about growth. That being said, the short-term path of least resistance may still be lower as there are some big overhangs (ICO selling, hedge fund redemptions, levered unwinds) that still need to be resolved before crypto assets can resume their ascent. We’ll be expanding on many of these themes in future releases.
 
A More Realistic Outlook on Crypto
One of the reasons we’re not rushing to anoint crypto as best in class is that it takes time for new technologies to reach their full potential. Let’s not forget that it took 14 years for the Nasdaq to get back to all-time-highs after the 2001 bubble popped. But once the Nasdaq moved passed the 2001 highs, it just kept going led by what we now call the FANG stocks (Facebook, Amazon, Netflix, Google). We may not see BTC reach the all-time-high of ~$20,000 for some time, but it is often difficult for crypto market participants to take a patient approach to long-term price appreciation.
 
 
The “Lindy Effect” is a concept whereby the future life expectancy of some non-perishable things like a technology or an idea is proportional to their current age so that every additional period of survival implies a longer remaining life expectancy. As can be seen in the chart below, the crypto story is far from over. And the next steps are building a better understanding through education, better security and custodial solutions, and an easier user experience for the general public. There is little doubt that the long-term trend is higher — but let’s not rush expectations.
 
Notable Movers and Shakers
Lately, there has been very little news that has impacted the markets. It’s been “student-body left” or “student-body right”. But in the past few trading days, we’ve seen a few tokens and coins outperform the rest of the market following positive developments, which is a very healthy sign.
What We’re Reading this Week
Hint: He doesn’t explicitly tell you to buy Bitcoin, but he sheds light on how problematic the US Dollar is under the weight of $15+ Trillion of debt.
 
We’ve all heard about the hiccups that face institutional adoption of crypto, but Fortune does a nice job laying out some of the near-term solutions that could lead to renewed interest from the world’s largest investors.
 
Canada was a leader in the legalization and financial listings of Cannabis companies. It is now offering accredited investors a chance to capitalize on Bitcoin.
 
Sometimes it’s difficult to see the true usefulness of Bitcoin when you spend all of your time in developed nations, but if you follow the currency crises in Argentina, Venezuela, South Africa, et al, you get a better sense for how important a global store of value is.
 
We’ve written previously about nefarious Corporate Treasury management by companies who have raised ETH via ICOs. This article does a nice job explaining the exact impact on the market, the overhang of ETH supply, and even dives into “negative Enterprise Value” (when companies have more cash than token market cap).
 
Arca in the Press
Arca’s CIO Steven McClurg and Arca’s Head of Research, Katie Talati, teamed up this week to release an important and timely overview of the upcoming Bitcoin Cash (BCH) hard fork.

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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