CryptoAM: The Last Edition

Tl;dr: Continuing my writing with a new weekly letter from BlockTower. Opt out of the new letter by scrolling down and clicking unsubscribe.

CryptoAM Readers,

I published the first CryptoAM on May 9th, 2018. It went to 16 people, and had a 90% open rate.

For some reason, they decided to forward it on to their friends, and the next letter had 44 people. (70% open rate). Now, there are over 5000 regular readers (40% open rate).

Over the last two years, much has changed. 2018 started with me quitting my first job out of college after 6 months to start a cryptocurrency company in Washington DC. By the end of 2018, I was living in Los Angeles and working with Wave Financial.

As of two weeks ago, I’m now living in NYC — and trading with BlockTower. This last position should stick. I’ve got a good feeling about it.

CryptoAM has gone through a few iterations. The most recent of which was the addition of the ever thoughtful Zac Thomas to the writing team. With him, the letter was revamped and revitalized. I owe him a lot (and a beer the next time he shows his face in the U.S!). He’s probably one of the smartest people I know. He’ll continue pushing fintech and crypto adoption down in Latin America with Startupbootcamp Mexico City. For readers interested in Latam, he’s your point man. I used to link his twitter frequently, and he would rib me that he never got any actual followers out of it. So do me a favor and click through this time! In addition, it would be remiss not to mention that I’m eternally grateful to the Wave team for supporting this letter and helping spread the good word.

Unfortunately, with this latest move, the story of CryptoAM comes to a close. It’s become difficult to manage a (sometimes) twice-a-week newsletter while also managing a portfolio. Additionally, the compliance and legal requirements can be onerous — and only make sense if the letter is part of the company’s brand.

So with all that in mind, I’m writing this as a farewell, but not goodbye.

So whats next? I can’t stop myself from writing about the markets. It’s become a way for me to solidify my own thoughts. I just can’t do it twice a week or on the side either. So I’m starting a new letter under the BlockTower brand. The ethos, framework and words will likely be the same as CryptoAM — but the name will be slightly different.

On Sunday, the first edition of Tower Watch will come out. I hope you’ll join me!



CryptoAM: SoFi launches Crypto, EOS Struggles, and North Korea Dives In

☀️Happy Friday CryptoAMers!

You may have seen last week that Wave Financial put out a press release, concerning our newest product — the Wave Income & Growth Digital fund. I’m very excited about this launch, and have worked hard to turn this concept into a real fund!

The basic premise is that the fund turns Bitcoin volatility into an income stream through the use of covered calls. You can read more about it here!

Three things you need to know:

One: EOS is running into some major governance issues

Image result for eos crypto

The past two years in crypto have been a crash course in governance structures. Some will work — others will fail. While it’s premature to say anything definitely, it’s become clear that EOS is starting to run into some trouble.

EOS has always had detractors, mostly due to its consensus protocol. EOS secures its network using a delegated proof-of-stake model. There are current 21 “block producers” that validate EOS blocks in exchange for a piece of the inflation produced by the blockchain. Block producers are voted in by token holders — meaning that large token holders hold a massive amount of power (in that they can pick block producers). Since block producers themselves get large amounts of tokens, their position is usually self-fortifying.

In a very informative piece published on Coindesk , Brady Dale outlines the main issues facing EOS:

  1. Block Producer Centralization: There have been been instances of block producers with existing relationships colluding and collaborating. This is exacerbated by the fact that the majority of BPs are in China.

As of this writing, a majority of the BPs indicate their locations as within China. Sources tell CoinDesk that multiple others are also located in China despite outward appearances.

  1. Lack of Robust Governance: Censorship resistance is not a feature of the EOS blockchain — BPs can vote to freeze accounts. This has actually happened before…

Among their first collective acts, BPs froze seven accounts that had been shown to hold stolen tokens (tokens attained by tricking users during the migration of assets from ethereum – upon which Block.One ran the token sale – to the actual EOS blockchain).

The decision to freeze those accounts presaged the controversy the blockchain is facing now, because the top BPs did so without any kind of agreed-upon governance process. A “constitution” had been drafted, but it had not passed a referendum of EOS users.

  1. Dapp Failures: It was originally thought that block producers would be incentivized to spent a large portion of rewards on dApp development. Unfortunately, this has not come true.

  2. Block Producers Are Not Executing: Block producers are not effectively processing blocks, and they are not dedicating enough technical resources to maintaining the EOS blockchain.

In conclusion…

Maybe EOS is fine. Maybe it’s in trouble. Either way, it’s worth casual investors knowing that a cadre of adherents to the protocol since the early days are growing concerned.

At this stage, there is no one prevailing cause for concern about EOS. It is a blockchain seeing a large amount of use, but it also has not yet attained the status of a blockchain that attracts major companies looking for a highly secure database with high throughput. That’s what its strongest adherents had hoped it would become.

Why this matters: EOS is one of the largest public blockchains, and a huge social experiment. There are many lessons to be dissected here about how to run the governance of a protocol. If you’re in the process of launching a protocol, this should be your case study.

One should also note that EOSIO is a software. The main EOS blockchain is just one implementation of this software — but there are others. An alternative chain like Telos also built on EOSIO have much to gain from the failings of the main EOS chain.

Two: SoFi enters the crypto game

Image result for soFi US student loans

SoFi, the $4 billion investment app company, today announced the launch of a new trading platform. The platform will initially support Bitcoin, Ethereum and Litecoin. The platform seems as though it’ll be liquid from the get go via SoFi’s partnership with Coinbase and follows announcements by other investment platforms eToro and Robinhood to include crypto offerings on their platforms.

Why it matters: Lots of young investors. SoFi started off as a student loan financing company, and still today the company is geared towards younger investors. There are an estimated 800,000 people using the company’s products.

That’s a potential goldmine of young investors who could be interested in crypto. The company’s CEO Anthony Noto noted in an interview with Forbes that being able to buy crypto has long been the most requested service from SoFi’s existing customers. A number of different studies have also shown millennials to have the highest rates of crypto ownership and knowledge compared to other generations.

It therefore makes sense that SoFi would leverage its existing financial relationship with young consumers and add a crypto offering for them - there’s no better way to pay off your student loan fast after all (absolutely not financial advice in any way).

My thought bubble: Increasing accessibility to crypto for mainstream consumers is great, and SoFi is just another potential pipeline for people. An open question however is whether companies like SoFi and Robinhood end up being competition to traditional crypto exchanges and platforms. This could be part of the reason why we're seeing crypto exchanges rapidly diversifying their business models to include new revenue streams.

Three: North Korea is developing its own cryptocurrency

Image result for north korea flag

State issued digital currencies are becoming a hot topic! Some history. The craze was truly kicked off by Venezuela in February of 2018, when Nicolas Maduro announced that Venezuela would be launching the “Petro”, a state backed cryptocurrency. His government claimed $3.3B was raised (there is no proof though).

Now, it’s North Korea’s turn at bat. According to a Vice report released last Wednesday, North Korea is planning to launch their own cryptocurrency to help fund state operations.

What Vice found:

The digital currency, which doesn’t even have a name yet, will be “more like bitcoin or other cryptocurrencies,” said Alejandro Cao de Benos, the official in charge of North Korea’s cryptocurrency conferences, and a special delegate for the Committee for Cultural Relations for the Democratic People's Republic of Korea (DPRK).

“We are still in the very early stages in the creation of the token. Now we are in the phase of studying the goods that will give value to it,” said Cao de Benos, adding that there are “no plans to digitize the [North Korean] won for now.”

North Korea's Embassy to the U.N. in New York would neither confirm nor deny Cao de Benos's claim. “I am not in a position to give you an answer,” an embassy spokesperson said before hanging up.

Of course, North Korea has been an avid user of cryptocurrencies to try to conceal their funding activities. Given that Bitcoin is radically transparent, this turned out to be a bad idea for them — as it gave the feds ample evidence to track money movements.

I’d like to note that we’ve also had less unstable regimes explore digital currencies, such as the ECB mentioned above, and the Central Bank of China. Chile also hinted that a central bank digital currency was on their radar. As mentioned in the last letter, the Marshall Islands is also looking into the launch of a digital currency.

Why this matters: It’s becoming more clear with every passing day that the markets are increasingly impacted by the existence of digital currencies. Figuring out how Bitcoin and other assets fit into the economy is highly dependent on how governments react.

Also in the news:

Market Outlook:

Quick Take

The last week of price action has been bearish to say the least. After almost two months of rangebound trading, we’ve finally fallen off the cliffs edge.

On Monday, the markets fell through the 10,000 price line down to 9,700, trading down 3%. Tuesday saw one of the largest candles in 2019, with Bitcoin trading down 16%.

Volatility came back in a big way — with at-the-money IV shooting up from ~62% to 92%. Putting on a straddle (with & without hedging your deltas) would have paid off big time.

We’re now looking at a relatively broken market structure based on the price action of the chart above. The break of 9,400 seemingly destroyed the confidence of buyers based on the fact that bids quickly pulled, leading to large liquidations and cascading effect as those liquidations needed to exit. Liquidation data from Skew shows approximately 272M

As of now, there doesn’t seem to be a strong sentiment shift based on price action being sideways, and there was no “v reversal” which would at least indicate some buying strength relative to the selloff. With all of that said, I believe it’s more likely than not we experience more downside.

Bitcoin is trading at a psychological support of 8,000 — and in my opinion is likely to flush down to price support at 7,400 based on price action and the broken confidence of buyers.

Things that might indicate potential bearish continuation

  • Open interest on the Bitmex perpetual fell from its 960M - 1040M range to ~730M currently. Combined with the fact that BitMEX funding rates have not been consistently negative this tells me that there has been a relative lack of shorting compared to what would be expected for down move like this.

  • Spot exchange volumes have ticked up, while derivatives volumes have ticked down — suggesting this selloff actually be as a result of people divesting from Bitcoin rather than putting on a short trade. (CryptoCompare Data — Chart is made by CryptoAM)

Things that may indicate a potential reversal of price action

  • A flush down to 7.2k on low volumes, with a quick reversal to 7.6k area.

  • Continued negative rates on the flush down

  • Reclaiming 9.2k

Overall Market: The altcoin market also suffered heavily, and our “alt-season” has died relatively quickly. While there are still a few select alts that have been moving on good news (BAT, LOOM), the majority have continued to suffer.

What I’m thinking today:

One of the more eye raising parts of last week were reports that Libra has decided which currencies will make up the backing for the Libra stablecoin. In case you missed it, here’s what they are and their weighting:

USD - 50%
Euro - 18%
Yen - 14%
Pound - 11%
Singapore dollar - 7%

On one hand you could argue that this is logical, as outside of the Singaporean dollar, the first four are the world’s most traded currencies. However in all likelihood there may be larger factors tied to the weighting of this basket. Let’s not forget the intense political pressure that Libra faces back in the US and Europe, with Democratic senators previously going as far as to openly call for Libra to exclude the Chinese Yuan - wish granted. Germany and France (the most important Eurozone countries by far) also have come out with legislation that could prohibit Libra and other digital currencies from operating in those countries.

Why this matters: It’s a bit harder to argue that Libra is going to undermine your monetary sovereignty if Libra actually relies on your country’s monetary sovereignty to function well. It’s still possible obviously that Americans, Europeans and Japanese choose Libra over their own currencies but again, given the existing stability of these national currencies and Libra’s reliance on them there are less incentives for this. The bigger prize in my mind has always been citizens in developing countries with unstable currencies wanting to use Libra instead.

Important to note also that the cost to Libra of not including the Chinese Yuan is pretty minimal given that Facebook is already banned in the country and the Chinese government seems set on launching its own digital currency. On this point, MIT Technology Review had an interesting point to consider:


If you ❤️ our newsletter, tell your friends about us!

About CryptoAM:

The core focus of CryptoAM is to cut through the noise of the cryptocurrency world — and deliver actionable information straight to your inbox. Every piece of information that CryptoAM delivers ends with a “so what — why does this matter?”. It’s easy to get lost with all the information that comes out everyday, CryptoAM exists so you have a guide.

- Avi and Zac

CryptoAM was founded as a daily newsletter by Avi Felman in May 2018. Zac Thomas joined Avi in January 2019 to revamp CryptoAM and is now a co-writer for the letter. Zac will normally focus on policy, regulation and mainstream adoption while Avi generally writes the project, technology and market focused pieces. If you read closely, you’ll be able to pick us apart soon enough 🙂

Nothing written in CryptoAM is legal or investment advice and should not be taken as such. CryptoAM does not make any guarantee or other promise as to any results that may be obtained from using our content. No one should make any investment decision without first consulting his or her own financial advisor and conducting his or her own research and due diligence.

CryptoAM: Bancors Change, Synthetic Issuances, and The Marshall Token

☀️ Good Tuesday morning, CryptoAM’ers! ☀️We’ll be back to your regularly scheduled programming this week, sorry if you’ve missed us.

For those of you in Chicago, we have a special event for you! Token Daily Capital & Fidelity are putting on a dinner, and you find the event linked here.

Three things you need to know:

One: Bancor Makes Some Significant Changes

Bancor has a storied place in the history of cryptocurrency. The Bancor ICO was the largest ICO in history! They managed to raise $153M in June of 2017, $1M more than than infamous DAO ICO… (which itself led to the largest dispute in the history of Ethereum — the DAO hack).

Bancor is a liquidity protocol, aimed at creating a decentralized way to exchange and trade tokens. It launched its web application about 2 months after the close of its ICO, and has attracted a small but core group of traders who transact using the Bancor protocol regularly. Despite this core group of users, Bancor suffers from many of the same drawbracks that plague decentralized exchanges in general.

  • The inability to achieve instant settlement leading to a lack of liquidity

  • No ability to take out leverage on your positions

SBancor has also restricted U.S investors as other decentralized exchanges (such as EtherDelta), have been targeted by SEC for the unregistered selling of securities. The token price has fallen >90% from previous highs.

So needless to say, Bancor needed a facelift. Last week, they got one. Bancor revamped their token in a sweeping manner:

  • To accelerate and incentivize network liquidity, Bancor will airdrop BNT’s entire Ethereum reserve, which will amount to 10% of BNT’s market cap at the time of the airdrop, on all BNT holders.

  • BNT will be upgraded to an inflationary token with a default setting of 0%. BNT holders will vote on the rate of inflation and its recipients — deploying funds to strategic Bancor liquidity pools, oracles and developers, as determined by the community.

  • We are announcing the Bancor Foundation Grants Program aimed at funding a broader array of developers and startups building on the Bancor Protocol. Initial grants are awarded by the Bancor Foundation, while future grants will be voted on by BNT holders.

Let’s break this down a bit.

  • First, Bancor will be airdropping their entire BNT ether reserve (filled from their ICO days) to Bancor token holders.

  • Second, they’re introducing inflation into the Bancor system and redefining what it means to be a Bancor holder. In line with many other newer procotols, Bancor is introducing more forms of community governance into the system, and they are using inflation as an incentive to participate.

  • Third, they are focusing on something we’ve talked about before — ecosystem funds. Many protocols are beginning to realize that developers and companies are unlikely to begin building on a protocol without incentive. In order to introduce incentive, many protocols have spun up “ecosystem funds” that can pay devs to create on their protocol. Personally, I view a well run ecosystem fund as one of the most important secondary offerings a protocol should have.

Why this matters: Token models are ever changing. When the first Ethereum based ICOs launched a little more than 3 years ago, the concept of a “token” at the center of what is ostensibly an economic construct was a radical idea. Keep an eye on protocols that have the guts to radically overhaul their token system. Projects like Bancor, Numeraire and Haven (now Synthetix) stand out considerably.

Two: Synthetic Issuances Continue to Grow

We’ve discussed the topic of decentralized synthetics a few times here already. Decentralized protocols that allow for the creation of synthetic assets through collateralization are taking strides everyday, and those protocols are some of the most compelling use cases for decentralized finance I’ve seen yet.

Yesterday, UMA protocol announce a new product, the “Synthetic Token Builder”. This is essentially a more flexible and user controlled version of Synthetix. The concept behind the protocol is simple — allow users to use collateral to mint any type of token. For example, someone could mint a TSLA token using DAI as collateral, and sell it on a DEX. You could simulate the exposure to pretty much anything.

To ensure that tokens are fully collateralized at all times, UMA has implemented a practice of “freezing” assets:

At any time, anyone can ask the smart contract to check if your token facility is undercollateralized. During this process, the smart contract checks what the latest price is from the price feed and checks if the amount of DAI you’ve maintained in the contract meets the required amount.

If you do, you’re all set. If you don’t, the smart contract freezes all the collateral in the contract (you can’t deposit or withdraw), and assesses a penalty. Anyone who holds synthetic tokens that were minted by this token facility can redeem them for a proportional amount of the backing collateral, plus any penalty.

The obviously drawback: If the market moves violently, and the amount of capital needed to bring the token back to full collateralization is *more* than the amount already deposited, the token creator would be incentivized to walk away from the contact. In effect, this creates a upper and lower bound on the potential price gyrations, making it a less safe bet than a centralized exchange.

Yes, but: This is a great experiment! The product is now live on Rinkeby. It’ll be interesting to see how the UMA model (more open source, no token) competes with the Synthetix model (DeFi, but less open — does have a token). It seems as though the token aspect of Synthetix has attracted a lot of speculators, and I tend to believe that models like this work better with tokens because of the psyche of cryptocurrency market investors.

Go deeper: read the full UMA protocol announcement.

Three: The Marshall Islands is Launching a Token Sale (!)

Yes, you read that headline correct. Last week at the CoinDesk Asia conference David Paul, a Marshall Islands Minister revealed that the Marshall Islands was planning on introducing a digital token to act as its national reserve currency. They’re even launched a nifty new website where you can register to buy the thing! They’ve named the new currency in an incredibly catchy and witty way: the Timed Release Monetary Issuance. Sounds good?

They plan to sell this currency over 18 - 24 months via a pre-sale.

Some key quotes from the conference as reported by CoinDesk:

  • The U.S. Treasury had told the RMI government “point-blank,” according to Paul, that it didn’t like the SOV. However, following nearly a year of internal discussions, Paul affirmed that U.S. officials are saying this project could work.

  • “A nation cannot rebrand [like a company can]. That’s why we have to do this in such a way that’s different. It has to be transparent. It has to be inclusive. We need to make sure that we work with regulators to ensure that once we launch, they don’t go back and say, ‘Oh, you haven’t done this. You should have done that.'” - David Paul

There were some big players that stood in opposition to this plan. According to a CoinDesk report, the IMF “advised against the currency” last year. U.S regulators were also uncomfortable with the idea, but ultimately turned foot and decided that the tender may actually end up working out.

Big picture: This may seem like a ploy by a smaller nation to capitalize on fundraising through tokens. Let’s be real — you’re probably right. With that being said, it’s indicative of a larger and interesting trend of countries introducing digital currencies into their ecosystem. It’s not unreasonable to assume that smaller, more economically fragile countries will look to digital tokens as a way to attract foreign investments.

Also in the news:

Market Outlook:

Quick Take

Overall Market: Both realized and implied Bitcoin volatility has dropped off significantly over the last week, and we’re seeing significant Bollinger Band and MA coiling as evidenced by the chart below. Based on those indicators, it’s likely in my opinion that we will experience an explosive. I tend to lean heavily on the reflexivity thesis, which would indicate that the first large candle out of this lull will dictate the next few weeks of price action. In light of these trends, although there is no guarantee, I would expect to see substantial movement.

As you can see in the chart below, Bitcoin dominance has started to fall off after reaching a peak of 73.5%.

Based on the correlations breaking down, and a turning in BTC dominance, I am long select ALT-USD pairs that have shown bottoming patterns such as XRP and LTC. I am holding spot Bitcoin.

Key Support:  10100, 9880

Key Resistance: 10400, 10650

Around the Corner:

  • Sep 17, 2019 - Ethereum Classic Hardfork

  • Sep 18, 2019 - Binance will be opening registrations for Binance USA

  • Sep 23, 2019 - Bakkt to launch Daily/Monthly Futured

  • Sep 27, 2019 - CME futures contract expiry (3 mo)

  • Oct 13, 2019 - Bitwise ETF decision by SEC

  • Oct 14, 2019 - Extended date for Bitfinex to meet order and turn docs over to NYAG

What I’m thinking today:

What You Should Know Before Putting Half a Million DAI in Compound

Came across this tweet the other day about the significantly higher interest rates we see in DeFi:

Pretty bullish sentiment. One of the things that has always been on my mind though is the actual risk involved with these DeFi platforms. So it was interesting to see Ameen Soleimani, CEO of crypto’s beloved Spankchain, discuss what it was like managing the company’s finances and deciding whether or not to use Compound, one of the largest DeFi lending protocols.

Spankchain has about 500K of DAI in reserves, which at 10% interest rate on Compound has the potential to net around $4K a month, so there’s a good incentive to move that DAI onto Compound.

Ameen identifies three risks when lending on Compound:

  1. Contract Security Risks

  2. Centralized Points of Failure

  3. Bank Run Risk

Contract Security Risk

Not a massive risk according to Ameen, given that Compound has had three different audit reports by three different smart contract security firms + an independent bug bounty program.

Centralized Points of Failure

This is where things get more interesting. According to the report:

Because all cTokens use the same administrator, if the administrator key is compromised, all assets deposited in Compound can be trivially drained.

Having this type of centralization allows Compound to more easily make upgrades to its protocol (e.g. V1 to V2), but does leave open the possibility that if the administrator key were to fall into the wrong hands, there could be major disruption. Also important to note obviously is that Compound itself has the ability to “upgrade the price feed oracle, upgrade the interest rate models, and upgrade the risk model of the protocol.”

Bank Run Risk

Perhaps the most interesting of all the risks. The key here is to know the utilization rate of a DeFi protocol, which is the amount of total assets in the protocol that are currently being borrowed versus the total amount of assets committed to the protocol.

E.g. If there was $100M worth of DAI inside the Compound protocol and $90M of that was being borrowed, the utilization ratio would be 90%.

The reason why this is interesting is at the end of July this year the utilization ratio on Compound hit close to 100%. In other words, if a large group of people wanted to withdraw their DAI from Compound at that time they wouldn’t have been able to - it was all being borrowed and the system didn’t have the DAI available to give back to these lenders. What this would look like, according to Ameen:

“Lenders attempting to withdraw would simply see their transactions fail, and would be forced to wait until more borrowers paid back their loans before they could withdraw.”

This is clearly a problem if you’ve lended out DAI and you quickly need to get this DAI back. Imagine putting your money in a bank or other financial institution and then, when trying to withdraw that money again, you’re told its not possible and that you’ll have to wait.

Your only other option would be to sell your cDAI (compound token representing DAI) on open exchanges, where you’re likely to get stuck with exchange fees and potentially lower prices if everyone is trying to sell their cDAI at once.

How Compound addresses this

In the case that the utilization rate gets close to 100%, the Compound protocol is supposed to increase interest rates to incentivize borrowers to repay their loans (or otherwise it gets increasingly expensive for these borrowers). Doing this also is supposed to incentivize more lending (which should also decrease the utilization ratio).

Here’s the problem. The maximum interest rate the Compound protocol can currently reach according to Ameen is 20%. Let’s not forget that to take out DAI, borrowers use Ether. If a borrower believes that ETH will increase by 20% over the course of the year, there’s no incentive to pay back that loan, which could leave Compound with a liquidity problem.

This problem could be avoided however because Compound has the ability to manually increase interest rates on the protocol if it wants to. However if you’re a borrower and you borrowed on the assumption that you would never pay more than 20%, then facing the prospect of rates higher than that is obviously going to leave you unhappy.


If you’re lending on Compound and you want to be able to withdraw your funds at any moment, you should carefully watch the utilization ratio. If it starts to tick towards 100% and the price of ETH is going upwards, I’d be considering my options to withdraw my DAI from the protocol. If not you’re relying on the hand of god (Compound) to arbitrarily lift interest rates for you - something that could lead to a whole lot of push back on Compound given the decentralized ethos of the crypto community.

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About CryptoAM:

The core focus of CryptoAM is to cut through the noise of the cryptocurrency world — and deliver actionable information straight to your inbox. Every piece of information that CryptoAM delivers ends with a “so what — why does this matter?”. It’s easy to get lost with all the information that comes out everyday, CryptoAM exists so you have a guide.

- Avi and Zac

CryptoAM was founded as a daily newsletter by Avi Felman in May 2018. Zac Thomas joined Avi in January 2019 to revamp CryptoAM and is now a co-writer for the letter. Zac will normally focus on policy, regulation and mainstream adoption while Avi generally writes the project, technology and market focused pieces. If you read closely, you’ll be able to pick us apart soon enough 🙂

Nothing written in CryptoAM is legal or investment advice and should not be taken as such. CryptoAM does not make any guarantee or other promise as to any results that may be obtained from using our content. No one should make any investment decision without first consulting his or her own financial advisor and conducting his or her own research and due diligence.

CryptoAM: Franklin Templeton,, and views on DeFi

🙏🏽 Happy Friday 🙏🏽

This edition is ~1200 words. A easy 5 minute read for those of you with tight schedules

Three things you need to know:

One: Franklin Templeton Introduces a Token

Image result for franklin templeton

Here’s a big one. Franklin Templeton, one of the largest investment firms in the world, just announced that they will be launching a tokenized money market fund on the Stellar network. The token is constructed to maintain a stable price of $1.00 and aims to issue a distribution every year.

  • In conjunction with the launch of the fund, Franklin Templeton will be developing a mobile application that will allow potential investors to purchase, redeem and track the value of the token in real time.

As to what the fund invests in? Simple. Low-risk assets. From the prospectus:

  • U.S. government securities which may include fixed, floating and variable rate securities.

  • Repurchase agreements which are agreements by the Fund to buy Government securities and then to sell the securities back on an agreed upon date (generally, less than seven days) at a higher price, which reflects prevailing short-term interest rates.

  • Portfolio maturity and quality   The Fund only buys securities that the investment manager determines present minimal credit risks. The Fund maintains a dollar-weighted average portfolio maturity of 60 calendar days or less, maintains a dollar-weighted average life for its portfolio of 120 calendar days or less, and only buys securities that mature in 397 calendar days or less.

Pay attention: This news is flying under the radar, despite the significance of the issuance. This is one of the first true steps into the world of tokenization and lays the groundwork for a potential swell of asset managers introducing the concept of a “tokenized” security to their large pool of potential investors.

  • The concept of “security tokens” has died a hard death among traditional crypto heads. If you dig a little deeper though, it becomes clear that the concept, rather than fading away, has merely shifted audiences. Traditional institutions are actually finding security tokens to be a rather interesting and investable product, as they tend to solve many of the current plumbing issues of the securities markets. The back office technology that security tokens can replace might not be sexy, but it doesn’t mean it’s unimportant!

Two: Wallet provider looking to raise $50M fund

Image result for logo

The largest companies in crypto keep on diversifying. Just months after announcing it was launching a cryptocurrency exchange, is reportedly raising a $50M VC fund. The fund will invest in both equity and tokens of cryptocurrency projects, and has apparently already invested in projects such as Origin Protocol and Coindirect.

Why it matters: Blockchain is the world’s largest wallet provider, claiming to have over 40 million users. This gives it some pretty natural advantages from an investing perspective, and the announcement of the fund is indicative of the growth of corporate venture capital. The name is pretty self explanatory; corporations creating venture capital arms to be able to invest in startups.

It comes with some key advantages - as a corporation you can invest in the most innovative new startups, whose technology you might then look to leverage in your own company (often to stop you from being disrupted). For a startup being invested in by a VC arm of a corporation, this may lead to opportunities to run pilots or PoCs with the biggest names in the industry.

Binance currently funnels part of its investment in startups through Binance Labs, an incubator for startups that provides seed funding for 10% of a company’s equity and token supply. Coinbase Ventures is also one of the more active funds investing in early stage crypto startups, with over 21 investments.

Hypothetical situation: If offered to invest in your crypto startup, and as one of the terms offered the opportunity for your token (the token would have to be quite advanced) to be compatible with the wallet and thereby available to its 40M users, what would you do?

The company currently offers support for bitcoin (BTC), bitcoin cash (BCH), ether (ETH), stellar (XLM), and USD PAX (PAX). I’ll be interested to see what type of additions there are to that list moving forward.

Three: A critical view of DeFi and ETH

We often can get caught up in our own echo chambers. For that reason I recommend the following tweet thread from the former head of EY blockchain, pushing back against the recent DeFi hype. Interesting food for thought:

On the other side here’s an interesting take on why, despite all the development that seems to be going on on Ethereum, the price seems to be faltering vs Bitcoin:

Also in the news:

Market Outlook:

Quick Take

Overall Market: Lot’s of macro themed developments over the last few days.

  • Christine Lagarde (former IMF head) mentioned the potential for digital currencies to disrupt the current economic system in a speech to the European Parliament.

  • Fed presidents are arguing over whether an inverted yield curve spells recession or not. The market is currently pricing in a 25 basis point cut in the Fed’s policy rate, the same size as its cut in July (which previously drew dissent from fed members)

  • The U.S and China will be meeting in October for another round of trade talks. The S&P was up ~1.3% on the news.

There are also some interesting protocol developments coming up. Ethereum Classic is still scheduled to fork this month and is racing ahead of other altcoins, outperforming even Bitcoin (+16% vs +4%) since August 1st.

Direction: The market fell out from under us. The range is tightening and the market is moving back down after failing to break the 10.9 key level. Now, everything between 10.1 and 10.9 can be considered noise — the next move will be explosive. Bitcoin is coiling.

I’ll be watching very closely here — lots of potential for Bitcoin to make new lows. The important things to watch for:

  • More build-up of open interest, indicating increasingly leverage

  • Funding rate patterns — is it going negative or positive?

  • How quickly are wicks bought up?

My personal take is more pain here moving forward. I’ve taken off a lot of risk here, and am flat on leverage.

Key Support: 10.1

Key Resistance: 10.9

What I’m thinking today:

A question I’ve always had that still bothers me: what happens when Bitcoin block rewards are gone? Will there be enough transaction fees on the blockchain to ensure a secure and 51% proof blockchain?

Block rewards + TX fees make up the security model of Bitcoin. One can consider them the total economic value produced by Bitcoin, and model the costs to attack Bitcoin based on that assumption.

In 2140, block rewards will go away, and the security of the Bitcoin network will depend entirely on transaction fees. I don’t know if this will be sustainable model, and it heavily depends (in my opinion) on whether Bitcoin is used as a means of transaction or as a store of value prior to continued halvings. People may think of this as a far off problem, but in reality the issue could crop up within the next 20 years. If Bitcoin price does not double at least every 4 years, then the security of the network will actually fall. Security relative to marketcap will also fall precipitously if Bitcoin is not used more frequently in transactions.

Well, I asked twitter the question and got lively responses. Dan Held wrote an article that talks in depth about the transaction issue, but my issues with it are almost word for word the issues that “@nuttycoin” has. Trimmed down, Bitcoin needs to scale to a much higher TPS in order to be used.

Go check it out, and if you have any answers of your own – send them my way!

Some additional readings on the topic:

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Nothing written in CryptoAM is legal or investment advice and should not be taken as such. CryptoAM does not make any guarantee or other promise as to any results that may be obtained from using our content. No one should make any investment decision without first consulting his or her own financial advisor and conducting his or her own research and due diligence.

CryptoAM: The Telegram TON, VanEck ETF, and Elwood Fund

Happy Wednesday, and welcome back from the holiday weekend – hope it was a relaxing one! Burning man just ended, and Bitcoin is up. Coincidence…? I think not.

Today’s CryptoAM is ~2300 words — a simple 9 minute read :)

Three things you need to know:

One: Telegram gears up to launch ‘TON’ network

The crypto industry’s favorite messaging app is getting closer to launching its own much anticipated blockchain network. Telegram, with an estimated 300 million users globally, is set to launch the Telegram Open Network (TON) by October 31st. In anticipation, on September 1st the company allowed public nodes to run on its testnet for the first time.

Telegram raised $1.7 billion through an ICO back in 2018, to date the 2nd largest ICO in history after EOS. Here’s some of the things the company has promised it’s building with that money:

  1. TON Payments = A highly secure, fast and decentralized payment system with a transaction speed comparable to that of Visa and MasterCard. Payments are set to be made via Telegram’s ‘Gram’ token.

  2. TON Storage = A file-storage technology available for storing files with torrent-like access technology and smart contracts used to enforce availability. Similar to a distributed Dropbox.

  3. TON Proxy = A network anonymizer layer to hide the identity and IP addresses of TON nodes. This layer can be used to create decentralized VPN services and blockchain-based TOR alternatives to achieve anonymity and protect online privacy.

  4. TON Services = A platform for third-party for DApps, smart contracts and a decentralized browsing experience.

  5. TON DNS = A service to assign human-readable names to accounts that will allow users to access decentralized services as easily as browsing the World Wide Web.

That’s a lot of promises in a lot of different areas. Not just that but these are big problems the company is promising to solve - blockchain scalability for payments while maintaining a high degree of decentralization, decentralized storage, and what seems to be a decentralized identity product. It’s unclear however whether the company is planning to launch TON with all these features by October 31st deadline (unlikely).

Key trend: There are a number of social media platforms currently trying to launch their own cryptocurrencies. Facebook is the most prominent example alongside Telegram, but there is also Kakao (Korea’s largest messenger app), and Japan’s Link. Lest we forget also that (EOS’s parent company), recently committed $150M to grow a new social network called Voice.

Why this matters: Telegram’s 300 million users give it network effects that no other blockchain network currently enjoys. That, combined with the $1.7 billion raised for the project, has led to high expectations about what the TON network will achieve.

What to watch for: The markets and the regulators. Expect this to make a splash in the markets as a number of exchanges will likely be offering Gram tokens over the coming months. Given the heightened regulatory scrutiny of crypto and the large number of Telegram users I’d also expect regulators in a number of different countries to take a close look at this. How Telegram attempts to engage with regulators could offer an interesting roadmap for Libra and Binance’s Venus project.

Oh, and if you’re wondering whether the October 31st deadline is likely to be met or might be delayed (like many other projects), here’s a quote from the NYT:

“Telegram promised in legal documents that it would deliver Grams to investors by Oct. 31, 2019, or give back the money. The company is now racing to get the coins out before that deadline.”

Safe to say I think we’re likely to see the release before October 31st.

Go deeper: Read the Aton research report on Telegram

Two: VanEck introduces a limited Bitcoin ETF-like product

Earlier today, VanEck put out a press release detailing a new Bitcoin product aimed at institutional investors in the traditional markets. The product is designed to behave similarly to an ETF and is issued under SEC Rule 144, which:

Modifies the Securities and Exchange Commission (SEC) restrictions on trades of privately placed securities so that these investments can be traded among qualified institutional buyers, and with shorter holding periods—six months or a year, rather than the customary two-year period.”

In short, the new Van Eck product will be tradable between institutional investors and will be compatible with the current plumbing of the financial system. This should make it easier for those institutions who would rather hold a Bitcoin product than get exposure through a derivative product (like a CME future). It also has the benefit of never expiring and is likely a more defensible buy for those funds with more conservative mandates.

An ETF – the “holy grail” of cryptocurrency products –  continues to elude issuers. Since the first ETF application denial by the SEC in 2017, many different product issuers have attempted to produce a exchange traded fund for Bitcoin. The introduction of such a fund would be a boon for retail investors, who are currently lacking a good way to invest in Bitcoin from traditional brokerage accounts.

  • There does seems to be appetite for a retail Bitcoin product. To get a glimpse of this appetite one can look at the holdings of GBTC, an investment trust that gives retail buyers the ability to own BTC through their traditional brokerage accounts. GBTC is issued by Greyscale investments and currently has $2.3B in AUM according to their publicly available information.

  • Not only does GBTC have a large AUM – they have a premium over the underlying Bitcoin. When an investors purchases a share of GBTC, they are on average (over the last 6 months) paying a 27% premium. This doesn’t seem like a good deal for investors to me! If an ETF product were to come out, it seems likely to me that this premium would collapse, and their product would lose market share.

The big picture: The structured products space in cryptocurrency is ripe for disruption. An underrated feature of a traditional product is the ability of investors to buy through a tax deferred account, which could open up a large potential pool of capital.

Three: $1B crypto ‘fund of funds’ set to be launched

Interesting time to be a crypto hedge fund. Late last week the Financial Times reported that Elwood Asset Management is looking to make a $1 billion investment in cryptocurrency hedge funds. Elwood itself currently manages the personal digital assets of Alan Howard, a billionaire fund manager. Howard is the founder of a large traditional hedge fund called Brevan Howard, which has a reported $20B in assets under management.

Elwood is reportedly looking to construct a portfolio that is made up of crypto funds for institutional investors. According to company CEO Bin Ren the company has already started screening crypto hedge funds, with 50 currently meeting the due diligence requirements.

Why it matters: Elwood and PwC co-authored a report on crypto hedge funds earlier this year. Here’s the money quote:

“We estimate that there are actually only around 150 active crypto hedge funds, which collectively hold around US$1 billion assets under management today. This excludes crypto index funds and crypto venture capital funds.”

In other words, if Elwood was able to attract $1 billion in investment to this new fund of funds, it could have a significant impact on the industry (to be fair — there are other sources that estimate the total industry AUM to be much higher). Ren’s comments also seem to suggest however that they only view 1 in 3 crypto hedge funds as currently fit for investment from institutional investors.

Any capital invested by Elwood may also end up increasing overall investment in crypto companies, which totaled $136 million in Q2 2019. Although the investment mandate for Elwood’s fund of funds is not yet known, most crypto hedge funds have venture arms or employ a hybrid hedge fund / venture fund model which allow them to invest in crypto companies.

Yes great but: I admit I got a little click-baited by the FT article. It looks as though Elwood is slowly looking to make its way to this magic $1B number, and doesn’t in fact have these commitments already fixed. However with a strong relationship to Brevan Howard’s $20B hedge fund, there’s no doubt an opportunity for Elwood to bring a number of institutional investors over to begin investing in the industry.

Go deeper: Here’s the original Elwood report on crypto hedge funds and a recent Cointelegraph overview of the key players in the crypto hedge fund market.

Also in the news:

Market Outlook:

Quick Take: Bitcoin dominance just hit 2yr highs, and is now at ~73% (Data: TradingView BTC.D).

This increase is dominance is mostly due to the great suffering of altcoins, and only a few application based coins and exchange coins have held up well. Some interesting coins worth mentioning are SNX a DeFi based coin and LINK, an oracle-based coin, up 5.5x and 6.2x YTD respectively (Data: Messari). Picking up alts right now is akin to finding a diamond in the rough.

With respect to Bitcoin, we are seeing a reversal after touching off the strong support at 9.4k. We got an MACD cross on the daily view, indicating follow through on the trend. Historically, follow through on a crossover has been high probability event. We’re back within range though, and face a key battle at the 10.9k level. If we reject off 10.9k once again, it’s likely in my opinion that buyers will be become less confident in continued momentum, and we could revisit 10.2k quickly. I hold a margin long position and will double down on the long after a break of 10.9k.

Personally, I believe in this particular reversal due to the length of time elapsed, the drawn out nature of the bottom, and relative leverage flushing compared to previous “bottoming” candles.

In general, the past few months have allowed moving averages to consolidate to current price levels, a good thing for continued growth. You can use the previous price action to create a frame for inflated distance between price and moving averages, as well as inflated implied volatility (>110%). This can help identify a topping move.

Key Support: 10400

Key Resistance: 10900

What I’m thinking today:

The Invention of Money

There is a certain beauty to the financial world. Only a select few areas of study or work require such a rounded approach across disciplines for success. History, philosophy and psychology, math and computer science are all integral to developing an understanding of the world, which is key if you’d like to understand the markets (and money!).

There are many fields that just briefly require the study of history. Speaking as a student of chemical engineering, I can assure you that once we passed by the origins of the atom, learning about Bohr, Rutherford and their ilk, I rarely revisited the field of history (save of course for the pictures of Daniel Bernoulli that appeared next to half the equations in my textbooks).

Economics of course, is often just the description of the aggregate behavior of mankind. As many that study history know, if there is anything in the world that rarely changes, it is the behavior of mankind.

With this in mind, the study of economics often accompanies the study of economic history. Many of the systems and “obvious” choices that exist in our current financial and economic systems are due to the choices and inventions of men hundreds of years ago. Understanding and dissecting these choices will help you understand the weaknesses and strengths of the current system.

In particular the system of money stands out. Money, like many other things in our daily life, is a man-made invention. Money can even be considered a technology. Just as the technology of the wheel radically improved our ability to transport, the technology of money radically improved our ability to transact.

Our current system of money is a claims and fractional based form of money. Money exists mostly on the digital ledgers of banks and within ones and zeros. Money is not “backed” by anything and is quite literally not a true object. Most banks are required to only have a fractional of true “money” on hand and can lend out far more than their actual reserves dictate. Historically, this has led to bank collapse when people begin to lose faith in their banks, and demand to withdraw cold, hard cash.

Bank runs in today’s world are structurally much harder. People tend to get direct deposits from their jobs. They pay off credit cards via their bank account. Money to many people now only exists within the banking system. There is little money left outside the system…so what happens if the system does collapse?

For me, understanding the history of the current system led me to appreciate the strength of Bitcoin greatly. For now, the inherent fragility present in a claims-based system competes with the usefulness of cheap debt. The discussion rages on.

How did this all come to be? Well that’s linked above. The article presents a thorough and fascinating read on the history of money, and how our current system came to be. I highly suggest the read!

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Nothing written in CryptoAM is legal or investment advice and should not be taken as such. CryptoAM does not make any guarantee or other promise as to any results that may be obtained from using our content. No one should make any investment decision without first consulting his or her own financial advisor and conducting his or her own research and due diligence.

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