Crypto Long & Short: 'Digital' Vs. 'Gold'
  Weekly insights, news and analysis for the professional investor By Galen Moore, Director of Data & Indexes June 6, 2021 Sponsored by  Prices as of 06/06/21 @ 8 a.m. UTC If you were forwarded this newsletter and would like to receive it, sign up here.
Friends:
It's with some sadness that I take over this newsletter from Noelle Acheson, who left CoinDesk last week to run a new research shop at Genesis. Noelle and I worked closely together to rebuild research at CoinDesk. I'm not going to be able to do exactly what she has done with Crypto Long & Short since she started this newsletter in 2018.
However, I can promise that this newsletter will continue to provide data and perspective for sophisticated investors. Whether you're steeped in crypto or not, I promise to keep Crypto Long & Short relevant to questions of risk and return. This week's Briefing focuses on Bitcoin's Taproot upgrade and its potential risks and benefits to BTC's narrative as both "digital gold" and a technology investment.
I can also promise to provide weekly insights from the entire CoinDesk Research team. I wouldn't be able to do this without help from my colleagues Christine Kim, George Kaloudis and Shuai Hao. (Know someone who should be on that team? Hit reply and send me their name.)
What I can't promise: Puppy photos. Some day, maybe. For now, instead, let's try music. I picked this one up on Friday for a friend who's turning 50: "The New Breed," a 2016 album from the jazz fusion guitarist Jeff Parker. It's moody, rhythmic and just a little disharmonious, a perfect soundtrack for working on the weekend. Check out the album on Spotify and support the artist here — and, please, reply to this email with your brain-work listens.
- Galen
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THE BRIEFING Taproot Will Test Bitcoin's Overlapping Narratives Bitcoin's strongest narrative is "digital gold." Investors buy it not out of an expectation that it will behave like gold behaves in the market today, but that it will some day take on the historic importance that gold has held across cultures and ages.
My colleague George Kaloudis recently reminded me that there's one important aspect in which bitcoin will never be like gold: In a vault or in the ground, gold will always be gold; bitcoin, however, is a technology, and a technology will be updated. This quality is now on display with the Bitcoin network's progress toward an update called Taproot. (Keep an eye out for George's forthcoming in-depth report on Taproot at coindesk.com/research.)
Taproot is a bundle of several improvement proposals. Notable among them, it would add data efficiencies that could ease supply-side pressure in Bitcoin's transaction-fee market. It also includes updates to multi-signature transactions, a Bitcoin feature that is significant for custodians and other organizations that take direct custody of bitcoin. In this column, I'll focus on the latter.
Multi-signature addresses are a governance tool for organizations that directly custody bitcoin. Taproot includes updates designed to make multi-sigs easier to use, and to improve their privacy: a multi-signature Taproot transaction cannot be distinguished from other Taproot transactions. This could be significant for organizations that require multi-signature transactions, but do not wish to advertise to the network that they are using them.
Bitcoin's pseudonymity has made it a target for criticism that the network can be used for criminal purposes. Pseudonymity also provides security for legitimate operators. On the internet, nobody knows you're a dog; on Bitcoin, nobody knows you're a financial institution. For organizations using the Bitcoin network, privacy reduces the likelihood of cyberattack.  This chart, adapted for readability from txstats.com, shows just how visible current multi-sig users are to the network. It also raises a question: With multi-sig growth at anemic levels (at least in bitcoin terms), is there really demand to justify adding these features? (We discussed that question on CoinDesk TV's All About Bitcoin show, last week.)
Multi-sig's shortcomings may be a barrier to adoption, which Taproot could address, opening the door to increased use. That could improve custodian services and make direct-custody forms of investment more attractive. Or, this could be a vaunted new feature that nobody will use. (Remember Microsoft Sets?)
Most technology investors understand the technology risk inherent in an update. (See Samsung Galaxy Note 7.) There's also the adoption risk of developing a feature that nobody uses. Unlike Ethereum, Bitcoin developers prefer backwards-compatible updates. After Taproot is implemented, users will still be able to use pre-Taproot transactions. This would be self-defeating for Taproot's multi-sig privacy features: pseudonymity only works in a crowd.
Improving multi-sigs also could make it easier to develop applications on top of Bitcoin, an especially relevant issue in 2021 as decentralized finance, non-fungible tokens and stablecoins have driven the cryptocurrency bull market. At this writing, ether's year-to-date returns are roughly 10X those of bitcoin.
At this point, it seems likely that Taproot will be enacted by the Bitcoin network, as more and more miners signal approval. Whether users take advantage of its features will be a telling test of bitcoin's adaptability and, by extension, its viability as an updatable technology investment.
On the other hand, a perceived inability to update or adapt may strengthen Bitcoin's resemblance to gold — which, after all, does neither.
Among events in Bitcoin's history, the Taproot update is receiving far less attention than, say, the Bitcoin halving, which occurred around this time last year. In the long run, it may prove more significant.
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CHAIN LINKS JPMorgan Chase & Co. has crypto ambitions beyond the interbank focus of its Onyx blockchain project, if a slate of recent job postings are any guide. Open reqs at JPM include: a VP for a "new payment methods" team that would explore crypto tie-ins; a regulatory affairs associate focused on digital assets in Asia-Pacific; a "senior digital assets platform lead," though the bank removed references to digital assets in the post, following a CoinDesk reporter's inquiry. TAKEAWAY: No surprises here. The new payment methods team is the most interesting component of JPM's hiring plans.
Guggenheim Investments has registered another fund that may seek exposure to cryptocurrencies, notably bitcoin, using futures markets and indirect investment. An SEC filing spells out strategies for the Guggenheim Active Allocation Fund, including relative value and tactical asset allocation. In November, Guggenheim Investments filed to allow its Macro Opportunities Fund to invest in bitcoin indirectly. TAKEAWAY: Elon Musk's tweets do not seem to be deterring asset managers at Guggenheim, or their clients.
Nasdaq-listed cryptocurrency mining equipment maker Canaan Inc. released unaudited financials last week, noting a narrow profit in Q1 of $200,000 on net revenue of $61.5 million. Beijing-based Canaan reported selling more than double the machines sold in Q4, under COVID-related supply chain constraints. The company said it expects to book net revenue between $150 million and $250 million in the second quarter. TAKEAWAY: Notably, most of Canaan's orders are now coming from outside China, including North American miners, who are more likely to address ESG concerns.
Jeff Curie, Goldman Sachs' head of commodities research, likens bitcoin more to copper than to gold, at least as far as its role in investment portfolios is concerned. Speaking on CNBC's Squawk Box Europe, he classed bitcoin a "risk-on inflation hedge," like copper, rather than a risk-off hedge, like gold. TAKEAWAY: This analogy is instructive for portfolio construction, but doesn't get at the long-term narrative. "Copper 2.0" just doesn't have the same relevance for the world's first digital bearer asset.
Cryptocurrency exchanges are investing in staking on Ethereum 2.0. Kraken is the largest exchange staking on ETH 2.0, with roughly 14% of ETH deposits. Binance follows with 10%. Notably, Coinbase recently acquired staking startup Bison Trails. TAKEAWAY: Cryptocurrency exchanges are already operating novel combinations of financial services, combining trading venues with custodial services. Adding yield to the mix underscores the innovation.
Former CFTC chairman Timothy Massad penned an op-ed pointing to systemic risk posed within cryptocurrencies by the stablecoin tether. In crypto markets, tether is analogous to a money market fund, Massad wrote, and investors should be concerned that its value could fall below $1, with effects similar to how the Reserve Primary Fund "broke the buck" in 2008. TAKEAWAY: The market has shrugged off questions about whether tether is 1:1 backed, and that's about all you can say to reassure yourself about an instrument that has become a critical source of market liquidity. Notable: stablecoin USDC is audited, but has been a distant runner-up to tether in both supply and volume, but as this chart from my colleague Shuai Hao shows, it's catching up. 
Sotheby's has opened a digital replica of its London galleries on the virtual "metaverse" platform Decentraland and an NFT platform, Candy Digital, has launched with a deal to provide non-fungible tokens for Major League Baseball. TAKEAWAY: Major brands' investment in NFTs at this stage should be seen as a marketing expense, which pays off in good PR and an innovation halo. The test of NFT longevity will be how the value of these virtual goods, themselves, holds up over time for investors.
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Podcast episodes worth listening to: 
A message from Coindesk  How is hashrate calculated? What does thermocap represent? What do hashrate ribbons say about bitcoin price cycles? This research note looks at Bitcoin miner metrics and how investors can use them to glean insight into the asset's price and network fundamentals. Download the free report here.
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May was one of the most volatile months in crypto market history. Bitcoin lost nearly half of its value and most of the top crypto assets closed the month down double digits.
The only crypto asset among the top 10 coins by market capitalization to end the month in the green, closing at +21%, was the ADA coin of smart contract blockchain network Cardano.
Going hand-in-hand with extreme price volatilities for crypto assets, May clocked the highest spot market volumes ever recorded at over $800 billion. In the previous month of April, monthly spot market volumes were just below $600 billion.
The surge in trading activity for crypto assets in May was a double-edged sword for cryptocurrency exchanges who profited from record trade counts of over 1 million per day but also suffered severe infrastructure issues such as delays, lagging interfaces and downtime as a result.
For the full overview of the crypto markets in the month of May, check out the newly released Monthly Market Report by digital asset data provider Kaiko on the CoinDesk Research Hub. -Christine Kim 
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