CryptoAM: Barclays & Bitcoin, Central Banks Love Blockchain, and Krugmans' Complaints

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HEY HEY HEY!!!! I bought into Bitconnect because Carlos fired me up” - Our most honest CryptoAM reader.

3 things you need to know:

One: Barclays is organizing a team to explore crypto trading. Their digital assets project will be headed by Chris Tyrer, head of energy trading, who will be working with Marvin Barth, head of FX and emerging markets macro strategy, to set up the desk. 

  • New kid on the block(chain): Barclays will join the likes Goldman Sachs and Morgan Stanley in the race to establish a functional crypto desk and digital asset platform. It will be interesting to see who will be the first-mover in this space, as they will certainly have an advantage over competing institutions.

  • Funds will flow: This announcement shines additional spotlight on the already well covered phenomena of traditional sell-side institutions seeking to enter the crypto markets. As infrastructure continues to grow, traditional players will gain the confidence to deploy their digital asset platforms, opening the arena for strong institutional funds flows into the nascent asset class

  • What are they trading? A lot of people wonder what exactly setting up a trading desk means. Is Barclays going to be buying your Cryptopia shitcoins? Probably not. These major desks have a lot of allocated capital, meaning the majority of cryptocurrencies will not provide enough liquidity for trading. Banks will likely focus on arbitrage and market making opportunities on the top 2-3 coins by volume.

  • Read more…

Two: Spain’s central bank touts the potential of cryptocurrencies In a nine page report, BDE, Spain’s central bank, stated that the introduction of digital currencies could help improve the banks existing infrastructure and ease the management of monetary policy.

  • There’s a caveat: While the report is positive in regards to the economic impact of introducing digital currencies, the bank maintains that only central bank sponsored tokens would be effective for monetary policy management. The report was supportive of the asset class, but bank issued tokens would take away from a key tenet of blockchain and cryptocurrencies, decentralization.

  • Transparency: A state currency residing on the blockchain would make for a more transparent money supply, allowing for easier monitoring and supply management. The central bank would be able to expand and limit the money supply more efficiently via the blockchain which would make them more effective at guiding interest rates. We might see more developing nations explore the introduction of digital currency in the near future, especially those that are dealing with rampant inflation (*cough* Venezuela), and once the benefits are made clear, more countries are likely to hop on the bandwagon.

  • Read more…

Three: Blockchain could save banks $27 Billion annually. That is simply from using blockchain for cross-border settlement transactions. However, these cost savings will not be realized until 2030 due to legacy systems needing to run in parallel with blockchain based systems until the ecosystem is fully developed to handle the new technology.

  • “…banks that integrate blockchain will achieve cost reductions not just in payment processing and reconciliation, but in treasury operations and compliance. Indeed, the research argued that in compliance, automation of identity/money-laundering checks, allied to capability of the blockchain to verify the digital identity of an individual, should enable savings of up to 50% of the existing costs base within a few years.”

  • Juniper Research notes that the market capitalization of the world’s stock markets is over $73 Trillion, and even small improvements in efficiency can mean massive cost savings. Savings on cross-border transactions is a very small slice of the pie.

  • Read more…

Also in the news:

What I’m reading today:

Transaction Costs and Tethers: Why I’m a Crypto Skeptic

When you’re working inside cryptocurrency, it’s easy to get swept up in the excitement of things without considering downsides and potential roadblocks for success. Crypto is one massive experiment, and no one quite knows with certainty whether it will succeed. Some people (including myself) have strong conviction that we will see cryptocurrency bloom, but it’s always worth reminding yourself arguments against.

Enter famed crypto-skeptic and economist, Paul Krugman. In his recent op-ed, Krugman argues that crypto will fail for two reason: transaction costs and tethers.

First he argues that transaction frictions are higher for cryptocurrencies than they are for traditional methods of payments.

“Bear in mind that conventional money generally does its job quite well. Transaction costs are low. The purchasing power of a dollar a year from now is highly predictable – orders of magnitude more predictable than that of a Bitcoin. Using a bank account means trusting a bank, but by and large banks justify that trust, far more so than the firms that hold cryptocurrency tokens. So why change to a form of money that works far less well?”

He next goes on to argue the that cryptocurrency lacks any tether to reality. According to Krugman, we as a society value things we are backed by human need and necessity. Gold is backed by real use cases such as jewelry or crowns for teeth.

“In normal life, people don’t worry about where the value of green pieces of paper bearing portraits of dead presidents comes from: we accept dollar notes because other people will accept dollar notes. Yet the value of a dollar doesn’t come entirely from self-fulfilling expectations: ultimately, it’s backstopped by the fact that the U.S. government will accept dollars as payment of tax liabilities – liabilities it’s able to enforce because it’s a government. If you like, fiat currencies have underlying value because men with guns say they do. And this means that their value isn’t a bubble that can collapse if people lose faith.”

These arguments are persuasive, and merit consideration — but they do have flaws. The first argument assumes that low-friction financial systems exist everywhere, which is patently false. I’ve always favored the idea that cryptocurrency will not make much of an impact in the first world, and will have outsized impact in developing countries. In addition, Krugman views low-friction transactions as a benefit with no trade-off. Low friction transactions in today’s society mean you are exposing yourself to the third party risk of financial institutions. Again, in countries with a robust financial system this may not matter but it certainly does in places like Venezuela or Greece.

The second point is salient and hard to refute directly. Bitcoin has value because people claim is has value. Gold has use because people claim it has use. If people enjoy having a string of numbers on their computer vs a shiny piece of jewelry, what does that say about the intrinsic value of gold? A philosopher might be needed here.

Around the corner:

Market Outlook:

Quick Take

It looks like we were overly fearful yesterday, and the markets exhibited a nice bounce. We are still looking quite bearish on the 4h and 1D charts. We bounced nicely off the bottom support around 6.9k, and are now looking to retest the 7.2k level. I’m looking for a break above 7.4k to indicate that we may be reversing the downtrend. The longer we stay below the 7.4k level, the more likely it becomes to to break down past 6.8k and hit the resistance at 6.6k.

I’m still leaning bearish and would short around the 7.2k resistance level with a stop around 7.4k, as I believe there is not enough buy pressure to buoy prices at this level.

Daily Chart

Fear & Greed

Here’s a reminder of what these criteria mean

Overall Picture

Watch out for the August 16th (not August 10th) announcement by the SEC on the Bitcoin ETF. Keep in mind that good news isn’t enough to cause market run, we would need news that fundamentally unlocks new sources of capital such as an ETF or new, favorable regulation.

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