Over the past 7 days, the FS CryptoFX Agg Index decreased by 0.4%, compared with a 1.6% increase for the S&P 500 (Slide 6). While Bitcoin’s price fell below $10,000 on Monday, Feb 10th , it recovered the loss on Tuesday and slowly rallied to $10,500 on Thursday morning, its highest level since last September. BTC moved sideways until Saturday when a large volume of sell orders pushed the price below $10,000 again. Overall, Bitcoin’s price fell 1.8% in the past week, lagging all other sectors of the market except for privacy tokens.
Sector Rotation
Sector-based indices – Platform and Exchange tokens maintained their strong leadership over other market sectors last week. FS CryptoFX Platform index and Exchange index outperformed Bitcoin by 9.7% and 4.8%, respectively, last week. Ethereum(+14%) was the biggest contributor to the gain of the Platform index, while OKB(+70%) and Huobi Token (+28%) helped the sector outperform despite the negative sentiment around exchange tokens caused by the news of FCoin (see more news below).
For size-based indices, primarily due to the “laggardship” of Bitcoin, FS CryptoFX Large-cap 10 index trailed the mid and small-cap indices by 3.2% and 1.9%, respectively. Notably, the large-cap index has been lagging other size-based indices for the past four weeks.
FinCEN’s Significant New Requirements
During a hearing last week, Treasury Secretary Mnuchin said FinCEN is about to “roll out some significant new requirements.” He also noted “we want to make sure that cryptocurrencies aren’t used for the equivalent of old Swiss secret number bank accounts”, likely a call for increased transparency for cryptocurrencies.
Even if we are not sure how “significant” these requirements could be, our crypto strategist David Grider notes that Privacy tokens such as Monero, Zcash, Dash might get hit the worst. The most serious outcome we are tracking is whether these new requirements will result in the de-listing of privacy tokens from certain exchanges, similar to what happened in Japan and Korea last year.
While traditional exchanges are likely to have been following laws already, they may need to step up oversight, which could lead to increased costs which would likely be borne by consumers. With the combination of FATF’s guidance and FinCEN’s new requirement, some exchanges outside the US may also come under increased scrutiny.
Companies performing on-chain analysis and monitoring could benefit the most as they will likely be employed to assist with implementing increased blockchain monitoring. Accordingly, we expect to see higher valuations for these companies over the next 3-5 years.
The Collapse of FCoin
The founder of cryptocurrency exchange, FCoin, Jian Zhang, released a news announcement earlier today dubbed “The Truth.” In “The Truth,” Zhang revealed that the company is expected to default on the payment of 7,000 BTC – 13,000 BTC (around $67 million to $125 million) to its users. He explained that this shortfall was not due to hacking or internal theft, but because of data errors and decision errors. The development of platform software/hardware could not keep up with the rapid growth of the platform’s usage, which led to internal control errors. Currently, the FCoin website shows it’s “under maintenance and upgrades”, but it is widely suspected that this “maintenance” may never be completed.
Since FCoin’s launch at the end of May 2018, it has been surrounded with controversy. The exchange was initially known for its “transaction fee mining” feature whereby the exchange would refund all transaction fees paid by users in the form of FCoin Tokens. As a result, many users were incentivized to make large amounts of transactions on FCoin in order to “mine” the transaction fees. Just 14 days after its launch, FCoin’s trading volume had not only become #1 globally but also exceeded the total combined volumes of the second to seventh largest exchanges. Accordingly, FCoin received a lot of criticism, especially for its inflated trading volume. Binance founder Changpeng Zhao then commented that “the popularity of transaction fee mining exchanges will not last long, because only a fool will always be a believer in this type of exchange.” Cryptocurrency transaction integration websites such as Coinmarketcap also excluded FCoin when calculating cryptocurrency trading volume.
The controversy of FCoin seems to have come to an end and the exchange’s collapse shows that the infrastructure for cryptocurrencies is still in its very early stage. Increased regulation could ultimately be beneficial for the future development of cryptocurrency and reduce the likelihood of FCoin-like mishaps. Likewise, FCoin’s collapse also serves as a reminder that investors would be wise not to put all their eggs in the same basket when it comes to choosing an exchange.
