Happy Friday everyone! Hope you enjoy this edition of CryptoAM. We’ve made an effort over the last few weeks to reinvigorate this letter (and it seems to be working). On Tuesday I was told by a reader that it reminds them of Axios. Smiled big at that one!
If you ever have any questions, concerns, or just generally feel like talking to someone — ping us on Telegram. My handle is @delta_neutral and Zac’s is @Cryptokiwi2.
- Avi & Zac
Three things you need to know:
One: The New York Times partners with IBM to fight fake news
Fake news is one of those topics everyone seems to have an opinion about. No matter what you consider fake news one thing is certain - the lines are becoming increasingly blurred between what is real and what is not. Being able to differentiate between the two isn’t just important to win an argument, it can sometimes have life and death consequences.
The New York Times seems to think that blockchain can be part of the solution. On Tuesday it announced it had set up the ‘News Provenance’ project to explore “new ways for publishers to fight misinformation.” The first proof of concept for the project utilizes blockchain, specifically IBM’s Hyperledger Fabric blockchain which has become the go-to for enterprises to build on.
Context: The idea that blockchain could be used to improve journalism isn’t a new concept. Back in March the Times posted a job opening for a blockchain lead, and high profile project blockchain project Civil has long touted its relationship with major publisher Forbes. Less known is that in 2017 Spotify acquired a startup called Mediachain Labs that looked to tackle a similar problem.
The key problem: News organizations have a number of different internal methods to identify and distinguish the content (e.g. photos and videos) that they publish. As well as knowing when and where content was originally captured, these organizations have other metadata such as the steps of the editing and publishing process.
However the users and viewers of content don’t have access to these same tools or verified metadata. This means that bad actors can mislead consumers in a range of different ways (editing videos, deepfakes etc). Here’s the key quote via the News Provenance project website:
“This metadata could help combat misinformation, but publishers have no reliable mechanism for distributing it to social media platforms, messaging apps, browsers and other systems that serve as the last line of defense in protecting users.”
NYT’s proposed solution:
“…establishing a set of signals that can travel with published media anywhere that material is displayed: on social media, in group chats, in search results and emails, and so on.”
What it means: If I’m on social media scrolling there aren’t many (any) signals that prove to me whether the content I’m viewing has been edited by someone apart from the original source. BUT if news organizations could ensure that the metadata they generate when producing content remains tamperproof and accessible, then as a consumer you would see small signals to verify that the content had not been tampered with from the original. The way I imagine that is similar to how you can see which Twitter profiles are real or not.
Reality check: It’s all well and good having clear signals on videos so that consumers can easily see what is real and what is not. It’s the back end behind this - actually creating a system that is scalable where truth can be verifiably secured across different social media networks - that’s the tough part.
As with any blockchain pilot you see announced be attentive to what actually ends up happening. The Times has already begun conducting user-centered research and interviews (please take note other blockchain projects) but hasn’t announced when they’re aiming to actually begin building the proof of concept.
The big picture: This proposed solution wouldn’t stop bad actors who write content that is plain nonsense, like these guys. If a news organization’s facts are just plain wrong, there is nothing that the proposed project can do to solve this. However it could help prevent the proliferation of doctored content like the video of Nancy Pelosi that spread earlier this year.
Two: Ethereum 2.0 marches on, and on, and on (and on)
If you are a smart protocol project you usually have a few items on your agenda in order to be successful. (1) you would like people to find use cases for your project (2) you would like your token to appreciate (3) you would like to be scalable & efficient (4) you would like to be easy to use (5) you would like people to use you.
As of now, Ethereum has managed to capture (1), (2) and (5) despite lacking (3) and (4). With Ethereum 2.0 comes the potential and hope that (3) and (4) will improve. Ethereum 2.0 has a few goals outlined:
Proof of Stake
Execution layer improvement (tooling, ease of use)
You would be hard pressed (without really digging) to find out how things are progressing. Until now! Thankfully Ben Edgington put together a fantastic medium article outlining where current development stands.
After exactly a year of the intensive development described above, the Ethereum 2.0 beacon chain specification was frozen on the 30th June: the research and the design are finished; we are fully into the delivery stage.
The beacon chain is the foundation of the Ethereum 2.0 system. It is responsible for managing the proof-of-stake protocol and coordinating all of the independent parallel shards, and is the most complex part of the development.
Phase 1 is the design and delivery of the sharded data chains. This is where we add 1024 independent blockchains to the system, each hanging off the beacon chain. The protocol for this phase is much simpler than the beacon chain, and the (mostly complete) specification amounts to only about half as many lines in total.
The main challenge for Phase 1 is the peer-to-peer network engineering required to get the right information to and from the right validators quickly enough when they are split across these 1024 chains. Work on this is already underway alongside the client interoperability activity.
On the execution layer:
Until a few weeks ago, nobody was quite sure where to start: what kind of programs will we be able to run on Ethereum 2.0? What will users’ accounts look like? How will the shards intercommunicate? There was no shortage of ideas; the possibilities are endless. But a clear way forward was elusive.
The impasse was broken by Casey Detrio, who gave a very nice, brief summary of the history in a presentation at the Scaling Ethereum conference in Toronto. He published a suggested approach that has proved to be very fruitful. Casey’s suggestion was picked up and developed further by Vitalik, and others have enthusiastically stepped in to prototype and define it further.
Basically — Ethereum 2.0 is quite far away. There is good progress being made on the research side of things, but the execution side has not moved forward significantly over the last year.
Why this matters: I do not believe that smart contract platforms enjoy the same moats as money does. Money gains importance and value the longer it is in existence. The same does not have to be true for decentralized protocols. If an ecosystem can easily be mapped to a new set of underlying “pipes”, then that ecosystem will be moved over if the pipes are faster/better/easier to install. This is a shorthand way of saying that Bitcoin enjoys a stronger network effect than Ethereum because of the different type of value each brings to the table.
Of course, Ethereum is currently the leading smart protocol platform. It would require a truly impressive competitor to bring it down — but those competitors are coming. Buying Ethereum to me is akin to buying a call option on the completion and execution of Ethereum 2.0, so you better be paying attention.
Three: Regulatory clampdowns continues to plague U.S crypto investors
…perhaps the headline betrayed my position on the matter.
Well, at least the first two words are an objective fact. The U.S is ramping up its efforts to tackle the cryptocurrency issue. Today that Wall Street Journal reported that the IRS has started sending letters cryptocurrency holders, warning about the “penalties for failing to report income and pay tax on transactions involving virtual currencies.”
The key section from the article:
“Taxpayers should take these letters very seriously. The IRS is expanding efforts involving virtual currency, including increased use of data analytics,” said IRS Commissioner Chuck Rettig.
In recent weeks, IRS criminal investigations chief Don Fort has announced that the agency is also building criminal tax-evasion cases involving cryptocurrency that are expected to be made public soon.
The Coinbase customers whose information was turned over bought, sold, sent or received digital currency worth $20,000 or more between 2013 and 2015.
For federal tax purposes, cryptocurrencies such as as bitcoin are treated as investment property akin to stock shares or real estate.
Also today — Abra announces the geofencing of four assets on its platform:
“From Aug. 29, US users will no longer be able to hold Qtum (QTUM), bitcoin gold (BTG), EOS, OmiseGo (OMG), and status (SNT) will have to exchange or withdraw any holdings of those assets from the app by 11:59 p.m. EST (03:50 UTC) on that date.”
We’ve talked about the difficulties of U.S regulation plenty on this newsletter before. Optically, it seems like Libra has pushed U.S regulators to start taking cryptocurrency seriously. We’ve seen major exchanges scale back, wallet providers, etc. IDEX (a “decentralized” exchange) introduce KYC, BitMEX is now being investigated by the CTFC…the list goes on.
Why this matters: It’s becoming increasingly prohibitive to exist as a cryptocurrency company in the United States. There is a significant amount of red tape being put up by people who often do not quite grasp what they are regulating. Of course, a lot of this is just catch up. Many exchanges existed in a legal grey zone (that was likely illegal). Few people have paid taxes on cryptocurrencies (in large part due to no guidance from the IRS…). Either way, I’m anecdotally seeing and hearing many companies move their operations abroad and block out U.S customers in order to avoid compliance.
The U.S is the one of countries that stands to lose the most from the proliferation of cryptocurrencies (as the USD is an incredibly powerful tool for diplomacy), so it makes sense that they are also clamping down hard. Generally the U.S has also been open to innovation though — which makes this more difficult. There are hard questions at play here. In my personal view, it makes the most sense for the U.S to work hard to be accepting. If innovation happens outside the borders of the U.S, it becomes *that* much more difficult to control.
For example, if the U.S blocks Libra — what’s stopping China from collaborating with Huawei to launch their own version? The U.S government will have decidedly less power over that version of Libra.
Also in the news:
1 Day Timeframe:
Since the breakdown from 13k, I’ve been calling for sideways trading / churn.
I still believe the market structure is very bullish based on both price action, indicators and the overall macro position of Bitcoin. I believe we will continue to churn between 8.8k - 12.2k, and then enter into a new parabolic advance. If we break down past 8.8k (and more importantly 8.2k) I would revisit the overall bull structure of the market. Accumulating a long position on the lower end of this range has a very positive R/R in my opinion.
You can see in the graph above the key areas. I expect volatility to continue to fall off over the next few weeks, and would look to take on some longer dated calls at that point to be ready for the next explosive move.
Correlations are jumping between BTC and Altcoins, and Bitcoin dominance has topped out around 70%:
Realized volatility has flatlined:
….is alt season coming back? High probability (I believe) that alts will post gains against Bitcoin in the next 2-3 weeks. If you want to discuss potential trades, come to our telegram group.
Things I’m watching
I believe FTX exchange is doing a fantastic job innovating in the cryptocurrency derivatives space. They are launching their FTT token soon, and I believe it’s a compelling investment due to the quality of the FTX product and the fact it has similar token mechanics to LEO and BNB.
On Monday, the NYAG will have its decision on whether it can proceed on the Bitfinex case. This will have either a very negative or very positive affect on LEO. If dismissed —> LEO goes up. Vice versa. An interesting trade around this event? Short Tether! Tether will not “pump” on this announcement, but it might crash. R/R looks good to me. Not investment advice.
What I’m reading today:
This piece from St. Louis Fed President James Bullard didn’t get much press given the noise from Trump, Mnuchin and Powell recently. But for me it offers a much more nuanced and academic view of cryptocurrencies - Bullard himself actually studied and contributed to research on private currencies and their histories before joining the Fed.
The good stuff:
“Cryptocurrencies are creating drift toward a non-uniform currency in the U.S., a state of affairs that has existed historically but was disliked and eventually replaced.”
Bullard refers to the 1830s, when 90% of US money supply was private issued banknotes. This system changed because of the frustration that markets accepted different currencies at different exchange rates depending on the town and city. Put another way, it was confusing and complicated for consumers and merchants alike.
“Public and private currencies can compete and co-exist as part of an equilibrium.”
In theory both types of currencies are required to allow voluntary trade to occur (I shouldn’t be stopped from completing a transaction just because I can’t access USD, which is where cryptocurrencies can be complementary). Bullard does however have doubts about how cryptocurrencies are being used in the real world to enable voluntary trade (citing potential for illegal transactions and evading capital controls).
“The current cryptocurrency wave may be driving the U.S. uniform currency system toward something more like the international non-uniform currency system.”
We don’t have a global uniform currency system, instead countries have their own currencies and exchange rates frequently fluctuate. This fluctuation between different currencies takes place regardless of whether individual countries have stable, uniform currency systems such as the US and Japan:
Bullard’s concern here is that a move towards a non-uniform currency system in the US will lead to similar levels of currency volatility that the international currency system experiences. Put another way: what if the USD fluctuated in the same way as the Yen/Dollar Exchange Rate fluctuated over the last 30 years, as per the above example?
This was honestly one of the most interesting and insightful reads with regard to how cryptocurrencies play out in a larger currency and monetary policy context. Bullard obviously has a very deep understanding , definitely check out his presentation.
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