Crypto Long & Short: What Does Dogecoin Have to Do With Government Bans?
 February 14, 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 (02/14/21 @ 12 p.m. UTC): BTC - $49,520.91 | ETH - $1,842.39
Hi everyone,
I don't recall a week with so many big steps forward for our industry. There's Tesla's big buy, ether futures launching, Mastercard, both BNY Mellon and Deustche Bank revealing crypto custody plans … it just keeps coming.
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In THE BRIEFING this week, I get to mash together silly crypto memes and serious government bans in the same thread. Scroll down to see how.
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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.)
What does Dogecoin have to do with government bans?
Dogecoin is not a cryptocurrency you would expect to read about much in this column since it is not exactly an "institutional grade" asset. It has a market cap of over $8 billion at time of writing (less than 1/100th of bitcoin's), no unique use case and no lively derivatives market.
But bear with me while I explain why it embodies two key themes impacting institutional interest in crypto assets: the role of "fundamentals," and the likelihood of successful government bans.
The power of enthusiasm
At time of writing, Dogecoin (DOGE) is up almost 1,350% so far this year. Last week, rapper Snoop Dogg temporarily rechristened himself Snoop Doge. Kiss frontman Gene Simmons topped that with a "God of Dogecoin" tweet. Kevin Jonas of the Jonas Brothers joined in. Elon Musk has inspired so many Doge memes that it would be impossible to list them all here. This is getting fun in a wacky "whatever" kind of way.
But should "fun" drive value?
Why not? As we saw with the GameStop drama, the market's understanding of "value" is shifting. The relentless rise of the stock market despite record uncertainty and risk, and the relatively new phenomenon of day-trader media stars, show that performance is increasingly a matter of message in a world where messages are coming at us thick, fast and everywhere. Bloomberg columnist Matt Levine summed it up perfectly:
"Money and value are coordination games; what we use for money depends on the channels that we use to coordinate social activity. Once society was mediated by governments, and we used fiat currency. Now society is mediated by Twitter and Reddit and Elon Musk, so, sure, Dogecoin."
The Dogecoin phenomenon may be a flash in the pan, and our attention may shift to something else tomorrow.
Or maybe not. The cryptocurrency's co-founder Billy Markus told Bloomberg this week that he was "baffled" by the coin's continued success, more than seven years after launch. The other co-founder Jackson Palmer said last year that it "makes no sense for people to have this devotion to it." But here's the thing: neither co-founder can do anything about it. Dogecoin runs on a public, decentralized blockchain that no one controls. It may dwindle into insignificance as people move on to the next shiny thing. But as long as there are fans who enjoy the silliness, it will have value.
Stop the tide
Which brings us to India and Nigeria (still with me?), which this week seemed to forget how public blockchains work.
In January, we reported the Indian Parliament was considering a government-sponsored bill that would ban cryptocurrencies. Needless to say, the community jumped into action with the #IndiaWantsBitcoin campaign, rallying citizens to email their government representatives to ask for progressive legislation.
Among the many arguments against the ban is the damage it would do to a lively ecosystem that includes 10-20 million cryptocurrency users, 340 startups and 50,000 employees. The full contents of the bill are not yet public, but it seems to be intent on clearing the field for a government-backed digital rupee. Hopefully the Indian government will learn from Nigeria.
Last week, Nigeria's central bank (CBN) ordered banks to close the accounts of cryptocurrency users. In response to the ensuing outcry, the CBN issued a press statement reminding the public that the rule was not new, and that it was for their own good. The notable thing here is that the CBN felt the need to respond to social protest. This is possibly because of the still-fresh memory of the #EndSARS movement which rocked the country late last year, in which mass protests combined with global online support achieved the dissolution of a federal police unit with a reputation for fierce brutality.
This week, a court ordered the CBN to unblock the accounts of 20 people who had been involved in the movement. The fact that the accounts were frozen in the first place is one of the many reasons seizure-resistant cryptocurrencies are rapidly gaining in popularity amongst Nigeria's young.
Another reason is the country's reputation as Africa's "Silicon Valley." Lagos is the largest city in the continent, with a rapidly growing tech community. It is also a country with inflation of over 12% and almost 30% unemployment, where the young account for 70% of the workforce and where trading crypto assets is a way of life for many. A report this week showed that almost a third of Nigerians say they own cryptocurrency, making it the most invested country in Statista's Global Consumer Survey.
The CBN's actions are being presented on social media as a generational call to arms where the young, tech-savvy army has new tools in its arsenal and a deepening disrespect for institutions. Sound familiar?
They're also not giving up on crypto. Exchanges such as Binance have been affected because local payment partners are no longer willing to deal with them due to the directive. But sources confirm that trading is moving to peer-to-peer channels.
What's more, the #EndSARS movement has not gone away even after its victory. It is now attacking what it sees as repression more broadly, and could end up uniting with the #WeWantOurCryptoBack movement to push for – and probably achieve – radical change in Africa's largest democracy.
The politicians have noticed. The Nigerian senate has invited the governor of the central bank and the director general of the securities regulator to testify on the matter, with one senator coming out as "strongly against" the ban.
Other countries thinking of banning bitcoin will no doubt be watching how this plays out. They will also be taking note that rules can make it harder to transact in cryptocurrencies, and could certainly dampen investor enthusiasm, but – just as the Dogecoin community could not care less about what the network's founders think – they can't make it go away.
And the very act of attempting to repress cryptocurrency's use could light a fire under a generational understanding of why it's necessary.
The rear guard
What does this have to do with institutional investment in cryptocurrencies?
One of the main risks to bitcoin is overly repressive regulation. Some believe that, as the network becomes more powerful, governments will see it as a threat and decide to intervene. It has been a suggested that national security issues might come into play as Iran, North Korea and Russia ramp up their bitcoin mining.
So, investors – and probably some western regulators – should be paying attention to the developments in India and Nigeria, to see whether an attempt to ban cryptocurrencies could be successful.
Only, now it's about much more than pushing consumers to public protest and unregulated peer-to-peer platforms. Now the institutions are involved.
Even just looking at the U.S., this week BNY Mellon, the world's largest custodian bank, announced that it was planning to roll out a digital custody unit later this year. Goldman Sachs, JPMorgan and Citi are rumored to also be looking at crypto custody. Payments giants are stepping up: this week Mastercard revealed it is planning to give merchants the option to receive payments in cryptocurrency later this year. Last week we saw Visa unveil cryptocurrency plans. Cryptocurrency buying and selling appears to be growing into an increasingly significant part of PayPal's activity. This list is just scratching the surface of public announcements; there is plenty of institutional work going on behind closed doors, as well.
Furthermore, cryptocurrencies now play a significant role in regulated markets in North America and elsewhere. From listed assets to indices to data businesses, traditional markets and crypto markets are becoming inextricably intertwined.
And there is considerable retail support. A study released last summer showed that around 15% of Americans own cryptocurrency, most of whom invested for the first time in the first half of 2020. If that rate of growth is even only partially accurate, the percentage is significantly higher today.
Would any government focused on repairing public trust have the stomach to take on a retail army as well as invested institutions?
As Dogecoin has demonstrated, cryptocurrency holders can be vocal and passionate. It's not just about love for memes, nor is it just about profit. It's about innovation, choice, freedom of expression and changing what seems to be broken. With social tension on a slow boil that sometimes spills over, the retail market's enthusiasm for cryptocurrencies and what they represent – supported by growing institutional investment and market infrastructure relevance – should be enough to make any government interested in maintaining its influence wary of measures that could ignite a problem that just might be harder to control.
And as we watch crypto communities flex their collective muscle, as we accept that markets have changed, as we root for the young workers of tomorrow in developing regions, as we applaud the U.S. President's nominations of individuals knowledgeable about crypto assets to positions of regulatory influence – we are also watching the risk of overly repressive regulation in large, developed economies recede into the distance.
Tesla's big bet
The week started with a bang, in the form of the announcement that Tesla has invested $1.5 billion in bitcoin. The fact that Tesla has invested isn't what's startling – it would have been surprising if it did not get involved. It's the size of the investment. This is very much a "go big or go home" statement, enough to make anyone sit up and take notice.
The size is also significant in that it reminds us the market is now capable of absorbing such large orders. We don't know how it was executed, whether via an OTC desk, using a prime broker or directly on exchanges. We also don't know when. But in late December, Musk was seen on Twitter asking Michael Saylor – yes, he of the very large corporate treasury purchases – if buys of $100 billion were even possible. And the SEC filing says that Tesla updated its policy in January 2021, and made the investment after that.
So, we can conclude that the buys most likely occurred over a few days in January.
You may recall that the beginning of January we saw a strong run-up in the BTC price, from $28,000 at Dec. 31 close to $40,000 on Jan. 9, an increase of over 40%.  The price increase coincided, not surprisingly, with a jump in trading volumes on leading fiat exchanges.  Was Tesla buying then? Is that what pushed the price up? As yet, we have no way of knowing. But we have seen that a market that now regularly trades billions of dollars a day has the capacity and the infrastructure to absorb seriously large orders.
Macro currents
Weaker than expected U.S. inflation caused a pull-back in Treasury yields and the dollar this week, while cryptocurrencies held onto gains.
U.S. core inflation last month was zero, versus market expectations of 0.2%. The January CPI report showed a continued decline in shelter inflation and pandemic-related service prices such as travel and leisure. However, unit labor costs are rising, which suggests higher inflation is on the way.
But will the Fed tighten monetary policy if inflation rises? Not quite. This week, Fed Chair Jerome Powell reiterated that the central bank will accommodate annual inflation above 2% for some time before raising rates.
The Fed's commitment to keeping rates low is a positive for risk assets. Even credit markets are enjoying cheap borrowing rates as yields on U.S. junk-rated debt reached an all-time low this week. But the reach for yield also comes with high volatility.
The chart below shows the CBOE volatility index (VIX) has been above 20 for 244 days, similar to the period before/during the dot-com bust and great financial crisis.  Source: Charles Schwab; h/t @LizAnnSonders
Bitcoin rallied this week and at time of writing is outperforming ETH month-to-date. The Tesla announcement kept buyers active, pushing BTC just shy of the $50,000 mark. In traditional markets, the S&P 500 and Nasdaq ended the week positive.  – Damanick Dantes
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Chain Links Investors talking:
"We see fundamental reasons to believe that — regardless of where the price of bitcoin goes next — cryptocurrencies are here to stay as a serious asset class. One is growing distrust in fiat currencies, thanks to massive money printing by central banks. Another is generational: younger people hear the "crypto" in cryptocurrency as new and improved, an exciting digital advance over metal coins." – Morgan Stanley Investment Management
"Every treasurer should be going to boards of directors and saying, 'Should we put a small portion of our cash in bitcoin?'" – Jim Cramer
Takeaways:
BNY Mellon, the world's largest custodian bank, revealed plans to launch a new digital custody unit later this year. TAKEAWAY: This is a very big deal. A couple of years ago, when we first started hearing about the "wall of institutional money" that was poised to flood the crypto markets, some of us natural skeptics thought "hmm, not until Goldman Sachs and BNY Mellon offer crypto services." We assumed that big traditional funds would prefer to wait for familiar names that they already work with, rather than trust startups in a new industry. If the reports about Goldman Sachs are correct, this year will see both of those boxes checked off, as well as many other blue-chip names that are either already involved or are poised to reveal projects they have been working on behind closed doors.
Deutsche Bank is also planning to launch crypto services such as custody, trading, lending, staking, valuation services and fund administration, according to a WEF report. TAKEAWAY: Deutsche Bank is the largest bank in Germany (Europe's largest economy) and the sixth largest in the EU, ranked by total assets. Its entry into crypto services is likely to make a difference to asset managers considering alternative investments, in that they will be able to do so with a familiar name and with Deutsche Bank's "blue-chip" reputation validating crypto as an investable asset class.
On Monday, the Chicago Mercantile Exchange (CME) launched ether futures. TAKEAWAY: The move is significant, as it gives traditional institutional investors – who probably already trade on the CME – access to a hedging and liquidity tool that could encourage more to take a look at the second largest cryptocurrency in terms of market cap. ETH futures volumes on the CME are still tiny ($40 million on Thursday compared with $6 billion on Binance, according to skew.com), but it's early days yet.  Source: skew.com
The Purpose Bitcoin ETF received approval from the Ontario Securities Commission to list on the Toronto Stock Exchange (TSX). TAKEAWAY: This will be the first bitcoin ETF in North America. No doubt its inflows will be monitored by the big securities regulator to the south. They could even accelerate approval of a bitcoin ETF by the U.S. Securities and Exchange Commission, as it is relatively easy for U.S. investors to trade on the TSX.
San Francisco-based crypto trading platform Apifiny is planning to go public by the end of the year. TAKEAWAY: So far, all of the planned and rumored public listings for this year that I know of are for companies building and running crypto market infrastructure. This gives investors of all types another way to invest in crypto markets, beyond a direct position in the assets – if asset prices do well, there will be more investor interest and more revenue for market infrastructure firms, which will help their share prices.
JPMorgan has added Signature Bank, one of the few financial institutions in the U.S. to service crypto companies, to its "focus list" of recommended stocks, saying the bank is "positioned to ride the crypto wave." TAKEAWAY: Just because planned listings seem to be in market infrastructure, there are other ways to bet on crypto market expansion – through the companies that support the companies that support the markets. Oh, and JPMorgan seems to think there's a "crypto wave" coming.
Crypto lender BlockFi launched its bitcoin trust for accredited investors, with 1.75% management fee (0.25% lower than market leader GBTC). The trust will not list on the OTC markets for another 6-12 months. TAKEAWAY: The competition to market leader Grayscale's funds (Grayscale is owned by DCG, also parent of CoinDesk) continues to grow, as BlockFi's trust now joins those run by Bitwise and Osprey. The emerging competition could be one of the reasons the premium retail investors have traditionally been willing to pay on popular trusts such as GBTC has been falling.
Canadian bitcoin mining firm Bitfarms (BITF) has entered into a CAD$40 million ($31 million) agreement to sell 11.5 million common shares, plus an option to buy another tranche for the same number of common shares, to institutional investors. TAKEAWAY: This is the firm's third financing sale in a month, and reflects the growing investor interest in listed crypto mining companies as a proxy play on the bitcoin price. Over the past three months, BITF's share price has increased by almost 700% – it's not surprising they're taking advantage of the opportunity to shore up the balance sheet while they can.  (Source: Google)
Mastercard is planning to give merchants the option to receive payments in cryptocurrency later this year. TAKEAWAY: This is another big step forward for the use of cryptocurrencies in payments. It's not clear which cryptocurrencies Mastercard is thinking of including in this service. Whether it includes bitcoin or not (it's more likely to focus on stablecoins), it will be a big boost for mainstream use of cryptocurrencies and could trigger a wave of innovation in related point-of-sale and working capital management services.
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