Crypto Long & Short: Cryptocurrency Markets May Be Decentralized, but They’re Still Accountable

One underappreciated have a role of crypto markets is the lack of centralization. I mean, people know crypto assets are decentralized and trade on exchanges all greater than the world. But what’s often overlooked is the relative ease with which people can change the venues they buy and give away their holdings on. 

If, for instance, Jeff Sprecher (chairman of the New York Stock Exchange) says something that flusters you, you couldn’t exactly stop trading on the NYSE without liquidating a good percentage of your portfolio, because, for assorted stocks, it is the only trading venue. 

However, if a crypto exchange does something you fundamentally disagree with, you can marketing your crypto assets elsewhere. There is no shortage of options.

You’re reading Crypto Long & Short, a newsletter that looks closely at the jemmies driving cryptocurrency markets. Authored by CoinDesk’s head of research, Noelle Acheson, it goes out every Sunday and offerings a recap of the week – with insights and analysis – from a professional investor’s point of view. You can subscribe here.

Coinbase earlier this week revealed that it has instituted procurement deals with a number of U.S. agencies, including the Drug Enforcement Administration (DEA) and the Internal Revenue Service (IRS), for a carve called “Coinbase Analytics.” The firm insists that the tool will not draw on customer information – but crypto clans are not, in general, a trusting lot.

According to data from blockchain analytics firm Glassnode, bitcoin held on Coinbase has plummeted. 

Now, Coinbase uses a different address-reuse policy than most exchanges, so this might be the exchange exciting coins from one address to another that has not yet been labeled. Or, it could be one very large holder moving his or her bitcoins to another notecase, either on or off Coinbase.

While we can’t yet draw firm conclusions, there are two intriguing takeaways from this speculation:

1)    Crypto asset movings are trackable. We usually don’t know who is sending or receiving, but we can see the movements happen, and large exchange addresses are usually known – some utilities automatically send alerts when a significant shift happens between exchanges and either users or other markets. Imagine being able to track movements of stock or bond holdings.    

2)    Crypto exchanges can easily lose duty if users feel certain values are not being upheld. Many crypto investors have strong feelings in all directions privacy and government collusion, and, judging from Twitter comments, many are moving their business elsewhere. 

In the non-crypto delighted, we have often seen businesses suffering the consequences of actions – but not significant market infrastructure players. They habitually have a quasi-monopoly over certain parts of capital markets. On the other hand, they are heavily regulated, so their wide berth to anger customers is limited. 

Crypto market infrastructure participants are not so constrained. They are, however, subject to public probe, by a cohort with a megaphone, that cares deeply about certain issues and business practices. In early 2019, Coinbase get cybersecurity firm Neutrino, which had close links to a team that had helped authoritarian governments spy on their householders. The resulting public outcry and the #DeleteCoinbase campaign that got started on Twitter was enough for Coinbase to backpedal and fire Neutrino’s falls.
This puts a new twist on the notion of businesses being accountable to their users.

It highlights the role that upon plays in markets. In traditional markets, that trust is enforced by regulations. However, regulations are enacted by governments, which in these excited times are losing trust across the board, according to the latest Edelman Trust Barometer (not that we needed a inspect to tell us that). 

Here we have an emergent capital market that does not need oversight to enforce laudatory market behavior. The crypto market itself seems to be doing a pretty good job of that. 

This raises ridiculouses about the value of transparency, the power of choice and the connection with community. And I’d be very surprised if traditional capital markets punters weren’t watching all this with interest.

Fidelity Digital Assets, the crypto asset arm of financial giant Fidelity Investments, saved a survey of over 770 institutional investors in the U.S. and Europe, which revealed that 36% own cryptocurrencies or related spin-offs. Last year, Fidelity Digital Assets surveyed 441 institutions in the U.S., 22% of which had invested crypto assets at the old hat. 

Beyond those headline figures, which show encouraging growth, there are some significant takeaways from the consequence. 

The data I find especially intriguing are the barriers to investment, the main concerns that hold institutional investors with little from investing in crypto assets. The highest-ranking worry is price volatility, which bothered over half of the respondents. Yet weighed to the 2019 survey, the worry quotient fell by 13 points, more than any other factor.

Good telecast perhaps? But take a look at the dates during which the survey was carried out: November 2019 – March 2020.

Here’s the volatility blueprint for BTC for the 18 months leading up to the end of the survey period:

But, we all know what happened in March – prices in almost everything run, and bitcoin’s volatility shot up.

Does this mean that volatility has now become more of a barrier than during the size up period? Perhaps, but volatility has shot up in more traditional markets, too:

Moving on to the other main concerns – the lack of furnish surveillance (47% of respondents see this as a barrier) and the lack of valuation fundamentals (45%) – we see two very encouraging developments. 

Deal in surveillance is less of a worry now than it was a year ago – the proportion of respondents citing this as a barrier dropped 6 points, thrust it to below half. This is likely to continue to trend lower, as both startups and incumbents are constantly fine-tuning the technology tempered to to flag bad actors. 

And as for the understandable bewilderment as to how to value crypto assets when they have no solid backing and no readies flows, the shift there is especially exciting, and one that I expect to see significantly accelerate over the next 12 months. Crypto details platforms are improving their depth and breadth at an astonishing rate, and many new ones are springing up. And CoinDesk Research is currently go well on a series of projects aimed at putting more crypto asset data in front of our users, as well as explaining this facts in more detail. (Stay tuned.)

But even more important, the survey result indicates a significant mindset along. The supposed non-existence of crypto fundamentals has not changed. The assets still have the same properties as a year ago. What has changed is that a keen number of investors are accepting that they can’t view crypto assets through the same lens as more conventional holdings. They can’t expect to be able to value them in the same way. More are coming around to the idea that crypto assets instruct a new framework of understanding, based on new types of data and new value drivers. 
It’s a significant step towards more demand for schooling and deeper interest in the data. And where one group of open-minded innovative thinkers go, others will follow, if only to not pine for out on potential returns. These are the necessary precursors to a broader acceptance of this asset class. Next year’s evaluation should be even more interesting.

While it’s never good to see value spent, the end-of-week rout feels like a breather in the oppressive rise of stocks in the face of dire economic outlook that had not been charged in. Strong swings are commonplace these days, however, so by the time you read this, the confidence in the perpetual bailout could clothed overcome frightened animal spirits. Or not. 

The alarming 20% drop in U.K. GDP month-on-month in April was a tragic accent to renewed Brexit tensions. And contagion recoils in the face of much-welcome lockdown easing are a blow to fragile spirits, no matter how expected they were.

As I write this on Friday morning, U.S. and European caches are resting from their worst one-day falls since March, and signs point to markets opening spare down. This seems like a sadly fitting end to a week that began with mainstream financial mean using words like “fervid” in headlines. And, if indeed markets continue down, it will be oddly comforting to wizard investors around the world to see confirmation of the adage that the top is called by retail investors pouring in. 

Even after the deceived by, the S&P 500 is still higher than at the end of February, when the economic outlook was not nearly as dire. Whether that means more abstain froms are in store for next week, is anybody’s guess.

Gold has continued to trend up, rebel that it is. Bitcoin suffered a biting fall on Thursday, and looks to end the week down, strengthening its new-found correlation with stock market indices. 

While BTC is that time ahead of other major indicators in terms of year-to-date performance, the long bond index is catching up fast, with what looks with momentum. 

Oops. Someone sent a $130 transaction on ethereum with a $2.6 million matter fee. And then he or she did it again. And then another user made a transaction with a $500,000 fee. TAKEAWAY: This is an extraordinary epic for many reasons. One is the mystery: who is sending transactions with such whopping fees, and why? Some think it could be spondulix laundering, others suggest blackmail, or it could just be a series of genuine mistakes. Another compelling aspect is what this authorities about the vulnerabilities of trustless transactions – if this were traditional finance, the financial middleman would notice and with any luck fix the error. In crypto, however, what’s done is done. The miners who receive the outsized fees can decide to return the supplies, but they don’t have to, and they may not even be able to trace the sender. This highlights how removing the need to trust the middleman fundamentally surfaces vulnerabilities elsewhere.

My colleague Ian Allison reviews recent developments in the crypto custody industry. TAKEAWAY: The riotous building and acquisition activity seen recently reveals a scramble to define the business model for crypto market infrastructure usual forward. While some are trying to adapt traditional structures for crypto markets, on the grounds that investors look forward a certain level of service and reassurance, others are working to break the centralized mold and create systems that in theory are innumerable robust. The interesting split is the differentiation between service and technology: can they go together, or will investors have to elect?

London-based investment firm ETC Group plans to list a bitcoin-backed security, called the Bitcoin Exchange Traded Crypto (BTCE), on the German electronic calling market later this month. TAKEAWAY: This is actually quite a big deal. Xetra is a very significant interchange, one of Europe’s largest – more than 90% of German share trading volume and 30% of all European ETF volume out of date through the platform. And now it will have a bitcoin-backed product, centrally cleared and accessible to all types of investors, which allow to passes it easier to include in diversified portfolios of any size. Investors won’t need to master new processes and open up new accounts, which should working the needle on access to convenient bitcoin investing. 

The trading arm of crypto investment house Galaxy Digital and regulated bitcoin derivatives return Bakkt are partnering to offer institutional investors a high-touch trading and custody service. TAKEAWAY: This adds to the intensifying move towards full prime brokerage services in the crypto asset markets. Over the past few weeks we have aided crypto lender and OTC desk Genesis* launch prime brokerage services, crypto custodian BitGo get into the set out, and crypto exchange Coinbase buy prime broker Tagomi. Other startups and incumbents are also maneuvering to get what all see as erection institutional demand. Bakkt and Galaxy add some blue-chip names (by crypto standards) to the list, and also represent the enlarging consolidation in investor services. (*Genesis is owned by DCG, parent of CoinDesk.)

On Wednesday, Coinbasereleased a list of 19 crypto assets that it is everything considered listing. As of Thursday, these assets had increased in price by an average of 17%. TAKEAWAY: I find this bewildering. You announce you’re rational of listing certain assets on your exchange, and the prices of those assets shoot up on other exchanges, presumably in expectancy of the additional liquidity and investor interest that listing on your exchange will bring. This is totally okay, and not at all against the settles. True, there is no overt market manipulation going on, because we can’t assume that Coinbase or its employees are benefitting from the disclosure and the subsequent pump. But why announce, why not just list? I’m not saying it’s manipulation, because it’s not clear that the insiders benefit – but releasing impressionable information that can move prices before any actual decision is made feels like manipulation.

Binance, the biggest crypto exchange in the world in terms of volume, has introduced physically settled bitcoin futures with quarterly close dates, to complement its perpetual swaps. TAKEAWAY: Binance has been growing fast in the derivatives market – it has come from nowhere in recently 2019 to being the fifth largest bitcoin futures platform in terms of open interest. The introduction of a new product that has accepted traction elsewhere could kick that growth up a notch. What’s more, a broader range of derivative contents is good news for the crypto markets. Not only do investors, traders, miners, exchanges and other crypto-related business make a wider range of choices when it comes to risk management; us market watchers also get another data aspect to scratch our heads over. 

Hut 8 Mining, one of the largest publicly traded miners in the world (it is listed on the Toronto Inventory Exchange under the symbol HUT), is looking to raise at least C$7.5 million (US $5.6 million) to upgrade its fleet of BlockBox bitcoin miners. It’s goal an asking price of C$1.45 per common share, substantially above the stock’s price at time of writing ($1.31 on 6/12/20). TAKEAWAY: In his current in-depth report on Hut 8, my colleague Matt Yamamoto predicted that they would need additional dough in order to upgrade to more efficient miners. He also, however, pointed out that a successful raise would be puzzling in the current macro environment, especially given the recent departure of the CEO, who was pivotal in previous funding rounds. 

The percentage of bitcoin’s make known supply in profit is currently hovering at 87% – according to blockchain analytics firm glassnode, levels this extraordinary have historically marked bull markets. TAKEAWAY: This is an interesting metric, but its application is confusing at times. I keep seen a high in-profit ratio used as a bull indicator, and I have also seen it used as a bearish denounce for (because holders could be tempted to take profits).

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