Partner, Business Development & Head of Trading
What happened this week in the crypto markets? The Arca Funds Portfolio team discusses reduced volatility in Bitcoin, Ethereum’s fate, and a few positive developments in Blockchain usage across financial services.
Every new technology has its ups and downs. However, most of them don’t give you minute-by-minute updates on how the experiment is progressing. Imagine if Thomas Edison was giving you real-time progress updates while inventing the light bulb.
As an inventor, Edison made 1,000 unsuccessful attempts at inventing the light bulb. When a reporter asked, “How did it feel to fail 1,000 times?” Edison replied, “I didn’t fail 1,000 times. The light bulb was an invention with 1,000 steps.”
The cryptocurrency market comes with 24/7 trading and pricing, and a whole slew of media outlets trying to predict its future. Sometimes, it’s best to just have a long-term view and avoid everything else in between.
It was actually a relatively calm week, with Bitcoin rising 3% while most other large-cap coins and tokens traded in a fairly tight range (+/- no more than 10%). In fact, much of the daily volume throughout the entire space has been sucked out, with Coinbase trading volume down 83% from its January highs. Some of this can be attributed to August, but it’s also a sign of where we are in the technology cycle. Many crypto projects have just gone dark, with numerous ICO’s now down over 90% from all time highs. Bitcoin volatility has been muted recently, holding prices relatively steady to its history. There seems to be a stand still between the bears and bulls, as both parties are fighting hard to hold key levels of resistance/support.
One central piece of news has a few holding their breath — the VanEck Bitcoin ETF proposal. Many in the space view a rejection of this proposal as a catalyst to new lows, while an approval would be the eutectic point that turns the market around. Meanwhile, on Wednesday, it was announced that the SEC rejected a total of 9 ETFs (ProShares, GraniteShares, Direxion), citing a concern of fraud and manipulation in the cryptocurrency markets in general. However, the next day, the SEC stated that they will review the disapproval orders on all of the ETFs, on the grounds that the decision was made by SEC staffers, not senior officials. Encouragingly, the market barely budged on the news, showing a sign of maturity or fatigue. While the Arca teams continues to be outspokenly against a Bitcoin ETF, it nevertheless will be a topic of conversation for the foreseeable future.
The price of Bitcoin remains at $6700. While some market participants are exhausted waiting for the bull market to return, we feel it is important to recognize that the bull market has, in fact, never left. What we are experiencing is an exponential uptrend, one that traditional finance has yet to see on such an accelerated timeline. When looking at the charts over the last year, it is easy to look at an 8-month snapshot, and focus on the downtrend signaling a significant bear market. However, zoom out, and the thought process shifts towards that of a continuous overall uptrend stemming from as recently as 2016.
Bitcoin Price chart — YTD
Bitcoin Price chart — Since Inception
In this era of unprecedented growth, it is easy to label Bitcoin a ‘bubble’: mass speculation with little adoption. But we stress caution when comparing the digital asset class to that of a traditional financial asset class. In fact, we continue to believe it isn’t an asset class at all, but rather a technological architecture that will support and underpin all asset classes in the future (see the World Bank Bond-i bond news).
As Bakkt gears up to launch their federally regulated market for Bitcoin in November, it is important to discuss the difference between their Futures market and that which is currently available (CBOE). Bakkt plans to launch physically backed Futures, whereas the CBOE currently does not offer a physically backed market, instead settling on spot price in US notional currency. What Bakkt offers allows institutional investors to physically purchase Bitcoin-backed Futures.
The ramifications of this on the market are unknown, but seem positive. One potential shortfall could be found in mining Bitcoin. Since Bakkt must back their contracts with physical Bitcoin, a sizable quantity will be removed from circulation. Since these assets will no longer exchange hands, miners will not be able to process transactions on the blockchain and therefore will receive less rewards (denominated in BTC). However, this may bode well for the price of Bitcoin itself, as miners would not mine Bitcoin if it were not a profitable endeavor. Therefore, the price of Bitcoin should equilibrate towards a region of profitability.
In other news, Ethereum had an important developer call on Friday regarding its system wide upgrade in October 2018. Three major points of contention for this call were:
Each one of these points has an immense impact on the future of the Ethereum blockchain — as such, developers, large stakeholders, and miners were all in attendance, with many incompatible viewpoints from each respective party. After two hours of deliberating, it was decided that all members should reconvene on August 31st — we will be listening closely for the outcome of this important meeting.
The negative price action of Ethereum and all ERC-20 tokens YTD suggests not just a downturn in crypto sentiment, but perhaps a fundamental move away from this protocol in favor of other platforms. But is ETH really dead? Getting this call right will be one of the key drivers of creating alpha in 2019 and beyond, as ETH is still the 2nd largest cryptocurrency by market cap. For now, when it comes to “app stores”, Ethereum is still the leader in the clubhouse, and one of the reasons that Ethereum has been viewed as such a promising cryptocurrency and blockchain protocol to date is that no other blockchain has attracted such a large army of developers. That could be changing, but it takes a lot of time, money and focus. Ethereum has been able to attract so many developers largely because Joe Lubin and ConsenSys have educated developers, given them a home, put them to work on practical use cases, and evangelized the decentralized world like crazy.
For a look at some of the “success” stories built on Ethereum, check out 40 Ethereum Apps You Can Use Right Now. Popular apps such as Metamask (1 Million+), Augur (43 daily users) and IDEX (1,565 daily users) all post extremely low user bases compared to traditional applications. Arca CIO, Steven McClurg, worked at Electronic Arts Mobile when the iPhone launched in 2007. According to McClurg, “Apps are a commodity. They are only successful when they are properly marketed to the right user base”. Despite billions of dollars spent on Ethereum Apps, there have been fewer active users in total than in the first 3 days of Apples iOS launch in July 2008 (10mm downloads).
Likely all three.
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And That’s Our Two Satoshis!
Thanks for reading everyone! Questions or comments, just let us know.
- The Arca Portfolio Management Team
Steven McClurg — Chief Investment Officer
Jeff Dorman — Portfolio Manager / Head Trader
Sasha Fleyshman — Trader
Katie Talati — Head of Research
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