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1 9 O C T 2 0 2 0 V O L U M E 4
TOPICS
Perspectives
CORPORATE TREASURY
OPTIONS MARKETS
INSTITUTIONAL INVESTORS
CBDCs
POLITICS OF THE INTERNET
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TIMES THEY ARE A CHANGIN’
Let’s kick things right off – no fillers or foreplay. The FCAban
on securities linked to crypto came as no surprise tous. We shared
our thoughts following the news, but inshort summary the decision
looks incongruous andCoinShares moves onwards and upwards in
manyjurisdictions that are embracing Bitcoin, Ethereum andother
protocols.
On that note we see some eye-catching and surprisingpositives
coming from US corporates. This site lists theamount of bitcoin
that is held by firms which are insome form publicly tradeable. In
some cases theseentities are dedicated bitcoin holders, such as our
XBTProvider line, which are growing but are not news to themarket.
The big news this cycle is the new entrants tothis list, corporate
treasuries. First to the headlines wasMicroStrategy, a $1.6bn
company that has placed $250mworth of bitcoin in its Treasury over
the summer.MicroStrategy CEO Michael Saylor has been anoutspoken
advocate for bitcoin on corporate balancesheets, and has
entertained us all with his Twitter
commentary. If we called it bullish, that would be anunder
statement. Close behind with a smaller size of$50M was Jack
Dorsey's Square, a rising FinTech starwith an $84bn market cap. I
would guess they will beback to the well for more.
As many of you will appreciate, corporate treasurers
havehistorically been able to book a nice 3-5% return in
verylow-risk assets, trading overnight rates and
treasuries.Corporate treasurers today are living in a
radicallydifferent world, with rates at 0 for the foreseeable
futureand trending negative, and target inflation at 2% orhigher.
Faced with this new reality, corporate treasurers(and all
investors) are looking at alternatives. Bitcoin isa highly liquid
asset that trades 24/7 in an increasinglyregulated and structured
global market - and its aneffective portfolio diversifier. our
extensive research onthe role of bitcoin in a portfolio highlights
how atraditional 60/40 portfolio can benefit from a
modestallocation to bitcoin.
From the Chairman’s Desk
As Chairman of CoinShares, Danny Masters draws upon his decades
of experience in commodities andfinance. Danny launched GABI, the
world’s first regulated Bitcoin fund in 2014, through Global
Advisors,
a commodities focused investment firm which he co-founded in
1999. Danny was Global Head of Energyand Trading at JP Morgan and
has traded "more oil contracts than any single person."
https://coinshares.com/news/coinshares-responds-to-incoming-fca-ban-for-crypto-derivatives-and-etnshttps://bitcointreasuries.org/https://coinshares.com/research/a-little-bitcoin-goes-a-long-way
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We think these actions are but the beginning of a Treasury
diversification strategy which will appeal totechnology and
payments companies around the globe. Our CoinShares capital markets
team is well-equippedto provide execution, lending, and custody
services to corporates and institutions.
As a veteran commodities trader my other observation of the week
was concerning the news-to-market pricerelation. In my 30 years in
trading my top golden rule was to act when the news was not matched
by pricemovement. This week we saw, arguably, two negatives in the
FCA decision as well as the indictment and arrest ofthe BitMex
founders. Having been around crypto during MtGox, the China ban,
Bitfinex Hack, Trump commentsand many of the other market-smashing
stories that punctuate bitcoin's history I was struck by the lack
ofnegative price movement, particularly around BitMex. It tells me
holders are not nervous and leverage is low - atheory supported by
wallet activity and traffic - and skews my short term price
expectations from neutral topositive.
Source: bitcointreasuries.org, visual created by Coin98
Analytics.
Bitcoin Treasuries are Growing
ETHER DERIVATIVES?
Last week, we saw the news that the CME was contemplating
launching Ethereum derivatives. The CME’s cash-settledbitcoin
derivatives have grown in popularity, and saw record notional
volumes over the last quarter. Recent demand inDefi has benefitted
ETH and contributed to sustained momentum and increasing flows.
Today, relatively low volume isobserved on leading platforms, such
as Deribit.
On the other hand ETH futures markets have been successful in
regards to the wide range of maturity offered andhave received wide
interest from investors/traders judging by the constantly rising
trading volumes. However,catalysts such as ETH 2.0 and Defi should
continue to support this demand on the longer term. Given the
high
From the Trading Desk
https://coinshares.com/products-services/capital-marketshttps://www.coindesk.com/cme-sounding-out-crypto-traders-to-gauge-market-demand-for-ether-futures-options
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BTC Options Volumes
correlation between ETH and BTC, adding a newunderlying will
create new arbitrage opportunities,thus contributing to better
efficiency and pricediscovery in the market.
Volatility is reaching an all time low as crypto marketsare
getting more mature and integrated with legacycapital markets.
A few factors might explain this trend:• The lack of momentum in
price, which historically
generates volatility and additional demand forleverage in bull
trends and liquidations cascade inbear markets.
• The higher numbers of participants resulting in awider and
more stable offer.
• One last reason is that volatility and a seeminglyunstoppable
bull market came back in equitiesmarkets, making Bitcoin look
boring in comparison.
But fundamentals are still looking good, with thebitcoin
hashrate continuing to increase, indicating
continued investment in network infrastructure, andnew large
corporate holders coming every single week.As Danny mentions on
page 1, MicroStrategy recentlyannounced that they had converted
their excess cashinto Bitcoin.
Our desk has been interacting with treasuries since2017. The
idea behind this seemingly aggressive capitalallocation is to
maximize the long term value byinvesting in an asset that looks in
many ways bettersuited to resist the risks of inflation. This is
animportant decision as the finance directors arestruggling to
generate even a slight return on theircash.
In an environment where worldwide central banks andgovernments
are printing money and buying anyassets, pushing interests rates
lower and asset priceshigher. This compression of this perceived
riskpremium, in a world where uncertainty is growing,makes
investing in Bitcoin appear less risky.
ETH Options Volumes
THE INSTITUTIONS ARE COMING… OR ARE THEY?
We’ve long heard the rallying cry that “the institutionsare
coming” for bitcoin. The market is evidently movingmore
institutional, with managers looking for newportfolio diversifiers
and hedges against potentialinflation. The average level of
knowledge about bitcoin
remains low and that will take time to address. From
myperspective, I don't think we'll see anything like a 2017level of
flurry into the market from institutions andadvisors, but more a
steady increase building in speedup to a point over the next 18
months.
Who’s Buying Bitcoin?Frank Spiteri, Chief Revenue Officer
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So the question is, who is buying bitcoin? If we're talkingabout
funds and products (not the underlying markets),then I would say
that outside of private investors, it isvery difficult to
generalize investor segments that aremore active in crypto. We
don't actually have a lot of harddata to go on. In our engagements
at CoinShares, we seeinterest and participation from every investor
segment,apart from pensions and sovereign wealth funds.
Family offices and private banks would probably be themost
obvious segments to highlight after private clients,but, even in
those segments, it depends on the individualcompany mandates and
their investment styles. There issignificant interest from
traditional multi-asset fundmanagers, but most of the larger ones
don't want to befirst-movers and would prefer the safety of the
herd. Ican't count the number of times that portfolio managershave
said to us that it would be so much easier to investif they knew
that similar peers of theirs were alsoinvested.
In terms of the impact of CoVid and the resultingfinancial
climate, I'm not sure that CoVid itself hasimpacted or changed the
type of investors that areconsidering bitcoin. It continues to be
those investorswho are mostly concerned about the implications
of
further fiscal stimulus, a weaker dollar, and a lack ofliquid
alternatives that provide portfolio diversification.One thing is
certain, closed-minded or more traditionalinvestors continue to be
resolutely opposed to the digitalasset class. I think it will take
18 months plus a few braveinvestors to be first over the wall
before we see asignificant shift in investor sentiment.
The drivers for bitcoin and crypto assets that seem toresonate
most with prospective investors are thegrowing adoption of the
asset class i.e. morefinancialization, concerns over increasing
debt levels, aweaker dollar, and uncertainty over equity
valuations. Anargument in the short-term against investment is
thatBTC has been more correlated recently with tech stocks /the
Nasdaq. So, if we see a broad equity sell-off overeconomic
uncertainty, how will bitcoin perform?
Even though BTC is up considerably this year - even moreso than
gold, serious investors tend to weigh first andforemost what
drawdown risks they face and the Marchdip did not help the
investment case there. Manyinvestors are contemplating whether
bitcoin will emergeas a safe haven, or at least provide some hedge
ordiversification if we see similar volatility, and this storyhas
not yet unfolded.
The recent news regarding large corporations investing in BTC is
helpful for sentiment and PR, but it is not somethingthat most
traditional investors will assign much value to. Most will only
begin to take notice once they see an ETFapproved in the US or if
there is evidence that more traditional funds are buying exposure
to BTC via ETPs and funds.Our aim at CoinShares is to help
accelerate the latter, and to motivate the more open-minded in the
traditionalinvestor community. Should either or both of these
catalysts happen next year or at some point in the near future,
westand to be best positioned to capture that investment.
Source: Bloomberg, CoinShares. 2012-2019 YoY performance from
and to 31st December. 2020 figures are YTD, as of 10th July
2020.
Bitcoin’s Meteoric yet Volatile Growth
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As everything becomes digitized, politics are also shifting from
the world of the physical to the world of the digital.The actions
of US politicians the last six months have spelled out the new
battle front for a digital war between therest of the world and the
US. These actions lay outline a more explicit approach to expanding
the great Americanfirewall on all compute and connectivity
infrastructure and flows.
We take our connectivity for granted, but behind the simple and
benign act of connecting to the internet lies anintricate maze of
physical hardware, wires, and complex routing logic. In this new
race for control of the digitaldomain, there are few US or European
companies who can compete in the compute and connectivity
infrastructurerace. As it stands, there are only a handful of
companies in the world who have the sophistication, systems,
andmanufacturing capabilities to produce mass-scale
infrastructure.
European companies have fallen behind due to onerous regulatory
pressure and are not capable of pursuing largeinfrastructure
projects, so they cannot afford to make innovative equipment, lay
fiber optic cables, and install thismuch-needed compute and
connectivity infrastructure.
America has a handful of companies ($ market cap at COB
10/14/2020)
• Qualcomm ($147B) in the wireless communications space
• Cisco ($170B) builds hardware and software for routing and
switching
• Juniper Networks ($8B) provides more than 65% of the world’s
router infrastructure for the Internet
• Data centers REITs like Equinix ($72B) are US based and serve
a global client base
However, none of these companies have the balance sheet strength
or capital base to compete, despite their bestefforts. If America
& Europe do not compete for the digital future, China will very
likely be our new digital overlord.And Huawei is competing with two
assets neither America nor Europe has — an unlimited amount of
capital andpolitical will.
THE POLITICS OF THE INTERNETFrom a longer post published on 16
October 2020
Over the last six months, we’ve witnessed a drasticacceleration
in the shift to all things digital. Ourinformation, content, and
communication is alreadymostly digital, delivered via wires and
device, flowing as0’s and 1’s over fiber, radio waves, and sat
link. Financehas resisted this trend for a long time, but now
thedigitization of trading, banking, payments, and lendingrushes
full speed ahead, and governments around theworld are contemplating
how to digitize the moneyprinter itself, in the form of central
bank issued digitalcurrencies (CBDCs). And all of digitization sits
right ontop of one highly centralized and highly fragile system
—the internet.
Over the last sixty years of the internet, the technologythat
was supposed to decentralize critical informationand communication
infrastructure has become the verything it was supposed to
circumvent — a highlycentralized, deeply vulnerable global
oligopoly.
Over the last six months, power has been consolidatedinto fewer
and fewer hands as more and more of ouractivities shift online. As
of August 18th, FAAMG stocksmake up more than ¼ of the S&P 500
by market cap.
But their supremacy goes far beyond markets.• AWS controls over
40% of the public cloud market,
with the remainder owned by Google and Microsoft.
From the Venture TeamMeltem Demirors, Chief Strategy Officer
• Google owns over 75% ofthe search market.
• In 2009, the top 10companies in the worldhad a market cap
of$2.3T combined. In August2020, one company, Apple,commanded a
balancesheet the size of a smallnation state’s economy, atover
$2T.
https://medium.com/coinshares/the-financialization-of-compute-connectivity-66beaffe7501
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DISCLAIMERS
The information presented in this presentation has been
developed internallyand / or obtained from sources believed to be
reliable; however, CoinSharesdoes not guarantee the accuracy,
adequacy or completeness of suchinformation. Predictions, opinions
and other information contained in thisdocument are subject to
change continually and without notice of any kindand may no longer
be true after the date indicated. Any forward-lookingstatements
speak only as of the date they are made, and CoinShares assumesno
duty to, and does not undertake, to update forward- looking
statements.Forward-looking statements are subject to numerous
assumptions, risks anduncertainties, which change over time.
CoinShares, its affiliates, directors, and/or employees may own
interests in thecompanies mentioned in this document. Any mention
of a company, product,or service is not intended to be a
recommendation or endorsement by theCoinShares Group.
Nothing within this document constitutes (or should be construed
as being)investment, legal, tax, or other advice. This document
should not be used asthe basis for any investment decision(s) which
a reader thereof may beconsidering. Any potential investor in
digital assets, even if experienced andaffluent, is strongly
recommended to seek independent financial advice uponthe merits of
the same in the context of their own unique circumstances.
Pastperformance is not a reliable indicator of future
performance.
The CoinShares Astronaut is a trademark and service mark of
CoinShares(Holdings) Limited.
Copyright© 2020 CoinShares Group. All rights reserved.
Putting the pieces together, it’s clear that we now havea battle
on two fronts:
• An economic war — US dollar hegemony v everyoneelse (see prior
writing on this topic here)
• A technological war — US led alliance v everyoneelse
That’s precisely why we need to build as muchdistributed, open
infrastructure as we can.
Because so much of the internet has beencommoditized by decades
of centralization andmargin compression, it feels like innovation
at thesecore layers is impossible. However, we believe that
theintroduction of programmable internet money, in theform of
digital currencies, facilitates an entirely newmodel for
infrastructure innovation. For example, theintroduction of asset
backed debt in bitcoin is a game-changer, as evidenced by the rapid
financializationand build out of US onshore mining facilities.
With the introduction of a token as an incentive andmonetization
layer, new models for constructing
networks become possible. In addition, new distributedgovernance
structures like DAOs (decentralizedautonomous organizations) make
it possible for groupsof pseudonymous people on the internet to
coordinatedecision-making in various ways.
With these new crypto-incentivized models beingintroduced, the
objective is to keep all components ofinternet infrastructure
distributed or decentralized, sothe only way to shut down or
otherwise disrupt thesenetworks will be to shut down every node in
the network.And if these networks become diffuse enough, this
willbe practically impossible to do. This is precisely whatmade
BitTorrent, the file sharing protocol, such anuisance for IP law.
Because the network is comprised ofglobal set of nodes operated on
a wide variety of non-proprietary hardware ranging from personal
laptops tosophisticated data centers, it becomes much moreresilient
to interference from government, lawenforcement, or other
disturbances.
ABOUT COINSHARES
At CoinShares, our mission is to expand accessto the digital
asset ecosystem while serving astrusted partners for our clients.
CoinShares is apioneer in digital asset investing and
manageshundreds of millions in assets on behalf of aglobal investor
base, with offices in Jersey,Stockholm, London, and New York.
MEDIA CONTACT
Jay [email protected]
