Commentary
Digital Assets ended the week -6% on slightly better volume. Trading increased to a daily average of US$57B across the space, +12% from the previous week. Declines were broad based with only 22% of the top 200 coins and tokens ending the week higher. Declines were worst in smaller, high beta coins and tokens with IEOs -14% and Utility Tokens -9%.
Dump this week is in line with expectations of a mean reversion in volatility. Skinny volumes and low volatility over the previous few weeks were exasperated by Zuckerberg’s grilling by US lawmakers — triggering $200M of long liquidations on BitMEX and sending the entire space sharply lower.
News this week was corporate focus with company specific news dominating headlines: 1. Congress gave Zuckerberg another grilling over Libra, 2. Fidelity launched a ‘full role out’ of its digital custody and trading platform, 3. Bitfury mined the 18th million BTC, 4. Coinbase announced $2B in trade commissions since 2012, 5. Bitmain launched a mining facility in Texas, 6) Bakkt traded record BTC volumes and 7. Bitfinex filed suits to recover $880M in frozen funds.
This week’s correction saw BTC drop to the 68% Fibonacci retracement level of $7,400 — our line in the sand from last week. From a technical perspective, BTC needs to recover quickly if it is going to shake off the Libra downdraft and reposition itself for normally positive 4Q seasonality. Failure to do so — and quickly — would be bearish for the near term trend. The next line of major support is at $6,400 the convergence of the 78% Fibonacci retracement and the Sep-Nov consolidation range. From a fundamental perspective, BTC is now trading at a ~$700 discount to the Stock/Flow fair value of $8,200, implying a stock/flow multiple of 0.9 — the lowest since May of this year. Given where we’re at in the halving schedule — 201 days until the halving — the low end for the stock/flow ratio is probably somewhere ~0.8 which also implies downside support at the $6,400 level.
Thoughts
Support at Stock/Flow Modeled Price (?)
Despite the current $700 discount, BTC price has been tracking pretty much inline with its predicted Stock/Flow valuation. Stock/Flow is essentially a measure of scarcity — traditional used in precious metal valuation — that generates a projected value based on existing stores of an asset vs new production of an asset.
Bitcoin’s current Stock/Flow ratio over a 365 day period is 25.4. Gold is estimated to have a Stock/Flow value of ~ 62. Note that BTC’s Stock/Flow ratio will double when the block reward halves in May 2020. Increasing its scarcity to 82% that of gold.
Interactive chart here
Price was ugly this week, but there were some very big developments…
Some pretty big corporate developments this week, including:
- Fidelity — one of the world’s largest asset managers — officially rolling out its custody and trading platform to users. This will make BTC much more accessible to mainstream institutional investors.
- Bakkt — a subsidiary of ICE (parent company of theNYSE—posting record high volumes on their physically settled BTC futures contract. Bakkt also announced that they will be launching BTC options at the end of the year. This will likely be particularly attractive to Bitcoin miners as it will offer them a liquid way to hedge their BTC price exposure.
- Twitter and Facebook — 2 of the largest social media platforms in the western world — debating wether it is better to design a corporate cryptocurrency or to support an open based solution like Bitcoin.
- Galaxy Digital and Morgan Creek both launching new funds and, in the case of the later, securing significant interest from mainstream Pension Fund investors.
- HTC — previously one of the largest handset makers in the world — launching a phone with a built in BTC node.
- Peter Theil —co founder of Paypal and one of the earliest investors in Facebook — Investing in a $50M raise for Layer 1’s Texas based mining farm.
News
- Fidelity opens crypto custody/trading to qualified investors
– Platform engaged in a ‘full roll out’ expanding from the initial trial users
– Fidelity is one of the world’s largest asset managers with US$2.8T AUM - Circle to spin out Poloniex less than 2 years after $400M takeover
– The trading platform will not serve U.S. customers after this year
– Poloniex was once one of the world’s leading Alt Coin exchanges with one of the broadest product offerings. Circle bet that they could clean up the platform and its assets enough to get US regulatory support
– The spin out is a bearish comment on US regulatory attitudes - Coinbase has generated nearly $2B in transaction fees since 2012
– Coinbase’s last fund raise put its valuation at $8B, profitable since 2017
– CEO says most of the profits are being reinvested into the company
– Wants Coinbase to be a “company of repeatable innovation” - Bitfury mines Bitcoin number 18 million
– Is the biggest western miner. Also has listed sub in Canada (Hut 8)
– Only 3 million BTC left… - Twitter CEO Jack says ‘Hell No’ to Libra, prefers BTC
“It’s not an internet open standard that was born on the internet,” Dorsey said. “It was born out of a company’s intention, and it’s not consistent with what I personally believe and what I want our company to stand for.” - Bakkt plans to launch BTC options in December
– Will launch the first regulated BTC options contract on December 9
– Will be either cash or BTC settled and based off Bakkt’s Monthly Futures - Galaxy Digital to launch 2 new crypto funds in Nov
– The Galaxy Bitcoin Fund and The Galaxy Institutional Bitcoin Fund - HTC launches Exodus 1S with BTC full node
– Exodus 1S will retail for US$244
– A few caveats, though, for running your node…
1. Must be connected to WiFi
2. Plugged in
3. and have a 400GB SD Card - Binance announces plans to launch Russian ruble trading
– Binance CEO Changpeng Zhao announced his plans at a Russian government-led event, the Open Innovations Forum in Moscow
– In Jan Binance announced plans to expand into 8new countries:
Singapore, Malta, South Korea, Liechtenstein, Argentina, Russia, Turkey and Bermuda. - Bitfinex looks to recover US$880M in new court filing
– filed an application with U.S. court in California to issue a subpoena to a former banking executive of trust company Crypto Capital
– Crypto Capital’s accounts — and US$880M in Bitfinex/Tether funds- were frozen earlier in the year - Bitmain said to have launched Bitcoin mining facility in Texas
– Sits on a 33,000-acre site, can expand to over 300MW in the future
– Bitmain previously forecast that the site would see $500M in investment over 7 years and was expected to generate 400 jobs
– Wonder to what degree the ongoing China trade war/tariffs have done to Bitmain’s ability to import mining equipment and execute on this investment - Morgan Creek Digital raises US$60.9M tranche for $250M Venture Fund
– Interesting to see 2 large Pension Funds account for most of the money
– Fairfax County’s Virginia’s Police Officer’s Retirement System and Employees’ Retirement System are investing a combined $50m
– Would expect to see Pension Funds divert more capital into the space as asset allocation moves away from Fixed Income in search of alpha and yield - US lawmakers may define all managed stablecoins as securities
– The proposed legislation appears to be a response to Facebook’s Libra
– Would potentially give the SEC authority over all stablecoins/issuers - Number of Americans owning crypto doubled in 2019 — now up to 14%
– Totals to 36.5 million. Average value held = $5,447 vs $360 median - Zuckerberg: Will not launch Libra without US approval
– Will not launch Libra anywhere in the world until US regulators approve
– Also refuted that libra is an attempt to replace sovereign currency
“will extend America’s financial leadership as well as our democratic values and oversight around the world.”
– Zuck pushed China fear angle pretty hard in front of the House this week - ING CEO: Banks may have to cut ties with Facebook over Libra
– Due to the risk placed on banks as “gatekeepers to the financial system.”
“We are such a large, regulated institution that you don’t want to risk anything” - Adam Back: BTC sidechains could replace alt coins
– A sidechain is a blockchain attached to a parent chain using a 2 way peg
– Allows users to escrow BTC in exchange for sidechain tokens & vice versa - 40% of blockchain industry employed at crypto exchanges
– Breakdown by number of employees:
Bitmain 1,500 . Huobi 1,300 . Coinbase 1,000 .
OkEx 950 . Binance 650 . Ripple 450 - Bakkt Futures trading hits record high of 640 BTC
– US$ notional just shy of $5M, not huge — but trending higher
– Previous high was $1.9M - Litecoin announces to 2 new privacy focused upgrades
– Users would have ‘opt in’ privacy functionality
– Implemented via MimbleWimble (MW) transactions on side chains - New Bitcoin ETF proposal submitted to the SEC
– Proposl comes from Kryotin Investment Advisors
– One of the company’s senior executives — Jason Toussant — is a former World Gold Council MD and asset manager of SPDR Gold Shares (one of the largest Gold ETFs)
Charts
Chart 1, Price vs Volume
– Most assets in the bottom left corner…price down on lower volume
Chart 2, Price Performance
– A sea of red
Chart 3, This day in history…
– BTC & BNB prices still the highest they’ve ever been for this point in October
Chart 4, % Change Major Thematics
– Smaller coins and tokens the hardest hit this week
Chart 5, 50 Day Volume Z Score
– Volumes mostly hovering or just north of their 50 day moving averages
Chart 6, Average Daily Turnover — By Month
– USDT volumes up this month as investors taking profit
– BTC on pace for its 5th straight month of volume declines
Chart 7, BTC vs Alt Coins
