CryptoAM: Bitcoin vs Gold, VC Activity, and Huobi Goals

Thursday, May 2nd

Good Thursday morning from the West Coast! Starting next week I’ll be making a trip out East, first to Chicago for the Trading Show, New York for Blockchain week, and Baltimore/DC for the Preakness Stakes. If you’re going to be at any of them, give me a shout!

3 things you need to know:

One: Bitcoin vs Gold: 1 in 5 Millennials prefer Bitcoin to Gold.

If you’re like me and you think that hedge funds doing interesting things is fun, you’ve already experienced two very fun things this week.

First: Blockchain Capital released their second survey on attitudes towards to the digital asset market, uncovering a multitude of gems like “4 in 5 millennials prefer gold to Bitcoin”. Did I say that differently in the title? My bad.

Second (and even more fun): Grayscale just released a commercial (wow!) about Bitcoin, in which they described it as digital gold, gold of the future, and insinuated that Gold is “so 1970’s get with the times”. The entire commercial consists of two people running around what looks like NYC but a version of NYC where everyone is carrying gold and dropping it because it’s so heavy. Go check out the website they launched with it, hilarious stuff.

On the concept of comparing gold to Bitcoin: It’s a powerful starting point to compare the two for many “no-coiners” to grasp that Bitcoin may be a useful “hedge” against the current financial systems, but to suggest that by investing in one you are choosing an “outdated” investment is mistaken at best.

  • Bitcoin can be viewed as a digital native asset that helps the individual escape censorship of money by individual governments. Gold can be viewed as a primarily physical store of value that enables people to be insulated from larger scale economic crashes (if they actually hold the gold). Let’s put it like this. Gold is more useful in widespread economic panic. Bitcoin is more useful for individual state collapses.

  • Gold has industrial use in addition to it’s Store of Value like qualities. Bitcoin has the qualities of “offshore money” AKA regulation arbitrage in addition to it’s SoV like qualities.

  • I will concede that if you are a fund, a trader or otherwise looking to hedge short term cycles and you have historically done that with Gold — it may be useful to do that via Bitcoin with increasing regularity.

Going back to the Blockchain Capital survey, I’d like to introduce you to the chart that will spark the bull run:

Yes, it’s the familiarity chart. It’s not discussions of who might buy, what they prefer it too, etc. It’s all about familiarity. Here’s an excerpt from the fantastic book Thinking Fast, and Slow by Daniel Kahneman:

People tend to assess the relative importance of issues by the ease with which they are retrieved from memory—and this is largely determined by the extent of coverage in the media. Frequently mentioned topics populate the mind even as others slip away from awareness. In turn, what the media choose to report corresponds to their view of what is currently on the public's mind.

As familiarity with Bitcoin increases, so does the propensity of buying Bitcoin. There are three steps to buying *anything* in this world. (1) Learning about the thing (2) getting comfortable with the thing (3) determining you want the thing (4) finding you can afford the thing (5) buying the thing.

The more people that are familiar with Bitcoin, the more you can skip step (1) and move further down the path on step (2). Humans as a pack tend to become more comfortable with something the more they hear about it, regardless of how they felt about it in the beginning. So the more people hear about Bitcoin, the more implicitly comfortable people will get about changing their minds and buying Bitcoin.

Two: Blockchain and Crypto Investment Activity

Alex Thorn put together a great tweet thread about the state of VC funding in the cryptocurrency world. Highly suggest checking it out.

Some interesting takeaways:

  • Seed rounds are shrinking as valuations go up, and investors are gravitating towards more established companies

  • This is leading to bigger (and fewer) rounds. Quality of deals is going up and quantity is going down

  • Many funds are chasing the same deals making them overcrowded.

From my personal perspective (working at a fund), we’re seeing a lot of high quality infrastructure & data plays walk through the door. Many of them are just on the cusp of closing a round and most already have some signal investors in the mix. I’d expect the field of participants to continue to decrease with time.

Three: Huobi leverages small overseas exchanges to boost revenue 

Large exchanges are continuing to diversify their revenue streams. That's what it looks like at least for Huobi Group, the large Singaporean based exchange conglomerate.

This comes after it announced the addition of South African exchange HIZA to its Huobi Cloud platform, as reported by Coindesk. HIZA will join 150 existing exchanges, with 80 further exchanges in the pipeline, according to Huobi Group's senior business director David Chen. Chen also mentions that they want to see these exchanges process a cumulative total of $55 million daily volume by 2020.

What is Huobi Cloud I hear you ask... Basically it's a one stop shop for parties who wish to set up digital asset exchanges quickly. Huobi leverages its expertise to help these parties set up things such as wallet management, order integration and clearing systems.

Better yet for these new players is the liquidity that they can access through Huobi's global order books - another benefit of this service. Don't underestimate this last point, having consistent depth in order books is important for an exchange to gain credibility and traction.      

This is part of a play to enter into emerging markets. Local partner entities split their profits 50/50 with Huobi and these local players are responsible for regulatory compliance. Huobi mitigates its legal risk by not actually owning the customer data that might pass through their order books. Huobi isn't the only one looking closely at Africa - Bittrex recently invested in South African exchange VALR and Binance has subsidiaries in Uganda.  

What I'm thinking: I'm of the belief that real world demand for crypto by millions of consumers will be fueled by emerging markets. The goal of $55 million in daily volume between potentially 230 partner exchanges might not seem like much on the surface. However I read it to be more of a long term play - if crypto does end up spreading in regions like Africa, then large exchanges with existing business operations stand to benefit enormously. Getting involved early through local entities mitigates risk, while allowing them to gain local knowledge, business contacts and insights which could be valuable down the line. 

Also in the news:

Market Outlook:

Quick Take

Direction: As expected we had a slight pullback to the 5280 level before continuing our climb. We’re looking at a weak volume resistance right now. Combining that with the moving averages crossing over, the shrugging off of the Tether news and the bullish continuation.

I’m a buyer of June & Sept 5500 calls at this level. It’s unclear to me where we will be in those months, but I’m fairly confident it’s likely we see a test of the strong 6000 resistance between now and then. You can offset some of the cost by selling calls above 6000 and buying longer strike calls if you (as I do) believe that a break of 6000 would lead to a strong upwards surge.

Key Support:  5280

Key Resistance: 5500

What I’m Reading

How Mesh Networks and Crypto Can Fill the Rural Broadband Gap - BreakerMag (RIP)

Nothing gets a crypto lover hot and sweaty like a story about how decentralization is helping improve people's lives in a real use case. That's a nice little image to introduce a company I've been following recently, Althea - a San Francisco based venture that leverages mesh networks and cryptocurrency to help democratize internet access to underserved urban and rural communities.

I assume the majority of people who read this newsletter have a pretty solid internet connection and are mostly inner city urban dwellers. Internet prices and options are relatively competitive in major centers (unless you're in Philadelphia in which case Comcast owns you).

But what happens if you're rural? You probably have one or two internet service providers (ISPs) that give you:

a) crazy high prices
b) slow internet speeds
c) both of the above

Either that or you don't have an internet connection at all. This makes it pretty difficult to access all this new financial infrastructure that the crypto industry is building to empower people.

Why does this happen? Because it's damn well expensive to lay fiber networks in rural areas, and there aren't many consumers to make the cost of this worthwhile (unless you charge them higher prices). This is the classic last mile problem.

That's where I want to focus on Althea.

Under Althea's model the economics of the last mile distribution are shifted by socializing internet access. In a nutshell, here's how it works: community members in the network pool their resources and buy a commercial grade internet connection from an ISP. This connection is a fixed cost, and an example might be that rather than needing to lay new fiber to the community, the bandwidth purchased can be transported using one or more antennas, communicating with one another via line of sight hops.

Once the fiber connection's signal has been re-routed to a more favorable location if need be, a router receiving this commercial grade connection can act as a gateway node. The internet from the gateway node can then be shared with other non-gateway nodes via an antenna at the gateway node and more antennas on households that want to receive internet. In dense environments, the houses with antennas can also share internet with their neighbors by each hooking their router to a switch, and running ethernet cables from that switch to routers in their neighbors' houses.

The gateway node shares internet access with other nodes in exchange for being paid in real-time for data that is used. The same is true for the houses that connect their neighbors via Ethernet cables. This mechanism is called “pay for forward.”

Each router has a wallet address that is pre-loaded with Ether (with xDai being implemented in some projects).

To make this network more resilient and scalable, any router running Althea's software, such as those houses sharing internet with neighbors via Ethernet cables, can also operate as an 'intermediary node'. These nodes can define a price in cents per gigabyte to forward internet service to nodes that are further away in the network. This is an important point as it helps extend the reach of this network to more remote households. See the demo here.

Not only should this model work out to be cheaper than each household buying an individual home broadband package, but previously unconnected households will have the ability to access the internet and the financial infrastructure of tomorrow.

I encourage you all to read more into the project. Ultimately what I'll be following is how easily this scales in communities and how easy it is for people to use and operate.

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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.