CryptoAM: Kik's Hail Mary, Banks & Coins, and Gemini's Struggle
|Jun 4, 2019|| 1|
New professionally designed logo? Didn’t notice.
As a follow up to last week’s CryptoAM, I got a note from a European cryptocurrency investor that claimed the banking crisis isn’t really a crisis. Will do more digging for you all and share my findings in the telegram chat!
Three things you need to know:
One: SEC officially sues Kik over $100 million ICO
Crypto’s most visible regulatory spat reached a new high today as the SEC announced it was officially launching a lawsuit against Kik. The announcement itself doesn’t come as a huge surprise, with Kik last week launching a legal defense fund called ‘DefendCrypto’.
Some of the juicy highlights of the lawsuit:
The SEC alleges that Kik’s ICO was a ‘hail Mary pass’ that came about due to concerns that the company would run out of funds.
The company allegedly described the opportunity as a way to make a ‘ton of money’. This, along with promises to change the Kik messenger app to create demand for the token, led investors to reasonably believe that they would make future profits from buying the token.
I’m not a lawyer, so I’ll stay away from the legal specifics that can be found by actual lawyers throughout crypto twitter. Here’s a recap of why this matters from a high level perspective:
ICO’s were the primary fundraising mechanism for crypto projects throughout 2017 and early 2018. The attraction of an ICO during this time was simple; you received capital to build your project but you didn’t have to give up equity. Great.
The SEC has warned against this as a fundraising method for a number of years now, saying that in the vast majority of cases ICOs violate current securities laws.
Until today, most projects have chosen to settle with the SEC instead of risking going to court. These cases can take a long time and be expensive, hence the desire of most teams to avoid court cases.
Kik’s lawsuit with the SEC could help clarify much of the regulatory uncertainty that has plagued the industry in the US. Namely, the legal status of digital tokens and under what circumstances they become securities.
One potential risk for the industry is that Kik is the wrong company to take on the SEC. That if it loses (there are some definite red flags in the lawsuit), then it may set a precedent that would harm other projects that are closer to the margins than Kik.
Go deeper here and check out this video of Ted Livingston speaking about the Kin token back in 2017.
Another good legal guide can be found below:
Two: Gemini Dollar falls well behind stablecoin competitors
This year is shaping up to be an absolute cracker for competition between the major fiat-backed stablecoins (excluding Tether). Most people forget but 2019 marks the first full year of competition between True USD, USD Coin, Paxos, and Gemini dollar. All of these launched at different times throughout 2018.
There’s a black sheep among this family however, with Gemini dollar’s market share tumbling in recent months from a high of nearly $100M to $20M:
Source: The Block
Gemini lacks the liquidity of its competitors. It isn’t listed on Binance unlike the other three and Binance has the most liquidity in all of crypto. USDC benefits additionally from being listed on Coinbase and Circle (USDC was created and is operated by these two firms). A large part of demand for stablecoins comes from traders. If Gemini dollar isn’t easily available on major exchanges then these traders will instead use these other options.
Gemini discounted Gemini dollars to trading firms when it first launched in order to spur adoption. This helped it gain market share quickly but, as this program ended, demand for GUSD dried up.
Why market cap matters: It’s a significant part of how the companies behind these stablecoins earn their revenues. They use the fiat deposits to invest in short-term treasuries and other interest yielding investments.
What I’m looking to see: Whether Gemini’s recent high profile partnerships with companies like Flexa and BlockFi can reverse this trend. Particularly with Flexa - there’s a strong value proposition to being able to use a stablecoin with a wide-network of retail merchants. BlockFi’s 6.2% interest rate on Gemini dollar, while still competitive, is less than the 8% that can be gained by lending USDC on Dharma.
And let’s not forget the 500 pound stablecoin-gorilla that I’m sure has got the attention of all these companies; Facebook’s soon to be released GlobalCoin.
Three: Banks are preparing to launch their own digital currencies
Financial Times reported yesterday that 13 new banks are in the process of launching digital tokens, similar to the JPMcoin announce by JP Morgan earlier this year. This comes on the heels of Facebook leaking more information about its proposed GlobalCoin which will be fully launched by 2020.
The UBS-led research on a “utility settlement coin” (USC) has been in the ether since 2015, when banks decided to investigate whether wholesale banking could be made more efficient by deploying distributed ledger technology (DLT). DLT, which is used in blockchain networks, enables participants to instantly share information on an open-access ledger which can never be altered or erased.
“When we started out . . . this project has basically been about R&D, we didn’t know if the characteristics [we wanted to achieve] were possible,” said Rhom Ram, head of Fnality, the new venture into which the banks and exchange Nasdaq have just invested £50m to create a market infrastructure to transfer value digitally. “The funding signals that it is possible,” he added. “The investors believe it is possible based on the evidence they have seen.”
The implications of this are not lost on us, and we’ve talked extensively in the past about the potential implications of widely used digital coins. As banks continue to launch digital tokens, the concept of cryptocurrencies become more accepted by the wider community. This announcement is also an implicit statement that current settlement systems are outdated, and that blockchain payment rails are in fact a much better implementation of payment methods.
To be clear, these coins are just an improvement on current back office systems and have little to do with cryptocurrencies as a whole. That being said, they cement the fact that stable coin issuers are tapping into a large and incredibly large market. This is the beginning of a whole new way to transfer value.
Anything and everything that can be tokenized and moved under this system will effectively become “money”. This explodes the efficacy of paying for things with items that historically were not considered “money” because of the problems of payment and distribution. It’s not crazy to assume that many different forms of value will be tokenized in the coming years, and that we will see an explosion of “bartering” as people are able to trade assets in a cost effective manner. The importance of having a standard here cannot be understated, as all of this will require buy-in from major institutions.
Also in the news:
Direction: To be blunt, market isn’t looking rosy other than the fact that altcoins are holding up nicely vs Bitcoin right now. As mentioned in the last issue, once we broke down past 8200, then 7800 was the next logical level.
We smashed past 7800 and are now trading around the 7500 level. I’m expecting more pain in the next month and would expect sub 7k Bitcoin sometime within the next two weeks. Buy support here is weak, and supply is strong. Lots of profit was made on the move up and not many people are inclined to give back that profit and lock it in.
Trend is your friend and we’ve invalidated the short term bull trend. Looking out more broadly, it’s entirely possible that we revisit sub 6k if we cannot hold 6800.
Key Support: 7000
Key Resistance: 7600
What I’m thinking today:
I read this fantastic research piece this weekend and thought I would take a moment to dig into some of the findings and how it might help you understand the dynamics of the cryptocurrency market.
This paper focuses its efforts on explaining how market efficiencies arise and the assumptions behind current market theory. The paper goes on to challenge four major tenets of traditional capital markets theory:
Assumption: Stock market returns are normally distributed.
Assertion: Stock market returns are actually exhibit high kurtosis meaning that the “tails” of the distribution are “fatter” and the mean is higher than predicted by a normal distribution. In ordinary language, this means that periods of relatively modest change are interspersed with higher-than-predicted changes—namely, booms and crashes. This is especially true in the Bitcoin market. Bitcoin’s return distribution is decidedly skewed, and exhibits higher kurtosis than the traditional stock market.
Assumption: Stock market returns are a “random walk” and therefore not predictable.
Assertion: John Campbell, Andrew Lo, and Craig MacKinlay, after applying a battery of empirical tests, concluded, “financial asset returns are predictable to some degree. Furthermore, other finance researchers have suggested that there is a long-term memory component in capital markets. That is, return series are often both persistent and trend-reinforced.
Assumption: Risk and return are linearly correlated
Assertion: Risk and return are not linearly correlated, and should not be assumed to be.
Assumption: Investors are rational actors.
Assertion: Investors in reality act irrationally. Investors will often exhibit generally risk-averse behavior. If presented with two investment opportunities, they will often choose the low risk investment even if the higher risk investment has a much larger expected value. This stands in contrast with expected utility theory. Investors will also trade more than theory assumes and base that trading on “noise” rather than true information. Lastly, unsophisticated investors will generally invest inductively rather than deductively, meaning they invest on what they believe other people are doing rather than investing on the true information.
After tallying up the ways the capital market theory may fail, the paper goes on to introduce a new way of understanding the market — as a complex adaptive system. Complex adaptive systems are more akin to a flock of birds or the movement of the ocean than they are to traditional market theory. Large shocks to the system are inherent to the build rather than caused by single points of fault.
A central characteristic of a complex adaptive system is “critical points.” That is, large changes occur as the result of the accumulation of small stimuli—just as the accumulated weight of many sand grains precipitates large avalanches. This implies that large fluctuations are endogenous to such a system. Critical points are a formal way to express the concept of “the straw that broke the camel’s back.” Seeking specific causes for even big-scale effects is often an exercise in futility
Here’s another really interesting point:
Do we need all investors to be rational profit seekers? Not necessarily. Joel Stern has used the metaphor of the “lead steer” to explain why the market appears to follow an economic model even if very few investors do so. To paraphrase Stern, “If you want to know where a herd of cattle is heading, you need not interview every steer in the herd, just the lead steer.” The basic idea is that there is a relatively small group of super-smart investors who do understand the economic model (as opposed to the conventional accounting model) of the firm, in which value is driven by expected changes in operating cash flow (as opposed to EPS). And it is these lead steers who are setting prices at the margin. Hence, companies need not worry about the typical investor because the investors at the margin—the lead steers—ensure that prices, on average, are set correctly.
This last point is particularly important to the cryptocurrency markets, because almost all of BTC pricing is set by those with outsized influence on the markets (your whales). Understanding the movements and motivations of large players is very important when trading in this space. Regular conversations with OTC desks, looks at whale wallets and conversations with funds are indispensable sources of information, as they are your “lead steer”.
Understanding market structure and dynamics is especially important in the cryptocurrency markets because there is nothing else driving price besides simple supply and demand. Understanding how those two interact and the participants in the market can give you a clue where price may move next.
Structure is hidden in:
Futures vs spot price
Demand shocks (Trade war, lower interest rates)
Supply shocks (Old coin movements, UTXO sets, halvenings)
If I were an enterprising man, I would put together a checklist on all of these data points and combine them into a predictive model…
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