CryptoAM: Security Tokens, Crypto Monitoring & Halvening Talk

👋🏽 I know you’re not going to read this on a Friday afternoon. So make sure to star and read it tomorrow morning. I promise it’s interesting (and we made it shorter for you!)

Would suggest reading the market section though, will be outdated by tomorrow (or not if this chop between $11.7 - $12.2k continues…)

Two things you need to know:

One: tZERO to open up security token market to retail investors

The attempts to increase liquidity in the security token markets continue. tZERO announced yesterday that on August 12th retail investors would be able to trade on its security token platform. Until now only accredited investors (rich people or institutions) have had access to security tokens available on the platform. See here for an explanation on accreditation laws in the US.

Yes but: There are only two tokens currently available to trade on the platform, and recent 24hr trading volume was a whopping $3,561.

Context: tZERO is owned by, the giant US retailer with more than $1billion in annual revenue. In August last year tZERO was supposedly valued at $1.5 billion, however that valuation appears to have come under increasing pressure as funds have backed out of investing in the company.

Why it matters: Security tokens were especially hot in crypto towards the middle and end of 2018 and were seen by many as regulated evolution to the ICO craze in 2017 and the beginning of 2018. Some of the main advantages often cited include:

  • Increased liquidity by offering fractionalized ownership of illiquid assets such as artwork and real estate.

  • Built-in regulation to the tokens. This ensures that tokens that are only offered to those who are legally allowed to buy them - the system literally stops trades from occurring if one investor does not meet the necessary requirements.

Since this time however the market has largely failed to live up to the hype, as the following graph from Circle Research showcases:

tZERO and OpenFinance, the two main secondary trading platforms for security tokens (exchanges where there is supposed to be increased liquidity), only offer around a half dozen tokens collectively. More are expected to be added this year however.

Two: European Central Bank steps up crypto monitoring

Image result for european central bank

The ECB is taking a closer look into crypto. It announced that it’s building its own monitoring framework for the crypto markets. The rationale for the decision is based on three parts: 1) Learning how crypto markets might impact monetary policy 2) How crypto might impact market and payment infrastructure, and 3) How crypto impacts overall financial stability.

There are already a number of private sector crypto monitoring systems that look at various parts of the market such as Neutrino (acquired by Coinbase) and Chainalysis. However the ECB believes these systems are lacking in several areas given their needs, including:

  • Information about the amount of banks or another financial institutions’ holdings of cryptocurrencies. This is important because if Bitcoin was to suffer from a major hack and the price collapsed, the ECB would want to know exactly if there are/which institutions might have had large holdings and might be at risk of failure, disrupting the entire financial system.

  • Value of withdrawal transactions from crypto ATMs, important to prevent anti-money laundering violations as seen in Spain earlier this year.

The ECB is by no means the only governmental body that is looking to better understand crypto markets and capture useful data through monitoring systems. For years now US governmental departments such as Treasury, Defense, Justice and Homeland Security have contracted firms like Chainalysis and CipherTrace (to the tune of $9M and $4.9M respectively) to help them understand the markets and prosecute actors skirting anti-money laundering regulations.

Key trend: Blockchain analytics companies are hot right now, and as governments become more aware and concerned about the expanding role of crypto markets I would expect these companies to continue to grow in importance. See here for a more detailed explanation about the potential of these companies.

Also in the news:

Market Outlook:

Quick Take

Direction: This PA feels like groundhog day. We’ve seen the same price action for about 3 days straight, ranging from 11.5 - 12.2. We’ve found it quite difficult to break the 12.2 range, which is the key level in my mind before a run at 13.8. We’ve also wicked down consistently, but have managed to eke out a higher low on the 1h/4hr.

We’re in a pretty good position right now, price-wise for Bitcoin. Resistances and supports tend to get weaker after continued touches. The 12k resistance will continue to get weaker — and if I had to make an educated guess, I would say we break 12.2k upwards within the next 48 hours. Of course, keep an eye out for invalidation. The key is holding 12k support, which has been a very weak support recently. Wicking above and getting smacked down to below 11650 (making a lower low) would change the market structure possibly be short term bear as it would likely dampen bull confidence.

Right now looks like a range traders heaven. Short 12, long 11.7 all day. For me, until confirmation of trend either way, I wouldn’t be confident in taking out a trade here.

The only concerning issue is that funding rates have been consistently high, indicating that there is a large amount of leverage being taken out for these positions which could result in a violent downwards flush.

Going long on a 12.2k break is a good r/r trade in my opinion though, and will have conditional bids around 12150 and 12180.

What I’m thinking today:

The Myth of the Cryptocurrency Halving

The Halvening is a mythic event in the Bitcoin community. It’s an event that many have trumpeted as a fundamentally bullish event. The halvening is the block in which Bitcoin rewards are halved (makes sense right?). Currently, every mined block of Bitcoin gifts miners 12.5 BTC. It’s estimated that on May 17th 2020, the halving will kick in and that reward will go down to 6.25 BTC.

This reduction in supply has convinced many people that Bitcoin price will go up in response. Theoretically, the reduction in supply reduces sell pressure which in turn leads to higher prices. I tend to disagree, for the simple point that there are incredibly high volumes of Bitcoin trading, and removing 1,800 BTC a day shouldn’t have a massive supply effect.

I also tend to believe that the market, while inefficient, is much more efficient than people believe. Average spreads in Bitcoin routinely are 1 cent on Coinbase, something pretty amazing for a 5 figure asset. The narrative that Bitcoin supply is going to go down is already baked into sentiment, and it is unlikely it will catalyze more buyers. The net effect of supply going down will probably improve Bitcoin outlook, but it will not outweigh other factors involved in Bitcoin price — and it definitely does not mean Bitcoin must go up.

There are three ways to really think about the effects of halvening on price. (1) Would BTC price be lower if the halvening was never a thing, (2) investors anticipate the halvening and bid up price and (3) supply reductions make buy pressure go further than previously.

I actually believe that all three of these things with conviction, but I believe that other factors influence the market in a bigger way — but let’s take a look at the data.

Luckily, the team over at Strix Leviathan put together nice piece on the potential affect of halvings in crypto:

  • We found no evidence that cryptocurrency assets experiencing a halving event outperform the broader market in the months leading up to and following a reduction in miner rewards.

  • An asset’s return distribution prior to and following a halving is statistically the same as the rest of its return distribution with a high degree of confidence, suggesting that there is no evidence of abnormal pricing action from a shift in supply and demand dynamics.

  • LTC outperformed the market in the months leading up to both halvings but performance fell to the bottom 25% of the market following the first halving.

  • BTC displayed the polar opposite behavior of LTC, with poor relative performance leading up to the halving and a stronger relative performance following the halving.

Here are some nice charts for you visual learners:

As you can see, there isn’t much variation in return during “halving periods” (defined as a 6 month period pre/post halving), which is in line with my thoughts and previous “research”.

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