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“That’s Our Two Satoshis” —  A Path to Recovery for Crypto Prices

Jeff Dorman, CFA
Dec 3, 2018
What happened this week in the Crypto markets?
Investors are Scared, and Rightfully So
Whether you’re a crypto investor, a technology stock investor, a high yield bond investor, or even a commodities investor…. the swings and losses are real, and are piling up. While many asset classes recovered last week, including a 6% pop in US equities, crypto and oil continued their violent slides. These are uncomfortable moves that have many questioning how sustainable the gains of the last 10 years really were.
So we sit here for the 3rd week in a row trying to make sense of the crypto carnage. In early November, just about every macro indicator in crypto was positive and euphoric, and 3 weeks later it’s hard to find a single positive attribute. The moves have been so violent, that just 7 days ago, the team at Arca battled internally on whether or not we were even adding value with last week’s “Two Satoshis” writeup, which picked apart both the bull case and the bear case in crypto for lacking humility and substance amidst a 2008-like meltdown condensed over just 10 trading days. To our surprise, we received an outpouring of support and gratitude from both crypto and traditional investors alike, praising our balanced approach to a difficult market plagued by extremes. Still, the damage may be so severe that it could take years before crypto investor interest returns .
The Path to Recovery
Equities, fixed income and commodities have hundreds of years of history supporting largely agreed upon valuations, giving investors reasonable expectations for recoveries even in the face of calamity. Moreover, there is a constant stream of news (political, macro, company-specific announcements, etc) that give investors data points with which to make investment decisions. The crypto markets just don’t have that same precedence, which means momentum and sentiment become dominant drivers of price. Still, it’s important not to lose sight of what happens when price declines without corresponding news or validation to warrant the move. No matter what ratio you choose to look at, valuations improve when prices decline and nothing else changes.
For example, a metric Arca likes to look at is the NVT ratio , a measure of network value over transaction value. In essence, cryptoassets are functions of their usage, and usage can be measured by the number of users and transactions. Despite the bloodbath in prices, transactions haven’t declined at all and in many cases have risen. As such, the NVT ratio has plummeted.
Looking at two of the most widely used smart contract blockchains, EOS and ETH, you can see that network activity is actually increasing in November. Said another way, developers and users don’t care about the price of the cryptoasset. The technology works, and functionality is improving.
Eos (EOS) NVT and Transaction Volume (USD) (smoothed to 30d average)
Ethereum (ETH) NVT and Transaction Volume (USD) (smoothed to 30d average)
When the bleeding stops, it may start to become obvious that now is a pretty good time to ignore the price driven narrative and instead focus on fundamentals. Despite the dramatic drop in price, we’re still seeing high volume and transactions going through both of these chains and others, which matters much more in the long run.
Let’s remember while we’re all here in the first place
Amidst a sea of red numbers and negativity, there were, of course, a few positive outliers. The Nasdaq and VanEck are still moving forward with their Futures Offering , there was a heavy increase in Google searches for Bitcoin , Fidelity is re-establishing its crypto venture fund , and investment is still flowing into many companies that are paving the way for future value creation. There is little doubt that value is being created in this space; the question is where will this value ultimately accrue? Right now, it’s the only winners in crypto are the service providers (exchanges, media outlets, lawyers, custodians, fund administrators, banks and data providers), but of course, that isn’t sustainable without real growth from those firms and individuals that are being serviced.
So let’s try to remember why crypto exists in the first place. The banking crisis of 2008 spawned Bitcoin and its many descendants, and in 2018, banks are once again in trouble . The flat 2s-10s yield curve cuts into Net Interest Margin (NIM), and the steepness of the curve out to 30 years makes it more expensive for home-buyers to take out mortgages. This is a bad environment for banks…. and do you really want to struggle through systemic counterparty risk again when better alternatives for value transfer and storage exist? Don’t forget, even if you are 100% cash, you’re still 100% tethered to the traditional banking system, which is more intertwined, levered and susceptible to risk than ever.
Notable Movers and Shakers
While broad market indices moved lower last week, an interesting dynamic reared its head. Large-cap, well-known tokens largely underperformed the market, while smaller, off-the-run tokens saw large 15–20% moves higher. More importantly, real news influenced the price of these tokens, indicating that security selection may matter again soon.
  • Smart contract platform Waves (WAVES) gained 54% last week following an announcement that their mobile app will launch this week.
  • Eos (EOS) was the 2nd worst performing asset, dropping over 15% week-over-week. It’s uncommon for EOS to underperform the market by this magnitude, but many are speculating that Dan Larimer is abandoning the project to focus more on his children.
  • Privacy token Verge (XVG) gained 34% after its listing on the Bithumb exchange, the same day it was added to Binance Info’s Gold Label Projects . Binance Info is the initiative from Binance Research that aims to identify which projects are providing the community with transparent and accurate information.
  • Despite news that it had laid off 30% of its workforce, Spankchain (SPANK) is up 40% after announcing that its product is actually being used; reports show that in October the platform had over 6,000 active users and had paid their webcam girls over $70,000 worth of crypto in the first six months of operations.
  • Numeraire token (NMR) rose 30% last week after announcing that it had decided to burn 45% of the outstanding token supply held by the foundation . This act of corporate governance was designed to also further decentralize the currency so it is no longer held by one group. As we wrote weeks ago , these are the types of atypical moves that the crypto market needs right now.
What We’re Reading this Week
Messari has launched a crypto disclosure registry as they work to promote transparency and self-regulation within the digital asset space. Their aim is to create a system similar to the SEC’s EDGAR filing system, whereby token projects independently upload information for current stakeholders and external parties to review. We’re excited to see legitimate players like Messari set these industry standards, and consider this a signal that the market is maturing.
Last week, ten financial services and tech companies announced the creation of the Association for Digital Asset Markets (ADAM). ADAM aims to create rules and guidelines for efficient trading, custody, clearing and settlement of digital assets. They have established a “Code of Conduct” and plan to work with regulators and industry participants on an ongoing basis to create rules that complement existing laws and regulation. This is another positive step for the crypto industry as it seeks to show that the Wild West period of last year is behind us.
As crypto prices decline, miners running machines to keep these networks alive are hit equally as hard. According to the founder of F2Pool, one of the largest Chinese-based Bitcoin mining pools, at least 600,000 mining machines have been shut down since mid November when the market started to decline. However, recent price decline is not the only cause of these miners losing business. The rising electricity costs in China, coupled with the constant release of new mining equipment from manufacturers struggling to increase profits after the downturn, has forced miners to close up shop as their mining rigs become outdated and unsustainable.
Tim McDonald published this piece a while back discussing what is necessary to invest in the blockchain space: education, lots of capital, proper custody and better analytics. Looking back on this piece six months later, the industry has received a greater number of custody options with the promise for more in the future. We are also seeing what looks to be the beginnings of regulatory clarity. There are still some hurdles to clear and we will keep our eyes on these going into 2019.
This article presents a well-balanced case for investing in Bitcoin despite this year’s bear market. Some points you may have heard previously (Bitcoin is a macroeconomic hedge), however, the article also highlight focuses on the asymmetric upside that results from Bitcoin’s total addressable market of up to $400T.
We often hear stories of how crypto millionaires have spent their money (Lamborghinis, private jets and elaborate parties). What you don’t hear enough of is those that give back: Ian Balina made his fortune starting a blockchain advisory business and investing in digital assets. Now he’s giving back through a series of free global educational speaking engagements and donations to Black Girls that Code , a non-profit focused on providing STEM education to young women of color.
Arca in the Press & on the Streets
  • Get to know Arca CEO, Rayne Steinberg, and his vision for our company. Steinberg was recently a guest on the Future Tech Podcast , where he discussed the fast-moving Digital Financial Marketplace and how investors can dive in and make sense of it all.
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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©2020 by Arca Funds Past performance is not indicative of future results. Past performance is not indicative of future results. Investors should carefully consider the investment objectives, risks, charges and expenses of funds sponsored by Arca Funds (the "Funds"). Other important information about the Funds are in each respective Fund's offering documents. A Fund's 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.