CryptoAM: Two Weird Things and One Important Thing

Happy Tuesday, CryptoAMers. Lots of crazy stories over the last week….

Two things you need to know (and one weird thing):

One: Bakkt begins testing its futures product, and the CFTC eyes Bitmex

The highly anticipated Bakkt trading platform announced yesterday that it has started testing out daily and monthly futures contracts with select participants from around the globe. Bakkt initially announced that it would launching in December 2018. The team then delayed the launch to January, and then indefinitely delayed it again until yesterdays announcement.

Regulation is the likely culprit of all these delays. Financial regulation — especially in the United States — has been a difficult maze for cryptocurrency companies to navigate. Based on the high quality companies and name brands supporting Bakkt, it’s probable that an immense amount of capital and time was spent on ensuring as-perfect-as-possible compliance.

Over the few months that Bakkt was delayed, a variety of competitors have sprung up. Both ErisX and LedgerX were able to secure CFTC approvals for physically settled contracts, and the Bain Ventures backed SeedCX was recently granted two NYC bit licenses for its subsidiaries.

The competition to become a regulated cryptocurrency derivatives platform is heating up, and for good reason. Non-compliant exchanges are currently going through a rough time. Bloomberg broke the news last week that BitMEX is currently under CFTC investigation for allowing U.S customers to trade unregistered securities on its platform. As of now BitMEX vigorously blocks U.S customers, but there are plenty of other exchanges that theoretically should be taking more steps to bar U.S customers under current rules.

With the clampdown on unregulated exchanges, an opportunity opens up for those that play by the rules. BitMEX currently commands a massive lead in volume over other spot exchanges, commanding almost 3x the volume of Coinbase and Bitfinex combined over the last month. The CME has also has captured a significant amount of volume from institutional players.

Why this matters: There are an incredible amount of exchanges (both regulated and not) that are attempting to break into the derivatives space. Many are competing for the same, small pool of investors. At the end of the day there are only so many people that are currently interested in trading Bitcoin derivatives. The reason that BitMEX has done so well is that they were introducing a *new* concept back in 2014. They even invented a completely new financial instrument, the perpetual swap. Exchanges now should look forward to the next great product suite. Launching physically settled futures is a consensus play, and there won’t be enough liquidity to go around.

Perhaps you need to…

  • Launch an options platform

  • Offer equities trading

  • Perpetuals / Futures on other highly traded currencies

  • Futures / Perpetuals on an index

  • Novel swaps on hashrate, btc dominance, tx fees, etc

First Weird Thing: Justin Sun, man on the run.

Justin Sun, the founder of Tron, is in a bit of a pickle. Earlier this year, Justin announced that he won a lunch with Warren Buffet through a charity auction, for a staggering sum of $4.6m. The cryptocurrency world went absolutely wild, as Justin Sun is mostly known for his marketing prowess, and a scandal laden history (Tron’s original codebase had meaningful amounts of code plagiarized from Ethereum…).

Tron first burst on the scene in late 2017, raising $70M in an unregistered ICO during the 2017 boom. Trons peak valuation hit 17B(!) in early 2018, before trading down to its current valuation around 1.6B.

Tron has undoubtably left a mark on the cryptocurrency space. In 2018, they announced the acquisition of Bittorrent, and age-old p2p project for $120M. They launched the $BTT token to attempt to bring token-economics into the fold, but both Tron and Bittorrent have lagged vs their peers in terms of usage and adoption.

Justin has been promoting this lunch as the opportunity to teach Buffet, a noted Bitcoin skeptic, about the virtues of digital currency. Many people claimed that this lunch would be bad for the cryptocurrency industry — others said it would bring much needed attention. Regardless of your stance, July 25th was a date for your calendar.

Until yesterday.

Justin tweeted that he would have to reschedule the lunch due to falling ill with kidney stones. In the tweet, it was claimed that both parties had agreed to reschedule. Then, just a few hours later, it was reported by Chinese media that Justin was under investigation for illegal financing and money laundering. Justin took to Weibo, the most popular Chinese social media site to refute these claims, saying that:

“The Tron foundation is based in Singapore in compliance with local regulations and laws. … and does not involve any flow of capital, or any crypto or fiat currency onramp.”

The timing of the rescheduling and allegations seemed suspect to many people, and there are currently rumors floating around that he is now barred from traveling outside of China. Justin recently posted a photos of the current Tron blockchain hash in front of the Bay Bridge.

For the more speculative people, below is an infographic created by cnLedger

Why am I writing about this? Because it’s important to recognize that cryptocurrency has now officially broken into the mainstream. The Wall Street Journal is currently covering this fiasco, as are many other traditional outlets. Two years ago, this type of story would be relegated to crypto-specific outlets. Just in the last few months:

  • Trump tweeted about Bitcoin

  • Jerome Powell called Bitcoin a “store of wealth”

  • Steve Mnuchin held a special press about Bitcoin & Libra

  • Facebook announced their intention to launch a cryptocurrency

We’re currently entering a new stage in public awareness of cryptocurrencies. Are you paying attention?

Second weird thing: The curious case of Bulgaria and 200,000 seized BTC

Image result for bulgaria bitcoin

Can seized funds be considered ‘reserves’? The answer to this question has become a divisive topic in crypto land. The reason: Bulgarian authorities seized about 200,000 BTC back in 2017. Aside from the enormous value that the seized BTC carries (about USD$2 billion) it also potentially leads to a world first:

Bulgaria’s Bitcoin holdings could be worth more than its gold reserves.

This story is a little bit mental so let’s recap why there is debate about this:

  • In 2017 Bulgarian law enforcement broke up a criminal cyber gang in Eastern Europe. According to the press release the authorities seized 200,000 BTC, worth around $500 million at the time.

  • After the announcement Bulgarian newspaper Bivol apparently requested information about the seizure, which the government refused to provide.

  • Coindesk picked up on the story at the time but, the day after the article, the Bulgarian prosecutor’s office came out to say that the Prosecutor’s Office had “not seized the Bitcoin in the investigation…”

  • The original press report however, by the European law enforcement agency no less, continues published and unchanged.

  • Bulgaria holds about 40.4 tonnes of gold, worth around USD$1.7 billion at today’s prices.

There’s a big difference between Bitcoin that is bought by central banks for monetary policy reasons and Bitcoin that is held by law enforcement agencies after seizure. One implies a direct and concerted strategy by a central bank to hedge against volatility in world markets. The other is, well, a stroke of luck. The Bulgarian situation seems to fit firmly into the latter.

Why this matters: Regardless of whether the Bulgarian government formally claims ownership of the BTC or not, it raises a larger question about governments and cryptocurrency. Namely, should governments hold Bitcoin reserves with the same mindset as they hold gold reserves?

Also in the news:

Market Outlook:

Quick Take

Direction: The markets over the last two weeks have been incredibly chop filled. Those watching casually may not have noticed, as we haven’t moved quite as significantly on the day to day chart, but active traders are well aware that the intraday movements have been sharp and violent.

We’re looking at a relatively bearish market structure. We’ve posted consistent wick failures at key resistance levels three times over the last month. The first failure was at 13.8k, the second at 12.6k and the third was at 10.8k. We are successively turning supports into resistances, and damaging the confidence of bulls.

Volumes have also plummeted, either due to this chop intimidating traders (or on the news that BitMEX was being investigated by the CFTC).

I’m quite bearish as a whole until we are able to regain 10.8k, as until then I do not believe buyers will have enough confidence in the market. Bitcoin bull markets experience often experience 40% pullbacks, and we haven’t quite got there yet. I believe it’s likely that we revisit low 9’s and high 8’s in the coming weeks based on the lack of buy support and weak rallies.

We still hold a bull market structure and anything between 8.8k - 13.8 can be considered “churn” when considering the macro view. The general environment for Bitcoin is very bullish, as the “store of value” meme grows, and central banks continue to be reckless with their monetary policy. For a good macroeconomic overview, I suggest reading this write-up by my friends over at Blockhead.

What I’m reading today:

Decentralized Finance Lending Report Q2 2019

Great report on the current state of Decentralized (De-Fi) Lending among the major protocols (Dharma, Compound, dYdX and MakerDAO).

Things that stand out:

  • 130% increase in loans originated through DeFi protocols ($155M). This is up significantly from $66.3M in Q1 2019.

  • DAI still dominates, making up 86% of borrowed assets followed by ETH (10%) and USDC (3%). Basically what this is saying is that borrowers still vastly prefer to borrow DAI than any other crypto asset. As the authors note however, with the mainstream support of USDC on many of these platforms (which only really started during the last quarter) we might see an increase in USDC used for decentralized lending and borrowing in future quarters.

  • MakerDAO is still the lending protocol of choice with 53% of total market share. Important here to clarify the distinction between MakerDAO and DAI in the paragraph above (for those new to the space, MakerDAO is essentially the organization that helped create and maintains the DAI stablecoin. MakerDAO can originate DAI loans on its protocol but other lending protocols can also originate DAI loans, hence why DAI makes up 86% of borrowed assets but MakerDAO only 53% total market share between lending protocols. Following Maker is dYdX in 2nd (24%), Compound in 3rd (16%) and Dharma in 4th (7%).

Highly recommended to give the full report a read through.


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