CryptoAM: Binance burns, Regulators rule, and Trump tweets


Zac here. Today marks the last edition I'll be writing from the US (I'll continue writing alongside Avi however!). I'm heading to Mexico City to start up a new role as Portfolio Development Manager for Finnovista - Latin America's leading Fintech Accelerator and Fintech research organization. 

I'm bullish on Latin America’s prospects and feel especially strongly about the potential to see a large uptake of crypto and blockchain technology in the region. My bet is that in a continent that has historically been let down by poor governance and corruption, these technologies will have a clearer path to adoption. There's no better way to test that theory than to get on the ground.

If you're interested in learning more about the Latin American Fintech scene or have any general thoughts re: crypto and the continent, ping me here.  



Three things you need to know:

One: Binance burns the BNB tokens of its team

The Binance juggernaut roles on. Yesterday in a company blog post and live stream CEO Changpeng Zhao (CZ) announced that the company was giving up the Binance team’s allocation of BNB tokens (40% or 80M of all issued tokens at time of launch were allocated to the team) and instead will be burning those tokens.

There has been some misinformation floating around about this burn, so let’s clarify a few things:

  • Binance will be burning these tokens as part of their quarterly revenues burns. This will not supplement those returns, but rather change which tokens are burned. Historically, Binance has burned BNB collected from fees on the exchange. Now they will be burning their teams allocation. At the end of burning, there will still be 100M BNB. What is changing is the BNB that is being burned.

  • This probably does change the dynamics of BNB. There have been some people claiming that this shouldn’t affect the price of BNB, since they aren’t burning additional tokens, just different tokens. I disagree with this. A distinction should be made between company allocated tokens and team allocated tokens, with respect to the likelihood of ending up on the market. If tokens were distributed individually to team members, it’s far more likely that they would be sold on the open market than if those same tokens existed on the company balance sheet. By restricting the ability of the individual to sell their tokens, this move has effectively reduced free float supply.

  • This move was probably made for compliance reasons. Binance recently ran into some difficulties with the US, and have to bar US customers from the exchange. The usage of profits to burn BNB and team allocation make BNB a potential security in the eyes of the law, and doing away the team allocation makes a stronger case that BNB is in fact a utility token.


Two: Regulated token offerings have finally arrived (in the US)

Image result for regulation A+

The future of retail investing in crypto has been rewritten. Over the last 48 hours two crypto companies, Blockstack and Props Network, both announced that they had received the blessing of the SEC to conduct regulated token offerings under a framework called Reg A+. Blockstack is raising $28 million of the sale of its tokens, while Props Network is simply looking to distribute its tokens legally.

Why this is important: This is huge from a capital raising perspective in crypto. Ideologically it also allows retail (Mom and Dad) investors to gain access to deals at an earlier stage which could help them generate greater returns (but are generally riskier).

If you’re a small company that is looking to raise money to grow, your options usually looked like this (simplified):

  • Take money from accredited investors (rich people) in exchange for equity in the company (traditional approach)

  • Take money from rich investors in exchange for tokens on the platform (e.g. Algorand, Cosmos) - usually in the form of SAFT agreements.

  • Raise money by token sales (e.g. IEO) but you have to exclude US investors

  • Borrow money from the bank (difficult if you’re small)

  • Crowdfunding platforms (Kickstarter - can raise a maximum of $1.07M)

Initial Coin Offerings, which were the primary mechanism that crypto projects used to raise money in 2017 and 2018, raised money from retail (Mom and Dad) investors by selling them tokens. This was attractive to many teams because a) they didn’t need to give up equity b) conducting an ICO was relatively low cost and c) at the time token prices were generally going up and up.

The problem? Nearly every single one of these token offerings that sold to US retail investors broke security laws in the US, and since then the SEC (the US regulator in charge of policing securities laws) has sued projects or forced them to close down for breaking these laws.

Now however there is an approved legal pathway for crypto companies to raise up to $50M under Reg A+ by selling tokens to these retail investors. It’s true that this $50M cap is less than many ICOs raised during the 2017/2018 heyday, but it nonetheless gives companies another prominent fundraising tool.

What to expect: More crypto projects being approved to conduct regulated token offerings via RegA+. Blockstack and Props have done other companies in the industry a huge favor by essentially fronting a large burden of the legal costs necessary to develop a framework for conducting regulated token sales in the US.

Food for thought: Complaining about the US regulatory environment for crypto and blockchain projects has been a staple of the industry for the last couple years (at least) and has led many crypto projects to incorporate outside the US. One thing to watch is whether these most recent announcements begin to draw projects back to the US, which still has the best capital markets in the world.


Three: NEAR Protocol Raises a 12.1M Series A Round

The race for a scalable blockchain continues! NEAR is a nifty protocol focused on building a better tooled and scalable Ethereum-like blockchain. As it stands right now, Ethereum is still trying to figure out it’s transition to Proof-of-Stake and is even further away from releasing a sharded version of its blockchain, which would significantly improve scalability.

There are quite a few teams working on “scalable Ethereums” as of now, but NEAR differentiates itself because the team claims that they have already cracked the nut on a new sharding solution without a “theoretical limit” to its capacity.

NEAR is also working on a developer friendly interface and tooling kit, which most blockchains are currently lacking. Building applications on Ethereum is currently more difficult than building traditional web applications due to the lack of pre-made infrastructure. As of now, there’s no good “Heroku” for Ethereum, a tool that makes traditional web applications dead-easy to deploy.

NEAR raised funds via a SAFT, and will not be offering a public sale at this time. Investors got access to both equity and tokens in this round, similar to other protocols raising via SAFT these days.

Disclosure: Wave Financial also invested in this round


One Fun Thing: Trump tweets about Bitcoin!

It wasn’t the Bitcoin tweet we were hoping for — but at least we got one. In the words of a good friend:

“There is now a non-zero percentage of 61.9M people that just heard the word cryptocurrency for the first time”

The really interesting part of this tweet thread is the last tweet. It’s clear what the true reasoning for this tweet is — the danger of losing USD hegemony.

In fact Jerome Powell recently admitted that Bitcoin could be considered a store of value and may potentially pose a threat to the US dollar. In a different, previous hearing, Rep. Brad Sherman (D-CA) stated that:

"An awful lot of our international power comes from the fact that the U.S. dollar is the standard unit of international finance and transactions”

"So whether it is to disempower our foreign policy, our tax collection enforcement or traditional law enforcement, the advantage of crypto over sovereign currency is solely to aid in the disempowerment of the United States and the rule of law”

It’s clear that the U.S is now seriously considering and evaluating the cryptocurrency world, and has recognized the potential dangers it poses to the current economic system. This is pretty much unthinkable to anyone in the space even just 3 years ago! Take a moment to appreciate just how far we’re come…


Also in the news:


Market Outlook:

Quick Take

Direction: This is what we call a wait and see market. Bitcoin volatility is all over the place, and so is the price action. I’m still net long, but based on historic upside/downside volatility and weak price action thus far, I’ve taken some risk off the table. I’ll be cutting all longs if we revisit price below 10.8, and find it more likely than not to revisit 4 digit bitcoin if we trade below that support level. That being said, we are in a bull market, and it’s important to keep in mind to not fight the trend too much…

Key Support:  11.2, 10.56

Key Resistance: 11.8, 12.2


What I’m thinking today:

How Futures Trading Changed Bitcoin Prices

Here’s an interesting article written by the Federal Reserve Bank of SF about how the introduction of futures impact the price of Bitcoin. (As a side note, it’s funny to me that the Fed likes to deride BTC while also continuing to furiously research it.)

Here’s the abstract:

From Bitcoin’s inception in 2009 through mid-2017, its price remained under $4,000. In the second half of 2017, it climbed dramatically to nearly $20,000, but descended rapidly starting in mid-December. The peak price coincided with the introduction of bitcoin futures trading on the Chicago Mercantile Exchange. The rapid run-up and subsequent fall in the price after the introduction of futures does not appear to be a coincidence. Rather, it is consistent with trading behavior that typically accompanies the introduction of futures markets for an asset.

Basically, the article makes the case that the introduction of CME futures allowed for pessimists to voice their opinion and go short — whereas previously only optimists could voice their opinion by buying. This led to a natural imbalance of buyers and sellers.

Now, this isn’t a completely accurate statement. During the entire 2016/2017 run, it was possible to short Bitcoin in a variety of ways. There were lending desks (although thin) and you could go short on Bitfinex and BitMEX. A counter argument to this is that people that wanted to short with real size were not comfortable with the current infrastructure, and that the introduction of the CME allowed those participants to voice their opinions. This also doesn’t hold much weight, as the volumes and open interest on BitMEX / Bitfinex at the time were much higher at the time than the CME volumes.

That being said, derivatives contracts provide an interesting conundrum. Does the introduction of derivatives lower the volatility of Bitcoin or do they increase it?

Theoretically if going long and short were of equal ease, Bitcoin price would see a dampening of volatility. The confounding factor is leverage. The largest cryptocurrency trading platform in the world, BitMEX, offers users up to 100x leverage. This makes the potential for cascading margin calls in incredibly high. We’ve seen multiple flash crashes on exchanges that allow for leverage (such as the famous 2017 ETH flash crash on Coinbase), and volatility seems to be exacerbated by this excessive leverage.

The wicks on up and down movements are usually much more violent on platforms like Deribit and BitMEX vs spot exchanges like Coinbase because of liquidations that force price to continue in one direction during times of high volatility. There’s no perfect answer right now, but the best one I can offer is that short term day to day trading on highly levered platforms is more volatile with leverage and derivatives, whereas on the macro long term basis they can help provide stability to the markets.

-AF


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