CryptoAM: SoFi launches Crypto, EOS Struggles, and North Korea Dives In

Sep 27, 2019

☀️Happy Friday CryptoAMers!

You may have seen last week that Wave Financial put out a press release, concerning our newest product — the Wave Income & Growth Digital fund. I’m very excited about this launch, and have worked hard to turn this concept into a real fund!

The basic premise is that the fund turns Bitcoin volatility into an income stream through the use of covered calls. You can read more about it here!

Three things you need to know:

One: EOS is running into some major governance issues

The past two years in crypto have been a crash course in governance structures. Some will work — others will fail. While it’s premature to say anything definitely, it’s become clear that EOS is starting to run into some trouble.

EOS has always had detractors, mostly due to its consensus protocol. EOS secures its network using a delegated proof-of-stake model. There are current 21 “block producers” that validate EOS blocks in exchange for a piece of the inflation produced by the blockchain. Block producers are voted in by token holders — meaning that large token holders hold a massive amount of power (in that they can pick block producers). Since block producers themselves get large amounts of tokens, their position is usually self-fortifying.

In a very informative piece published on Coindesk , Brady Dale outlines the main issues facing EOS:

Block Producer Centralization: There have been been instances of block producers with existing relationships colluding and collaborating. This is exacerbated by the fact that the majority of BPs are in China.

As of this writing, a majority of the BPs indicate their locations as within China. Sources tell CoinDesk that multiple others are also located in China despite outward appearances.

Lack of Robust Governance: Censorship resistance is not a feature of the EOS blockchain — BPs can vote to freeze accounts. This has actually happened before…

Among their first collective acts, BPs froze seven accounts that had been shown to hold stolen tokens (tokens attained by tricking users during the migration of assets from ethereum – upon which Block.One ran the token sale – to the actual EOS blockchain).
The decision to freeze those accounts presaged the controversy the blockchain is facing now, because the top BPs did so without any kind of agreed-upon governance process. A “constitution” had been drafted, but it had not passed a referendum of EOS users.

Dapp Failures: It was originally thought that block producers would be incentivized to spent a large portion of rewards on dApp development. Unfortunately, this has not come true.
Block Producers Are Not Executing: Block producers are not effectively processing blocks, and they are not dedicating enough technical resources to maintaining the EOS blockchain.

In conclusion…

Maybe EOS is fine. Maybe it’s in trouble. Either way, it’s worth casual investors knowing that a cadre of adherents to the protocol since the early days are growing concerned.
At this stage, there is no one prevailing cause for concern about EOS. It is a blockchain seeing a large amount of use, but it also has not yet attained the status of a blockchain that attracts major companies looking for a highly secure database with high throughput. That’s what its strongest adherents had hoped it would become.

Why this matters: EOS is one of the largest public blockchains, and a huge social experiment. There are many lessons to be dissected here about how to run the governance of a protocol. If you’re in the process of launching a protocol, this should be your case study.

One should also note that EOSIO is a software. The main EOS blockchain is just one implementation of this software — but there are others. An alternative chain like Telos also built on EOSIO have much to gain from the failings of the main EOS chain.

Two: SoFi enters the crypto game

SoFi, the $4 billion investment app company, today announced the launch of a new trading platform. The platform will initially support Bitcoin, Ethereum and Litecoin. The platform seems as though it’ll be liquid from the get go via SoFi’s partnership with Coinbase and follows announcements by other investment platforms eToro and Robinhood to include crypto offerings on their platforms.

Why it matters: Lots of young investors. SoFi started off as a student loan financing company, and still today the company is geared towards younger investors. There are an estimated 800,000 people using the company’s products.

That’s a potential goldmine of young investors who could be interested in crypto. The company’s CEO Anthony Noto noted in an interview with Forbes that being able to buy crypto has long been the most requested service from SoFi’s existing customers. A number of different studies have also shown millennials to have the highest rates of crypto ownership and knowledge compared to other generations.

It therefore makes sense that SoFi would leverage its existing financial relationship with young consumers and add a crypto offering for them - there’s no better way to pay off your student loan fast after all (absolutely not financial advice in any way).

My thought bubble: Increasing accessibility to crypto for mainstream consumers is great, and SoFi is just another potential pipeline for people. An open question however is whether companies like SoFi and Robinhood end up being competition to traditional crypto exchanges and platforms. This could be part of the reason why we're seeing crypto exchanges rapidly diversifying their business models to include new revenue streams.

Three: North Korea is developing its own cryptocurrency

State issued digital currencies are becoming a hot topic! Some history. The craze was truly kicked off by Venezuela in February of 2018, when Nicolas Maduro announced that Venezuela would be launching the “Petro”, a state backed cryptocurrency. His government claimed $3.3B was raised (there is no proof though).

Now, it’s North Korea’s turn at bat. According to a Vice report released last Wednesday, North Korea is planning to launch their own cryptocurrency to help fund state operations.

What Vice found:

The digital currency, which doesn’t even have a name yet, will be “more like bitcoin or other cryptocurrencies,” said Alejandro Cao de Benos, the official in charge of North Korea’s cryptocurrency conferences, and a special delegate for the Committee for Cultural Relations for the Democratic People's Republic of Korea (DPRK).
“We are still in the very early stages in the creation of the token. Now we are in the phase of studying the goods that will give value to it,” said Cao de Benos, adding that there are “no plans to digitize the [North Korean] won for now.”
North Korea's Embassy to the U.N. in New York would neither confirm nor deny Cao de Benos's claim. “I am not in a position to give you an answer,” an embassy spokesperson said before hanging up.

Of course, North Korea has been an avid user of cryptocurrencies to try to conceal their funding activities. Given that Bitcoin is radically transparent, this turned out to be a bad idea for them — as it gave the feds ample evidence to track money movements.

I’d like to note that we’ve also had less unstable regimes explore digital currencies, such as the ECB mentioned above, and the Central Bank of China. Chile also hinted that a central bank digital currency was on their radar. As mentioned in the last letter, the Marshall Islands is also looking into the launch of a digital currency.

Why this matters: It’s becoming more clear with every passing day that the markets are increasingly impacted by the existence of digital currencies. Figuring out how Bitcoin and other assets fit into the economy is highly dependent on how governments react.

Also in the news:

Market Outlook:

Quick Take

The last week of price action has been bearish to say the least. After almost two months of rangebound trading, we’ve finally fallen off the cliffs edge.

On Monday, the markets fell through the 10,000 price line down to 9,700, trading down 3%. Tuesday saw one of the largest candles in 2019, with Bitcoin trading down 16%.

Volatility came back in a big way — with at-the-money IV shooting up from ~62% to 92%. Putting on a straddle (with & without hedging your deltas) would have paid off big time.

We’re now looking at a relatively broken market structure based on the price action of the chart above. The break of 9,400 seemingly destroyed the confidence of buyers based on the fact that bids quickly pulled, leading to large liquidations and cascading effect as those liquidations needed to exit. Liquidation data from Skew shows approximately 272M

As of now, there doesn’t seem to be a strong sentiment shift based on price action being sideways, and there was no “v reversal” which would at least indicate some buying strength relative to the selloff. With all of that said, I believe it’s more likely than not we experience more downside.

Bitcoin is trading at a psychological support of 8,000 — and in my opinion is likely to flush down to price support at 7,400 based on price action and the broken confidence of buyers.

Things that might indicate potential bearish continuation

Open interest on the Bitmex perpetual fell from its 960M - 1040M range to ~730M currently. Combined with the fact that BitMEX funding rates have not been consistently negative this tells me that there has been a relative lack of shorting compared to what would be expected for down move like this.
Spot exchange volumes have ticked up, while derivatives volumes have ticked down — suggesting this selloff actually be as a result of people divesting from Bitcoin rather than putting on a short trade. (CryptoCompare Data — Chart is made by CryptoAM)

Things that may indicate a potential reversal of price action

A flush down to 7.2k on low volumes, with a quick reversal to 7.6k area.
Continued negative rates on the flush down
Reclaiming 9.2k

Overall Market: The altcoin market also suffered heavily, and our “alt-season” has died relatively quickly. While there are still a few select alts that have been moving on good news (BAT, LOOM), the majority have continued to suffer.

What I’m thinking today:

One of the more eye raising parts of last week were reports that Libra has decided which currencies will make up the backing for the Libra stablecoin. In case you missed it, here’s what they are and their weighting:

USD - 50%
Euro - 18%
Yen - 14%
Pound - 11%
Singapore dollar - 7%

On one hand you could argue that this is logical, as outside of the Singaporean dollar, the first four are the world’s most traded currencies. However in all likelihood there may be larger factors tied to the weighting of this basket. Let’s not forget the intense political pressure that Libra faces back in the US and Europe, with Democratic senators previously going as far as to openly call for Libra to exclude the Chinese Yuan - wish granted. Germany and France (the most important Eurozone countries by far) also have come out with legislation that could prohibit Libra and other digital currencies from operating in those countries.

Why this matters: It’s a bit harder to argue that Libra is going to undermine your monetary sovereignty if Libra actually relies on your country’s monetary sovereignty to function well. It’s still possible obviously that Americans, Europeans and Japanese choose Libra over their own currencies but again, given the existing stability of these national currencies and Libra’s reliance on them there are less incentives for this. The bigger prize in my mind has always been citizens in developing countries with unstable currencies wanting to use Libra instead.

Important to note also that the cost to Libra of not including the Chinese Yuan is pretty minimal given that Facebook is already banned in the country and the Chinese government seems set on launching its own digital currency. On this point, MIT Technology Review had an interesting point to consider:

-ZT

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About CryptoAM:

The core focus of CryptoAM is to cut through the noise of the cryptocurrency world — and deliver actionable information straight to your inbox. Every piece of information that CryptoAM delivers ends with a “so what — why does this matter?”. It’s easy to get lost with all the information that comes out everyday, CryptoAM exists so you have a guide.

- Avi and Zac

CryptoAM was founded as a daily newsletter by Avi Felman in May 2018. Zac Thomas joined Avi in January 2019 to revamp CryptoAM and is now a co-writer for the letter. Zac will normally focus on policy, regulation and mainstream adoption while Avi generally writes the project, technology and market focused pieces. If you read closely, you’ll be able to pick us apart soon enough 🙂

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