At the cusp of a paradigm shift.

Friday August 28, 2020

Healthy correction prevailed over the breakout that looked to materialize last week. CME open interest has dropped by ⅓ to sub $400M and while they expire today, the impact of this has thus far done little to move markets. Judging by Federal Reserve Chairman Jerome Powell’s speech overnight, the musical chairs will continue as equity markets pony back up seeking fresh ATHs. With no new catalysts to speak of, it may well be that market participants are flipping back to equities in search of the next TSLA US. Mr Portnoy has certainly retreated to his comfort zone having called it quits on crypto (following a $25K loss from his heralded debut) in favor of milking the forever giving Fed. The community didn’t even flinch when he offered “help” — gotta love crypto twitter! When the man left in charge of monetary policy is more concerned about racial inequality and jobs than we can brace for tougher times ahead… convexity will firm up with the longer term inflation-sensitive rates widen as they print away your wealth. Investors appear to be hedging their equity longs with shorts on DXY, an aggregate short position on the latter leg being the first time in two years.

Seeing some commentary covering the record short positions in CMEs $BTC futures, but this is hardly new as that position has perpetually been so. The uptick in OI was initially triggered by RenTech’s Form ADV including CME’s $BTC futures and the resulting FOMO influx from their peers, to think these direction-neutral quant funds laying on outright shorts is quite far out.

Also lets not forget that not only is the M2 supply at ATH, but the velocity is also approaching some depressing levels… For now it seems the age-old adage don’t fight the Fed still stands as the bearish report translates to more support for capital markets.

Hong Kong looks intent on maintaining its world-class financial center status. Despite the knocks it’s taken over the past year (plus) and most recently its status as a freeport having changed in the eyes of US officials — Hong Kong has thrived as the gateway for trade (and financial exchange) into and out of China. Almost every deposit taking bank, merchant bank, investment bank, asset manager, fund, etc have a presence in the city — and that says it all on the city’s importance. And the SFC is doing its part to see Hong Kong firmly in the midst of the future of capital markets too — through action not labels or marketing spin. Last week, OSL was the beneficiary of their vision and their actions as the first to be granted AIP for virtual asset trading in Type 1 and Type 7 regulated activities. Whilst this is great news for OSL, and although just the first tiny step in greater leaps ahead, it is a significant win for the preservation (if not repositioning) of the financial services industry in Hong Kong. The capital markets have been the engine in a service-driven economy, and inclusion of digital assets provides a lifeline for all the ancillary specialists from crypto law to auditors and STO advisors and M&A, etc — all will be necessary contributors to the success and benefit from an expanded playing field. The regulators have done their part in acting, now the talking needs to shift to action with those who want to make good on this glorious opportunity.

There have been so many players in the space that have misled the public with their marketing maneuvers — buying a list co and saying they are listed without reorganizing under the entity; acquiring SFC licensed entities and calling themselves “licensed”; not liquidating loans despite insufficient margins due to lack of risk controls calling it CRM and my favorite; calling their hot wallets “insured” with a specie insurance policy… Hope this goes to separate the wheat from the chaff. Those that fake it till they make it will not have a happy ending as crypto continues to get regulated and we are seeing telltale signs of further problems ahead for the entities with an appetite for regulatory arbitrage by way of Bitstamp moving from the UK to Luxembourg & Bitmex being denied in Ontario.

As Congressman Tom Emmer continues to shill Ripple ($XRP), more voices in DC are starting to raise the alarm bell as the schizophrenic state of affairs of the regulations state side serve to further widen the gap between China and the US. There have been calls for increased transparency regarding the audit whereabouts of the seized crypto bounties. Trump dished out billions to his friends under the veil of an “emergency” when he was dealing with state appropriated funds, but with semi-pseudonymous crypto?

The Chinese continue to fire from all cylinders with Huawei being the latest to chime in by enabling all sorts of citizen’s data to be tracked and stored as the government prepares to roll out their DCEP for the 2022 Beijing Winter Olympics.

The one group that has not been invited to the party are Chinese miners. Already suffering from record floodings, they now face a double whammy as Inner Mongolian officials start cracking down on crypto miners, because why would they want to peddle in someone else’s coin when they have their own?

Compounded by the shortage of ASICs resulting from the soap opera at Bitmain, no one was looking for a pop in difficulty to ATHs…

Whatsminer is the only name in the game (at an industrial scale) with Riot Blockchain allegedly cleaning out 2020’s last S19 batch and they have been much more selective in their sales preferring to partner with industrial large-scale mining farms. While the mining scene in China has taken a backseat, there have been various anecdotes reflecting the burgeoning migration to more accommodating jurisdictions. Inner-Mongolia (link above) will become a much more pronounced problem come round the end of the wet season as diminished hydro-power generation compounded by heating demand increase in Chengdu will force the vast majority of the mining operations to relocate to the colder northern climates- primarily inner-Mongolia. It will be interesting to see how the geographical dispersion changes from the current status quo of ~65% of all miners currently being based in China.

Ethereum ($ETH) dropped 6.8% on the week, double the drawdown posted by $BTC as the euphoria of the hardfork dissipated. The miners did not sit well with EIP-2878 (an Ethereum Improvement Proposal) proposing a 75% cut on mining rewards however, a more pressing problem is with the >10% of ETH node operators currently experiencing all-too-frequent freezes from the OpenEthereum client update as they were bogged down by heisenbugs.

While there was nothing stopping Kraken from debuting $DOT, they certainly could have done a better job highlighting the denomination adjustment akin to a 1:100 stock split. Changes were guided to be implemented last Friday yet Kraken jumped the gun three days ahead. With the project having raised without an ICO locking out John Doe, volumes exploded upon listing taking the coin more than 10x within the first hour. Issues well known surrounding Grayscale’s mind-boggling premium (and the management fees) are also looking to be replicated on the latest new alt-coin offerings as volatility goes through the roof.

However, this has done nothing to stop the liquidity. $BTC and $ETH volumes have subsided some yet USDT volumes have gone from strength to strength, eclipsing Paypal.

Surely the usual detractors will come at us with the “crypto is for drug dealers and money launderers” nonsense. But, guess who the biggest players in the business of nefarious account dealings and practices in Mexico are?

We also saw more endeavors expanding the crypto penetration: FiCAS’s nifty Bitcoin Capital Active Exchange Traded Product permits users to allocate painlessly through a phone; Ribbit Capital prepares to launch a $350mn crypto SPAC; FTX acquires Blockfolio for $150mn; Binance adds Florida to the 37 US states they service; Bitgo bites the bullet and files to become a NYFDS approved trust; Brazilian congresswomen proposes regulation for the space; Huobi begins catering to Russia; Gemini & Archax get FCA approval as the British Authority issues a consultation paper for further adoption; Akon spills a few beans on his Wakunda project; Coincheck surfaces from the ashes to launch Japan’s first ICO and; drum roll… Fidelity debuts their first crypto fund. They manage over $8tn…

Additional news that caught our eye this week:

  • Shapeshift files lawsuit against former senior engineer alleging a $900K theft.
  • US prosecutors freeze 56 bank accounts of Reginald Fowler suspected to be tied to Bitfinex’s $850M hack.
  • Shinhan Bank KYC to be governed by ICON’s Iconloop enabling remote account openings.
  • YellowCard the Nigerian crypto exchange received $1.5mn funding.
  • Binance Coin ($BNB) announced Binance Darwin upgrade (blockheight 109999000 8/28/2020, 6am UTC) adding staking, interchain operability and onchain governance procedures
  • Bitcoin Cash ($BCH) Bitcoin Cash Node (BCHN) rejects latest upgrade requiring 8% mining rewards be devoted to a development fund
  • Prediction markets come to DeFi
  • Aave ($LEND) pops post FCA approval for their Electronic Money Institution (EMI) license
  • Compound ($COMP) looks to amend governance to end yield farming craze.

May the trend be your friend… Happy Trading!

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