The tensions that have spilled over into the streets of U.S. cities this week are a heartbreaking expression of a long-standing problem that has the whole world in its grip.
Inequality is not specific to the U.S. Nor is it limited to a handful of relatively well-off geographies. It stratifies societies within borders, trapping the majority within a narrow income band while markets pour wealth into the accounts of the few. It also divides the haves from the have-nots on a spectacularly global scale, relegating some countries to the back of the hand-out queue while others, blessed by nature and exploited luck, centralize their advantage with technology moats and resource supply chains.
You’re reading Crypto Long & Short, a newsletter that looks closely at the forces driving cryptocurrency markets. Authored by CoinDesk’s head of research, Noelle Acheson, it goes out every Sunday and offers a recap of the week – with insights and analysis – from a professional investor’s point of view. You can subscribe here.
Technology is part of the problem. It has widened the chasm between those who can harness it and those who as yet cannot. It has enthralled populations who are now captive to its influence. It has sped up flows of capital, while further concentrating its distribution.
So many of us fervently hope it can also be part of the solution. But sending in trained mechanics to fix cars they designed rarely produces a meaningful change in the way cars work. Asking innovators to re-think the shape of a system that is all they’ve ever known is unlikely to result in a totally new approach. If the fix is part of the problem, we shouldn’t be surprised when the problem doesn’t go away – at best, it will just change form.
And then there’s the motivation. Fear can produce results, but generally unplanned, incomplete and undesired ones. For unity and clarity, passion can work, by giving a glimpse of a better world. But although it captures hearts, passion is hard to define and harder to implement. Sometimes it takes a slow, methodical tinkerer to emerge from the back room with a bewildered expression and a unique prototype.
Enter stage left
Just over 11 years ago, bitcoin quietly made its presence known as a defiant workaround to the concentration of financial authority. Clouded in code, it sang as a more muted and less lyrical echo of John Perry Barlow’s “Declaration of the Independence of Cyberspace,” unleashed from Davos in 1996 on the widening cracks in the definition of progress. The stirring document opened with this:
“Governments of the Industrial World, you weary giants of flesh and steel, I come from Cyberspace, the new home of Mind. On behalf of the future, I ask you of the past to leave us alone. You are not welcome among us. You have no sovereignty where we gather.”
The opening paragraph of the white paper that introduced bitcoin to the world, authored by a pseudonymous Satoshi Nakamoto, did not carry quite the same level of energy:
“Commerce on the Internet has come to rely almost exclusively on financial institutions serving as trusted third parties to process electronic payments. While the system works well enough for most transactions, it still suffers from the inherent weaknesses of the trust based model.”
Both Barlow’s Declaration and Satoshi’s* white paper stem from an inherent resistance to unjust control. Both propose harnessing technology to give freedom to those who want it. Both identify the reliance on centralized trust as a vulnerability. Both understand that the progress of civilization stands on the liberty to transact and communicate.
But there the similarities end.
In terms of style, Barlow harnessed the flourish of rhetoric to evoke a generational call to arms, to fight with words the tyranny of the past. Satoshi talked about timestamps and hashes. Barlow set up a defiant barricade between the terrestrial and the ideological, between mundane rules and the magic of ideas. Satoshi wanted to solve the double-spend problem.
Barlow’s work is inspiring but has limited practicality – he assumed that regulations could not shape the reach of the new web infrastructure, that property had to be physical and that jurisdictions didn’t matter online. Satoshi’s document oozes practicality, with digital signature diagrams two paragraphs in. Barlow had no concrete proposals; Satoshi had nothing but. Both wanted to create something without access barriers. Only Satoshi seemed to have a strong grasp of what those actually are.
The most notable and poignant difference, however, is in the relative weight of each today.
The freedoms that Barlow promised have become intensifiers of social pressure. They have connected us in ways we don’t yet fully understand; but they also remind us of the widening gaps and the shortage of bridges. Rather than reinforce the platforms of free speech, they have turned them into divisive weapons to which we cannot see an alternative.
“We cannot separate the air that chokes from the air upon which wings beat.”
Even he probably didn’t expect how relevant that would become.
Slow and steady
And bitcoin? Like Barlow’s Declaration, things haven’t turned out as expected. Bitcoin is not yet used as a widespread alternative payment mechanism, and many doubt that it ever will be.
Yet, the journey of bitcoin is still just beginning. Use cases – some expected, some not – are emerging in pools of innovation across industries, geographies and philosophies. For now, its compelling narrative has given it a role in asset portfolios of all types, as speculators and investors bet on the spread of its nascent use cases.
But scrolling through CoinDesk headlines, every week there are developments that hint at real-world impact, adaptation, progress and hard work. This week, for instance, a lawmaker in Iran urged the country’s central bank to support bitcoin as a currency and take over its oversight, which could reduce the country’s reliance on unavailable U.S. dollars.
And we interviewed an author who is focusing on how bitcoin can enable independent local communities to work around the rules that, either intentionally or unintentionally (and often unfairly), disadvantage some over others.
The fun exercise of picking out these nuggets of hope and potential serves as a constant reminder that there is no going back. There is need for change, even beyond the causes of the deep rifts we are seeing today. And the technological leap forward presented in Satoshi’s paper has inspired hundreds of thousands of brilliant people to focus on building, testing and teaching applications on both a local and global scale.
Headline scrolls also serve as a welcome reminder that all solutions bring new problems. This week, as in most, the security of digital assets shows weaknesses, surveillance is a double-edged sword and official organizations seek to better understand rather than suppress, which also implies more control.
Yet, unlike Barlow, builders in the crypto industry are aware that regulations matter, and that changing a system is often best done from within.
Behind the scenes
The first cryptocurrency emerged quietly 11 years ago; since then, it has been softly gathering strength as its powerful message gains momentum, without flourish and rhetoric. Price surges and plunges may grab our attention for a hot second; but they pass. Calls for bitcoin to replace the current system trigger feverish enthusiasm on Twitter, but they are simplistic misuses of a megaphone.
Bitcoin’s relative quietness not only allows serious work to continue behind the scenes. It not only gives the experiments time to mature and evolve. It’s also just what the world needs right now, with so much noise and confusion in our feeds, on our screens and in our hearts. Investment in quiet progress builds the stairs that will be there when the dust settles and we start to get a clearer idea of what our future will look like. This is one thing these days that is a privilege to watch.
(*I know for style coherence I should write “Nakamoto,” but I can’t – we all know him, her or they as “Satoshi.”)
A high-level use case
Zooming in on the case of Iran mentioned above, earlier this week a member of the Iranian government called on the central bank to step up on bitcoin oversight and take it more seriously as a currency, rather than relegate it to commodity status. “We do not understand that the government has entrusted the monitoring of bitcoins to the Ministry of Industry and Mines,” said Representative Mohammad Hossein Farhangi (Tabriz), speaking Tuesday before the nation’s parliament, “because the central bank must oversee digital currencies.” Proper management of bitcoin is a “good opportunity for the country.” This is fascinating on so many levels. For instance:
- You have a repressive government supporting the mining of a cryptocurrency designed to give people tools to work around repressive governments.
- You have a government official recognizing the difference between bitcoin as a commodity and bitcoin as a currency.
- You have an example of bitcoin potentially being used not just by people in search of more financial freedom, but also by governments in search of more financial freedom. It could be that Iran sees bitcoin as a workaround to the straitjacket of sanctions, and as a potential antidote to the oppressive power of the U.S. dollar.
Iran was one of the first countries to officially recognize cryptocurrency mining as a legitimate industry back in July 2019. The government now issues mining licenses, giving companies the right to mine and then sell off any digital assets produced. A couple of weeks ago, Iranian President Hassan Rouhani asked the government to draw up a renewed national approach for the emerging crypto mining industry.
The government support seems to be bearing crypto fruit. According to the CBECI, Iran accounts for 4% of bitcoin’s hashrate, more than double what it was just eight months ago. For context, this is almost four times that of the U.K., and more than 50% of the U.S. share.
Why does this matter? Because it reveals how complex bitcoin’s eventual use cases will be, and how important it is to keep an eye on geopolitics and macroeconomics. It also reminds us that investors are not the only ones hoping the value of the currency goes up.
Anyone know what's going on yet?
With disconcerting timing, a glimmer of relatively good news appeared in our feeds at the end of the week: U.S. employers unexpectedly added 2.5 million jobs in May, sending the unemployment rate down from 14.7% to 13.3% and underscoring optimism that the economic rebound would be swift and buoyant.
The numbers are encouraging, indicating certain sectors such as hospitality, construction, retail, education and healthcare are bringing back some of the workers that were let go in March. Some areas are still cutting back, however, and the lack of demand is likely to put a cap on economic growth through consumption and investment, even as lockdowns start to ease. What’s more, the numbers do not necessarily mean that new jobs are being created – they are more likely a reflection of furloughed workers getting back to some sort of work, even if not full-time. And let’s not forget the unemployment rate is still significantly higher than at the lows of the 2008-2009 recession.
Since inequality is on everyone’s minds, it’s worth pointing out that the unemployment rate among African-Americans ticked up in May to 16.8%, its highest rate in over a decade.
The S&P 500 is now 40% from its March lows, in its largest 50-day rally in its history. The market is either telling us the economic outlook is rosier now than it was in December 2019, before lockdowns were even on our radar, or it no longer reflects economic expectations.
Hester Peirce, one of five commissioners with the SEC, has been renominated for a second term at the U.S. regulatory agency. TAKEAWAY: This is good news for the crypto industry, as she has been a vocal proponent of bitcoin ETFs and financial innovation more broadly. If this goes through, she will serve until 2025 – by which time market infrastructure should have evolved enough to remove regulatory opposition to more liquid products that broaden access to cryptocurrency investment.
A report by Bloomberg predicts the price of bitcoin will reach $20,000 in 2020. TAKEAWAY: This prediction is based on price patterns from the last few years, which matters if you believe patterns move markets (and they may do so – I’m not judging here). Basically, if 2020 follows 2016’s trend (that was also a halving year, remember), then we can expect some wild moves in the second half. This is a good line, though: “Something needs to go really wrong for bitcoin to not appreciate.” And what could possibly go wrong, right?
Private Swiss bank Maerki Baumann has launched a crypto trading service for institutional investors and high-net-worth individuals. TAKEAWAY: While relatively small in scope for now, this is a continuation of the explosion the crypto industry is seeing in prime brokerage services, but with an intriguing twist: this is a legacy institution entering the crypto market. The bank was founded in 1932, and earns most of its income from investment advisory services with a small portion coming from lending. The bank has said that it will be looking at offering other private banking products to its crypto clients, possibly emerging as one of Europe’s first full-service crypto prime brokers.
Crypto bank Avanti has raised $5 million in an angel round, led by the University of Wyoming Foundation with participation from Anthony Pompliano’s Morgan Creek Digital, Blockchain Capital, Digital Currency Group and others. TAKEAWAY: The lack of reliable banking in the U.S. has long been cited as one of the major headaches for the crypto industry. A more competitive and robust crypto banking ecosystem is likely to make a material difference in the operational efficiency of existing businesses, and support the emergence of future crypto innovations.
“Sell in May and go away” doesn’t apply to bitcoin, apparently. Bitcoin had positive performance in eight of the last 10 Mays, and outperformed its monthly average in six of them. TAKEAWAY: There’s low correlation for you.
Bitcoin miners have been selling more bitcoin than they are producing, according to data source ByteTree. TAKEAWAY: Counterintuitively, this run-down of inventory could indicate bullish sentiment among miners, as apparently they tend to sell when they think the market is strong and can take it. If they thought the market was weak, they would hold, so as to not depress the price further.
The market for ether options is tiny compared to that of bitcoin, but it is growing fast. Open interest in ether options is at its all-time high on derivatives exchange Deribit, the largest options exchange in the crypto industry. TAKEAWAY: This underscores the growing sophistication in the ether markets – options are seen as a more complex yet more granular hedging tool than futures, and a vibrant options market is often seen as a prerequisite to institutional involvement.
David Leibowitz, global macro portfolio manager at Lebo Capital Management, looks at bitcoin’s role in the new investment landscape. TAKEAWAY: David makes the interesting point that fixed income as an investable asset class is disappearing, as interest rates will probably be low forever. Money leaving fixed income allocations will have to go somewhere.
The put-call open interest ratio, which measures the number of put options open relative to call options, fell to 0.43 on Thursday – the lowest since March 24, according to crypto derivatives research firm Skew. TAKEAWAY: More people are buying calls than puts, which is generally taken as a bullish signal. It can’t be taken too literally, though, because the call options could be protection for a short strategy.
Constantin Kogan, partner at BitBull Capital, argues that family offices should look at crypto assets as a source of return and diversification. TAKEAWAY: Family offices have been investing part of their over $6 trillion collective AUM in crypto assets for some time. They have fewer constraints than other institutional investors and tend to be less risk-averse. Two interesting statistics: the article cites the UBS Global Family Office Report, which indicates that 57% of family offices believe blockchain will transform investing strategies and behaviors in the future. It also refers to a recent Fidelity Investments survey which revealed that 22% of over 400 U.S.-based institutional investors, including family offices and foundations, have explored products relating to digital assets.
Just in case you thought token sales were completely dead, this past week saw two notable announcements that show that they are still a thing. The amounts are small, but the projects are intriguing, and the regulators appear to be on board. French renewable energy services provider WPO has been granted approval from the French financial markets regulator to raise funding through a public token offering under the “ICO visa” program. And hedge fund and predictions market startup Numerai sold $3 million in NMR tokens to investors including Union Square Ventures, Placeholder, CoinFund and Dragonfly Capital.
Podcast episodes to listen to:
- 5 Numbers That Tell the Story of Markets Right Now – The Breakdown
- Three Arrow’s Su Zhu on the race to build a crypto prime broker – The Scoop
- The Age of Monopoly: Power, Censorship, & The New Consensus | Matt Stoller – Hidden Forces
- Adam Tooze on Dollar Dominance, the Eurozone, and the Future of Global Finance – Macro Musings