Welcome to a special Wednesday edition of CryptoAM. We’ll be off Friday for the July 4th holiday, so have a slightly longer version for you today. As always, we have a party going on in the telegram group. Come say hi!
Three things you need to know:
One: The battle for the cryptocurrency derivatives space rages on
Over the last week, we’ve seen a public explosion of interest in cryptocurrency derivatives products, with many teams announcing their intention to begin building out different types of derivatives.
Binance put feelers into the space last month with their announcement of margin trading, and then a few weeks later Bitfinex announced their intention to offer futures on their platform with up to 100x leverage, in an attempt to compete with the current leader, BitMEX.
The race continued yesterday when CZ revealed at the Asia Blockchain Conference that Binance would be launching futures contracts with 20x leverage on select trading pairs.
At the same conference BitMEX CEO, Arthur Hayes, announced his intention to introduce a Bitcoin denominated zero-coupon bond (which we have discussed previously). The trend is clear — cryptocurrency derivatives are here to stay. If you’re still doubting, just look the data…
Today, the Wall Street Journal published an article about the rise of cryptocurrency derivatives, and pointed out that firms are now exploring exotic structured products that give very specific types of exposure to the cryptocurrency markets. The products range from futures based on Bitcoin volatility to more complicated things like reverse convertibles (very popular in Asia). The future of cryptocurrency derivatives is massive, and it’s incredibly likely that over the next year there will be a Cambrian explosion of cryptocurrency derivatives.
If you’re a cryptocurrency fund that wants to stay cutting edge, being on top of these developments should be a top priority. If you’re an individual investor that wants smarter ways to invest in crypto — you should be aware that derivatives can be useful tools. It’s important to understand how these instruments work, but they can be incredibly powerful for portfolio hedging and reducing all sorts of exogenous risk (sell your Bitcoin + buy call options, buy Bitcoin + buy puts, short perpetuals + hold spot to collect funding rates…)
As of right now Deribit is the leader in Bitcoin options.
Some interesting ideas for investment products (disclosure, we are along the path of working on some these at Wave Financial)
Two: Tezos leads the way on major STO developments
STOs have definitely received a bad reputation due to the early 2018 landscape, where the term was being used by scammers to pump “the next thing after ICOs!” Over the last 12 months though, it’s become abundantly clear that security tokens are here to stay — but in a very different way than originally pitched.
STOs are now focused on improving liquidity in assets that were previously illiquid or have a good return curve, but require a significant amount of capital in the beginning to kick off. Assets such as:
There is now a rush by protocols to brand themselves at *the* STO platform. Currently Ethereum is the main protocol used for STO’s but now….well…
Banco BTG Pactual S.A., Latin America’s largest standalone investment bank, together with Dalma Capital, a prominent Dubai asset manager, announced today plans to utilize the Tezos blockchain for Security Token Offerings (STOs), including the ongoing REITBZ STO. By utilizing the new platform for digital securities transactions, the financial institutions address a deal pipeline in excess of $1bn for existing and prospective token issuances – with an outlook to utilize Tezos to tokenize a wide variety of traditional and alternative investments.
Tezos! Look who is is. They’re up 16% today on this news — and for good reason. They’ve recently started branding themselves as a great platform for enterprise blockchain and for STO issuance, and it seems to be working well. The question becomes: will value accrue to Tezos because of this?
My take: Yes, value will accrue to Tezos. The general framework for my answer is that the actual demand for a token is driven by two things 1) actual demand for the token via usage of the network 2) perceived demand by holders of the token.
If the Tezos protocol is used for issuing STOs, and becomes the de facto protocol for STOs, then it will of course be used to transact and track these security tokens. This will of course require tx fees. Additionally, large issuers of STOs will want to hold and stake Tezos in order to ensure the protocols governance stays healthy and useful for their projects. On the second point, I believe that it’s impossible to understate the importance of speculation as a value accrual method. People often write off speculation for not being “true” value but I vehemently disagree.
Speculation on price (if upwards speculation — on good news for example) sets into motion a self-fulfilling prophecy. If enough people buy XTZ because of this announcement, then a feedback loop starts. As Tezos announces more usage of their platform, speculators will push up the price. The price becomes a function of usage even if usage does not warrant the price…! This status-quo leads to volatility but can also lead to true appreciation (see: Bitcoin….)
The longer Tezos holds a value (any value), the more valuable it becomes as money. So speculation and price increases on good news actually generate value for the network. So the question: ‘will value accrue’ is answered. It has already accrued value! It’s up 16%!
Three: Bank of International Settlements learns to love digital currencies
Mainstream opinions towards digital currencies continue to evolve. Last week Agustín Carstens, the head the Bank of International Settlements (BIS), told the Financial Times that central banks across the world are looking at speeding up their research and development of Central Bank Digital Currencies (CBDC).
What’s the BIS and the CBDC?
The BIS is basically the central bank for central banks. Its stated role is to ‘serve central banks in their pursuit of monetary and financial stability’ and to promote international cooperation in these areas. Think of it as the organization that represents central banks all around the world. Until recently the BIS and Carstens had been extremely critical of crypto, comparing it last year to a ponzi scheme.
A CBDC is a native digital currency issued by a central bank. It’s like a digital representation of a country’s fiat currency, except with a couple key differences:
A CBDC would not require an intermediary when transacting between two parties. This is one of the core concepts of cryptocurrencies and allows for greater efficiencies and reduced risks.
CBDC’s could open up the possibility of the public being able to borrow directly from a central bank. Currently only commercial banks or other private sector lenders can borrow directly from central banks, who then lend to the general public.
The limitations of CBDC: Central Banks have been exploring this concept for years and blockchains like R3’s Corda and J.P. Morgan’s Quorum have been testing this concept. However Carstens noted that part of the reason why we haven’t yet seen the release of a CBDC is:
“There needs to be evidence for demand for central bank digital currencies and it is not clear that the demand is there yet…”
Flashback: The South Korean Central Bank, one of the more technologically progressive central banks, issued a report earlier this year on how a Central Bank Digital Currency could affect financial stability. It found that the issuance of a CBDC could cause financial instability by causing a run on commercial banks as people shifted from using commercial banks to opening up deposit accounts directly with a central bank.
Key narrative: All the talk of CBDC vs Bitcoin vs Libra ultimately comes back to one key point - it’s a question of who has control of the monetary supply for a country. This is something that has significant consequences, if not only because monetary policy has a significant impact on the economy and central banks use monetary policy as a key tool to combat recessions. Depending on who you ask, taking away the ability to manipulate monetary policy from governments and central banks is either a huge step forward - or a recipe for disaster.
What I’m thinking: CBDC could end up being a last ditch attempt by some governments to maintain control of the monetary supply. If CBDC’s are issued worldwide but consumers overwhelmingly opt for non-governmental controlled currencies like Bitcoin and Libra, what will be the governmental response?
Four: David Marcus responds to Libra firestorm
The Head of Calibra released a post earlier today attempting to clarify some of the misunderstandings he believes there are about Libra. The response comes after criticism by governments, regulators and many voices in the crypto community in the two weeks since Libra was announced.
Why it matters: Regulatory pressure is the thing that is most likely to prevent Libra from ever being fully released. Yesterday the US House Financial Services Committee sent a letter addressed to David Marcus, Mark Zuckerberg and Sheryl Sandberg requesting an immediate halt to implementation plans for the project.
The key takeaways from Marcus’s post:
On the openness of Libra and decentralization: Marcus accepted the critic that for Libra to be sustainable over the long run, there needs to be fungibility of nodes (nodes can come and go without friction and with limited cost), which is something the project is working towards. He did however defend the initial design, arguing that “one hundred geographically distributed, industry-diverse organizations is quite decentralized."
On financial inclusion: He strongly refuted comments from several critics who stated that the real reason people are unbanked is because they don't actually have enough money to be banked. Instead he positioned Libra as fighting against services that charge exorbitant fees and rates. In his own words:
"...anyone with a $40 smartphone and connectivity will have the ability to securely safeguard their assets, access the world economy, transact at a much lower cost, and over time access a whole range of financial services."
On engaging with regulators: His main point here was that Libra would actually help law enforcement to reduce financial crimes by bringing activity on-chain where it can be analyzed. As per the post:
“…we believe that a network that helps move more cash transactions — where a lot of illicit activities happen — to a digital network that features regulated on and off ramps with proper know-your-customer (KYC) practices, combined with the ability for law enforcement and regulators to conduct their own analysis of on-chain activity, will be a big opportunity to increase the efficacy of financial crimes monitoring and enforcement."
On whether Facebook can be trusted: Marcus again pushed back on the notion that Facebook would have control over the network, the currency, or the reserve backing it, given that it would be only 1 of 100 members of the Libra Association by launch. He also mentioned that although Facebook owns and controls Calibra, it won’t see financial data from Calibra. The bottom line, in his own words:
“You won’t have to trust Facebook to get the benefit of Libra. And Facebook won’t have any special responsibility over the Libra Network."
5. On what the benefit for Facebook is:
"If Libra is successful, Facebook will first benefit from it by enabling more commerce across its family of apps…if we earn people’s trust with the Calibra wallet over time, we will also be in a position to start offering more financial services, and generate other revenue streams for the company."
Our thought bubble: Expect to see a whole lot more of David Marcus and these types of announcements. Because of the significant implications of Libra for multiple different industries and governments, you can expect there to be a strong PR offensive to win over the public and governments around the world.
Also in the news:
Direction: Tweezer bottoms on the daily chart and the recent bullish action tells me that we have likely bottomed out for the foreseeable future. Moving averages are converging upwards on the 4hr mark, and when that happens in a bull market — parabolas generally come next. 12.1 and 13.8 are the next key levels to watch for.
We’re currently rangebound between 11k and 11.6k. I’ll personally be adding to my long at 11-11.2k, reducing positions at 10.6 and exiting below 9.8, Upside aiming for 13.8k, taking small profits on the way up, and if rejected taking full profit.
We’ve flushed out a leverage on the long side, and have recently seen funding rates actually turn negative for the first time in weeks. The market finally returned to its 30D EMA after more than a month trading higher, indicating normalization. We retracted ~30% from the peak which is typical for a bull market blow off top. Hope you’re ready to sell into euphoria the next time it happens :)
Volatilities have also come off a bit, after implied volatilities hit almost 150%(!!) during the peak. We’re still far above normal, but are slowly coming back down to earth. Personally am scaling into long dated 20-30 delta calls because I believe there is a lot of hot air above 13.8k, and a break there will see similar gap up behavior to when we broke 10k. Asks will be pulled and Bitcoin will likely be sent up quickly and with haste.
What I’m thinking today:
Here’s a truly elegant tweet thread Dan Zuller about distributed consensus. For the holiday weekend I encourage you to dive into a topic you should know more about but you don’t. For me (and a lot of other people who are enamored with the markets), it’s the evolution of distributed consensus.
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