CryptoAM: BitMEX Bonds, Institutional Capital, & Bitcoin SV
|Apr 16, 2019|| 3|
The story so far:
In late 2008, Bitcoin was created. This has made a lot of people very angry and been widely regarded as a bad move.
Three things you need to know:
One: BitMEX looks into more Bitcoin Derivatives
If you read this letter consistently, you may realize that I tend to discuss derivatives a little bit more than the next person. The reasoning behind that is because I believe there’s a lack of financial products in a space that desperately needs them, as they can help one hedge out and even profit from volatility and could even be built off other factors like hashrate.
In fact, the CME technically trades derivatives (futures), and they account for a majority of “real” cryptocurrency volume. Source
There are a variety of different “cryptocurrency products” that can be built to improve market participation, as large investors generally like to tailor their experience by buying structured products rather than outright establishing a large position in a single stock. This tends to help them manage risk effectively.
It then makes eminent sense to me that large exchanges would begin to enter into the financial products space, and we’ve seen that with firms like Deribit and LedgerX offering products such as options.
And now, this:
In a recent interview, Arthur Hayes, Co-Founder and CEO of crypto derivatives exchange BitMEX, talked about his company, and in particular, mentioned that he was looking into the idea of BitMEX issuing some kind of short-term Bitcoin bond.
"One thing that I have started exploring, on a very small scale, is how do we generate income natively…if I hold some Bitcoin and I want to generate some income from it, it's extremely difficult. It means I have to lend it to somebody unsecured... and default rates are quite high.
So, one of the underpinnings of the fixed income markets in the traditional space is that high-quality corporates that everybody knows and trusts issue commercial paper, short-term paper, and usually U.S. dollars, for the funding needs of their company. Now, usually, they don't need this money. It's more that it's operationally and financially efficient for them to borrow money instead of using their retained earnings.
That should happen in crypto as well. I want to create a future where the highest quality exchanges and miners... issue short-term Bitcoin bonds to the ecosystem. So, let's say you want to buy some 30-day paper. Why can't you buy a BitMEX 30-day zero-coupon bond [CryptoAM note: zero coupon bonds don’t pay interest Arthur misspoke here] that yields some rate of interest that reflects the market's determination of our credit risk? Or the Coinbase, or the Kraken, or the Bitmain... that probably don't need the money but they have a reputation to uphold. Do I want to default on the ecosystem? So, I'm more inclined to pay back this money because I want to keep the good name of BitMEX in good standing.
So, if we start to have an almost risk-free curve of interest for Bitcoin, then riskier borrowers can start to price themselves against the rock-solid companies in the ecosystem, and people can start to select. OK, I'd like to take a little bit more risk. Maybe, there is a speculative project. They're going to build X, and they need a 100 bitcoin, and they are paying a 20% per annum yield. I am going to buy that issue.
Now, we're really creating a credit curve for Bitcoin, and people can start natively borrowing it, and creating businesses around, in the crypto space, borrowing crypto, having no outside currency exposure. That really helps generate this ubiquitousness of the use of Bitcoin and other cryptocurrencies, and that really takes our industry forward.
So, that's something I'm looking into now, and hopefully in the next few months I can come up with sort of a paper, if you will, or a test transaction to see if there really is interest for this, so that we can get this fixed income market going.
And obviously, from a selfish perspective of BitMEX, the fixed income markets are much larger than the FX markets... So, if we can start to trade interest rate derivatives on our native crypto credit curve, which is comprised of the best quality companies in the space, that's really going to take our platform to the next level, and help us achieve our goal of becoming the largest exchange and the most profitable in the world."
"We hope to possibly have our own options platform in maybe in 12-18 months."
For those that don’t want to read all that, let me summarize. BitMEX is looking into building financial products based off Bitcoin, starting with Bitcoin based bonds that a company could issue in order to finance themselves. This would allow you, the Bitcoin holder, to lend your Bitcoin to a company like a BitMEX for a certain payout over a certain period of time. This is only possible for cryptocurrency companies, as they’re likely the only companies that could use Bitcoin as working capital.
This would be tremendous for a few reasons. (1) it would introduce a baseline level of risk for this industry and allow other counter-parties to price accordingly, (2) it would give you insight into how companies themselves price risk and allow you to accurately quantify risk for different industry verticals (miners, exchanges, etc), (3) you can put your Bitcoin to work!
One of many: Moving forward I’d expect to see a variety of different financial products being issued, and Bitcoin bonds strike me as an easy first move. If you want to figure out what products will be issued next, let me suggest looking at traditional financial products, and assuming at some point they will all have a cryptocurrency version at some point in the future.
Two: The Institutions are…already here?
Cryptocurrency enthusiasts over the years have become convinced that institutional adoption of cryptocurrencies will become one of the main drivers of price, and will save them from poorly chosen investments by market buying their chosen assets.
In reality, it’s more likely that institutional adoption would come in the form of smart deals and over a long period of accumulation. People tend to still assume that institutions aren’t particularly interested in cryptocurrencies, which may be true in aggregate when looking at institutions, but definitely isn’t true anymore in terms of the institutional money : retail money ratio in cryptocurrency.
Recently we’ve been seeing some real signs of life flow in from the institutional side of things:
In fact, the most recent Bitcoin run up was preceded by institutional asset managers tripling their long positions on the CME and sharply reducing their shorts.
So as it turns out, the institutions are slowly trickling in, and they make up a non-insignificant amount of the capital in market right now. There is no other way to interpret this than: bullish. The institutions that do not enter the market now are likely to speed up their processes and rush in as they realize they’re being left behind. Since this is such a small market, there isn’t a lot of room for playing right now, and early adopters will be much more handsomely rewarded than latecomers. Remember that it’s much easier to go from 100B -> 1T than to go from 1T -> 10T…
Three: Like if you cried - Bitcoin SV gets delisted
Let’s not forget who holds the power in crypto. Yesterday Binance announced that it was delisting Bitcoin Satoshi Vision - and set forth a cascade which saw BCHSV drop more than 20% in the 24 hour period following the announcement. In the hours afterwards, exchanges and wallets such as Shapeshift, LVL, and Blockchain all announced they were also delisting or discontinuing support for BCHSV.
A brief explanation of how we got here, in case you’re absent from #cryptotwitter:
Craig Wright, the Australian computer scientist, has for years claimed to be Satoshi Nakamoto and therefore the inventor of Bitcoin
He’s been widely ridiculed for this throughout the community for years
Wright also founded BCHSV, a hard fork of Bitcoin Cash which was created in late 2018
Wright recently served legal letters to famous crypto people who had slanted him in the media suing them for harassment and libel
A few days later, BCHSV was delisted by Binance.
This whole thing has emphasized a few uncomfortable truths about the industry, the major one being that the exchanges decide who lives and who dies. The founder of a top 10 coin annoyed the founder of crypto’s most important exchange and, low and behold, holders of BCHSV caught in the crossfire have now seen 1/5 of their asset’s value disappear in 24 hours.
Now exchanges like Kraken are polling twitter to see whether they too should delist Bitcoin SV….and it doesn’t seem to be going well for BSV.
Also in the news:
Direction: Bitcoin is looking strong once again. As mentioned last week, I believed that implied volatilities would fall, and so far they have. We also rebounded off the support areas specified last Thursday nicely, indicated there are still a large amount of buyers at the 4900-5000 zone for Bitcoin. Based on the strength of those reversals, I would expect this rally is likely to continue, and that we will expect a slow climb to the 5200 levels over the next week, so I am personally long while still holding those 5250 and 5375 calls I sold last week.
If we break down to 5000 again though, I’d expect the level to break this time and would reduce exposure.
Overall sentiment is still neutral-bullish, and the many different pieces of positive developments over the last year have proven to be an effective mental bolster for market participants. The important thing to watch is market’s reaction to good news, as during a bear market the prices wouldn’t be affected — but in a bull market they will be. That is a great litmus test for understanding if we are still in a downtrend.
Key Support: 5000
Key Resistance: 5160
Overall Market: The altcoin market is weak right now, and is giving off signs we may be entering into a similar late 2016 - later 2017 pattern. We may see Bitcoin crush alts until one/two/three lead the pack forward similar to Ripple and Ethereum’s early 2017 run. Will have more on how to play this on Thursday.
What I’m thinking today:
Trust, Liquidity and Venture Capital
One of the more interesting themes at FO256 was the debate around the pros and cons of holding tokens vs holding equity in companies. Now obviously the holding tokens crowd hasn’t had the best of this argument in the last 12 months - however there were some interesting arguments made in favor of holding tokens over equity. Let’s first break down what equity in a company generally gets you:
1. Information rights to company performance data
2. Governance rights such as the ability to vote on important decisions
3. A share of the profits when the value of the company increases or when the company issues dividends
Holding tokens decouples these three things. Take Maker as an example. Holding Maker tokens give you governance rights such as the ability to vote on stability fee changes. It also gives you a share of the profits - if the price of a Maker token increases, then the holder is better off. However a holder of Maker doesn’t get access to company financial information the same way an equity holder in Maker would.
This decouplement gives rise to unique opportunities for both the investor and the company - the basic argument of the pro-token folks at the conference.
And let’s not forget the obvious kicker. As a token holder I can usually liquidate my position in a project much more quickly than an equity holder. Equity holders in early stage ventures generally have to hold onto their positions for several years before being able to access a liquid market with buyers. With token holders, especially those without vesting schedules, this can be done shortly after the token is listed.
The next time you sit in a crowd and listen to a panel discuss their favorite crypto projects take a second to think about what positions they themselves or the firm they represent might have in that project. Because in this brave new world of ours people can change their positions at the click of a button - something that hasn’t really been possible in VC early stage investing before.
Agree? Disagree? Let me know!
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