BLOCKCHAIN & CRYPTO: Part 1 - Crypto Whales, IEOs, and the US-China trade war take Crypto to new heights

Its very difficult to ignore the noise when cryptocurrencies increase in value, especially since the crypto-apocalypse of 2018 which saw $400 billion in value wiped from the market #NeverForget. And as of Saturday May 11th, the noise has been deafening with Bitcoin rallying to price levels around $8,300 which we hadn't seen since late July 2018. So what exactly happened here? Well, to answer this we need to look at a few things:

Firstly, lets look at what triggered the rally in the first place. As recorded by, 47,000 Bitcoins at a value of $340 million were moved in a single transaction on the evening of May 11th. According to coinmarketcap, such a large movement of the digital currency resulted in a 13% increase in bitcoin's price from $6,378 to $7,204, and an almost 50% increase in volumes traded. Transactions of this magnitude or made by "Whales" -- entities with large sums of the cryptocurrency -- who often use such transactions to "burn margin traders" who use money they don't have to stake out long or short positions in hopes of hitting it big or "riding a lambo to the moon" as they like call it. As of Monday, $84 million worth of shorts had been liquidated on Bitmex, with some affected parties announcing crippling losses (see pic below).

Secondly, let's touch on the rise of Initial Exchange Offerings (IEOs). An IEO is different to its Initial Coin Offering (ICO) sibling, in that funds are raised and administered by an exchange on behalf of the startup, whilst an ICO is completely independent of any major entity to enable its fundraising activity. This is important because participants in the IEO need to be registered on the specific exchange's platform in order to get access to the startup's tokens. Regulators obviously love the idea of this as (1) the exchange needs to screen every project it lists on its platform -- eliminating any scams from happening (see how Bittrex cancelled RAID IEO), (2) from a security standpoint, KYC/AML is conducted on each participant by the exchange, and (3) token issuer startups receive better support on marketing initiatives and credibility from exchanges. An increasing number of cryptocurrency exchanges have started to embrace IEOs. One of the first in line was Binance, which launched its IEO platform Binance Launchpad, swiftly followed by Bittrex, BitMax, Huobi, OKEx, and KuCoin. Whilst it's still too early to quantify the significant impact of IEOs, we can report a 220% increase in overall token sales from February this year, IEOs contributing to this are: Celer Network raising $4M, Matic Network with $5M, and Newton Project with $28.5M.

Lastly, such a rally couldn't have happened at a better time for Crypto evangelists. The news of the trade war between the US and China resulted in the fall of the Dow Jones Industrial Average by as much as 696 points on Monday the 13th, and MSCI's index for emerging markets by almost 300 points. Whilst this was taking place, Bitcoin's price was still increasing, and closed 12% up for that day -- unaffected by global markets. Although this is not sufficient evidence to conclude that cryptocurrencies are good hedges against global market volatility, the sentiment towards such a reality is progressing, especially with enhanced institutional support from large incumbents and the launch of regulator-friendly IEOs. 


Source: Whale Alert (via Twitter), Bitmex Forum (via Twitter), CryptoPotato (IEOs vs ICOs), Autonomous NEXT Analysis

BLOCKCHAIN & CRYPTO: Part 2 - From Main Street to Wall Street, institutions are the key to mainstream Crypto adoption...oh the irony

As we know, one of the aims of cryptocurrency was to provide a means to anonymously and securely transfer value between transacting parties i.e., removing the power away from financial intermediaries whose distribution channels exploit fees from those wishing to transact in the current system. Funnily enough, it seems that the very same institutions that crypto sought to disenfranchise, are key to its success. Success here being widespread adoption.

Let's start with mainstream adoption in retail where Flexa -- a payments network startup is partnering with New York-based exchange Gemini to enable crypto payments to be made at an estimated 30,476 stores, including Wholefoods, Nordstrom, and Gamestop. Flexa works by processing the payments made on its platform using its custodial wallet and mobile app called 'Spedn' which enables spending of specific cryptocurrencies -- Gemini Dollars, Bitcoin, Ether, and Bitcoin Cash. Flexa uses its own native coin -- Flexacoin as collateral to secure payments until the transaction is approved on the blockchain, and custody is taken care of by Gemini. Spedn is custodied with Gemini who provide security for this new payment technology. Finally, adoption is enhanced by (1) ensuring merchant's payment processing costs are reduced whilst the blockchain maintains security, (2) no changes are needed to the existing payment hardware, and (3) revenue can be received in fiat as opposed to crypto.

This institutionalization of crypto is also echoing in larger public companies. See NYSE’s partnership with Bakkt. Or XRP being launched on securities marketplace Deutsche Boerse and Coinbase. And lets not forget the likes of JP Morgan's coin, and Fidelity set to launch its crypto Trading service. According to Fintech Analyst Efi Pylarinou Wall Street institutions are looking at crypto as a new structured product business i.e., ETP’s linked to baskets of cryptos (low-hanging fruit) and tokenised real-estate (main focus) which is good if it democratizes exposure to the real-estate market, but bad if we see a reformat of the 2008 mortgage crisis. We will leave this gem for you to make up your mind – Banco Pactual issuing an STO in distressed Brazilian real-estate. 

As the institutionalization of crypto and blockchain continues to gain traction, it is likely to see the services and products they offer provide the gateway into the crypto markets, which may ultimately result in a surge in fresh capital making its way into these markets, and possibly kindling the flame that ignites the next price rally.


Source: Flexa Spedn App (via news.bitcoin)

BLOCKCHAIN: Why China's ban on all cryptocurrency mining activity is a good thing

Ever since decentralized currencies came into fruition, they have posed an existential threat to a government's ability to control the purse strings of its citizens -- which is important to prevent illicit activities such as money laundering. In China, this lack of control coupled with the growing rate of crypto-induced bankruptcies led to the swift imposition of sweeping reforms. All trades of legal tender (i.e., Yuan) into cryptocurrencies and vice versa, as well as all Initial Coin Offerings (ICOs) were made illegal. The resultant lack of legal exchanges and ICO activity meant crypto-mining was the last remaining pillar propping up this intangible edifice. Today, China holds around 70 percent of the world's crypto-mining capacity, predominantly due to: easy access to the hardware (i.e., Nvidia processors which are locally manufactured) essential to crypto-mining operations, cheap cost of labor, and crucially, cheap and bountiful energy via massive coal and hydroelectric power plants.

A recent report now suggests that the Chinese government, more specifically the National Development and Reform Commission (NDRC), intends to ban all crypto-mining activity as well. The report lists cryptocurrency mining as one of 450 activities slated for elimination, citing “wasting resources, polluting the environment, being unsafe, or not adhering to law” as the primary reasons, and they wouldn't be wrong on the pollution front -- a study in the journal Nature Sustainability suggests bitcoin alone was set to consume more energy in 2018 than the country of Denmark.

So does this spell disaster for crypto as we know it? Well, not quite, and here's why: (1) China's largest and most visible miners, such as Bitmain's Antpool, will be forced to explore new locations for mining operations specifically where renewable power is cheap and abundant to keep costs low and win favor with the regulatory entities governing these jurisdictions, (2) Mining activity is more likely to become more decentralized and safer, as large Chinese mining pools who dominated the networks, are dismantled into smaller factions, (3) Crypto-miners could use this as an opportunity to pivot into work that is deemed more crucial to the overall success of the ecosystem i.e., blockchain scalability (speed of the network) and interoperability (cross chain information movement) solutions. Such benefits could catalyze adoption rates by addressing the underlying environmental, safety, infrastructural, and centralisation issues that have plagued crypto since its inception. Additionally, a recent survey by Harris Poll for Blockchain Capital suggests, the overall sentiment towards crypto relative to other investable assets is positive with 21% of respondents preferring Bitcoin over government bonds, 17% over stocks, 14% over real estate and 12% would invest in Bitcoin before investing in gold. Finally, although it is still argued whether the NDRC was implying a outright ban or more oversight on mining activity, the resultant benefits fueled by positive market sentiment towards crypto could mean great things to come.

Source: Hans Moeller Illustration, Divvy (homepage), Divvy (Brex comparison)


Source: CoinDance (BTC Mining Data), OVOEnergy (Electricity Cost per country

PAYMENTS: Ant Financial's $700 million for pushing into the West, which could help Square and Lightning

We're on a payments kick, so let's highlight some further developments. The first is Ant Financial -- the world's most valuable Fintech company -- spending $700 million to acquire WorldFirst, a UK paytech "startup". That's a sizeable check, but WorldFirst is a 15-year old firm with 600 employees and $10 billion of volume per year. Put another way, WorldFirst is like a B2B version of Transferwise (or Revolut if you like), eliminating FX spread and other money movement cost for cross-border payments. Compare and contrast to our JPM coin discussion above. The secular growth in global value chains (i.e., Chinese manufacturers on Western retail attention platforms) is the main driver for a business of this nature.

This is so strategic, in fact, that Amazon has a proprietary FX service for international merchants on its own ecosystem as well as another partnership with Western Union called PayCode. Remember that in a platform-first world, native economic activity between platform participants is the main vector, and this stuff (i.e., finance) is just the derivative. As another interesting permutation, Ant also is partnering with 7,000 Walgreens locations in the US on accepting Alipay. The business rationale is that Chinese tourists abroad are used to paying wth QR codes on their phone and do not have credit cards. This initiative would make the lives of that target audience easier.

It would also train American staff in retail locations to use QR codes to process value transfer. We've already discussed Amazon and European banks trying to push the West towards such methods of payments, but American consumers (other than at Starbucks) are endlessly allergic to modern mobile wallet adoption. However, once you do teach Americans to leave cards at home and use phones to pay via app, tokenized digital finance -- from key management to open banking to cryptocurrency -- becomes second nature. Put another way, a QR code on WeChat is a token for a single purchase. A QR code for Bitcoin is your public address, allowing money transfer with a very comparable user experience. Another proof-point: Square has the most popular personal finance app called Cash on iOS, and Cash will support Bitcoin off-chain money movement service called Lightning. Square has lots of point of sale devices tethered to phones running mobile software. How hard do you think it will be to let that software read Lightning invoices with QR codes?


Source: Financial Times (Ant Financial), TechCrunch (WorldFirstWalgreens), Company Websites, Autonomous NEXT (Amazon QR Codes), Coindesk (Square and BTC Lightning), Consumer Reports (Cash App)

CRYPTO & VENTURE CAPITAL: The wild symptoms of paradigm change

Two extreme things just happened in the land of Crypto. The first concerns the Quadriga exchange, whose CEO has died while traveling in India -- while also being the only person with key access to $130 million of customer funds on various blockchains. This means the permanent loss of customer assets. Tactical comments like using multi-sig wallets or not trading on a subscale exchange are besides the point. The key takeaway is that this new-fangled crypto banking has a wildly unpalatable feature. The second extreme thing is Jack Dorsey, who loosely-speaking controls Twitter (millions in audience) and Square (millions in payments), participated in Bitcoin's "lighting torch". This is a process by which one Twitter user sends a few pennies worth of BTC to another user through the developing Lightning Network, facilitated by posting a lightning network invoice in a tweet (there's even a conspiracy theory that Twitter expanded its character limit to accommodate these invoices). So if Bitcoin is money, then it's moving like never before.

Let's pause for a moment to consider how innovations become reality. We recommend the following frameworks: (1) the book Why Greatness Cannot Be Planned: the Myth of the Objective and (2) Epsilon Theory's discussion about seeing change in the Zeitgeist, both linked below. Boiling things down, the book concludes that it is not objective maximization that gets us to great outcomes (i.e., let's develop a new money or a new artificial intelligence) but the search for novel, disagreeable, controversial outcomes. The more new or bizarre something seems, the more likely the discovery will open up a search space for entirely new directions. From that perspective, the examples of Crypto extremes above point to the most compelling stepping  stones to the future. That they are made through market evolution (from on-chain transactions to Lightning) and demonstrate some version of natural selection (exchanges without multisig wallets will die) is more promising than a corporate initiative into making practicable enterprise solutions to save cost.

On the Zeitgeist point, the essence is that an astute observer understands when the meta-game changes. We are certainly seeing this in politics, with the US pivoting away from a Bush vs. Clinton each trying to satisfy political donors, into a Trump vs. Ocasio-Cortez trying to satisfy their social media audiences and the machine learning algorithms that deliver information. More practically, we can see a zeitgeist shift in the role of technology. Whereas tech used to be the supporting Shield in financial services, today it is the aggressive Sword. This pivot is obvious when looking at Fintech's share of venture capital and comparing it to the share of the stock market in financial services companies. You can see below that what started out as 5% of venture and 23% of public equities has converged in the mid-teens. Once Fintechs started being built like Silicon Valley startups, the relative value shifted out of traditional financials into private capital. When we allow China and Ant Financial into the equation, private fintech venture is now over-indexed relative to the public markets. The soil in which things grow has become different. 


Source: Twitter (original lightning torch thread), Epsilon Theory (Zeitgeist), Youtube (Why Greatness Cannot be Planned), Bloomberg, Pitchbook

BLOCKCHAIN: $1 Trillion lost in Crypto since all-time-highs, but $700 million in November still flowed in

Ugh. Here's the monthly update on the crypto fundraising figures. Let's start with some good examples -- we are fans of Trustology raising $8MM in equity from Two Sigma and ConsenSys, and ErisX raising $28MM from Fidelity and Nasdaq. Those sound a lot like the institutional chassis needed for traditional players. However, from a retail perspective, the crypto markets are not holding their value in an overall downturn, and have been fairly correlated with traditional equities as everything nosedives together. This is in meaningful part, we think, driven by the availability of instruments to take short positions in the market. 

We took the ever excellent OnchainFX data from Messari, and looked at the total loss of market capitalization (i.e., "hopium") across their tracked coins from all-time-highs. The answer is that there has been nearly a trillion of burned down value in the last year. Millennials are going to be salty for a long time! But look, it's not all doom and gloom. November saw another $700 million or so in blockchain-first funding, again roughly split 50% between token sales and venture investment.  The sustained flow of venture is encouraging to the promise of this sector in the future.

Some conclusions from looking at the tokens in detail: (1) an Arizona offering stood out as an interesting jurisdiction, (2) a few EOS projects are going forward, (3) some projects are using the STO monicker to try and position more positively, and (4) there are still quite a few questionable business models in the mix. Looking at crypto funds, we continue to see new entrants in the space, even as 2018 funds face -80% performance profiles and shed employees. Crypto projects are also starting to downsize, and we projected for Bloomberg a contraction of 25-50% in the number of funded seats at the blockchain table for existing companies today. That doesn't mean there can't be new companies with new opportunities ahead -- it just means their journey will be more rational, and potentially more fruitful.


Source: Messari (liquid coin data), Autonomous NEXT (crypto fund data set, ICO tracker leverages and cleans CoinSchedule, ICO Rating, ICO Bench, ICO drops and various others), Bloomberg (layoffs)

BITCOIN: ETP launches on Swiss Exchange, while Chinese miners go out of business due to price collapse

What a weird crypto week. This market moves in conflicting directions at once, in large part because the execution speed of the actors is very different. A billionaire selling on a whim is instantaneous, while an enterprise team's process to build a product can take 18 months. So we simultaneously get to see (1) Switzerland's SIX stock exchange listing a crypto index product composed of BTC, XRP, ETH, BCH and LTC and (2) the long tail of miners starting to shut down their machines as BTC crashes below break-even range. Financialization and speculation up, infrastructure and hash power down. Would this be different if the timing was better synchronized?

This isn't the first exchange traded product, the honor for which goes to Coinshares (Bitcoin ETP at $500mm+ in assets on Nasdaq Stockholm). But it is meaningful. The underlying index comes from VanEck, a mid-size traditional asset manager which had tried to get a US ETF going and failed. And it is also a basket -- broadly speaking, diversification is a strict good, putting the arguments around inclusion of BCH and LTC aside for now. We hope now to see at least some family offices and Swiss private banks allocate 1-5% to crypto in liquid, regulated wrappers.

Right, so the second point is that Bitcoin mining pools across China are slowing down activity, with certain devices (Antminer S7, S9, Canaan Creative's AvalonMiner 741) becoming unprofitable at prices below $5,000. We have pegged the range of break-even somewhere at $6,000 for individuals with regular access to electricity, and $2,500 for large scale players inside a hydro-electric dam. Regardless of scale, this is bad news for Bitmain and several other Chinese hardware manufacturers. But, BTC was designed for this eventuality -- as price drops, miners will exit, and the probability of rewards to the remaining players goes up. 


Source: FT (Switzerland pay wall), Coin Telegraph (Swiss ETP), South China Morning Post (Mining), Amun/VanEck (Index Sheet -- which we neither hold nor endorse)

BITCOIN: $15 Billion Losses and Pointless Fork Wars

Bitcoin went down 15%, losing $15 billion of market cap in a flash last week. We're not focused on every gyration of the markets, but this case deserves analysis. The first quick point is that there are four major components of BTC value we see: (1) secular, permanent adoption of blockchain technology across every use-case, (2) the proliferation of new crypto assets that reduce the use-cases that BTC satisfies, (3) a team's operating ability to grow and maintain the network, and (4) the financialization of the sector. Putting aside (4), we can say that the more stablecoins succeed at payments, the less BTC will be the medium of exchange; the more smart contracts platforms grow DApps, the less BTC will be programmable; the more XPR banks use, the less BTC they are likely to adopt. But there are massive tailwinds in the secular shift for the sector overall, which should counterbalance increased specialization. Smaller pie slice, bigger pie.

Which brings us to operating execution. On November 15th, Bitcoin Cash, a fork of Bitcoin that was about 10-20% worth of the parent, underwent another fork, while making the headlines for major personality conflict between several crypto billionaires. The split is by now a familiar story --  trying to solve for scale using (1) new concepts that are additions to the "original" protocol (Scalia would be proud!), or (2) just increasing the blocksize again. Depending on what asset you own (a mining pool, a manufacturer of chips, merchant processor), software decisions drive economics in your other assets. And there is also the opportunity to be Internet_King, ruling over an open source protocol and being written in the history books as a progenitor of digital money.

Forking is an interesting experiment. Believers in the homo-econonomicus - that mythical creature of marginal utility maximization, see forks as a reasonable voting mechanism for deciding human policy. We agree that it's neat to see hash power from collective mining pools be directed as votes for software versions. But this is a naive view of human collective decision making. Imagine a constitutional democracy where any petty disagreement -- between oligarchs controlling private oligopolies mind you -- lead to a secession of states, currencies, systems and assets. No requirement or need for forced compromise. If you want to build a network that flows across nation states to lift people into techno-utopia, endless fractal splintering facilitated by no meaningful governance is not the way. Using either the logic of Metcalfe's law to say that network value falls exponentially with each node removed, or the logic of corporate spin-outs to say that some minimum entity size is important (you shouldn't spin out all your employees into LLCs, looking at you Uber), suggests that BCH's fork was a bad idea. 

This had a $15 billion effect on Bitcoin proper. Perhaps some of the aspirants needed to liquidate assets to wage a hash war, mining 51% of empty blocks on their opponent's chain to break their asset. Or perhaps there was simple confusion, or a desire to sit out the volatility, on the part of investors. Regardless, Bitcoin Cash ABC is trading at 5% of BTC, and Bitcoin Cash SV is at about 3% of BTC. Hard to see the future of money in there.


Source: Bloomberg (BCH Fork), Coin Dance (charts), Binance (ABCSV), Coinmarketcap (BTC)

CRYPTO: September ICOs 90% Down from January, but Venture Funding is Ray of Hope.

Source: Autonomous NEXT, Pitchbook Data, China     Microlenders

Source: Autonomous NEXT, Pitchbook Data, China Microlenders

We're really trying to make this look good! But it's not working. We've scrubbed token offering data from September, and the trend continues generally to be down. Last month saw about $300 million in ICO funds raised, with the month before that revised to a bit over $400 million, a far cry from the $2.4 billion in January of this year. If we include EOS and other chunky private token raises, the highs go to over $3 billion, suggesting that monthly ICO activity is down 90%, which of course looks a lot like Ether's price performance, but with a 3-month lag.

There are three narratives at play, which are worth exploring. First, perhaps investors have devalued the idea of buying a utility token (does nothing yet, legally non-binding), and instead want to buy equity in the same companies. To test this, we looked at Pitchbook's data on blockchain and Bitcoin venture capital raises, which you can see in the second chart below in the magenta color. There is indeed a lagged effect in venture as well, with increasing drips of capital, reaching over $1 billion in August 2018. Why is that? Two reasons: (1) fintech companies like Robinhood and Revolut pivoting into crypto and (2) Bitmain trying to vacuum up capital before the public offering. This gives us a slightly more balanced view of funding in the space -- with recent months seeing a decline in public crowdfunding, but an increase in private checks. Anecdotally, projects are selling equity and giving matching tokens for "free" to investors in the capital structure.

The second narrative is Security Token Offerings (STOs). We know many different platforms working on this space -- from Templum, to Tokeny, to Sharespost, to Indiegogo, to tZero. And while we'd love to plot STOs on this chart as well to offset the decline, truth is that STOs won't hit the market in earnest for another half-year at least due to regulatory indigestion. We tried to find that extra monthly billion in STO land, but it's not there yet. And last, we're testing a narrative about the collapse/crisis in Chinese P2P lending since 2015, and whether that risk-seeking capital wound up in ICOs. If you've got any hints on that last one about Asia, let us know!

ONLINE BANK: Square's Unique Advantage in Rebundling the Bank

Square has $200 million of balances in its Cash app. At a Recode conferences focused on commerce, Square's CFO suggested that the payments company is thinking about expanding beyond its core competency (enabling long tail merchant commerce) to wrapping the full suite of financial products around those $200 million in balances. That includes savings accounts, investment offerings within the app, in addition to the current capability of buying Bticoin. This is why Square has looked into an ILC license and is expected to take advantage of the OCC Fintech license, once the legal dust has settled. For context, about 66% of banks and 80% of credit unions in the US are below $250 million in deposits, which is roughly 10,000 institutions in total of approximately the same size.

But on the other hand, this long tail has no tech DNA. Square, on the other hand, started out as a hardware solution to empower payment-taking by micro enterprises (e.g., comic book vendors). It now runs at approximately $80 billion in annual volume. It also quickly spun itself into a platform, by building out lending capability for the merchants using its payment systems. Now it originates about $400 million of SME lending per quarter, or $1.3 billion over 12 months, leveraging access to both (1) payment data at the point of purchase and (2) its network of merchants at the moment of financing need.

On the other side of the network, it has built out an active consumer user base of 3 million for its Venmo competitor, Square Cash, which has been downloaded over 30 million times. Adding crypto capability to the app has reportedly added another 6 million to the user-base. This has been a successful financial marketing and customer acquisition strategy for others as well, with Revolut doubling its user-base, Robinhood adding another million, and eToro growing 6 million as well for crypto trading. Unlike the long tail of small banks, these players grok young customers and build the features they want. And unlike the rest of the Fintech apps, Square has a physical hardware footprint and a merchant network that gives its "Bank of the Future" an asset in corporate banking, B2B payments, and various other higher margin activities. So when they talk, we would listen.


Source: Recode (Square Investments), TechCrunch (Square Cash screen), St Louis Fed (Number of banks by size), Statista (Lending)

BITCOIN: Public Market Paths for Crypto Billions


Here is a founder's dream. You and a partner own 60% of the company you founded. That company printed $2.5 billion of revenue last year. You have massive political capital to influence the industry in which you are a top player. To cash out, you are looking at an IPO -- the real regulated kind -- of $9 to $12 billion. Welcome to Bitmain, which was founded in 2013 and makes Coinbase and Binance look like amateur town. The company is behind Antpool, the world's largest cryptocurrency mining pool, and is also the largest producer of mining hardware. The next step in the playbook is neural network processing, which also requires specialized graphics cards, a market currently dominated by Nvidia. We still think that mining is something that should be done by traditional banks to support the crypto rails. And so if Bitmain does go public, it will open a fascinating window into the operations and economics of manufacturing global trust machines using hardware and software.


Let's take another potentially meaningful instrument. The saga around a Bitcoin ETF continues to grab headlines, this time with a combined effort from $45 billion AUM asset manager VanEck and crypto company SolidX. Prior efforts were all shot down by the SEC due to an "immature" market -- pointing to everything from liquidity, to execution, to volatility. The lack of an ETF, in turn, created an absolute nightmare in the public equities markets. Instead of buying something efficient at 20 bps, investors flooded into blockchain-pretenders like Long Island Ice Tea. Which caused the SEC to start chasing these opportunists to shut them down. But it looks like VanEck may have an ETF contender that is made up of actual cryptocurrency in cold storage with an insurance layer against hacking. That sounds way better than an ETF made out of CME/CBOE futures to us. Except the planned minimum investment is $200,000.

Let's linger on the differences between these two potential events, and the existential questions they create. One is a currency (or store of value) in which digital economic activity is denominated. The more economic activity shifts into it, the better; speculative trading and labyrinthine financial structures don't count. The second is a traditional oligopolistic champion with regular old equity, selling a claim on profits off $2 billion in revenue. That revenue is essentially a toll-booth on the functioning of the Bitcoin network. If Bitcoin continues to exist at all, Bitmain continues to charge its toll for network maintenance. Which one sounds like more of a sure thing?

Source: Bloomberg (Bitmain), Marketwatch (NVIDIA), WealthManagement (VanEck), Bimain Equipment (BlockonomiHashnest)

CRYPTO: Growth Hacking with Airdrops and Forks


As we gear up for the next edition of Token Mania, one of the key issues to quantify are token airdrops and forks. While ICOs are still good for fund-raising, they are becoming less democratic as investment moves from crowdfunding towards large private pre-sales. So instead of a community-backed token, companies end up essentially raising a token version of early stage financing from venture capital. Airdrops, however, are a way of driving project growth and adoption without asking users to pay for access, or to prefund development. The model is reversed – the project may already be funded, and the team is distributing value to the community to incentivize adoption.

While there's nothing new about sign-up bonuses (e.g., $100 to open a bank account), this particular version of internet growth-hacking is quite different. First, some ICOs are reserving 5-10% of their raise to distribute back out to the community, compared to 0.50% per ICO advisor, or 1% for ICO law firms. Markets see this as a legitimate incentive because many investors value protocols on a ratio of Market Value to Transactions. This means that the more transactions within a network, the higher the relative price of the token. For example, EOS surged 45% in anticipation of a planned drop. And second, the application of a growth hacking to airdrops can tie "free" tokens to bounty tasks, like following a Twitter account, joining a Telegram group, or downloading a crypto wallet. An example of this is that people who signed up for the Ontology newsletter (project on the NEO blockchain) had received tokens which are now worth nearly $10,000. The biggest enabler of this growth hacking is, a recent $120mm+ acquisition by Coinbase and driver of much crypto community theater.



It's hard to find good data, but we were able to parse (so take this with a grain of salt). You can see in the chart past and planned airdrops by month. The rising tide signals that projects are in the mode of buying community, now that they've raised assets to fund development. Oddly enough, the projects want community before their software is finished -- perhaps to put pressure on exchanges to list the token, or to financially engineer positive sentiment and demand.

Two adjacent issues are worth mentioning – (1) taxation and (2) forks. Airdrops could be interpreted to be income, and taxed as such. You are receiving some value with a cost basis of $0, so watch out. And from a structural perspective, airdrops and forks both resemble dividends in some form. We had predicted 50 Bitcoin forks in 2018, which probably won't be far from the truth. Regulation, or at least economic normalization, of such financial engineering to remove scammy behavior is still desperately needed in our view. Too many opportunists are giving away free magic beans, persuading people those beans will grow, and then walking away with capital gains and no positive impact on the world.

REGULATION: Hypocrisy on Fiduciary Rule in Bitcoin Age

Source: Federal Bar Association - Fifth Circuit

Source: Federal Bar Association - Fifth Circuit

The financial services industry seems lost without a moral compass, like a tin man searching for his heart. On the one hand, take the role of financial advisors. During the Obama administration, the Department of Justice put forward a "fiduciary rule" that implicated financial professionals selling investment product to behave as a fiduciary on their clients behalf, if that investment product somehow reached into retirement assets. Of course, most investment product does reach into retirement assets, and by association extends to brokerage assets. Acting as a fiduciary generally means charging the lowest-market fee reasonable for funds, not getting paid additional kickbacks, not promoting proprietary products, and planning for the client's future. A federal appeals court (Fifth Circuit) just overturned this attempt to legislate the standards in the industry, but the rule was out of favor anyway as Trump's officials in the DOJ kept postponing enforcement.

Why do we need something like the fiduciary rule? The answer is that financial professionals selling investment product are kind of like doctors in a lab coat. Their self-branding creates the impression of professionalism and knowledge, which in turn persuades retail investors to purchase investments. Abusing that power by delivering inconsistent or biased advice (i.e., clients with similar needs getting different prices and products) is a social negative, which is why the SEC is now looking into creating some alternative to the DOJ fiduciary rule. And the SEC regulates investment advisors, making it more likely that they have jurisdiction over the standards. It is generally believed that such a rule helps roboadvisors and augmented financial advisors, because technology can record the standard to which advice is given, and all the legal documents and financial recommendations are tracked and can be compared to client circumstances. Not having the rule excuses choppy behavior and implementations and the inconsistent behaviors of brokers. Deregulation lowers the need for technology to keep us honest.

And yet, look at the inanity of the congressional hearings on crypto currency. Senators unfamiliar with the underlying software or the drivers of innovation in digital assets are spouting judgments about what investors should and should not be able to purchase. Representatives are claiming that they will not sit idly and "fail to protect investors". While it is certainly true that investor protections, and especially clear and transparent information should exist, there is a deep hypocrisy here. Deregulating the sale of traditional financial asset such that the sales processes can be biased is fine, while allowing for a self-funded global ecosystem of digital assets that is literally building its own capital markets is dangerous.

A consistent policy for Fintech would favor the efficiency of financial technology over the human status quo, which would mean distribution through software platforms of modern packages of a variety of investment vehicles. Financial professionals (and their software extensions) should be selling reality to their clients. But if individuals want to shoot for the moon based on personal decision making, the best we can do is global financial literacy and transparent data. Instead, we have a circus.

BLOCKCHAIN: Crypto Index Fund from Coinbase still not ETF


One of our key predictions for 2018 was the rise of vanilla investment product packages for digital assets. That means we would get to see ETFs and boring-old portfolios, rather than the wild contortions of 2017, where public companies pretended to always be into blockchain to get a crypto halo. And in large part, we put the responsibility for irresponsible retail investment behavior squarely at the feet of American regulators. Instead of a 5 bps ETF with some crypto exposure, we continue to see coin mania and sentiment-driven speculation. 

Coinbase is not standing still, and has announced a subsidiary called Coinbase Asset Management that will oversee a Coinbase Index Fund. While Coinbase has never been one to list a lot of assets, it is disappointing to only see 4 crypto currencies (BTC, ETH, BCH, LTC) in the package. Not to mention that this product comes with a $10,000 minimum and a 2% annual management fee. Looking at crypto assets, 2% may not sound like much given 1000% returns last year. Looking at digital investment management, 2% sounds like 10 times the price of the entire Betterment service. That price is expensive and inefficient, and is another reason why we need an ETF structure.

Last, investors have a track record of experience with the Bitcoin Investment Trust structure (about $2 billion of GBTC), which shows some of the disconnect between holding a crypto asset directly, versus through a wrapper. The wrapper can trade at a discount or a premium to the actual assets it holds. Below you can see that depending on the time period, you would have had quite different return profiles investing in Bitcoin directly versus the investment trust. And at times, you would be buying the fund where the net asset value was 20-30% higher than the value of the holdings in it. The solution for better pricing is more liquidity, not less, and lower fees, not higher.

Source: Autonomous NEXT analysis, Coinmarketcap, Yahoo

Source: Autonomous NEXT analysis, Coinmarketcap, Yahoo

CRYPTO: Why Bitcoin Falls Down

Remember the mantra. Tech innovations swing between the extremes of meme and electricity. Memes are human sentiment, the animal spirits of the market shooting up and crashing down. Yahoo message boards, Reddit posts, Telegram communities, excited media articles. Electricity, however, is real. It's discovery and taming led to an industrial revolution, light and progress. Today's laundromats might be boring and tame, but imagine the first robotic clothes washer animated by electric powers unseen. All tech innovations have a bit of each. Crypto is enjoying its meme moment. Why is Bitcoin going down, after it went up? Let's talk about the factors that are adding up to the current sentiment.

(1) The first is definitional -- Bitcoin (and all crypto) is a volatile early stage technology asset and these massive run-ups and falls are a feature of the asset class, not an exception.

(2) The second is that data points about hacks and Ponzi schemes have been dominating the news. From Tether (which may be trying to print billions of sovereign currency) to Bitconnect (likely Ponzi scheme with a proprietary coin falling from $2.6 billion in marketcap)  the Coincheck hack ($500 million Japanese exchange hack), to Arise Bank ($600 million ICO shutdown by the SEC), billions of USD equivalent value keep are literally evaporating from the crypto economy due to bad actors. These issues are not new in the space, but now there is mainstream attention with nearly at trillion at stake, and the regulators are starting in enforcement actions.

(3) The futures market that so many crypto natives were excited about allow professional investors to actually take a bearish view. Oops. This sentiment should reflect back into the price mechanically.

(4) Decentralized systems will supposedly erode the control of centralized systems. So we should not be surprised when centralized systems fight back when coopted for this purpose -- from Facebook's Bitcoin ad block and regulator crackdown on fake bots, to the refusal of credit card issuers and banks to keep financing crypto purchases, to asset managers like Vanguard announcing they won't create vehicles for the asset class.

None of this should be new information. If in 2002 you asked the music labels whether they like Napster, not only would they answer with a resounding NO, but they would talk about Digital Rights Management and all their plans to fight back. Welcome to creating product-market fit.

ROBO ADVISOR: The Flipside of Digital Wealth

Source: Finance Magnates

Source: Finance Magnates

The path of digital investment advice is going according to plan. We (with big help from Patrick Davitt @Autonomous) predicted digital wealth to grow to between $500MM-$1.5T in AUM by 2020 in the Fintech Phenomenon analysis, and the latest estimates from Cerulli place is at $220 billion today. Of course most of that is Vanguard, Schwab and other incumbents, which was also expected given the product set and the customer acquisition dynamics in place. But guess what! Roboadvice as a theme is already integrated into the asset management ecosystem and you are too late. So what's next? Well, that depends who you are.


If you are an incumbent, then there is a desperate rush to build artificial intelligence into the investment management product. This is hard, but you can see the investment dollars being poured into the space. For examples, look to Man Group saying to adopt big data or be "eaten alive" (by what? computers or something?), JP Morgan copying BlackRock in creating a quantamental / equity data science unity within its asset management business, and Wells Fargo augmenting research analysts with AI. To see how bankers think about this AI augmentation, see this article on the use of AI at BAML. Augmentation is giving the power of automated human judgment at scale, backed by data, to humans who can apply it on particular fact patterns. More simply, it's letting AI do the first draft, and then having people finish the work.

Source: Bloomberg

Source: Bloomberg

If you are a consumer-facing fintech startup, then you probably gave up on roboadvice a while back (except for the top 3 or so). Instead, some companies have scaled massively by finding a very concrete paint point and creatin well-designed relief. See SoFi with student loan refinancing, Robinhood with mobile-first stock trading, Acorns with automated savings. In each case, the pain point is immediate and specific -- save $5k on student debt now, buy AAPL without paying $10 now, save $100 this month starting now. But these businesses are too narrow to fill out their current unicorn valuations. So they must broaden. Thus SoFi is going to offer checking accounts (without a banking license, ha!) in the spring. And Robinhood is following neobank Revolut into offering crypto trading on its trading platform.

That makes sense -- compete where traditional finance can't. See how Nordea bank is forbidding employees from trading Bitcoin, or how Vanguard refuses to launch a Bitcoin ETF. We have you on the record Mr. Buckley!

But it doesn't always work out. For example, Stripe is subtracting rather than adding. They were one of the first payments companies to accept Bitcoin payments, but are planning to remove Bitcoin due to slow transaction times and expensive fees. That's been a byproduct of the investment rush, and could be later solved by something like Lightning. But, you know, they say they might use Lumens instead, a crypto coin with the former Stripe CTO on its board. We've already written about rent seeking before, so we'll keep the finger wagging out of this one.

BLOCKCHAIN: The Small-Cap Coin Rush

Source:  Coinmarketcap  (and its 300 million monthly uniques)

Source: Coinmarketcap (and its 300 million monthly uniques)

Literally everyone around us is either trading crypto or starting crypto companies. Two conclusions are possible: (1) from now on all startups are crypto startups, like all tech startups use Web and Mobile, and (2) people are chasing the dragon because it's a dragon. Checking in with investors that have gone through the DotCom experience, most say that it feels like 1997 -- where both the excitement and the bad decision-making are palpable and public. So what are the key symptoms?

The first data point is that the mainstream excitement about crypto has shifted from Bitcoin into alternative cryptocurrencies, i.e., alt coins (XRP, IOTA, ADA, TRON, ICX, etc). The reason is simple. Many people have onramped from fiat into crypto via Bitcoin in 2017. But you you have to believe some wacky things to get Bitcoin to increase 100x from here. With tradeable coins that have a $50-500 million marketcap, it is still possible to imagine (rightly or not) those 100x returns. And in fact, there is a cottage industry of Youtube personalities that keep publicly available spreadsheets that evaluate Initial Coin Offerings, Twitter day-traders working through candlesticks and resistance levels, and well-branded investment newsletters. Talk of "pump and dump" is rampant, and celebrities are leveraging influence to drive coin prices. Tetras Capital penned a great article on Coindesk about the black hole of this phenomenon, and how to navigate it.

One of their conclusions was that the cheaper the price of a particular token (not the marketcap, just the $ price), the better return it had in the last month. That's not a great investment rationale, and has nothing to do with technology or potential. So if you participate in this market, understand that while a technical innovation wave is indeed underneath it all, the current market is a set of options whose strike prices are based on sentiment, fear of missing out, and social media marketing bots.

The antidote to dragon-chasing is data. The good news is that there are some great data providers out there. If you use Google sheets, check out the Cryptofinance plugin. To track social media activity, see Solume (and the chart below that shows the correlation between social discussion and XRP price). We are impressed with OnchainFXCoinmetricsSeigniorage and Iceberg for quantitative and fundamental data. The other antidote is indexing. The best thing thing that could happen in the space are boring vanilla ETFs priced at 5 bps, tracking (1) large cap, (2) mid cap, and (3) small cap coins. We track many crypto funds that are pursuing token basket strategies, but Crypto 20Crescent Crypto and 2030 come to mind. The race is on to be the next Dimensional Fund Advisors and get your name on a business school.

Source:  Solume .

Source: Solume.

CRYPTO: Value of All Economic Activity (or Max Bitcoin)

Source:  WSJ

Source: WSJ

Ah, Bitcoin opinions -- it used to be that only geeks cared, then it was millionaries and financiers, and now everybody has one. With the advent of crypto-derivatives, institutional investors can bet on these opinions. You can steal one from this Bloomberg visualization telling us what every "important" business magnate thinks about BTC. Of course, most of these folks have little technical understanding, thereby lacking at least some subject-matter credibility, so why not check out the ground zero of Reddit or BitcoinTalk.

Assign no magic importance to today's price. The only thing special about $10,000 is that it is a round number, made special by the fact that humans are social animals that use shortcuts in their thinking. The growth from $1,000 to $9,839 vs to $11,483 is not meaningfully more or less impressive. Further, BTC can be subdivided into teeny fractions. So owning "1 Bitcoin" or "0.93 Bitcoin" or "0.0001 Bitcoin" is technically equivalent. No argument should be based on the unit. What we need to think about instead is the overall stock, and the best we have today is the total Price x Quantity of about $200 billion. Looking at all crypto, that is trending at $350 billion. But remember that this is also a fragile number -- it is both extremely volatile and also not particularly liquid. If I pay $100 USD for 1 percent of 1 percent or 1 percent of a company, that company would have a market capitalization of $100 million. How confident would you be that, let's say, another party would put in $5 million at the $100 million valuation based on my $100 USD?

So let's go on a numbers adventure. Suspend all disbelief (as you should when trying to take seriously an argument on its own terms), and imagine that Bitcoin is not a cryptocurrency but an inevitable technology that required first the global adoption of the internet. Or put a broader way -- the crypto economy, that uses blockchain as infrastructure, grows according to Moore's law and is not merely a foolish human meme

What can crypto become? See the spectacular visualization from the WSJ. Total US currency in circulation is $1.6 trillion, about 5x the size of global crypto. Total marketcaps on the Nasdaq in the 1999 DotCom bubble reached $3.2 trillion (adding $1.6 trillion in a year prior), which is about 10x. All gold ever mined at today's prices would be valued at $7.6 trillion, let's say 20x. Global foreign exchange reserves are at $10 trillion, or 30x. All equities of all public companies are worth $80 trillion, or 230x, and if we add in all other asset classes including alternatives and real estate, we can get up to $500 trillion. Another way to get to $500 trillion is to get the net present value of global GDP (obviously a silly exercise, but why not). That would be about 1,400x today's global crypto. And if we want to go completely bonkers, we can estimate the statistical value of all human life on the planet -- that would be $5 quadrillion, or 14,000x current crypto valuations. So there you have it. Now you know how much more it can go up, adjust your belief system accordingly.

Source:  Adamant Research    

Source: Adamant Research

CRYPTO: Skeptical View on Pinball Machine of Bitcoin Valuation

Source: Pinball machines (in different flavors like Crypto tokens) by  Rob DiCaterino    

Source: Pinball machines (in different flavors like Crypto tokens) by Rob DiCaterino

Much of the current price movement in crypto currencies today is speculation, which we may want because there is a precious grain of underlying technological breakthrough and innovation. For example, avoiding the Bitcoin fork was helpful to keeping the community together and correlates with a positive price impact. Or, token launch activity shows Ethereum being used for a "killer crypto app" and validates blockchain for enterprise, which should therefore correlate with a price increase. These things can be naively measured as transaction volume on the blockchainrelative to the value of the overall market supply.
But on the concerning speculation side, price seems to go up regardless of whether the news is good or bad. Just having crypto in the media increases mindshare and exposure. So, for example, Bitcoin futures being launched on the CME and CBOE is in large part a way for traditional financial companies to take short positions on the price of Bitcoin. But the market is interpreting all developments in financial services around Bitcoin as positive. Or, China cracking down on ICOs mostly just puts ICOs into the news, which leads to retail investors reading about crypto coins, which creates a desire to invest, which leads to them buying Bitcoin. So there's this unintended consequence. Perhaps we can separate out technology or mindshare adoption from actual utility or financial adoption to justify the rapidity of growth, but that requires some science fiction thinking.
Further, the private, public and crypto markets are connected like a Pinball machine. Valuations in the private markets for Fintech can be 5x higher than those in the public markets -- see OnDeck vs Kabbage. Valuations in the crypto markets are 5x higher than those in the private markets. Venture investors see this price disparity, where ICO funding is driven by a near limitless supply of crypto capital gains, and some push their (unprofitable) portfolio companies to do ICOs. Because those companies have VC credibility and an operating product, like Kik for example, they raise multi hundred million dollar rounds without much effort. Venture investors have a fiduciary responsibility to monetize this, so they may exit after the ICO and lock in their pre-sale discount. Traditional fintech is also bleeding into crypto markets because fundraising is easier, there is no equity dilution, and startups can tap a narrative of actually disrupting the incumbents, rather than supporting them as vendors.

As more and more companies launch ICOs, retail investors become aware of the trend. Most are not technically savvy enough to buy Crypto, other than perhaps at Coinbase. Note that Coinbase now has more accounts than Schwab. They also look in the public markets for anything resembling blockchain, bidding up assets like Overstock. Supply and demand means that very few public companies will get this asymmetric benefit right now -- thus the rush in by traditional finance to offer products that trade on regular exchanges (e.g., Van Eck). And in response, the crypto markets look at the public markets and see "the mainstream economy" adopting or pricing up crypto companies. That is interpreted as a positive development for the whole ecosystem. But it could, instead, just be capital flows looking to find a way to back an idea in low supply. 

BLOCKCHAIN: History of Bitcoin and the Crypto Economy

Source:  VisualCapitalist

You may not have been a crypto native from the beginning, so how did this whole thing get so big? The journey started with Bitcoin in 2008, stuck in incremental open source development for many years, until venture capitalists began to fund infrastructure (2012-2014) that could compete with financial incumbents (wallets, exchanges, miners). That funding proved some amount of scale, but the corporate world still did not trust a decentralized currency deemed to be for hackers and drug dealers. So by 2015-2016 there was a major shift to “enterprise blockchain”. Funding moved to corporate venture capital, and financial institutions joined consortia like R3Hyperledger and EEA among many others. All talk was of distributed ledgers, not public markets.
But while this was happening, Ethereum did its own token launch and came pre-built with a way for projects to be written in a Turing-complete development language, and to simultaneously raise money. This led to first a trickle and then a waterfall of Initial Coin Offerings leveraging the Ethereum blockchain. Much of that funding into ICOs came from capital gains in Bitcoin and Ethereum by early adopters. Fintech innovation shifted to crypto, and the movement became global. It started to involve regulators across the world, created debate among CEOs, and put something from the crypto-economy into the news every single day. It brought in Paris Hilton and other celebrities.
The issue is that investing into an ICO is technically challenging. The first step is just converting USD or EURO into crypto, and Bitcoin is the de-facto winner by having the largest liquidity and biggest network. Once a user has BTC however, they have to figure out a wallet, what addresses are, how blockchain works, what an ICO is, how to invest in it, and whether to trust the provider. And last, they have to contend with the regulatory overhang and uncertainty. Thus, fiat flows into Bitcoin and very likely gets stuck there.
The narrative around what is happening in crypto currency in the second half of 2017 is the entry of traditional financial incumbents into the space. First, there are now about 170 crypto funds dedicated to crypto alone. Second, the CME, CBOE and LedgerX are all providing futures product on liquid coins. Third, asset managers are starting to build more traditional vehicles, like trusts or ETNs, so that retail investors can participate using established markets. Fourth, large public companies are fueling the story with their own developments in the space. Fifth, private capital is moving in through vehicles on CoinList and Republic Crypto. And last, the media is combining all these narratives with the price of Bitcoin, which leads to even more people getting interested in the space (without understanding it).
Ethereum and Bitcoin are correlated with the overall market, so attention on any sub-part of the ecosystem catalyzes the rest. But there is also a lot of science fiction thinking about where this could end up. Will all trees be put on blockchain and their carbon production put on carbon trading markets? And of course, market manipulation, multi-level marketing schemes, and other unethical market behavior is rampant as well. What is the next stage? Regulation, rationality and legitimacy.