Bits and stuff: decisions, derivatives and decentralization – August 19, 2018

Yet again cryptoland enters ETF fever, although this time with a twist.

Barely a month after publicly dismissing the Winklevoss’ application for a bitcoin ETF, and just two weeks after postponing a pronouncement on the VanEck SolidX bitcoin ETF petition, next week the SEC is supposed to announce its decision two more proposed ETFs – ProShares Bitcoin ETF, and ProShares Short Bitcoin ETF.

These are different, in that the underlying asset in both is not bitcoin itself, but bitcoin futures. Specifically, the bitcoin futures that trade on CME and/or Cboe, two regulated markets.

A significant detail is that the futures in question are cash-settled. That is, no actual bitcoin changes hands, which removes the thorny problem of custody from the table.

That aside, will the transparency and oversight be enough to quell the SEC’s concerns of price manipulation?

Perhaps, but there’s another problem, quite a big one, that is likely to lead to a rejection: the relative lack of liquidity.

Although the bitcoin futures in question trade on regulated exchanges, the volume is still relatively low, about 7% of bitcoin volume. The concern is that, if the ETFs are well subscribed, they could dominate the futures markets.

Why is that bad? Concentration of volume in a handful of buyers and sellers is never good for a market’s reliability – erratic behaviour (for whatever reason) can produce volume spikes and price swings that could send ripples of uncertainty throughout the whole market, which is relatively volatile anyway.

Another factor against it is that it does not have measures to prevent retail investors from piling in. It’s unlikely that the SEC will be comfortable with that.

Obviously there are more issues taken into account than just these mentioned. And it will be illuminating to see what justification for a rejection the SEC chooses to stress.

(And who knows, maybe I’m wrong and it will get approved. But I don’t think so.)

One thing we can be sure of: the proposers of bitcoin ETFs are not going to give up easily. Nor should they. The barriers to approval will be worn down with time. And the first to market will enjoy not only massive publicity, but also a fair amount of demand.

As Winston Churchill allegedly said: “Success is going from failure to failure without losing your enthusiasm.”

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This article on ethereum-based collectibles by Brady Dale veers between the endearing and the ludicrous. You thought CryptoKitties were strange? Check these out. (I’m tempted by the dancing crystals.)


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The more I dig into bitcoin swaps, the more confused I get.

First of all, the ICE recently announced that it is developing an exchange that will allow regulated trading of bitcoin swaps. This was greeted with jubilation by the crypto media, because (finally!) institutions will have a regulated venue on which to get exposure to bitcoin.

Only, LedgerX has been doing this for ages. And they are regulated by the CFTC, as a registered swaps execution facility.

Why is the ICE idea so much “better”? I don’t know. Perhaps the liquidity will be higher? Perhaps because of name recognition?

And on the ICE proposal of 1-day swaps. If I understand it correctly, I commit to buying bitcoin tomorrow at a set price. How is this different from buying bitcoin with 1-day settlement? Delayed settlement is already a feature of most investment asset markets. This could be interpreted as a “reshaping” of bitcoin to suit institutional habits. While the inflow of liquidity would be good for the sector, it does seem to sort of defeat the point of bitcoin.

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I was on the Blockchain Insider podcast again last week! So much fun seeing Todd McDonald, Martin Bartlam and Anthony Macey again. Simon Taylor, as always, was a stimulating and original host.

BI ep 59

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Maybe it’s confirmation bias, but I’m seeing more thought going on about what decentralization means, and whether we really want it (or can achieve it in a socially acceptable form).

This tweet thread (with valuable external links) is definitely worth reading.

Meltem Demirors took Sarah’s analysis further:

And I’m looking forward to seeing the results of this, from Angela Walch:

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While not ostensibly about crypto or blockchain, this article by Zeynep Tufecki speaks to the dangers of not thinking about not thinking about longer term consequences of supposedly “liberating” technologies… (so maybe it is a bit about crypto).

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Bear market or not, the crypto sector has never been more interesting.

Bits and stuff: platforms, podcasts and predictions – August 5, 2018

I was in London this week for a bunch of reasons, one of which was the Global Digital Finance round table, in which representatives from the cryptoasset industry (entrepreneurs, executives, regulators) discussed how to bridge the gap between the “new finance” that blockchain-based assets promises, and the regulators who have to protect their constituents.

It was awe-inspiring to be in the room with such smart people, and there will be some interesting work emerging in the coming weeks. Watch this space.

You can find out more about our goals here – download our papers and offer constructive suggestions! Consultations are open until the 30th of August.

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The news that Intercontinental Exchange (ICE), the owner of the NYSE, was developing a crypto asset platform caused a big stir in the media, but little movement in the bitcoin price.

The platform will offer a federally regulated marketplace for cryptocurrencies, that also takes care of clearing and storage. This is a potentially big deal for institutions, given ICE’s reach and reputation.

It is also developing a second layer to facilitate settlement. The idea is that bitcoin trades between Bakkt clients would settle instantly with a simple change of ownership on the ledger – not actually on the blockchain.

Yet the bitcoin price fell after the announcement. Why, when the press gushed that this would provide an outlet for the “flood of institutional money” that was waiting for regulated infrastructure?

Could it be that the market is so pessimistic that even this can’t generate some excitement?

Could it be that claims of a “flood of money” are not credible?

Or could it be that this news is not as good for the community as the media would have us believe? Rather than decentralized finance, not controlled by anyone and with no counterparty risk, bitcoin is becoming increasingly absorbed by the incumbent system. While that may be necessary to satisfy institutions’ requirements, it may at the same time make bitcoin less attractive as an investment.

Leaving aside the centralization and counterparty risk this implies, if bitcoin is to be “digitized” like share certificates, and ownership changes hands on a ledger rather than in “real life”, then what’s to stop it from becoming the base for lending, collateralisation and fractional reserve banking?

While this may inject liquidity, it will also increase fragility and risk, while lowering volatility and returns. In such a scenario, why would institutions want to invest?

Then there’s the involvement of Starbucks, that allegedly will encourage development of bitcoin-based consumer payment mechanisms.

This sounds like a totally different target and mechanism – not to mention the fact that there has not been a demonstrable demand for this service, at least not in most jurisdictions where Starbucks operates.

The press release says that “Starbucks will play a pivotal role in developing practical, trusted and regulated applications for consumers to convert their digital assets into US dollars for use at Starbucks.” I cannot fathom why clients would want to do that.

On the positive side, this could trigger a new wave of innovation – “standard” financial services could add breadth to bitcoin demand, and encourage development of a new type of ecosystem. Ever the optimist – but I can’t help but feel disquieted by this announcement.

(The New York Times reported back in May that Softbank was originally going to be involved in the deal, but they have since backed out – anyone know why?).

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My colleague Adam Hart wrote an eye-opening report on how the main cryptocurrency data sites have been misreporting bitcoin volumes and origin. A deep dive into the numbers revealed that bitcoin trading in Japan had been grossly overstated, since Bitflyer and others were bundling cash delivery derivative trades into the bitcoin trading figures, while other exchanges were not.

Adam and his team pointed out their findings to CryptoCompare, who almost immediately changed their calibration.

The figures now show the US dollar easily in the lead as the highest volume pair when it comes to bitcoin trading.

Intriguingly, Adam’s report then goes on to ponder the possible effect this simple data change could have on the US regulatory approach to cryptocurrencies.

“The dollar’s role in this exchange ecosystem extends the reach of the U.S. government. Just as the dollar’s preeminence in the international financial system gave U.S. regulators the leverage they needed to shape global anti-money laundering (AML) practices in the wake of 9/11, the dollar’s importance in global fiat-to-cryptocurrency trade could give them outsized influence as governments around the world mull new regulatory frameworks for cryptocurrencies.”

Good reporting, interesting insight.

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Caitlin Long published a compelling article on why cryptoassets cannot be “financialized” (ie. spun into new financial assets) – they’re bearer assets, not debt-based (which means they are usually held and controlled by the owners, vs. shares which are centrally deposited and the owners hold a digital IOU). This means that the financial system cannot use them to spin off other financial assets, because the financial system does not hold these assets – bitcoin investors do.

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Goldman Sachs published a report that went negative on cryptocurrencies, predicting that they would not appreciate much in 2018.

The overall conclusion from the report (not just the part about cryptoassets) is that market sentiment rules, and market sentiment now is particularly fickle. Since we are in the unusual paradigm of having strong fundamentals that are equally positive (economic growth, controlled inflation) and negative (domestic politics, geopolitical tensions), the market moves according to whatever investors choose to focus on.

This is not new, and is generally how markets work. What is new is the unpredictability of the flip-flopping – market volatility is way up.

Back to the (brief) cryptocurrency comment, the negative outlook is based on the failure of bitcoin and peers to act as a good currency, since they are neither a medium of exchange, a unit of account nor a store of value. Some of that is debatable, but even if it were true, it overlooks that cryptoassets can (and most do) have value outside of the potential role as a currency. It also overlooks the underlying shift in what a currency is. Traditional definitions evolve, as do expectations.

What perhaps stung the most was this dismissal: “We believe that they garner far more traditional media and social media attention than is warranted.”

That reminds me of the story of the man on the hill who didn’t believe reports that the water was rising because he was still dry.

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Bloomberg ran an intriguing hint at a shift in the hype cycle, pointing out the slowdown in corporate blockchain spending, and referring to unkept launch promises:

Notice that most of the big announcements these days are about infrastructure, not use cases.

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There was an ear-shattering amount of great cryptoasset podcasts this week:

Blockchain Insider, with me! And Vinay Gupta and ING’s Stéphane Malrait – we discuss the SEC’s rejection of the Winklevoss ETF, BBVA’s blockchain trial, assassination markets, insider dealing and a whole lot more.

An Intelligence Squared podcast (always worth listening to) called Blockchain: Quantum leap forward or digital snake oil? – with Primavera di Filippi, David Gerard and others – some head-nodding parts and some eye-rolling parts.

The Bitcoin Knowledge Podcast, with Caitlin Long – with fascinating insight into good vs. bad financialization, the ICE platform and the culture clash between crypto and institutions.

Cryptonetworks and Cities: Analogies, by the a16z crypto team – intriguing thoughts about ecosystems and organic development.

Cryptonetworks and Decentralization: Building Blocks, also by the a16z crypto team.

Laura Shin’s Unchained, one of the best episodes so far, with Jill Carlson and Meltem Demirors.

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I’ve just finished reading “The Watchmaker of Filligree Street” (charming), in which the protagonist has synethesia, which means that he “sees” sounds through colour. Running down a staircase was a yellow. A human voice is gold. Silence has a “silver hem”.

So I was transfixed by these paintings by Melissa McCracken that represent music genres and that hum with movement, life and what feels like a message.

This is jazz:


This is pop:



(by Melissa McCracken, via Colossal)