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“That’s Our Two Satoshis” —  A Tale of Two Utility Tokens

Jeff Dorman, CFA
Feb 11, 2019

Editor’s Notes: As a part of our mission to educate sophisticated investors about the crypto and blockchain ecosystem, the Arca team has ramped up its content efforts. In addition to our weekly crypto market recap, “That’s Our Two Satoshis”, the Arca team will also publish the following content:

  • Rayne Steinberg, CEO, will cover the macro trends impacting the global economy and blockchain’s role in the financial ecosystem
  • Phil Liu, Head of Legal and Product Structuring, will utilize his unique background as a securities lawyer and financial product structuring to review popular blockchain/crypto stories and headlines from a regulatory and product innovation lens
  • David Nage, Head of Strategic Relations, will harness his deep traditional finance network and “on the ground” efforts to cover sophisticated investor sentiment towards digital assets and identify trends, roadblocks, and opportunities

What happened this week in the Crypto markets?

A Tale of Two Utility Tokens — BNB & LTC

“It was the best of tokens, it was the worst of tokens, it was the age of crypto, it was the age of bearishness, it was the epoch of belief, it was the epoch of incredulity, it was the season of Light, it was the season of Darkness, it was the spring of hope, it was the winter of despair, we had everything before us, we had nothing before us…”

The historical novel by Charles Dickens centers on the years leading up to the French Revolution and follows two men who look similar but are very different in traits. The crypto markets rallied 7% last week, following the lead of two digital assets, Litecoin (LTC) and Binance Coin (BNB), that are both well known by people who follow the crypto markets, but could not be more different. Both tokens rallied over 30% last week, and set the stage for many other crypto assets to rally as well. But if we may cite Dickens one more time, one of these tokens is the Ghost of Crypto Future, while the other is most assuredly the Ghost of Crypto Past.
Binance coin (BNB) is a utility token issued by Binance, the largest and most heavily trafficked digital asset exchange in the world. Unlike many other assets in this space, this token has both real utility AND acts like a security. The BNB token can be used for discounts on trading fees, as well as for purchases of other tokens both within the Binance platform (e.g. the BitTorrent token), and beyond (e.g. purchasing digital land on Decentraland). However, it also has security-like features, that allow BNB to be modeled similar to a stock or a bond (20% of all Binance revenues are used to buyback BNB tokens, which acts as a form of buyback/dividend that can easily be modeled using a DCF analysis). Binance the company is killing it; BNB the token is being utilized in real and impactful ways. This token is the model of success, and it’s not surprising that it is now up almost 100% from the December 2018 lows.
While Binance Coin may be the future of successfully structured digital assets, Litecoin (LTC) is the epitome of “old school crypto”, where rallies are met with immediate sell-offs and value rarely accrues to the token. The reasons that LTC rallied last week are largely cosmetic:
  • A block halving approaching in August, which cuts future supply and has been the most credible positive catalyst in crypto’s short history
  • Strong technical support at the low-end of its historical trading range versus Bitcoin, and very heavy short interest from hedge funds who are likely feeling some pain right now
  • A lot of promises to integrate new features (privacy) and morph into something that may never materialize
There is strong reason to believe that LTC won’t exist in 3–5 years. It is barely used for anything today other than as a sandbox for testing Bitcoin functionalities (think of LTC as Bitcoin’s laboratory; LTC developers test out functionalities and if they work, BTC adopts them — If they don’t, BTC doesn’t). Unlike Binance Coin, Litecoin has no reason to rally other than speculation and short-covering.
In terms of market health, BNB going higher and leading the market rally is very healthy — it is issued by a company people love, has a token structure that makes sense and serves a purpose, and both the company and token have made great progress in terms of growth and use cases. LTC going higher was driven by short-covering and some news that looks good on the surface, but probably means nothing at the end of the day. BNB is a positive for the future of the asset class; LTC Is a symptom of the asset class’ past.
We may be witnessing a changing of the guard — where the performance of new tokens that serve real purposes slowly replace the older, more irrelevant breeds. We show this start dichotomy to once again reiterate that it is just as irresponsible to dismiss digital assets altogether as it is to anoint all of them as premature winners. There will be clear winners and losers in this space, and there are many firms involved in crypto asset management, Arca included, that are tirelessly searching for these new guards.
Percent Gains of BNB & LTC compared to BTC since the market lows on 12/14/18
Source: Arca Proprietary Models
Wells Fargo & QuadrigaCX
Despite the much needed reprieve from constant crypto selling last week, it’s probably not a great sign for the industry when the two biggest stories in crypto last week were “was it fraud?” or “was it gross negligence?”. The QuadrigaCX saga has been beaten to death, so we won’t recap it, but let’s just say it’s unsettling when ~$150 million vanishes. And as Arca’s own Phil Liu noted earlier this week, this wasn’t even the first time a Canadian company with a mysterious death ended with investors losing their shirts.
But crypto still remains tiny relative to the world’s overall assets. Meanwhile, Wells Fargo’s latest mishap made $150 million seem like nothing (other than for those who were directly affected by the QuadrigaCX fraud). Wells Fargo has almost $2 trillion in assets, and yet the bank shut down last week, freezing withdrawals and prompting some to worry if a bank run was upon us. Hyperbole aside, most people didn’t really believe this was a bank run… but the fact that it even entered the narrative reinforces the value proposition of crypto just as much as the Fed’s dovish reversal. Most people probably aren’t even aware of Wells Fargo’s issues, and most others don’t care and weren’t affected by it. But the small population of people who do care and saw this as another failure of centralized and fractional reserve banking, likely already own digital assets. And if they don’t, they should. Every negative story about crypto can be met with an equal or larger and more negative story about traditional banks, including fraud, money laundering, and other illegal activities.
Owning a small percentage of digital assets, either passively or actively managed, may end up being the cheapest and greatest insurance policy against an increasingly unstable global macro backdrop.
Notable Movers and Shakers
The market ripped higher last week with an overall 6–8% rise, led by BNB and LTC. The February rally now has people talking about upside again and not just downside. While sentiment can shift on a dime, with volumes rising from historic lows, and overall volatility near 12-month lows, the market does seem poised to move higher.
What We’re Reading this Week
Daniel Heyman of ConsenSys and PegaSys discuss Carlotta Perez’s work on technology life cycles and bubbles. He argues that contrary to popular belief, the crypto frenzy of 2018 was not in fact the bubble that marked a turning point in the technology innovation cycle. Heyman believes we are still currently in the “gestation” period and there is still another bubble yet to come.
Smart Securities, the new term for Security Tokens, are set to take center stage in 2019. This presentation traces the history of crowdfunding regulation and previous offering types and how this sector of cryptocurrency is growing as a fast pace.
This op-ed from WIRED discusses the elements of trust in blockchain technology and that “a false trust in blockchain can itself be a security risk.”. Although blockchains are supposed to be “trustless” systems, trust in these systems actually just shifts away from centralized authorities to technology — whether that be code, smart contracts, wallet providers, exchanges or operation systems — and these are still points of failure.
Robert Jackson, a commissioner at the SEC, made comments that he thought a Bitcoin ETF would be approved “eventually”. It seems that more people inside the SEC (see Hester Pierce) are warming up to the idea and will be more receptive as the potential for manipulation diminishes.
Forbes reported last week that Google is quietly getting involved with crypto, starting with Blockchain ETL. The project has loaded the entire history of the Bitcoin and Ethereum blockchain into their big data platform and created “sophisticated software” to search the data. They’re also working on adding other currencies such as LTC, ZEC, DASH and more. One thing is certain: the search aspect in blockchain seems ripe to improve.
Last week, Bitcoin wallet provider, Abra, announced a new feature, allowing users to purchase certain stocks and ETFs using the Bitcoin in their crypto wallet. Specifically, non-US based investors can participate in the US stock market without opening a brokerage account. This is a great example of a company working within the current financial system instead of against it.
Acquisitions Heat Up
Crypto exchange Kraken kicked off the week announcing they had purchased Crypto Facilities, a futures trading platform based in Europe for a whopping $100m. Kraken plans to combine Crypto Facilities with their existing spot trading exchange business. We also saw Facebook acquire Chainspace in an acqui-hire deal, to further development of blockchain solutions.
If you haven’t been kept apace of the biggest scandal in crypto last week, here’s a quick refresher: QuadrigaCX, a Canadian crypto exchange, claims to have lost access to their cold storage. The CEO, who mysteriously died in India in December, was the only person who had access to the exchange’s cold storage where $140m+ in BTC was kept. The exchange’s personnel were unable to recover the private keys or access to their cold storage and now the exchange’s affairs are being handled by EY as it faces Canada’s creditors court.
Arca in the Press & on the Streets
  • Catch Arca’s CEO, Rayne Steinberg, along with VP of Portfolio Management, Hassan Bassiri, in New York the week of February 20th — please reach out if you’d like to schedule a time to meet.
  • Arca’s Portfolio Manager, Jeff Dorman, is traveling to San Francisco on February 26th to speak at Blockchain Investment. He’ll be available during the day for meetings.
  • Rayne Steinberg writes about how Modern Monetary Theory is problematic to today’s economy, furthering the narrative that Bitcoin and other cryptocurrencies are a safe hedge from traditional markets.
  • Chief Legal Officer, Phil Liu, published the first in a series last week, “Reading Between the Merkle Leaves” where he discusses pressing legal and regulatory happenings in crypto (spoiler: he talks about Kik and QuadrigaCX).
  • David Nage, Head of Strategic Development, discusses how the language among institutional investors is focused on blockchain technology without an understanding of how important Bitcoin and other cryptocurrencies are toto these distributed systems.
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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