The Blockchain Brain Drain, Fidelity's New Products, and Japanese Hacks

Thursday, September 20th

☀️Happy Thursday everyone. We’re back from our quick break yesterday. Today is a packed day for news! Lot’s of stuff going on after the relative lull of last week. If you’re a trader — yesterdays crazy swing was especially exciting.

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3 things you need to know:

One: RBS’s blockchain team has left the building. A blockchain team from Royal Bank of Scotland (RBS) just left to start a blockchain venture studio called Chorum. Richard Crook, who headed the innovation team at RBS, left the bank to build a venture studio that will be using Corda. He’ll also be taking three talented engineers with him.

  • Brain drain: Over the past year, we’ve seen many executives from Wall Street leave traditional finance for the blockchain/crypto space. At this point, the list is too long to write out. Almost every top bank and financial institution looking into cryptocurrency has lost at least one of their leads. The reason Richard gave for leaving RBS is telling:

    "RBS has been a tremendous sponsor and employer. However the blockchain space has outgrown and outpaced the incumbents including RBS. We wanted to be part of this wave of disruption to both the financial and other industries."

  • Chorum’s maiden voyage: The studio’s flagship protocol will be a quantum resistant enterprise blockchain Arqit; Arqit will be built on Corda and use a proof of performance consensus mechanism. Chorum will be working closely with R3 co-founder, and it has already received an investment in Arqit from Neo Global Capital, a crypto fund associated with the Chinese blockchain company, Neo.

  • Why this matters: One of my professors in university had a unique investment strategy. He would invest in the companies that his top students went to, under the assumption that the companies attracting the best talent would become the most successful. I think a similar approach can apply to general industries…always follow the talent!

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Two: Abigail Johnson, CEO of Fidelity, has announced that the firm will be pursuing crypto/blockchain related products. They have stated their goal to launch these mysterious products by year end.

  • Forward thinking Fidelity: Fidelity is one of the largest financial services players to consistently cite their interest in Crypto. In June, they were rumored to be working on a crypto exchange and a cryptocurrency fund (neither rumor has been confirmed). They have some projects in the works and some that are on the shelf until the time is right. While it is exploring use cases, Fidelity will be focusing on the market’s need rather than the development of the technology.

    “What we started with was building a long list of use cases for either Bitcoin, Ethereum, other cryptocurrencies, or potentially just raw blockchain technology. Most of them have been scrapped by now or at least put on the shelf. The things that actually survived were not the things I think necessarily we expected. We were trying to listen to the marketplace and anticipate what would make sense.”

  • Why it matters: It is important for large, trusted institutions to offer crypto/blockchain financial products in order to get traditional investors on board with this new ‘wild west’ market.

  • More important: Fidelity is one of the largest providers of 401ks, mutual funds, IRAs and retail facing financial products. They’ve also been a champion of Bitcoin for quite some time. We’ve seen a lot of companies such as Goldman Sachs looking into institutional crypto products, but not that many focused on your average consumer. Fidelity is in a prime position to unlock the retail side the crypto equation, making it easy for people to get access through more traditional means.

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Three: Japanese exchange, Zaif, has lost $60mm in digital assets in a recent hack. This is the fifth largest exchange hack (by $ amount) in history. About $19.6mm of the stolen funds belonged to the exchange, and the remainder belonged to its clients.

  • The breakdown: Japanese regulators ordered the exchange to improve security measures following the Mt. Gox and Coincheck hacks; unfortunately, the exchange was still vulnerable. Zaif has halted all withdrawals and deposits, and its parent company, Tech Bureau, has sold a large equity stake to finance client compensation for lost funds.

  • The market is desensitized: News of hacks and attacks pop up frequently, and the market has become somewhat desensitized to information like this. Hacks and attacks of this scale have little effect on market value, as evidenced by the fact that bitcoin has traded steadily in range despite news of the fifth largest hack in Bitcoin history.

  • Why is it desensitized? Historically, hacks have negatively impacted price. This non-reaction could either be due to the already bearish nature of the markets limiting sell pressure, or a signal that the markets are becoming more efficient as emotional retail investors have been flushed out over the past few months.

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Also in the news:

Market Outlook:

Quick Take

Direction: We saw a wild trading day yesterday, with price fluctuations of >4% in under an hour. Bitcoin experienced it’s highest volatility day since Sept 12th, which was to be expected after the low volatility ranging over the past week.

We are currently trading near the top of the range, after a reverse “Judas swing”. Notable about the buy up is that it was bought entirely almost spot, which is not normal. The push down was more driven by leverage then the buy up, which is bullish for the overall market (see chart).

We are currently seeing many alt coins pushing higher, with coins like XRP up more than 20% over the past few days. Generally, when Bitcoin trades within a range with bullish sentiment, alt coins rally. We will likely see some profit taking into BTC, and I expect coins to retrace their gains against BTC, as the overall market is still bearish.

Due to the bullish swing yesterday, I’m expecting BTC to continue to rise and test the upper range of 6500 soon. A break of 6500 would indicate a potential run to 6700. If 6500 is rejected on high volume, it’s likely we break down to 6300.

Key Support:  6350, 6280, 6200, 6180

Key Resistance: 6500, 6580, 6700

Fear & Greed

F&G is decidedly neutral.

Here’s a reminder of what these criteria mean

Around the corner:

What I’m reading today:

Virtual Markets: Integrity Initiative

It would be remiss of me to not mention the latest development in the regulatory space. The Office of the New York State Attorney General (NYAG) just published an in depth report about cryptocurrency exchanges and their role in the manipulation of the cryptocurrency markets.

As some background, the NYAG office sent questionnaires to 13 different crypto exchange platforms in April, asking them about some of the major pain points involved with

When the report was announced, the Attorney General highlighted three broad areas of concern:

  1. Exchanges are failing to combat abusive trading. The report claims that many exchanges are actually catering to professional, automated traders—leaving retail customers at a disadvantage.

  2. Exchanges are not transparent about conflicts in interest. Customers are not informed about these these conflicts. The platforms currently have no plans to protect everyday traders from the consequent disadvantages.

  3. Customers have limited protection for their funds. Generally accepted methods for auditing virtual assets do not exist, and trading platforms lack a transparent approach to auditing the virtual currencies purportedly in their customers possession.

I highly suggest going through the entire report — it’s fascinating. It’s filled with non-public information about exchanges, and reveals some activities that were suspected but never truly confirmed.

Some interesting takeaways:

“Of particular concern, however, several platforms reported that they had no formal policies governing automated trading. Some claimed that automated trading behavior is “monitored,” without providing detail.”

“The industry has yet to implement serious market surveillance capacities, akin to those of traditional trading venues, to detect and punish suspicious trading activity. A platform cannot take action to protect customers from market manipulation and other abuses if it is not aware of those practices in the first place. Several platforms also told the OAG that it was impossible to effectively surveil for manipulative activity taking place on more than one platform, and so any one trading platform is necessarily limited in the steps it can take to police abusive activity.”

“The OAG found that significant variation exists in the amount of trading activity attributable to those platform operators. Circle reported that it accounted for less than one percent of the executed volume on its platform Poloniex during the most recent time period reviewed. BitFlyer USA indicated that its own activity accounted for approximately ten percent of the executed volume on its platform. Another, Coinbase, disclosed that almost twenty percent of executed volume on its platform was attributable to its own trading.”

For a more in depth take on the whole report, I suggest reading Katherine Wu’s take.

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