Commentary
Digital Assets extended last week’s strength to finish up another +6% this week. BTC did most of the heavy lifting — adding another +11% this week, hitting a 182-day high and pushing the overall Digital Asset market cap to US$190B. Trading volumes across the space reaccelerated to a daily average of US$48B, +14% from the previous week. Alts continued to lag BTC, but breadth remained positive with 63% of the top 200 coins and tokens higher this week.
News flow this week was action packed, following up on a big week of headlines last week. Top stories this week included: 1. Binance suffering a US$42M hack, 2. Fidelity expecting to launch institutional crypto trading ‘in a few weeks’, 3. Binance kicking a hornets nest with reorg comments, 4. US Representative Brad Sherman reiterating his call to ban Digital Assets, 5. Fidelity hosting a Digital Asset Mining Summit and 6. EOS burning $167M tokens as part of a plan to reduce its inflation schedule.
Despite a total of US$200M of BTC short liquidations this week, the overall market looks to be shifting from trimming longs over the previous 7 days to establishing new shorts.
This is in line with our short to mid term view expressed last week; that BTC would likely see increased resistance as it struggles to break convincingly above the US$6000 mark. This may drive a rotation into smaller laggards. BTC outperformance vs smaller coins and tokens continued to widen this week. BTC outperformance is now just off a 1.5 year high (chart 8) and is looking very stretched on all relevant metrics (BTC:other Digital Assets +3 standard deviations > 50D MAVG, RSI 81, +17% this week). Part of the reason for the widening of the spread this week was the withdrawal/deposit restrictions imposed by Binance in the wake of their attack. A resumption of normal trading next week could be the catalyst for a catch-up rally in the rest of the Digital Asset space.
The big caveat here is a potential short squeeze in BTC (as shorts increase and then get liquidated as has been the trend recently). The 200-day moving average remains the strongest immediate line of support for both BTC ($4400) and the broader Digital Asset space ($143B).
Thoughts
- Binance eyes mutually assured destruction to recover hacked BTC
– This week we learned that Binance had reached out to miners in an effort to explore the feasibility of ‘reorganizing’ BTC’s transaction history
– This quickly became more the focus of the market than the hack itself given the potential impact a ‘rewriting’ of BTC’s transaction history would have on BTC’s value proposition as well as on the entire ecosystem
– Binance’s CEO commented that a ‘reorg’ would cost at least US$90M
– While technically possible it would likely be organisationally and economically unworkable:
1. Economically, the US$90M quote (from miners?) is 2.2x the cost the hack. But the real cost of attempting to reorganize BTC’s transaction history would be the potential destruction of BTC’s value proposition. Miners would have to be compensated very well, maybe even for their future earnings in perpetuity
2. Organisationally, it would be very difficult to secure enough hashrate to execute the reorg. Largely because of the increasing fragmentation of hashrate distribution. At the moment, no single miner controls more than 15% of hashrate — it is becoming increasingly difficult to coordinate and execute a large scale reorganization (though is still possible on smaller, more centralized chains)
– This is really nothing new. The possibility of a 51% attack is baked into the system. If a 51% is not possible — then the Digital Asset in question is centralized and permissioned - Cash is the thin green line preventing negative interest rates
– Both Australia and China are reportedly increasing capital controls
– This is reminiscent of an IMF blog post:
Cashing In: How to Make Negative Interest Rates Work
– Cash and the possibility of bank runs is the only thing that prevents Central Banks from charging depositors to save money
– The war on cash is likely more to do with increasing central bank control over the economy than it is about preventing tax evasion or illicit use
“In a cashless world, there would be no lower bound on interest rates. A central bank could reduce the policy rate from, say, 2 percent to minus 4 percent to counter a severe recession. The interest rate cut would transmit to bank deposits, loans, and bonds. Without cash, depositors would have to pay the negative interest rate to keep their money with the bank, making consumption and investment more attractive. This would jolt lending, boost demand, and stimulate the economy.” — IMF, Cashing In: How to Make Negative Interest Rates Work
News
- Binance suffers large scale security breach — loses 7,000 BTC
– Equivalent to US$42M, small given Binance resources
– Binance has reportedly covered user assets that were impacted
– Binance dedicates 10% of commission to an insurance fund - US Representative Sherman proposes bill banning Digital Assets
– Rep Sherman has been pushing this bill since 2017
– Other countries that have banned Digital Assets include: Algeria, Iran, Egypt, Saudi Arabia, Pakistan and China - Binance CEO explored BTC reorg as solution to BTC hack
– This discussion has had ore impact on sentiment than the hack itself
– There was a lot of criticism of Binance around this suggestion - Fidelity to launch crypto trading ‘within a few weeks’
– Fidelity is one of the world’s largest asset managers with US$7T AUM
– Fidelity’s Digital Asset trading service is a major step for adoption
– Offers Digital Asset trading access to mainstream institutional clients - Facebook reverses ban on cryptocurrency ads
– Will now allow ads on “blockchain technology, industry news, education or events related to cryptocurrency” - US crypto firms propose blacklist to isolate bad actors
– Pretty transparent effort to dig a regulatory moat around the space - Miners highlight green energy credentials at Fidelity Mining Summit
– Miners’ search for cheaper energy will be a driver for renewable power
– Highlighted how mining can be used to capture wasted energy like vent gas or excess hyrdro for example - How many wrongs make a Wright? (why Craig Wright is not Satoshi)
– A very detailed exposé by well known BTC engineer Jameson Lopp
– Essentially a very detailed collection of evidence suggesting that it is very unlikely that CSW is Satoshi, including:
1. CSW’s use of forged and unconvincing cryptographic signatures
2. Altered blog posts and emails
3. Activity schedules (based on times CSW/Satoshi posted on the internet)
4. Numerous public technical errors - Proposed soft fork from segwit invetor promises BTC upgrades
– Pieter Wullie’s Schnorr Signature and Traproot proposal
– New capabilities that extend BTC’s smart contracting capability and simultaneously improve both scalability and privacy - Microsoft Releases Ethereum App Development Kit for Azure Cloud
– Will help developers create and deploy ETH apps on Azure or ETH chain
– Will also promote JPM’s Quorum to business customers through Azure - EOS executes US$167M burn as part of plan to reduce inflation to 1%
– Result of a decision made in 3Q18, reduces > 34M EOS from supply
– Current 5% inflation rate is expected to be cut to 1% - ETH Dapp volume hits new high
– Over the past few months ETH has lost significant Dapp market share to competitors like EOS and TRON
– April volume came in at a total of 776,000 ETH (>US$130M) - CFTC said to be preparing for ETH futures launch
– Cites an anonymous source from within the CFTC
– Last year the SEC commented that only BTC and ETH are sufficiently decentralized to not by considered securities - Blockstream’s inter exchange settlement network adds big names
– Tether plans to launch a Liquid based version
– Coinone, Huobi & BitMEX are working to support deposits/withdrawals - Tron patches critical vulnerability
– The bug could have reportedly made the entire network unusable
– Would require only a single machine to execute the attack - Chinese banks quietly lower daily limit on foreign cash withdrawals
– Central bank has lowered US$ withdrawal limit from US$5K to US$3K
– Article mentions a Chinese account holder (in China) unable to withdraw US$200 from a US$ account after being put on a watch list for too many withdrawals
– Strict capital controls are long term positive for Bitcoin - Austraila bans cash for all transactions >$7,500
– Will take effect July 1, 2019
– Cites efforts to transition to a ‘digital society’ and ‘tax evasion’
Charts
Chart 1. Weekly price vs Volume
Chart 2. Weekly price change
Chart 3. Major Thematics
Chart 4. Monthly average daily volume as % of the historic high
- Chart 5. MTD average daily volume
– New historical high volumes in BTC and LTC
- Chart 6. Price 50 day z score
- Chart 7. BTC vs Other Digital Assets, 1 Month % Change
– BTC in blue, Other Digital Assets in red
- Chart 8. BTC vs Other Digital Assets
– BTC:Other Digital Assets just off of last year’s high
– Z Score at ~ 3 standard deviations, RSI at 82, 7 day ROC at 17%
