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Digital Explosion

As big banks have officially announced digital currencies to be a legitimate long-term asset class, we believe there is an increased need for regulated trading venues, particularly regulation for derivatives trading venues, which are complex financial products.

With a dozen pivotal announcements by major global financial institutions in the past six months, one can expect an even larger wave of players to follow. Banking is a hyper-competitive, technology-centric industry. Smaller financial institutions need to spend as a matter of survival as major banks prepare for the next generation of financial technology. Financial institutions, having already embraced the digitalisation of finance, are prepared strategically and technically to move quickly. Don’t underestimate the speed at which transformation will accelerate. Banks are quietly moving to build infrastructure and design capabilities to deliver on the large consumer demand for digital assets. 

As for regulators, there was more good news. Powell and Yellen consider Bitcoin to be “digital gold” and hence more accepted (and then not positioned as a challenger to the dollar). 

These private and public developments establish a foundation for the entire digital asset ecosystem to explode, from mining chip designs to consumer applications and innovation to build digital tokens that may represent physical assets, or even less-tangible ones, such as data.

Entrepreneurs worldwide who are deep into blockchain will continue to roll out powerful technologies and creative applications for bitcoin and other digital tokens. The most significant application for the digitisation of assets is inevitable as a national currency. The US Fed admits that it is under genuine review while China has announced its digital-RMB.

Just about every big bank on Wall Street is working on ways to enter the digital currency space. Most recently, Fireblocks, a leading digital asset custody, transfer and settlement platform, raised $133mn in a Series C round into which Bank of New York Mellon was an investor. The bank plans to use Fireblocks’ tools for securely storing and transferring cryptocurrencies to serve as a custodian for digital assets.

Key highlights over the last quarter:

  • JPMorgan Chase is creating a basket of 11 crypto-related stocks. 
  • Morgan Stanley plans to allow some clients to invest in bitcoin-related funds.
  • Goldman Sachs restarts crypto desk
  • CBOE Files to list VanEck ETF, starts the clock on SEC to respond
  • State Street named Fund Administrator and Transfer Agent for VanEck ETF
  • Blackrock, the world’s largest asset manager, plans to include bitcoin futures as eligible investments for two of its funds.
  • PayPal, which already allows users to buy and sell crypto, confirmed earlier this month that it’s acquiring Curv, a technology firm that powers the secure storage of cryptocurrency. 
  • Visa to enable Bitcoin purchases at 70mn merchants
  • Visa launches pilot program with Crypto.com to settle USDC on Visa Network

In addition to moves by traditional financial institutions, we have seen tech companies join the battle. Facebook (FB), Tesla (TSLA), Twitter (TWTR) founder Jack Dorsey, and legendary hedge-fund manager Paul Tudor Jones, Stanley Druckenmiller and others have also all invested in or are working on crypto-related projects.

The massive Bitcoin rally has induced Wall Street to embrace the trend before the likes of Coinbase take all the glory.

Expect acceleration. 

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Deal-flow and Disciples

The confluence of Reddit, Robinhood and GME has been a fascinating distraction. GFO-X believes in transparent price discovery and the freedom to trade at all times.

Meanwhile, the cryptocurrency eco-system has been frantic with news of exchange listings and capital raises. Increased positive commentary from investment luminaries and institutions is lending more support to the longer-term appetite for cryptocurrencies.

Capital Markets Activity

Cryptocurrency giant Coinbase, which announced plans to go public in December, intends to sell its shares through a direct listing. Valuations rumoured to be anywhere from $50bn-75bn. The last time Coinbase publicly disclosed its valuation was following a Series E funding round in 2018 that priced the company at $8 billion.

BAAKT SPAC: Bakkt, the cryptocurrency platform majority-owned by ICE is in advanced talks to go public through a merger with blank-check firm VPC Impact Acquisition Holdings. The rumoured valuation is around US$2bn.

Diginex (EQOS) who raised US$20m back in September 2020 ahead of its October 2020 NASDAQ listing, raised a further U$$38.6m in mid-January 2021 The stock has traded from lows of US$5 to US$20.64 in January 2021. It has a current market cap of US$525m.

Coinbase continues to acquire companies in the sector, including trade execution startup Routefire to beef up their institutional offering. Their latest acquisition is Bison Trails, a blockchain infrastructure platform that includes staking features.

For more on crypto trends and M&A, read The Block’s 2021 analyst predictions. A few that stand out:

  1. The market structure continues to mature, with options having another big year.
  2. Non-custodial derivatives take off due to Optimism and capture 10% of CEX’s open interest by year-end.
  3. Total venture funding in the sector nearly doubles in 2021 to $6.0 billion
  4. At least one infrastructure provider is acquired for >$400 M and becomes the largest M&A transaction to date.
  5. US/EU regulators will try to force KYC/CTF regulations onto popular DeFi applications.

Retail and Institutions still warming to Bitcoin

  • Investment giant BlackRock filed documents with the Securities and Exchange Commission showing that it wants to include cash-settled Bitcoin futures as eligible investments for two of its funds—the latest instance of a major financial institution dipping a toe into cryptocurrencies.   
  • Bill Miller IV of US$3.5bn AUM Miller Value Partners discusses their appreciation of BTC and why they invested in the MicroStrategy CB.
  • The eToro platform signed 530,000 new users globally in the first 17 days of 2021. It also said cryptocurrency trading volumes were 25 times higher YoY. The platform says one third of sign-ups were in their 30s, two out of five were under the age of 30 and the majority invest in cryptocurrencies.
  • Grayscale inflows in 4Q 2020 reached US$3.3bn, a threefold increase from the previous quarter. 93% of new investments came from institutional investors. Grayscale also discussed “surging demand from wealth managers”. Total AUM is now over US$20.2bn.
  • Ray Dalio in a lengthy article concludes with these words “Overall, it’s clear that Bitcoin has features that could make it an attractive store hold of wealth” However, he has hedged his view, “Bitcoin looks like a long-duration option on a highly unknown future that I could put an amount of money in that I wouldn’t mind losing about 80% of”
  • Apparently, Harvard, Yale and Brown endowments have been buying BTC for at least a year.
  • Visa may add cryprocurrencies to its payment network. Visa CEO Al Kelly said the payments giant is in a position to make cryptocurrencies more “safe, useful and applicable” and may add them to the company’s payments network. “Our strategy here is to work with wallets and exchanges to enable users to purchase these currencies using their Visa credentials or to cash out onto our Visa credential to make a fiat purchase at any of the 70 million merchants where Visa is accepted globally,” Kelly said. 
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Institutional Appetite for Cryptocurrencies

Finally it appears that the predicted tipping point of traditional financial institutions investing in Bitcoin is behind us. The headlines have been both dramatic and accelerating along with the rapid rise in BTC price:

Accelerating institutional adoption of digital assets

MicroStrategy invests $425m of corporate treasury in Bitcoin

If you want to get up to speed fast, listen to Michael Saylor, the co-Founder and CEO of MicroStrategy explain why he truly believes that BTC is a store of value, especially into massive QE. A monetary network that can plug into any technology such as Square, Paypal, Amazon etc. BTC has now passed the test of time and won’t be hacked or banned. He believes $10-15bn  of BTC will be sold on mobile phone apps.

The Proff G Podcast 15mins in. MicroStrategy invests $450m in BTC

 

BTC Investing- Safer than before.

We have come a long way in crypto currencies and safety and security have improved significantly. The emergence of insured and credible custody (Bitgo, Fidelity, Gemini) and safe trading (Copper, Tagomi, Fireblocks) is, without a doubt, a considerable catalyst in further interest in digital assets. Liquidity providers such as B2C2 take much exchange pain away for bigger players. For investors/speculators still not keen to set-up trading accounts many tracker funds (Coinshares, Grayscale) and actively managed crypto-asset funds are available ( Nickel, Soldium)

BTC Futures: Exponential growth expected

BTC futures and options are the natural evolution of any financial product. On 26th November derivatives exchanges set an all time record volume of $93.36bn. In the regulated space, reflecting institutional activity, the CME traded a record $17.1bn in November, averaging $962bn of open interest.

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Bitcoin For the Masses

Bitcoin’s ease of use has often been cited as a significant hurdle to mass adoption. If I can’t spend it easily what use does it have?

 

This situation is changing fast. it has never been easier to buy and now spend cryptocurrencies, particularly Bitcoin.

 

 

On 21 October Paypal lanched a new service enabling users to buy, hold and sell cryptocurrencies. It appeared to prompt a spike from $12,000 to 13,000 despite the news of their tie-up with crypto custody and brokerage firm Paxos being well telegraphed.

 

Securing $142m of Series C funding Charles Cascarilla, CEO and co-founder of Paxos, commented, “In the last year, global adoption of crypto and blockchain-based solutions by enterprises has accelerated. We are proud to count among our clients’ global leaders in payments, banking, trading and fintech, such as PayPal, Credit Suisse, Societe Generale and Revolut. Paxos is uniquely positioned to address the digital asset needs of global brands and bring our solutions to enterprises with trillions in assets and billions of end users.”

 

Earlier this month Revolut, a UK based challenger bank with over 12m customers, made buying BTC perhaps the easiest I have seen. With five taps on the app my daughter joined the masses ‘investing” in crypto with a monthly buying plan.

 

Michael Saylor, the co-Founder and CEO of MicroStrategy invested $450m of their corporate treasury into Bitcoin and believes $10-15bn  of BTC will be sold on mobile phone apps.

 

Companies like Bitpay are enabling businesses to accept bitcoin as payment for goods and services.  Check out their curated list of merchants that accept Bitcoin. From Amazon to private jets.

 

Shopify has integrations to allow merchants to accept cryptocurrencies on their platform. Shopify powers over one million businesses in over 175 countries.

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DeFi

Decentralised finance (DeFi) is an ecosystem of smart contracts that allows participants to offer and access financial services in a peer-to-peer format, without relying on traditional intermediaries like banks, credit unions, or brokerages.

The MakerDAO is a decentralised lending protocol and one of the most popular DeFi dapps (decentralised applications). The protocol allows users to use ETH as collateral to borrow DAI, a digital token pegged to the dollar. The dapp allows investors to go long on ETH: users can spend the DAI borrowed to buy even more ETH, which can then be cycled back into the vault to borrow more DAI. This creates decentralised leverage — investors can bet on the price of ETH for only a small initial sum.

A variety of dapps are being built to facilitate trading, banking, and investing solely through smart contracts. Compound, for example, allows users to earn interest or borrow crypto against collateral. Through Uniswap, users can swap tokens or provide liquidity and earn fees. With Augur, users can bet on real world events and earn payouts automatically based on the results.

The DeFi space has been growing rapidly: the total value locked in DeFi increased by 10x since the start of 2020, to over US$7bn. Check out defipulse.

Lending dapps dominate the space with huge numbers locked in. Aave ($1.5bn), Maker ($1.42bn) and compound ($782.9m)

The remaining Ether is split between minor DeFi applications including decentralised exchanges and financial derivatives.

DeFi Market Cap, estimating tokens associated with the DeFi phenomenon now have a combined market value of $12.7 billion.

Can’t choose which one? Binance plans to offer “DeFi Index Perpetual Contracts,” listed on Binance Futures. The contracts will be denominated in the dollar-linked stablecoin tether, and offer traders leverage up to 50 times their money down.    

The “fully synthetic derivative product enables greater access to decentralised finance,” Binance said in the release. Binance’s DeFi index consists of 10 tokens associated with DeFi, several of which rank among the year’s best performers. They include Chainlink’s LINK, Compound’s COMP, Kyber’s KNC, Aave’s LEND, ZRX’s 0x and MakerDAO’s MKR. 

Meanwhile “old school DLT/Blockchain applications could be numerous: 

  1. Tokenised Real Estate: illiquid assets and siloed networks.
  2. Digital assets: Represent any asset or agreement.
  3. Supply chain: Inefficiencies in global value chains.
  4. Digital Identity: Massive vulnerabilities.
  5. Decentralised advertising: Trust and transparency.
  6. Insurance: Archaic end-to-end processes.
  7. Healthcare: Tracking IP, drug provenance, parent admin.
  8. Trade Finance: Opaque and fragmented industry.

Outlier Ventures has a significant portfolio of companies pushing DLT/Blockchain to create the “next era of digital infrastructure”.

A good example is Sovrin, an open-source project creating a global public utility for self-sovereign identity.

The use case is compelling as they discuss here. “As hacks and breaches become commonplace, affecting millions of people around the world, self-sovereign identity (SSI) is quickly gaining traction among technology developers looking to gain an edge in the race toward web 3.0. This new type of decentralised identity brings control and security back into the hands of the individual. Unlike flawed centralised models, including some federated and siloed traditional data systems, which could become honeypots and security risks, SSI allows identity holders to communicate peer-to-peer with organisations, disrupting the status quo of online transactions.”

I should not have to give all of my passport details to someone who may only require my date of birth. SSI allows me to control my digital identity and verify who I am in a secure way.

If this all sounds to conceptual vs real world, you can find real value being created with the utility tokens connected to some of these projects. 

Fetch AI just listed at $71m market cap. Polkadot, another recent listing has a cap of $5.4bn.

DLT is real for sure…to be continued