In the Market
Despite having seemingly found a floor, crypto’s continued to nosedive. The sell-off was mostly felt in the small to medium cap coins. The DCX index finished flat at -0.2% while the DCEX Index dropped by -3.7%. The protocol layer (DCPX Index) was hardest hit with a performance of -2.2%. This largely was a result of EOS which underperformed by -8.1%, as its messy transition from token to crypto continued to weigh down its price. The cryptocurrencies (DCCX Index) also finished the week flat at -0.2% while the Token layer (DCTX) was the only sector in the green ending the week up 0.8%. Trading volumes continued to tank more than half since the beginning of the month with correlations remain elevated at 0.63.
The Basic Attention Token, which is a blockchain-based digital advertising platform, was the best performer, clocking a very strong return of 37.4%. Ethereum Classic, the old version of Ethereum, was the second best performer closing the week at 23.7%. This result was largely driven by Coinbase adding the coin to its platform. Propy, a blockchain-based real estate title registry, was the biggest loser for the week, sliding by a deep -21%. Bloom, a cryptographically secure identity system, closely followed Propy dropping by -20.6%.
In The News
Summary: Reserve, a project to create a cryptocurrency whose value is stable has secured funding from some key players in crypto. According to Reserve co-founder Nevin Freeman, the $5mn seed funding was intentionally kept small, with the round focusing on partnership-building rather than amassing capital.
Commentary: This is yet another release of a so called “stable” coin. So far, there have been 9 other projects competing with Reserve with each project taking a slightly different approach to solving the stability problem. The collective fundraise of all these projects point to a very large demand for a cryptocurrency whose value is stable. The question becomes, should this be achieved by private entities or by central banks?
Summary: Bithumb, one of the largest exchanges by volume and based in Korea, has been hacked for $30mn. This hack is the 3rd in the past 12 months for Bithumb. While the details remain unclear, the exchange is reportedly working with other exchanges to attempt to recover some of the stolen crypto. The exchange has declared that it will reimburse the stolen money.
Commentary: For investors, hacks are a unique risk for crypto. In this year alone there have been over 4 hacks, one of which totaled $500mn. The security standards for the industry haven’t been developed and storing coins which do not support multi-sig wallets are at risk of being hacked. For this reason, at DigiCor, we don’t keep any of our assets in the exchanges and only invest in crypto whose wallets support multi-sig.
Bitcoin Makes Historic First Appearance in US Supreme Court Opinion CNN
Summary: Bitcoin made its first appearance in an opinion published by the US Supreme Court which examined whether employee stock options represent taxable compensation. Ultimately, the 5-4 majority ruled that employees should not be taxed for exercising stock options since the action did not constitute “money remuneration.” Bitcoin was referenced when Justice Stephen Breyer argued that stock options should be taxed and that a “broader understanding of money” is needed. To make his point he stated “perhaps one day employees will be paid in Bitcoin or some other cryptocurrency,” suggesting that how we think about money should not be written in stone and should be open to change.
Commentary: Although the case was not about Bitcoin directly, Bitcoin was referenced as an example of how money can change over time. This is relevant since it demonstrates that the Supreme Court sees Bitcoin as a credible example of the future of money.
Regulated Crypto Custody Is (Almost) Here. It’s a Game Changer Bloomberg
Summary: Crypto custody regulated by SEC is arriving. It is estimated that as much as $20 billion in crypto assets are poised to flow into custody services once those services are available. These would compete with traditional qualified custodians like BNY Mellon who currently do not have the technical capabilities to pull off secure crypto custodianship.
Commentary: Custodianship is one of the biggest concerns for crypto investors, particularly at large scale. This is because custodianship is necessary to satisfy the “custodianship rule” of the SEC, something that has been limiting many funds from growing. The fact that they are coming is welcoming news as it could enable larger pools of money to safely and compliantly enter the space. At DigiCor we are well aware of this issue, and only use qualified custodianship to hold all our Fund assets.
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Making Sense of Crypto Valuation
Summary: In traditional equities, there are multiple models for price valuation. Unfortunately, for blockchain, these models have not been developed yet. Additionally, given the blockchain networks fundamentally different features from the classic asset classes, traditional valuation frameworks do not necessarily apply. Some recent publications attempting to put forth a theoretical structure are worth exploring.
Interesting quote: “Take the 2013, price for example in chart 2. The year starts with an expanding DEUV leading to the first mini peak. However, as investor expectations aren’t met, the price found a floor before rebounding again at the end of the year when both the CUV and the DEUV expanded in tandem.”
Summary: Stable coins are cryptocurrencies whose purpose is to maintain a stable value (e.g. 1 TrueUSD = 1 USD). In this article, Myles Snider from MultiCoin, examines three different types of approaches to produce a price stability within a blockchain context.
Interesting quote: “All stablecoins must address the oracle problem. If stablecoins are pegged to the value of some external asset like the US dollar, the system needs some way to get data about the exchange rate between the stablecoin and the asset that it is pegged to.”
Summary: The Bank of International Settlements (BIS) put forth a scathing critique of cryptocurrencies, arguing that it is hard to identify a specific economic problem for which they currently solve. BIS states crypto transactions are slow and costly, prone to congestion, and cannot scale with demand. They also argue the decentralized consensus behind the technology is also fragile and consumes vast amounts of energy. This critique deserves a defense. Stay tuned for next week response on why we disagree.
Summary: Jimmy Song critiques the application of keynesian economics to guide the understanding of cryptocurrencies. For context, here is the tweet that drove the author, Jimmy Song, to write this article.
Interesting quote: “The first argument for smart contracts is that there’s a lot more “developer activity” on Ethereum’s Turing-complete Solidity. This argument is about as useful as focusing on aggregate demand and aggregate supply that Keynesians love so much. Economic activity by itself doesn’t tell you anything. People could be trading the same egg back and forth for a dollar a billion times and that would count in the economic activity statistics as a billion dollars of activity. The aggregate numbers simply don’t mean very much because they have at best a very weak correlation with the actual value added.”
Summary: A round-up of various approaches to valuing crypto.
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