Crypto Long & Short: The Wrong Way to Think About Bitcoin and the Financial Crisis
 January 24, 2020  Weekly insights, news and analysis for the professional investor Sponsored By:  By Noelle Acheson Director of Research If you were forwarded this newsletter and would like to receive it, sign up here. PRICES (01/24/21 @ 8 a.m. UTC): BTC - $32,707.61 | ETH - $1,325.66
Hi everyone,
What a week.
I'm not just talking about the crypto market, although it sure was interesting. I'm not just talking about a moving ceremony followed by a flurry of executive orders and nominations that hint at meaningful change.
I'm talking about these major shifts overlaying a hectic stream of development news, regulatory moves, funding announcements, industry solidarity and all the other typical features of a week in crypto.
Am I the only one wondering when "unusual" became the norm?
Below in THE BRIEFING I share a pet peeve with you. It has to do with lazy research leading to misinformation, and although on the surface it may not seem material, it does matter.
And, of course, there's a selection of the week's developments, and why I think they're important.
Read on...
– Noelle
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The Briefing (Note: We use Bitcoin with uppercase when referring to the protocol, and bitcoin with lowercase, or BTC, when referring to the asset.)
Bitcoin and the financial crisis
Maybe it's just that winter is dragging on, but I find myself getting increasingly irritated with mainstream reports about Bitcoin that say it was a result of the financial crisis.
It wasn't, and that matters.
First, let's look at why it wasn't, and then I'll explain why this misunderstanding bothers me.
Bitcoin's pseudonymous creator Satoshi Nakamoto started working on the Bitcoin white paper in early 2007, over a year before the financial crisis hit mainstream markets.
In early 2007, the subprime mortgage industry was collapsing, but even lifelong finance insiders didn't foresee the scale of what was to unfold. As Satoshi worked, bankruptcies and bank tremors would have been making the headlines, but there is no indication this added to his* urgency.
(*We don't know that Satoshi was a "he," but to avoid linguistic clutter I'll use that pronoun throughout.)
By the time Satoshi uploaded the white paper to a cryptography mailing list in October 2008, the markets were in full meltdown, the U.S. government was taking over parts of the financial ecosystem, and central banks around the world were dropping interest rates and printing money.
The genesis block, mined by Satoshi in early January 2009, included the text of a headline from that day: "The Times 03/Jan/2009 Chancellor on brink of second bailout for banks."
Many have taken this as proof that Bitcoin was created in reaction to the crisis. This reveals a lack of understanding of how much work went into the design of Bitcoin, as well as the long history behind the idea of peer-to-peer finance.
History matters
The confusion is also potentially damaging to the Bitcoin narrative.
Why? Because it misrepresents the intentions of the army of cryptographers that had been working on a decentralized electronic cash solution for decades. It diminishes the bigger picture.
Satoshi was not reacting to an event, just as those on whose shoulders he stood weren't planning for a specific circumstance. They were all trying to solve the fundamental issue of financial sovereignty.
While we do not have (that I'm aware of) evidence of Satoshi's thoughts on the financial system from before the publication of the Bitcoin white paper, shortly after the genesis block was mined, Satoshi wrote:
"The root problem with conventional currency is all the trust that's required to make it work. The central bank must be trusted not to debase the currency, but the history of fiat currencies is full of breaches of that trust."
Satoshi was not referencing the financial mess at the time, even though its fallout was loud and hard to ignore. He showed signs of bigger thinking.
And as for the genesis block itself, maybe the timing and choice of embedded text was intentional, or maybe it was a coincidence – we'll never know for sure. Either way, a point was made.
That point was a dig at how politically beholden the banking system had become. It highlighted the lack of solid financial structure and the diminishing trust in institutional solvency. It essentially represented the financial crisis that was unfolding. But it was an example rather than a smoking gun.
The financial crisis was not the reason for Bitcoin. It was a symptom of the reason for Bitcoin. And if we continue to hear claims that the crisis was the cause, we will start to believe that Bitcoin is a new solution to a relatively new problem.
It isn't. It's a long-awaited solution to a long-standing problem.
If we continue to think of Bitcoin solely in the context of financial crises, we could start to believe that the need for it will diminish as the painful adjustments recede into the mists of time.
It won't – the technology can't be put back into its bottle. Nor can the growing awareness of the vulnerabilities inherent in the financial system on which we all rely.
Bitcoin has managed to spread ideas that were previously the purview of an arcane mailing list, and in so doing, has changed the way we look at our financial rights, our data, even our identity. True, the timing of Bitcoin's emergence helped with that spread, and the recent departure from traditional monetary policy has accelerated it. Financial privacy, seizure resistance and fiat debasement are just some of the concepts that the crypto market price swings have pushed into conversations that now reach even the hallowed halls of traditional finance.
But Bitcoin was not created to fix crises. It was created to give people a choice.
Let's stop treating it as a reaction to a specific situation, and recognize that Bitcoin is a technological evolution of a process that started decades ago.
Let's also give credit to a group of thinkers who realized from way back where centralization of finance and our economy could eventually lead.
Regime change
After a momentous week in which COVID-19 briefly stepped back from the headlines to give space for us spectators to appreciate hope, rhetoric and a peaceful transfer of power, it feels good to take a breather and contemplate the scope of potential change ahead.
It's not just that market infrastructure and institutional interest are growing in leaps and bounds (more on that below). It's also that many of the regulatory authorities that determine the framework of financial markets, custody and value transfer are changing guard.
Gary Gensler will be the next chairman of the U.S. Securities and Exchange Commission (SEC). This possibility was reported last week, and was flagged as potentially very good news for the crypto industry, as Gensler has not only researched and often spoken in public about crypto assets and blockchain technology – he also has taught a course on the subject at MIT.
Chris Brummer, a Georgetown University law professor who runs the annual D.C. Fintech Week conference, edited a book on crypto assets and hosts the excellent Fintech Beat podcast, which often features compelling crypto content, may be the next chair of the Commodity Futures Trading Commission (CFTC), according to Reuters.
According to the Wall Street Journal, Michael S. Barr, a former U.S. Treasury Department official and onetime member of Ripple's board of advisers, is likely to become the next Comptroller of the Currency.
This almost seems like a crypto-savvy trifecta of financial regulators which, as my colleague Nik De hinted at in his new crypto regulation newsletter The State of Crypto, is almost too much to ask for. It doesn't guarantee crypto-friendly legislation, but at least it means the discourse will be relatively well informed.
Macro currents
After starting the year with strong performance, bitcoin (BTC) suffered one of its sharpest corrections this week, at one stage erasing almost all the gains so far this year.
Traditional markets, on the other hand, are not signaling broad-based fear. This suggests that investors are not positioning for a prolonged risk-off environment. The CBOE Volatility Index (VIX) remains relatively low by recent standards, which suggests continued complacency.  On the flip side, investors who are concerned about rising risk should monitor movements in VIX and the dollar, which typically move in tandem. As we saw in March 2020, risk-off sentiment in traditional markets will also be negative for bitcoin.  This week, not only did ether (ETH) avoid bitcoin's downward trajectory, it outperformed virtually all other asset groups, increasing its lead over BTC in terms of YTD returns. This could in part be due to some catch-up – ETH passed its 2018 all-time high (ATH) this week, whereas BTC left its 2017 ATH behind in early December. It also could be due to growing excitement over the growth of decentralized finance, and the potential in Ethereum's pending shift to a proof-of-stake protocol.
– Damanick Dantes
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Chain Links Investors talking:
· "While it is nigh on impossible to forecast an expected return for bitcoin, its volatility makes the asset almost 'uninvestable' from a portfolio perspective." – Barclays Private Bank chief market strategist Gerald Moser, talking to Financial News. He goes on to claim that the current bull run has been driven by retail investors rather than institutional money, which is a bewildering interpretation of the data.
· Guggenheim Partners Chief Investment Officer Scott Minerd, who recently said that he thought bitcoin's fair value could reach $400,000, has been looking at the BTC charts and now believes that the cryptocurrency could be in for a sell-off down to $20,000.
· Bill Miller featured bitcoin in his Q4 income strategy letter, and talks about his fund's investment in the MicroStrategy convertible security. "The world is ruled by fat-tail events, or seemingly improbable occurrences that have an outsized impact, and all indicators so far point to Bitcoin being one."
· "You know what, if you won the lottery – Yes, I'm gonna say it: 5% in bitcoin." – Jim Cramer, host of the Mad Money program. Cramer apparently sees bitcoin as an "important new store of value."
Takeaways:
BlackRock, the world's largest asset manager with $7.81 trillion under management, appears to have granted at least two of its funds (BlackRock Global Allocation Fund Inc. and BlackRock Funds V) the ability to invest in bitcoin futures, according to prospectus documents filed with the U.S. Securities and Exchange Commission. TAKEAWAY: For now, the funds will only be able to invest in cash-settled bitcoin futures, not actually hold bitcoin. And we shouldn't assume that BlackRock will be betting on upside – it could use bitcoin futures to express bearish positions. But this move does echo comments made last month by CEO Larry Fink, when he said bitcoin could possibly "evolve" into a global market asset. And it is encouraging to see official acknowledgement that the world's largest asset manager has invested resources in understanding the market.
If any of you heard some alarming chatter about a double-spend on the Bitcoin network (when a certain amount of BTC is spent twice, which in theory is impossible), here is an explanation of what really happened and how it's nothing to worry about.
While bitcoin is still usually the first crypto investment for professional investors, due largely to its relative liquidity and range of onramps and services, Ethereum's native token ether is starting to attract more institutional attention. A report from Fundstrat Global Advisors posits that the wide array of potential use cases for Ethereum gives ETH the best risk/reward scenario in the market, and believes that the asset could rally up to $10,500. TAKEAWAY: ETH has outperformed BTC for 8 of the past 12 months (and looks set to do the same for this one), yet it is currently below its all-time high (ATH), while BTC left its ATH in the dust three months and 52% ago (at time of writing). It is not easy to directly compare the two, however, since the underlying technology, use case outlook and risk profile are very different. We'll be following this closely, so watch this space. (See our report on Eth 2.0 for more detail on its upcoming protocol shift.)  New U.S. Treasury secretary Janet Yellen got off on the wrong foot with the cryptocurrency community by claiming that bitcoin was mainly used for illicit financing. This happened on the same day that blockchain forensics firm Chainalysis published a report that shows that cryptocurrency-based criminal activity fell to 0.34% of total transaction volume, down from 2.1% in 2019. TAKEAWAY: That doesn't look like "mainly" to me. Thankfully, she rectified shortly after in a written response to the Senate Finance Committee, stressing the need to "encourage their use for legitimate activities while curtailing their use for malign and illegal activities." That sounds more reasonable.
London-based crypto liquidity provider Wintermute has raised $20 million in a Series B funding round, led by Lightspeed Venture Partners, with participation from Pantera Capital, Sino Global Capital, Kenetic Capital, Rockaway Blockchain Fund, Hack VC, DeFi Alliance and Fidelity-affiliated Avon Ventures. TAKEAWAY: Most of the meaningful raises we've seen recently have been for market infrastructure firms, which points to strong under-the-surface development and increasing sophistication from crypto markets, and expectations of significant growth in service demand.
Sen. Mike Flood (R) of Nebraska has introduced two bills that would allow the state's banks to offer custodial services for digital assets. TAKEAWAY: Several states are likely to follow Wyoming's lead in making their jurisdictions crypto asset-friendly. This will not just attract new businesses or retain existing ones in an industry with growth potential. It could also serve to attract investment funds, and enhance the opportunities for interstate crypto commerce and business deals.
Market research commissioned by trading platform eToro, which surveyed 25 large institutions in Q3, revealed that interest in crypto markets from pensions and endowments is increasing. TAKEAWAY: This would be a big shift if it materializes, as pensions and endowments are traditionally risk-averse investors. Crypto markets, as we were reminded this week, are not for the risk-averse. It's a relatively small sample, and so can't be taken as indicative of pending inflows, but it does hint at a shift in market perception.
According to a Deutsche Bank survey of market professionals, over 50% believe that BTC is at a 10 on a 1-10 "bubble scale", and is likely to halve in value over the next 12 months. TAKEAWAY: Is this a sign of the market getting tired? Or, a sign of growing awareness amongst people who have yet to do research?
JPMorgan strategists have said in a report that a bitcoin price breakout over $40,000 would require daily inflows into the Grayscale Bitcoin Trust (GBTC; Grayscale is owned by DCG, also parent of CoinDesk) of approximately $100 million. TAKEAWAY: So far, that does not look too farfetched: On Monday, the firm had its largest daily inflow ever, almost $700 million, bringing the daily average since it reopened for new investment last week to approximately $200 million.  Source: skew.com
Digital asset management firm CoinShares has launched an exchange-traded bitcoin product (ETP) on Swiss stock exchange SIX. TAKEAWAY: It is becoming increasingly obvious how much livelier in terms of variety the listed crypto product landscape is in Europe vs the US.
Valkyrie Digital Assets filed an application this week for a bitcoin exchange-traded fund (ETF), the Valkyrie Bitcoin Fund, which would be listed on the New York Stock Exchange. TAKEAWAY: This is the second bitcoin ETF filing we've seen in the past three weeks, and is probably the first of many in 2021. With Gary Gensler as nominated head of the U.S. Securities and Exchange Commission, expectations are rising that the industry will see a bitcoin ETF approved this year.
Wall Street CFOs are more wary of putting company funds into bitcoin after last week's 30% price plunge, according to Bloomberg. TAKEAWAY: As they should be. CFOs putting company reserves into BTC just for the headlines and possible share price bump are being irresponsible. BTC has a place on balance sheets, but it should be a cautious one. Microstrategy, the software company that kicked off this trend in August of last year, is placing conviction above caution, however, and revealed this week that it has added another $10 million worth of bitcoin during the dip.
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