Financial Research

Crypto Blasts

Crypto Blasts

Following the U.S. Capital riot last week, Big Tech coordinated the de-platforming of President Trump. Twitter followed suit by suspending 70,000 accounts associated with the far-right QAnon conspiracy theory group. Parler, the social media platform billing itself as a “free-speech paradise” was the next target as Apple and Google banned the mobile app from their app stores and Amazon Web Services stopped hosting Parler’s website. Although the effort is arguably justified for several reasons, these actions raise questions about the state of “cancel culture” and the amount of unilateral power these centralized tech companies have accrued. If a sitting U.S. President can be de-platformed, does that mean everyone of us is also at risk of being cut off? Evidenced by Cambridge Analytica and other scandals, Big Tech has been exploited by malicious foreign actors to manipulate its users. Are the interests of Big Tech and its advertising-based business model aligned with those of its users? Source: Wired These are hard problems, and I have no doubt Jack Dorsey and other Big Tech leaders are well intentioned in their crusade to minimize harm and stop the spread of bad ideas. However, by censoring and de-platforming droves of its users, Big Tech is only enflaming them and causing further entrenchment in their previously held beliefs, as ill-advised as those beliefs may be. Excommunicating users is an extraordinarily consequential punishment that can be imposed with no due process by monopolies on a whim. Public discourse is a pillar of our democracy, and although misinformation and bad ideas may be propagated on these platforms, it is only through public discourse that we are able to explore a full diversity of ideas and discover what is true. Any intellectual pursuit carried out with rigor requires the exploration of a wide set of ideas and hypotheses, even though the majority of these ideas will be rejected as the investigator inches closer to the truth. The marketplace of ideas must be open for us to effectively separate good and bad ideas, and any centralized arbiters with outsized authority will inject their implicit and explicit biases to steer the conversation and alienate certain groups. Instead of cultivating “filter and preference bubbles” in which Big Tech’s AI algorithms foster the creation of personal echo chambers of ideas, Twitter’s algorithms should encourage a wider spectrum of debate. Rather than parrot the same idea leading to confirmation bias and a reinforcing of one’s original perspective, Twitter should display comments from individuals with opposing viewpoints and opinions. Flipping the business model incentive structure The incentive structure of the leading social media platforms is in conflict with the wellbeing of their users. Their ad-based business model relies on the monetization of attention, which is encapsulated in the phrase, “if you’re not paying for the product, you are the product.” By monetizing attention, Facebook and Twitter’s algorithms are implicitly programmed to push the buttons of their users, often tipping discourse towards outrage and dissonance. As is hardwired in our psychology, fear and outrage provokes an emotional response that maximally captures our attention. One recent study concluded that anger makes people more vulnerable to misinformation and more likely to be highly confident in the accuracy of their memories. However, the more confident subjects were, the less accurate were their memories. “Cancel culture” may also tip into our finances. As our activities and identities become further intertwined with the digital realm, our ability to engage in day-to-day business transactions and interact with basic financial products and services may be compromised if we fail to follow the status quo.   To address these issues, young Web 3.0 platforms are experimenting with different business models and incentive structures to empower their users instead of manipulate them. Crypto is enabling the Web 3.0 evolution, in which users can seize control of their data and demand privacy as they interact with new decentralized applications that have no ability to manipulate or censor the user.   By removing advertisers and precluding the brokering of user data, Web 3.0 platforms can implement more ethical standards for user behavior in the attention economy. Crypto Web 3.0 platforms may integrate a token that appreciates in value as users flock to the platform, further aligning the interests of developers, token holders, users, and other stakeholders. Users may be able to port their Facebook, Twitter, and Shopify data, tokenize it, and then fully destroy or port it over into a user-owned economy of decentralized applications (dApps). Users would have increased choice in new open platforms, and the emergence of legitimate dApps would limit mass censorship. The Big Tech platforms would still exist, but they would be largely defanged as the Web 3.0 ecosystem would serve as a powerful check-and-balance. Source: Twitter Privacy-focused crypto assets Horizen and Zcash caught a bid in the wake of the de-platforming uproar, appreciating 85% and 66%, respectively, since the events on Capitol Hill last week. Horizen is a Web 3.0 platform that gives users control of their online data with its blockchain cloud computing platform for financial services, peer-to-peer messaging, media, and third-party decentralized applications. Zcash is a fork of Bitcoin that implemented ZK-SNARK cryptography to provide enhanced privacy for its users. These assets and others stand to benefit greatly if Big Tech cannot clean up their act and the Web 3.0 thesis comes to fruition. Source: FSInsight, CoinMetrics As Web 3.0 platforms begin to challenge incumbents, Big Tech will need to disrupt themselves and introduce new business models to retain market share. However, advertisers and the attention economy produced over $533 billion in annual 2019 revenue for the FANG companies, so they are incentivized to cling on to their existing business models for as long as possible.

  • Crypto Blasts
Nov 17, 2020

CRYPTO BLAST (Grider): Bitcoin Reaches Target: Issuing FY-21E & Increasing Outlook: $25K

For the full copy of this report in PDF format, Click this link. Crypto continues to be in a secular bull market. Bitcoin has rallied 3x since we issued our initial outlook following the mid-March sell-off, with prices today bursting to ~$16,700 or 1% above our FY-2020 target of $16,500. We are maintaining our bullish view on crypto and releasing our new FY-2021 fundamental economic financial model estimates, which we are applying to revise our price target upward to $25,000 (Slide 2).    Macro Thematic Thesis Remains Strong: Bitcoin has been the best performing among global assets 8 out of 10 years since inception and leads in 2020 by 98% YTD (Slide 3). Outlook remains strong and we’re maintaining our recommendation for investors to overweight crypto as a core portfolio holding at 1-2% or a 10-20x OW vs. current size at 0.1% of assets (Slide 4).  Fourth Bull Market Cycle Remains Intact: Crypto economies move in macro boom and bust business cycles like traditional economies. As the U.S. drives the global economy, Bitcoin, the largest among peers, is the bellwether and driver of the crypto economy. It has seen three macro market cycles with astonishing returns, excessive valuations and over 80% price declines. We continue to believe Bitcoin is in its fourth bull market cycle, which we now see in its 3rd or 4th innings (Slide 5).  Growing Central Bank Assets, Mining CAPEX & Users: Crypto emerging market price cycles follow mechanical cause and effect incentive relationships between capital flows, accumulated fixed investment, and human capital productivity. Bitcoin price has been highly reflexive to major central bank balance sheet growth, which has increased $18T since 2009. Bitcoin’s $310B market cap has captured 1.7% of this value, and we estimate an accumulated $20B of mining CAPEX (our proprietary Grider Crypto Book Value metric which has served as a price floor) has been invested in the digital economy, while crypto users have grown above 100M (Slide 6). Price to Book Valuation Multiples Support Higher Prices: Our proprietary Grider Price to Crypto Book Value Multiple, which compares Bitcoin’s Market Cap (Price) to its accumulated mining CAPEX/revenue (Book), has been a very reliable predictor of cycle movements since it was first published in January 2018. Multiples are 3X off cycle lows, but by no means excessive, and we believe given the currently strong market fundamentals this cycle will go longer (Slide 7). Current Bitcoin P/B multiples sit at 15.4x, which are above the lifetime average of 9.4x but well below +2 std. dev. or 26.1x, where 6M forward returns turned negative during the prior two cycles (Slide 8). Grider P/B multiples and Bitcoin forward returns have had a stronger relationship than PE multiples and S&P 500 stock returns, and 3M, 6M & 1Y returns from current 15x P/B averaged 26%, 69% & 49%, respectively, with 6M and 12M returns at or above the 50% upside implied by our FY-21 target (Slide 9).  Introducing Bitcoin FY21 Economic Estimates & Raising Outlook To $25,000: Our FY20 fundamental forecasts call for Bitcoin’s Book Value to reach $27.5B (35% growth) and Book Value Per Share (BTC) to reach $1,454 (32% growth) (Slide 11). Other than our prior model released in May 2020 (Report), we believe this is the first of such sell-side forecasts. Our target applies a 17.2x forward P/B, which is slightly under +1 std. dev. lifetime valuation of 17.8x, but below prior cycle highs of 69. More Liquidity & A Weaker Dollar Offer Macro Tailwind For Growth: Prior cycles have coincided with central bank balance sheet growth and a weaker dollar, both conditions are in place today that we see as catalysts for meeting our target (Slide 10).  Bottom Line: Bitcoin is within 1% of our 2020 economic and price forecasts. Conditions are in place for a continued rally in crypto prices over the course of the next year. We remain bullish and are raising our Bitcoin price target from $16,500 to $25,000, while noting that we recommend investors seeking to add exposure should favor pull backs, especially given the recent run. Key slides from this report… Price Target: Increasing Bitcoin Outlook: $25,000 (Slide 2)...  Tactical View (6M -12M): Fourth Bull Market Cycle Still Underway(Slide 5)...   Inflection Points: Valuations Have Room For Continued Expansion (Slide 7)...    Macro Tailwinds: More Liquidity, Weaker Dollar, Higher Valuations (Slide 10)...  Bitcoin Forecast: Issuing FY 2021 Fundamental Economic Estimates (Slide 11)... 

OCC Greenlights Bank Stablecoins: Opens TAM of ~200B Annual Public Blockchain Transactions = Good For Crypto

For a full copy of this report in PDF format, click this link. Yesterday afternoon, the U.S. Office of the Comptroller of the Currency (OCC) issued interpretive guidance clarifying that federally chartered banks may participate in independent node verification networks (INVN i.e., public blockchains/crypto networks) and use stablecoins for payment activities. Bitcoin and crypto prices have fallen modestly since the news. While some may be tempted to view the possibility of banks entering the blockchain space as a competitive threat for crypto valuations, we do not hold that view. We see the news as a long term positive for the crypto industry but think it could create other financial sector winners and losers. ● OCC Issues Guidance Clarifying Banks May Use Stablecoins For Payments: Stablecoins, which are digital blockchain tokens often pegged to ownership of a fiat currency like dollars held in a bank account, have been a fast-growing segment of the crypto industry, with a market cap today standing at ~$30B compared to ~$5B a year ago. To date, fiat backed stablecoins have mostly been issued by crypto exchanges, while banks awaiting greater regulatory certainty have stuck to accepting deposits on behalf of issuers. Following OCC guidance that banks may validate, store, and record payments transactions by serving as a node on a public blackchin crypto network, we believe that will start to change (Slide 2). ● Intranet -> Internet = On Prem -> Cloud = Private Blockchain -> Public Blockchain: As there was initial hesitance and then mass adoption during the transitions from intranet to internet and from on prem to cloud computing, we believe open public crypto networks will follow a similar path. Most leading banks have been testing blockchain initiatives for many years now but have opted for private permissioned blockchains instead of public permissionless blockchains like Bitcoin or Ethereum due to regulatory uncertainty. The OCC’s guidance shows a keen understanding of how the technology works in our view, and while there will be a learning curve that will take time before it ultimately gets adopted with traditional financial institutions, we see this as a turning point and catalyst for the tech forward banks to start using public blockchain crypto networks. ● Guidance Opens TAM ~200B Annual Public Blockchain Transactions: Stablecoins offer several benefits to traditional payment systems, such as transaction speed and cost reduction by probably reducing errors and fraud. Using Federal Reserve Payments Study data, we estimate there to be a Total Addressable Market (TAM) of ~200B annual U.S. payment transactions that could be digitized and tracked on a public blockchain. While it will take time for adoption to take hold, capturing related fee revenue share from the use case would be a materially positive fundamental development for crypto (Slide 3). ● Tech & Reg Shift Good For Crypto But May Create Possible Winners & Losers: Bank issued stablecoin adoption would likely impact several areas of the payments sector. We believe such a move would eventually benefit global GDP, blockchain tech firms, blockchain analytics firms, public blockchain smart contract platforms (although it’s too early to pick winners), and big banks. We currently see the impact as relatively neutral for cryptocurrencies like Bitcoin, offshore stablecoins, fintech and big tech. Those negatively impacted by such a shift may include corporate stable coins, smaller regional banks, money transfer services, and global payment networks (Slide 4). ● What are the risks? Banks may be slow to adopt public blockchain networks, the technology may prove not mature enough to handle the scale required by banks and other large financial institutions, the industry competitive landscape may change. Bottom Line: We see greater regulatory clarity unfolding across the crypto space. OCC stablecoin guidance is a net neutral for assets like Bitcoin today and bodes well for crypto blockchain adoption and prices over the long term.  Key Slides from this report.... OCC Guidance: Banks May Use Stablecoins For Payments (Slide 2)... Opens TAM of ~200B Public Blockchain Transactions (Slide 3)... Tech & Regulatory Shift Creates Potential Winners & Losers (Slide 4)...

  • Crypto Blasts
Dec 30, 2020

CRYPTO BLAST (Grider): Raising Outlook $40K: Bitcoin Reaches Target But Upside Remains

For the full copy of this report in PDF format, click this link. Crypto investors received a late Christmas present with the price of Bitcoin reaching new all-time highs early this morning briefly touching $28,580. Bitcoin has risen by 75% since our last upward price target revision and now sits at ~$28,000 or 12% above our most recent $25,000 target. Despite the rise in prices and valuations, we believe the conditions remain in place for a continued rally in Bitcoin and crypto more broadly over the next 6-12 months. Institutional & corporate buying, regulatory de risking and retail stimulus demand are factors that have led to an increase in positive momentum, which we believe can continue. As such, we’re revising our valuation model estimates higher and raising our price forecast to $40k representing ~50% upside from current levels. New Buyers, Regulatory De-Risking & Stimulus: Institutional investors and corporations are entering crypto and are acting as a new source of demand. We view recent FINCEN & SEC proposed regulation and enforcement actions as long term positive de-risking events that highlight the growing regulatory clarity and U.S. government stance on Bitcoin, albeit not all crypto assets, which should lower the risk premium and bolster capital flows. The latest U.S. stimulus package should boost personal savings and could lead to greater retail crypto investment (Slide 2). For these reasons, we believe Bitcoin prices can go higher and are raising our target to $40,000 (Slide 3). Fourth Bitcoin Bull Market Cycle Still Remains Intact: We continue to believe Bitcoin is in its fourth bull market cycle, which we now see in its 4th or 5th innings vs. the 3rd or 4th innings we discussed at the time of our prior target update report. We believe our new 6 to 12-month target of $40,000, which offers 50% upside from current levels, is conservatively reachable, while reaching $100k+ during the full cycle is historically not outside the realm of possibilities (Slide 4). Valuations Becoming More Expensive But Can Go Higher: Bitcoin’s price has risen by nearly 4x during the year. The gains in price have come alongside increased fundamental traction and valuation multiple expansion. Our two metrics for tracking supply (Grider Book Value) and demand (Wallets/Users) fundamentals have risen by ~33% while valuations investors have been willing to pay have risen by roughly 175%. This implies a large portion of the gains have come from multiple expansion (Slide 5), but we believe this cycle will go longer (Slide 6), and while trailing multiples are nearing the higher end of their historic range (Slide 7), forward multiples based on our estimates make current prices appear more sustainable (Slide 8). Increasing FY21 Economic Estimates & Raising Outlook: Our FY2021 fundamental forecasts now call for Bitcoin’s Book Value to reach $29.7B (41% growth) and Book Value Per Share (BTC) to reach $1,569 (39% growth) (Slide 9). Our new target applies a 26x P/B multiple, which we view as conservatively reachable because it’s in line with the +2 Std. Dev. lifetime multiple where 6M forward returns turned negative during the prior two cycles. We believe the possibility for further, more speculative multiple expansion back to prior cycle highs of ~70x is possible, which could lead to BTC prices north of $100k (Slide 10). What are the downside risks? Prices have had a significant run and profit taking may slow or reverse the rally. Crypto regulatory actions against unregulated exchanges, certain DeFi or ICO projects, and enhanced stable coin restrictions are possible during Q1. We wouldn’t view these events as long-term negatives for Bitcoin, but if such events unfold, they may negatively impact broader market sentiment and prices. Bottom Line: Conditions are in place for a continued rally in crypto prices over the course of the next year. We remain bullish and are raising our Bitcoin price target from $25,000 to $40,000, while again noting that we recommend investors seeking to add exposure should favor pull backs given the recent run and corresponding higher valuations. Key slides from this report…  Bitcoin Breaking New Highs & Our $25k Target (Slide 2)... Increasing Bitcoin Price Target: $40,000 (Slide 3)... Fourth Bull Market Cycle Still Underway (Slide 4)... Prices Increasing Alongside Fundamentals & Valuations (Slide 5)... Forward P/B Multiples Still Reasonable Based On Our Forecasts (Slide 8)... Conservative Target is $40k But $100k+ Is Historically Possible (Slide 10)...

  • Crypto Blasts
Dec 30, 2020

Bitcoin's Narrative Is Shifting As It Races Towards $30,000

In Ancient Greek mythology, the Chimera was a monstrous fire-breathing hybrid creature composed of the parts of more than one animal. It was a bizarre beast of divine origin that ravaged the countryside of Lykia in Anatolia. Classic depictions of the Chimera typically portray it as a lion, with the head of a goat protruding from its back and a tail that ends with snake’s head. The Chimera was reputed to be “near invincible,” for it had the strength of a lion, the cunning of a goat, and the venom of a snake. However, its most unusual and deadly weapon by far was its ability to breathe fire. Today, the term “Chimera” describes anything composed of disparate parts, or perceived as wildly imaginative, implausible, or dazzling. It is a concept that lives in the minds of its host and is interpreted differently based on the individual’s circumstance and preconceptions. Source: Musée du Louvre Bitcoin is the Chimera of the financial world. Although its attributes seem deceptively simple at first glance, one of its biggest strengths is that it represents many different things to different people. A Syrian refugee may adopt Bitcoin as the primary savings wealth preservation vehicle she chooses to transport her wealth as she embarks on a precarious journey to cross borders and settle in a welcoming European country. The owner of a bodega in Argentina may utilize Bitcoin as a store of value and medium of exchange as the Argentine peso rapidly depreciates in value. High net worth individuals may view Bitcoin as a higher beta play on gold that has superior qualities to the lustrous rock. Additionally, it is increasingly being viewed as a hedge against monetary and fiscal irresponsibility destabilizing the global monetary system by the largest macro asset managers, insurance companies, and public corporations. As Bitcoin has grown, its community has rallied around varying narratives that have morphed over time. Beginning as a speculative digital collectible, moving to a novel peer-to-peer form of digital cash, evolving to digital gold now, and potentially transforming into a base-layer money and foundation of digital capital markets in the future, Bitcoin gains credibility as it moves through various stages of maturity. This ability to redefine itself in the minds of its users provides Bitcoin its greatest defense mechanism. How can anyone take down a system that is constantly reshaping itself to congeal with the latest narrative of the day? Especially a system that enables its users to take ownership of their assets by memorizing a mnemonic phrase, thus quite literally living in the user’s mind. Visionaries and dreamers are the stewards of technological and societal change. In its early days, the development of the internet was derided by cynics of the mainstream media and business institutions. Even technology pioneers and entrepreneurs were skeptical the internet would take off in its early days. In 1995, Robert Metcalfe exclaimed, “I predict the Internet will soon go spectacularly supernova and in 1996 catastrophically collapse.” The internet required visionaries and early adopters to look past its initial limitations and push technical development forward, though they would have scarcely predicted the killer apps of Amazon, Facebook, Google, and Netflix.   Financial Incumbents Are Changing Their Tune Leading financial gurus and business leaders were right to be skeptical of Bitcoin in its early days. No one could have foreseen that an embryonic digital currency birthed pseudonymously from the fringe Cypherpunk movement would challenge dominant sovereign currencies and global store of value assets. However, financial services incumbents that derided Bitcoin have recently begun to change their tune, signaling wider acceptance and an open mindedness to the digital asset’s potential. Quantitative strategists at the world’s largest bank, JP Morgan Chase, recently published research suggesting funds were flowing out of gold and into Bitcoin while quoting a Bitcoin price target of $650,000. Similarly, a leaked Citibank report published Bitcoin could reach $300,000 by the end of 2021. Proclamations like these are notable because banks were historically Bitcoin’s biggest critics, and they arguably have the most to lose from a burgeoning alternative digital capital markets system.     Although it is showing tremendous promise, Bitcoin still has a myriad of technical and social issues it must contend with if it is to fulfill its potential and continue its current growth trajectory. Bitcoin and other digital assets still have numerous attack vectors both internally and externally from technological, political, and regulatory perspectives. They are still very early in their lifecycles, and their primary use cases will continue to solidify over time. 2020 was the year Bitcoin entered the public consciousness. As it flourished whilst our public institutions faltered, people began to view it as a true safe haven asset. 2021 will bring new challenges, and an uncorrelated non-sovereign store of value wealth preservation vehicle can help us deal with the uncertainty.

  • Crypto Blasts
Dec 18, 2020

Bitcoin Hitting New ATHs: Remaining bullish on crypto but getting cautious on Bitwise 10 Crypto Index Fund (BITW) due to the high NAV premium

For a copy of the full report in PDF format, click this link Bitcoin continues its climb, reaching new all-time highs (ATHs), and now sitting at ~$23,000. Crypto markets more broadly have continued to rally as well, leaving many investors looking for a means to gain asset class exposure. Many have turned to exchange listed trust products like Bitwise, which has seen prices sore lately. The rally which cooled during the latest session, has led to a sizable NAV premium, and we would caution investors against buying at current levels. Bitcoin and crypto bull market continues. This week, Bitcoin pushed past $20,000 resistance to reach new all-time highs. Bitcoin has room before reaching our possibly conservative price target of $25,000 and we believe the crypto rally more broadly has room to continue. As underlying crypto prices have sharply risen, so has investor interest in gaining convenient cost-effective exposure to the asset class. Exchange traded products fill a valuable market void. Difficulties, delays and security considerations associated with opening accounts at crypto exchanges and purchasing assets directly are frictions many investors seek to avoid by instead owning an ETP. ETPs give investors indirect crypto exposure via listed stock products that hold underlying crypto assets and are available for trading in traditional brokerage accounts. Grayscale and most recently Bitwise, which we released a report on earlier this year, are the two main players offering such products. Bitwise 10 Crypto Index Fund listed on OTCQX last week. Last week, on December 9th, Bitwise 10 Crypto Index Fund (BITW) shares were listed for trading, making BITW the first publicly available crypto index fund for U.S. retail  investors. Shares have soared 451% since the listing, and an increasing premium to NAV has come along with it. Recently increased premium offers increased downside risks. Bitwise BITW has a NAV of $20.2. The current price of $93 is a sizable 360% premium. Although competing products do trade at more elevated premiums, and we think there should be a premium because of enhanced liquidity, we also think in a few months it will be lower than this current premium. We believe long term investors should consider gaining exposure at more favorable levels. Altcoins may benefit from BITW premium which may later reignite rally. We believe some accredited investors will opt to avoid the premium and purchase shares directly via a privet placement, which would increase demand on underlying alt coins held by BITW and could later help drive the fund NAV higher. Bottom Line: We remain bullish on Bitcoin and crypto. And while we continue to like Bitwise the firm, the team, and the 10 Crypto Index Fund (BITW) product, we’re cautious of downside risks at these NAV Premium levels. Key Charts from this report.... Bitwise Going Parabolic Post Listing But Risks Increasing Too (Slide 2)... Crypto Exchange Traded Products (ETPs) Market Share (Slide 3)... Crypto ETPs Net Asset Value (NAV) Growth (Slide 4)... Market Cap vs. NAV Crypto ETP Share (Slide 5)... ETP NAV Premium Historical Evolution (slide 6)... Liquidity Plays Key Role Influencing ETP NAV Premiums (Slide 7)... ETP NAV Premiums Following Public Listing (Slide 8)... Crypto Market Underlying Returns Drive Premiums (Slide 9)...

  • Crypto Blasts
Oct 30, 2020

CRYPTO BLAST: Maintaining our constructive crypto market outlook but uncertainty at Binance & OKEX take us from cautious to sell on exchange tokens while we see greater CME market share – that’s GOOD NEWS

We are long term bullish on the overall crypto market but see pockets of the industry that offer greater risks than others - exchange tokens are one of them. In a previous report (Regulatory Actions Highlight Risks But Market Remains Bullish), we urged investors to carefully consider risks associated with assets in the offshore exchange token sector, and specifically Binance (BNB), due to its historical allegations and actions taken by US regulators against the derivatives exchange BitMEX. A week later, the CEO of one exchange token we listed, OKEX (OKB), was taken into custody by Chinese police, leaving user funds unavailable for withdraw since October 16th and causing the value of its token to drop by over 30% on the news. Yesterday, a Forbes staff reported on leaked documents that allege Binance “conceived of an elaborate corporate structure designed to intentionally deceive regulators and surreptitiously profit from crypto investors in the United States.” The reports are unconfirmed by the company, but the news underscores our prior concerns from industry rumors and calls for caution on BNB’s token and the sector in general. The total crypto market cap excluding stable coins is roughly $380B, which makes exchange tokens at roughly $9B ~2% of the market a small pocket of risk with Binance (BNB) being ~1/2 – one we have been questioning if, and now believe, investors should avoid for the following reasons: Headline risk of allegations alone is enough to cause a market sell off on uncertainty. BitMEX news has caused many industry venues to enhance verification procedures and remove unallowed customers, which could lower trading and token value. Actual regulatory investigations and actions like those taken against BitMEX caused material harm to its business as 16% of volume dropped the day after the announcement, which would be bad for venues with tokens with their value derived from trading profits and buybacks. If allegations of regulatory violations are investigated and proven to be true, exchanges could face fines (bad for profits, buybacks, and token price) or worse, exchanges could be shut down and assets could go to zero. Yes, the same set of risks apply to banks, and all businesses, but given industry history, recent regulatory actions, and news announcements, we believe now is the time to be conservative in this area. Further, while a crypto bull market will likely bring increased trading, fees, and token values, we would rather own the underlying crypto assets themselves as we believe they have greater upside potential and risk/reward tradeoffs. Bottom line: We’re recommending investors who own assets in the exchange token sector sell holdings. However, we would cushion against shorting these volatile crypto assets. We’re watching how offshore exchange risks play out for the broader market short term, but not sounding any alarm bells besides the specific sector risk. We think the real positive is that this news likely drives more volume to regulated venues like CME as has happened since the BitMEX actions. If this happens and if there is any regulatory action (we are not making any speculations there is), the market may have already moved on and it may not cause systemic disruptions as happened with BitMEX due to volume migrating after the March price crash. We see that as GOOD NEWS for crypto markets long term. Point 1: Maintaining our positive long-term view on Bitcoin and crypto while eyeing short-term market risks optimistically for now Bitcoin and crypto have been the top performing asset class in 2020. We’re maintaining our constructive long-term view on the overall market and our FY 2020 BTC price target of $16,500. While we believe the situation at Binance and OKEX are worth watching very closely, it’s too early to sound the alarm bells for systemic risks across the space, but certainly see cause for concern within the exchange token sector. Source: Fundstrat Point 2: We’ve been cautious of the risks associated with crypto exchange tokens and have seen further risks mounting with OKEX and Binance ever since In a previous report, we questioned if the exchange token sector was exposed to regulatory risks after the derivatives exchange BitMEX was announced to be under investigation by U.S. authorities. Source: Fundstrat Binance (BNB) is the exchange we discussed specifically given it’s the largest offshore crypto exchange and the 6th largest crypto asset (ex stablecoins) by market cap sitting at ~$4.25B. Source: Fundstrat Given historical allegations against Binance, we have been urging clients to ask the question - Is the risk/reward of paying nearly the same times earning for BNB and major exchanges worth it? At this point, we think the answer is clearly NO. Source: Fundstrat Point 3: OKEX CEO investigation very well may be unrelated to the exchange, but it has been ongoing for 2 weeks, which is bad for its business & OKB token… but we are not sounding any other alarms yet One of the leading Asian exchanges OKEX had its CEO taken into custody by Chinese authorities on an investigation. User exchange balance withdraws were halted after, presumably because the CEO is a private key signer required to approve such transactions. Many have claimed that this investigation has nothing to do with the exchange and that its related to personal matters and that users funds are safe. Without speculating on what caused the investigation or what’s going on, users are surely not happy with their funds being held on the exchange going on two weeks now, and its harmed trading activity which was paused for a period of time, which are both bad for the value of the OKB token. Source: Coindesk Some market participants have found a work around to help users get funds off the exchanges. Trusted parties, usually other exchanges with accounts at OKEX, much like correspondent banks, have allowed users to use the internal transfer mechanism at the exchange to move funds into their account. From there, these trusted parties issue IOU tokens for the assets held at OKEX in their account and deliver them to the owner. They then can sell them on the secondary market to gain access to liquidity. The buyer assumes the counterparty risk of collecting from the exchange once withdraws are opened and usually demands a discount to face value. Thus far, we know of this happening firsthand with TRON and USDT and have heard second hand unconfirmed of it happening with other assets like BTC. Source: Google, Poloniex On some exchanges, we have seen the IOUs for USDT, a stable coin usually valued at $1, trading at a $0.80, but we’ll note on relatively low volume thus far that we’ve seen. But the price represents some combination of investors’ need for liquidity and the markets expectations for OKEX default risks. Source: CoinEX History doesn’t repeat but it often rhymes. Such a scenario happened before back in 2014 right before the infamous exchange Mt. Gox went under following its hack and loss of Bitcoin. An exchange called Bitcoin Builder popped up that allowed users to trade these Bitcoin IOUs, as can be seen from the 2014 article below. Source: Coindesk What gives us some level of comfort around the situation at OKEX is that the market doesn’t seem to be pricing the same default risk in after two weeks as it did for Mt. Gox back in 2014. At the time, the price of Bitcoin on Mt. Gox was trading at a much more significant discount to Bitcoin on other exchanges than the OKEX USDT IOU discounts we’re seeing today. Source: Bitcoin Charts Point 4: Bitcoin rallied 25% after OKEX announced no withdraws, with it holding ~7% of BTC on exchanges, we wonder how much this supply limitation fueled the move, and question what that means for prices next? Over the short term, for tactical investors, we are considering what effect the reduction in BTC supply locked on the exchange might have had on this recent price rally. Bitcoin has seen its price rise by ~25% since the withdraw restriction was announced, while the price ok the OKEX exchange token OKB has fallen by roughly the same amount. Source: Trading View We estimate Bitcoin held on the OKEX exchange is 7% of all exchange balance supply, which would be a material portion of the traded float and could lead to short term selling pressure if pent up BTC becomes able to move to other exchanges and be liquidated. Source: Viewbase, Coinmetrics, Glassnode, CryptoQuant, Chain. info While trading has resumed on the platform, thus far the only fiat pair enabled have been the CNY, INR and VND, while withdraws have remained closed. Point 5: New accusations against Binance are very serious and potentially as bad or worse than those against BitMEX if proven, but headline risk is enough to cause investors to flee as they did with BitMEX Source: Forbes The Forbes article alleges Binance designed a structure meant evade regulators with its on shore exchange never intended to capture material profits and value. One of the risks we highlighted in our prior note was that very little of the exchange volume at Binance comes from its US based exchange. We saw this as a risk given BNB value tied to exchange profits and fees were largely coming from the offshore entity, which is perhaps at a greater regulatory risk. We also wonder if its BNB token would be an illegal security in the U.S. given the relationship to profits, despite being listed on its regulated exchange which has a money transmitter license but not a broker dealer license? Source: Forbes The alleged plan to mitigate U.S. enforcement across all major agencies, if proven true, would constitute a very serious situation for the exchange likely to land it in hot water with regulators as happened with BitMEX recently. Source: Forbes Following U.S. government enforcement claims against BitMEX, its exchange saw a significant fall in usage and volumes and presumable profits. BitMEX has not issued a token tied to exchange profits as some other offshore venues have, but we feel its safe to say, had there been one, its prospects would not have been bright following the news. We feel Binance may be in a similar situation and sill over risks make us want to avoid the entire sector for now. Source: Crypto Briefing Point 6: Binance allegations are a POSITIVE for U.S. institutional investors since Bitcoin volume will likely flow to CME as happened after BitMEX news Immediately following the news of U.S. regulators investigating one the largest Bitcoin derivatives exchanges BitMEX, funds and transaction volume flowed off the exchange. Much of it made its way to the Binance offshore exchange, but the U.S. regulated venue CME was a very big beneficiary as well. Source: Skew With these current accusations against Binance we think a repeat of the same may happen again, and it will push more funds to U.S. regulated venues – that’s good for integrity of the Bitcoin capital markets, institutionalization of the industry, and the price in the long term.

  • Crypto Blasts
May 8, 2020

April jobs report reminds us "bull markets bottom on bad news" + Paul Tudor Jones says Bitcoin reminds him of 1970s gold...

The April jobs report is the worst ever in the history of the world with >20 million job losses. And this figure is so horrific, there is no way anyone can spin this figure as “half full” — it is a terrible and tragic figure and shows how much Americans are suffering the consequences of a pandemic that nobody asked to happen. But the equity markets rallied today with the S&P 500 close above 2,900 and pulling further away from the key 50% retracement level (2,794).  The S&P 500 is within striking distance of the 200D mavg 3,002. I don’t think stocks are “ignoring” bad news — that is simply impossible.  Every minute, every investor in the world is faced with this tragic reality–we are largely working from home and in a country that is largely shut down.  Perhaps, computers are not aware of this. Same jobs getting hit… the 25 industries that shed 96% of the jobs in March shed 70% of the jobs in AprilIn the April jobs report, 70% of the jobs lost were the top 25 job losers in March (see chart below).  That is, 14mm of the 20mm losses.  We are not seeing a significant spread of the economic hit beyond the “social distance” victims.– In April, Amusement parks shed 1 million jobs (Disney, etc) and shed only 8,000 in March.– Local govt (education + workers) shed ~800k jobs and barely shed jobs in March. So 2mm of the 6mm “other” jobs (non-top 25 in March) came from those two groups. Source: Fundstrat, BLS The breakdown of the top 25 job shedders for March and April are shown below. Source: Fundstrat, BLS Our takeaway is that what is that job losses are taking place essentially where we expect them to be happening.  Still, 4 million jobs are lost in other industries.  Even that 4 million would be 2X the worst ever jobs shed in a single month.  So the US is taking a huge hit. BITCOIN: Diversifying asset holdings towards digital gold…Paul Tudor Jones, founder of Tudor Investments, and legendary hedge fund and commmodities investor surprised many this week by announcing he is buying Bitcoin as a hedge against inflation.  In fact, he noted it reminds of gold from the 1970s.  This makes him the latest of several high profile investors who have started to view Bitcoin as a non-correlated asset.   Many of you are aware that we have been constructive on Bitcoin over the past few years, seeing a 1% allocation as a reasonable uncorrelated hedge against a lot of bad things.  And PTJ comments resonate with us.  Actually, Bitcoin has also been quite a prodigious performer YTD up 39%, and the best asset class and trouncing even Treasuries and Gold which are up an impressive 21% and 13%, respectively. 5 RULES OF BITCOIN: We re-published our 5 “rules” of Bitcoin a few weeks ago and last week rule #3 was triggered. We think for most crypto holders, keeping it simple makes sense.  And we see these 5 rules as useful guides for timing and holding Bitcoin. The link to that report is here –> FS Insight Digital 5 Rules of Bitcoin STRATEGY: WHAT IS AN EASY WAY TO BUY BITCOIN, WITHOUT USING PRIVATE KEYS? There are many ways to acquire bitcoin, and depends on a few questions:– ease of acquiring– operational security– costPTJ is trading Bitcoin via futures, logical since maintaining private keys is often another operational security issue many funds would prefer to leave to a custodian.  If you don’t go the futures route, you can either open a crypto account at Coinbase, Square, etc.  But that leaves you with account security risks.  A simpler way to get exposure is managed funds and some ETN-like products.  Two providers, in our view, are the largest, well known and backed by credible companies:– Bitwise Investments, based in San Francisco and founded by Hunter Horsely (formerly Facebook) /– Grayscale Investments, backed by Digital Currency Group (Barry Silbert) and backed of $GBTC  For those in Europe, Coinshares has a nice product that is an ETN with no NAV premium  can seem strange and odd.  So for the vast majority of those looking for exposure, passive strategies like the 3 providers above or trading futures make sense.  20200508 BLAST COVID 19 ReportDownload

  • Crypto Blasts
May 1, 2020

What’s Going on With Cryptocurrencies: The Big Picture

Bitcoin (BTC) and cryptocurrencies generally have seen sharp price volatility over the past 12 months and it’s fair for investors to ask, “What’s going on?” The big picture: The three-to-five-year crypto outlook is strong. Our fundamental growth thesis combines elements of 1) emerging market growth play, 2) secular technology disruption trends, and 3) new digital gold emergence. Crypto EM global digital economies are a natural consequence of the fourth industrial revolution. DLT tech disruption is driving secular crypto industry growth. Crypto digital gold (cyber economy black gold oil equivalent) is powering new virtual products & services. Crypto price volatility: Growth is never straight up. March 12th saw prices diverge from usual broader market correlations. Panic selling resulted in exchange inflows spiking sharply and prices crashing by 50%. Data indicates shorter term traders, and possibly institutions were margin called on crypto or broader portfolio positions and needed to raise liquidity. Exchange liquidity evaporates and spreads blow out amid a surge in blockchain transaction backlogs exacerbated problems. Cascading liquidations and deleveraging required sellers to get out at any price, causing exceptional volatility, even for COVID times. Macro valuation perspective: Crypto economies moves in macro boom and bust market cycles like traditional economies. The Market Cap / Cumulative Miner Revenue (Mkt Cap/CMR) valuation model I developed has been a very reliable predictor of cycle movements. Last month’s sell-off took Bitcoin to a “value buy” range of 5x Mkt Cap/CMR. At today’s price of $9,200, its  valuation has recovered to 9.4x, which is only 2% below its 9.6x lifetime average, but well below its 70x 2017 peek. Historical 1M, 3M, 6M & 12M forward returns from current levels have averaged 9%, 88%, 348% & 996%, respectively. Catalysts approaching: Bitcoin is above its 200DMA. The halving is May 12th. Leverage is reentering markets. DeFi is seeing demand. Monetary and fiscal liquidity may spill over. Continued stock recovery or geopolitical shocks are positives.  Risks remain: Prices are still somewhat fragile, with liquidity and spreads below pre-sell off levels. Miners may need to sell coins to offset lower revenue if prices fall. Existing supply pressure may outpace new supply reductions temporarily. Current market outlook: Bitcoin has moved 85% off its lows and the recovery we called for near that bottom looks to be intact. We’re bullish over the next 12 months and expect prices may continue moving up into the halvening and possibly after. While we view the event as positive longer term, we’re closely watching for pull back risks in the immediately days before and weeks after. We’re not adding to our already overweight position here just yet. We’d prefer to get more clarity on how the halvening plays out and waiting to see if prices get more attractive before getting more tactically aggressive.  Market View: Recovery in 2nd or 3rd inning. Bitcoin Outlook: 12M price outlook: $14,350. Portfolio Allocation: OW crypto 1% to 2% vs 0.01% market. Size Positioning: OW larger caps vs. small cap crypto assets. Defensive vs Cyclical: OW defensive PoW vs. cyclical PoS assets. Asset Selection: OW blue chip alts vs. BTC, OW ETH vs. BTC, UW XRP vs. market.

  • Crypto Blasts
Apr 30, 2020

Bitcoin closes above 200D dma, triggering rule #3. Constructive outlook for crypto but pullbacks always happen

Bitcoin closed above its 200-day moving average (dma) yesterday, triggering Rule #3 from our top 10 crypto rules.  The implication is that Rule #3 is saying risk/reward for Bitcoin is favorable as Bitcoin sees a higher 6M win-rate when it moves above its 200dma (80% win-rate vs 36% below its 200dma). We already have a confluence of positive tailwinds for Bitcoin in 2020, so this triggering of Rule #3 will be useful if Bitcoin pulls back in any meaningful way in the coming weeks.  In fact, Rob Sluymer, Head of Technical Strategy, believes Bitcoin is due for a pullback as the daily RSI is way overbought. But in the next month, we approach the block reward halvening, which is another positive dynamic for supply/demand. Our takeaway? Bitcoin is up 22% YTD, making it the best performing asset in 2020, after tripling in 2019 (best performing asset in 2019). And typical 6M forward returns is 193% after Bitcoin crosses above its 200dma.  This is based on 10-yrs of history but the more recent 200dma crosses have been more mixed.  Last year, the 200dma failed after Congress came after Facebook’s Libra. If crypto doesn’t face regulatory/Congressional backlash, there are better odds for a positive outcome. The first 5 of 10 rules of Bitcoin…. The historical 6M forward returns of Bitcoin when above or below 200dma… Rob Sluymer’s latest comment on Bitcoin as BTC made its 200dma cross… Forward path of Bitcoin when around the 2 precedent block reward halvenings…

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