This Week's Headlines:
Bitcoin Linked Investment Products Coming of Age
With the lack of clear regulations on trading and taxation of potential Bitcoin gains, institutional investors have sought alternative products linked to Bitcoin’s impressive value rise and daily fluxes. Multiple financial products are now available and many more have been announced giving big money an easier entrance point to the cryptocurrency.
Last week the US Commodity Futures and Exchange Commission (CFTC) confirmed that the Chicago Mercantile Exchange (CME) and neighbour rivals CBOE have completed their self-certification for Bitcoin futures. The CFTC also announced that Cantor, a firm that deals with a range of products from bond brokerage to investment banking have also self-certified a contract for Bitcoin binary options.
And while the CFTC announcement marks an important step for legitimizing Bitcoin on the world scene and bringing in institutional money, the watchdog was quite clear on its position on the volatile cryptocurrency and distanced itself from the product.
“As with all contracts offered through Commission-regulated exchanges and cleared through Commission-regulated clearinghouses, the completion of the processes described above is not a Commission approval. It does not constitute a Commission endorsement of the use or value of virtual currency products or derivatives. It is incumbent on market participants to conduct appropriate due diligence to determine the particular appropriateness of these products, which at times have exhibited extreme volatility and unique risks.”
Nasdaq was the latest major financial firm to throw in its support for a Bitcoin futures that it aims to launch in 2018. Nasdaq currently trades an Exchange Traded Note (ETN) on its Stockholm exchange through XBT Provider, who also offers an Ethereum ETN denominated in both Swedish Kronor, and Euro.
While big guns are now entering the ring, there have been other products on the market for the institutional investors that have wanted exposure to Bitcoin without going through exchanges and paying hefty fees in storage (See story below). Earlier this year in July, LedgerX was given the green light by the CFTC to launch Bitcoin options. In its first week of launching this fall, LedgerX clear over $1Mn in Bitcoin derivatives. And just a few weeks ago, LedgerX initiated a derivative called a Long-Term Equity Anticipation Security (LEAPS), effectively a form of a futures, that allowed the holder to purchase Bitcoin at $10,000 on 28 December when the contract is set to expire.
There have also been other indirect ways of investing in Bitcoin without owning the underlying asset. Grayscales Bitcoin Investment Trust, one of the largest Hedge Funds, has an impressive $1.2Bn in Assets under Management (Diar, 27 November). The trust, currently trading over-the-counter, has actually outperformed Bitcoin itself at the time of writing with an increase of 1326% versus Bitcoin’s 1053%. Its popularity can be seen as part of a larger portfolio of various funds (see table).
What remains now to bring potentially most financial products to the table are Exchange Traded Funds - which up until now have been unsuccessful. However, with the plethora of products coming online, and as liquidity continues to increase, so could the potential offerings to profit, or hedge, for those who will own the underlying asset.
Bitcoin Price-Linked Investment Products
|6||XBT Provider||Exchange Traded Note (Traded on Nasdaq Stockholm)||Available|
|7||Tobam||Bitcoin Mutual Fund||2018|
|8||Grayscale||Bitcoin Investment Trust (OTCMKTS: GBTC)||Available|
|9||MGT Capital||Bitcoing Mining Operation (OTCMKTS: MGTI)||Available|
Funds/Managed Accounts Investing in Bitcoin Investment Trust
|Name||Portfolio Weighting %||Portfolio Owner Type|
|Kinetics Internet Fund||7.18||Mutual Fund|
|Kinetics Paradigm Fund||1.15||Mutual Fund|
|ARK Innovation ETF||7.42||Mutual Fund|
|Ark Web x.0 ETF||6.88||Mutual Fund|
|Kinetics Market Opportunities Fund||5.45||Mutual Fund|
|Horizon Strategic Value Investment Instl||0.9||Separate Account|
|Kinetics Small Cap Opportunities Fund||0.8||Mutual Fund|
|ARK Disruptive Innovation Strategy||0.5||Separate Account|
|Oxbow Advisors, LLC||0.2||13F|
|Horizon Small Cap Institutional||0.34||Separate Account|
|Ark Industrial Innovation ETF||1.14||Mutual Fund|
|Horizon Spin-Off Institutional||0.66||Separate Account|
|Kinetics The Global Fund||7.56||Mutual Fund|
|Horizon Large Cap Institutional||0.71||Separate Account|
|American Beacon ARK Transfmt Innov Fd||5.92||Mutual Fund|
|Rothschild Investment Corp||0.02||13F|
|Validus Disciplined Growth & Income||0.93||Separate Account|
|Validus Disciplined Global Growth||0.68||Separate Account|
|Validus Disciplined US Growth||1.09||Separate Account|
Source: Morningstar Direct, Forbes
Bitcoin Exchange-Traded Fund Applications
|ETF Name||Filing Date||Status|
|Winklevoss Bitcoin Trust||2013||Denied, Appealing|
|Bitcoin Investment Trust||2016||Withdrawn|
|SolidX Bitcoin Trust||2016||Denied|
|Etherindex Ether Trust||2016||Withdrawn|
|VanEck Vectors Bitcoin Strategy ETF||2017||Withdrawn|
Blockchain Identity Platforms Target Old Institutions
Blockchain have been promising a plethora of solutions against downtime and security. Startup Bloom is targeting the market share of credit scoring agencies, while others such as uPort and Civic aim to provide a secure identity platform that has even seen some governments use already.
Time and time again, centrally stored information has been breached by hackers. This has been reflected in the amount of money that companies are investing in their cyber security. According to a report by Gartner, worldwide information security spending will reach more than $86Bn in 2017, a 7% rise from the previous year. A hack on US Credit agency Equifax exposed confidential information of 143 million Americans. Even though the Equifax hack was not the largest breach in history, the most sensitive data was stolen including names, date of birth, Social Security Numbers (SSN), addresses, and in some cases even driver's licenses and credit card numbers. The vice president of Gartner said: “It’s certainly the worst single breach of personal information that I know of. This data is the key to everyone’s files and interactions with financial services, government and health care.”
The problem with the current system is that these static identifiers, such as SSNs, are universally used by all kinds of institutions to identify a customer. Javelin Strategy & Research found that $16Bn was stolen from 15.4 million U.S. consumers resulting from identity fraud in 2016. Experts have recommended people freeze their credit to protect themselves against identity theft. However, a credit freeze only protects against opening of new accounts and will not help with the malicious use of current accounts, which is the most common type of identity fraud. Affected Individuals thus have to frequently monitor their accounts’ activity, use multi-factor authentication and hope that they will not be an identity fraud victim.
In 2015, a data breach of Anthem that had personal information including the SSNs have affected 80 million people. Yahoo, eBay, Linkedin and Dropbox data was also stolen amongst many others. There are several underground black markets hosted on the untraceable internet Tor network where identities are sold in bunches.
Equifax, Experian, and TransUnion generate revenue by collecting and aggregating personal data and then charging other companies such as financial institutions, landlords and employers to access that data. Last year, Equifax generated $3.1Bn in revenue, Experian generated $4.34Bn and TransUnion $1.7Bn. Equifax, Experian, and TransUnion have enormous power as people are dependant on them to get loans or even applying to a new job. Moreover, there is no option to opt out from having personal data stored by them.
There are two possible options to limit the influence that private credit bureaus have over people’s lives. One option is to nationalize the credit bureaus and let the central bank run a public registry. However, even if credit reporting was nationalized, which is unlikely, the data could also be breached. Even the governments are susceptible to cyber attacks.
Another option is what startup Bloom, who last week started their ICO, is working on.
Bloom is developing an Ethereum-based platform to boost the security and decrease the dependence on the credit bureaus where FICO has a 90% monopoly. Bloom was co-founded by Ryan Faber, John Backus, Jesse Leimgruber and Alain Meier. Backus and Meier left Stanford to co-found Cognito in 2013, a KYC solution for various cryptocurrency exchanges including Coinbase. Leimgruber co-founded NeoReach, which provides influencer intelligence to NBC, Walmart, Honda, Amazon and Microsoft among others. Faber founded growth accelerator Flatiron Collective.
In wake of the Equifax hack, Bloom received a great amount of community interest as they advocate to move away from centralized data hubs by providing a decentralized and global credit scoring system. Bloom believes that identity checks should be linked to the identity that is used for all financial transactions. Cryptography allows Bloom to share data with companies, which will be able to verify that it is the same data that was used for past verifications. It complies with the requirements without having to go through credit bureaus. Jesse Leimgruber said “expecting the ancient credit bureaus to suddenly get security right is unrealistic. We should focus on systems that decentralize their roles and phase them out entirely”
Bloom’s platform is consisted of three main components - establishing identity, maintaining credit history and credit scoring. The independent third parties will be able to publicly vouch for the other’s identity and legal status; it will be possible to import existing credit history to the system and finally, Bloom will create a dynamic and inclusive indicator of an individual’s likelihood to pay debts.
Bloom are not the only players in town to identify the problem. Civic and uPort are both working on a blockchain-based identity platform where users will have the ability to control their own data. Both platforms will allow users to use digital identity to identify themselves without the use of a third party. The data is exchanged voluntarily directly between the two parties and must always be verified by the identity holder. This will allow users to control which parties have access to their personal information. Moreover, both platforms secure the information so even if it is compromised, it would be worthless to hackers without the personal identification of the user.
Brazil's Ministry of Planning had successfully tested uPort to see whether blockchain technology can be used to verify the legitimacy of personal documents. Moreover, uPort also issued digital verifications of citizenship in Zug, Switzerland. Zug plans to utilize uPort as a platform for online voting in the Spring of 2018. Civic already has working partnerships with wikiHow, Shapeshift and Jaxx amongst others.
Bloom, Civic and uPort are decentralizing the established identification systems and simultaneously increasing the security by shifting the responsibility to individual users instead of relying on one centralized database. The success of these platforms will depend on their ability to attract partners that will support their solutions. But infrastructure overhaul of the credit bureaus is by all means necessary either way. Whether it will happen through blockchain or by some other means remains to be seen.
Venezuela Aims to Launch National Cryptocurrency
OPEC founding member Venezuela announced its intention to launch a cryptocurrency backed by their oil & gas, gold and diamond reserves. Venezuelan President Nicolas Maduro made a televised announcement where he dubbed the planned currency as "Petro.”
Venezuelan officials, its oil companies and debt issuers have been under sanctions following an executive order signed by US President Donald Trump in what Washington sees the government as a dictatorship. Relations between Caracas and the White House have reached their lowest point ever, with the Venezuelan President stating the US has waged an “economic war” on the oil-revenue dependent country.
PDVSA, the state-owned petroleum company of Venezuela, which effectively finances the government has been struggling with cash flow problems due to low global oil prices and its ban from the US financial system which has stopped the flow of US Dollars back into the coffers of the South American nation.
The irony is not lost on Venezuelans who have had capital control imposed on them, and who recently, sought out to purchase Bitcoins amid the continuing collapse of the Bolivar. In 2003, then President Hugo Chavez, imposed currency control to stop capital flight due to an anti-government strike that saw the Bolivar drop 30% in value. Private companies and individuals saw the increased cost of imports give rise to a parallel black-market currency exchange for the US Dollar. Reuters estimates that the Bolivar has lost 57% of its value against the US Dollar in November 2017 alone.
Venezuela Bolivar Collapse versus US Dollar
While specifications on the Petro have yet to emerge, the cryptocurrency could in theory be able to circumvent US Sanctions should it become traded on Cryptocurrency exchanges - and should it find an audience. However, faith in the idea hasn’t been staggering. Bitcoin advocate Andreas Antonopoulous said “it appears Venezuela may soon have two centrally mismanaged currencies instead of one.”
Institutional Bitcoin Storage Solutions Rake in Big Money
While the blockchain is near impenetrable, Bitcoin has been notoriously known for hacks that have been the result of shoddy security measures and the downfall of centralized hold places such as exchange Mt.Gox which lost an estimated 650-850,ooo Bitcoins. Coinbase and other Bitcoin companies have found an opportunity to charge massive fees to safe keep clients Bitcoins.
One of the key features of Bitcoin is that everyone can store their bitcoins on the blockchain for free. As long as the private keys are held and they are unknown to everyone else, the person is in full control of their own bitcoins. For long term purposes, it is possible to set up a cold wallet and hold the private keys on a paper or in any other safe way. If regular transactions are necessary, bitcoins can be kept at reliable hardware wallets such as Ledger or Trezor. Hardware wallets only incur a one time cost.
However, even though Bitcoin storage is fundamentally free, trusts and vaults are getting away with charging upwards of 2% in annual fees. Bitcoin Investment Trust, which allows investors to trade Bitcoin as a traditional investment vehicle, currently has $1.694Bn of assets under management while charging a 2% annual fee. The trust has generated a return of 1,270% YTD, which has by far outweighed the high management fees. Bitcoin Investment Trust promises a robust security and storage of bitcoins. The assets are stored in cold storage vaults that are managed by Xapo.
Xapo is one of the few vendors that publically provide their cold vaults as a business solution. Xapo uses a three layer solution of cryptographic, physical and jurisdictional protection. The cryptography process includes multi-factor authentication and private key segmentation amongst others. Xapo’s vaults are stored underground in geographically dispersed locations on three continents - America, Europe, and Oceania. Moreover, all of the digital information is stored on offline servers and guarded by “intense human and automated security measures 24/7”. If one of the locations was compromised, the other two would function properly as a backup. The bitcoins can be retrieved after 48 hours, in which an advanced security process is undergone to verify the identity and authenticity.
Xapo’s vault is free to use for retail customers other than a small processing fee to cover the transaction cost. Xapo no longer insures their wallets but since 97% of their assets are stored in deep cold storage, they only hold a Bitcoin reserve, which provides self-insurance against hacks of hot wallets. If such a hack were to occur, Xapo would cover the full losses to its customers.
Coinbase has a free retail vault that can store Bitcoin, Litecoin and Ethereum. Coinbase’s vault also requires a 48 hour window to withdraw any funds. An additional feature that Coinbase provides is the ability to split the ownership of a vault and thus having to authenticate from all owners before the funds can be withdrawn. Coinbase stores 98% of all of customer funds offline. It is not as specific as Xapo with its security measures regarding the funds stored in vaults but it claims that “drives and paper backups are distributed geographically in safe deposit boxes and vaults around the world.”
Just recently, Coinbase announced a custody storage service for institutional investors with an initial setup fee of $100,000 USD, and a fee of 0.1% per month on assets stored. Only institutional investors with a minimum of $10M in deposits will be allowed to use this service. Brian Armstrong, CEO of Coinbase, said that “by some estimates there is $10B of institutional money waiting on the sidelines to invest in digital currency today” because they haven’t found a way to store client funds securely yet. Coinbase plans to support all major digital assets including Bitcoin, Ethereum, Litecoin and ERC20 tokens.
The trend in the market is that storing cryptocurrencies in cold vaults is free for retail investors while storing assets for institutional investors costs a premium. As long as the crypto market continues growing, it will continue attracting institutional money. However, if the growth slows and more custodial solutions start appearing, the fees could decrease to remain competitive.
Shinhan Bank, the largest bank by assets in South Korea, announced that they are planning to launch a cryptocurrency vault by mid-2018. The service is aiming to provide the security of a traditional bank for holding cryptocurrencies. At first, the vault will be free with a small fees for withdrawals to attract new customers.
IRS Granted Partial Access To Coinbase User Data
San Francisco US Magistrate Judge Jacqueline Scott Corely ruled in favor of the Internal Revenue Service (IRS) last week in a bid to gain access to Coinbase customer data in order to track users who have failed to report their capital gains from Bitcoin trading.
The period that was being looking at in question was from 2013-15 were only 800-900 taxpayers actually reported gains while Coinbase had more than 14,000 users who had bought, sold, sent or received a minimum of $20,000 in Bitcoin.
In July, Coinbase did succeed in having the IRS scale back its initial request which was claimed to be "overly broad" and which even found the backing of some in the US Senate.
European Entities Reign ICO Parade, Says Atomico
Venture capital firm Atomico released a comprehensive report (see here) on the state of European Tech ahead of the infamous Slush conference in Helsinki this year.
It highlights, that 46% of total ICO funds raised have gone to European entities, (47% for entities registered in Zug, Switizerland alone), while the North America has attracted 28%.
And while the number of most projects launched come from Central and Eastern European countries (almost double at 162 vs 90), Swiss, Austrian and German project have raised three times as much at $976Mn.
Week-on-Week: Bitcoin's Steady Rise
ICOs Raise $682Mn in November, a 21% Drop From October.
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