2018 August 6 - Volume.2 Issue.31

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2018 August 6 - Volume.2 Issue.31

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Grayscale Finds Competition as ICE Set to Enter Bitcoin Trade

Intercontinental Exchange, who owns the Big Board, can't seem to get enough of Cryptocurrencies after seeing its NYSE's investment in Coinbase soar. The institutional exchange operator has now set its eyes on Bitcoin Futures that will be physically-settled, as opposed to CME and CBOE cash-settled futures. And news coming out of New York also highlights the opportunity to enter the mutual funds market, as it sees Grayscale making its mark and gaining institutional investors through the Bitcoin Investment Trust.


Following rumors in May, Intercontinental Exchange (ICE), operator of 23 regulated exchanges and marketplaces including the largest stock market NYSE, officially announced on Friday that it is starting a new company called Bakkt (pronounced “backed”). ICE is partnering with Microsoft, Starbucks and Boston Consulting Group to facilitate the new venture.

Bakkt aims to create an open and federally regulated platform for both the consumers and institutions to trade, store and spend digital assets. Jeffrey Sprecher, founder and CEO of ICE, said that the goal is to build confidence in the digital asset class on a global scale by leveraging ICE’s track record of bringing transparency and trust to previously unregulated markets.

|| HOLD YOUR HORSES...APPROVAL NEEDED

If approved by the CFTC, starting in November, Bakkt’s first offering will be one-day physically delivered Bitcoin futures traded on ICE Futures exchange. Bitcoins will be physically delivered to ICE’s regulated Digital Asset Warehouse, an offline custody service storing both the public and private keys. All the online trading will happen off-blockchain on the ICE Futures exchange while the bitcoins will be securely stored offline until a withdrawal request by the client. In order to initiate the withdrawal process, the identity of the client must be thoroughly confirmed and only then, the bitcoins are released. Any transfers between Bakkt clients will be processed internally offline and off-blockchain. Bakkt will also fund a separate guarantee fund to back all the transactions.

While cash-settled Bitcoin futures have been traded on CME and Cboe since December, Bakkt would provide the first physically delivered Bitcoin futures in the U.S. Physically delivered futures eliminate the cash price settlement risk and the contracts can be used as an instrument by institutional investors to hedge exposure. In 2017, CME filed a patent for physically settled Bitcoin derivatives clearing system. Coinfloor, a cryptocurrency exchange operator based in the British Virgin Islands, launched the first trading platform with physically delivered Bitcoin futures in April.

Microsoft backed Bakkt financially and the platform will be run on Microsoft’s cloud solutions. Despite some confusion, Starbucks clarified that we it will not start accepting digital assets but rather Bakkt will convert digital assets into USD, which can then be used at Starbucks. Starbucks’ role will be to consult and develop applications for Bakkt.

If Bakkt is successful in making the trading and storage more transparent, regulated and secure, it can be expected that it may increase institutional demand, increase liquidity and in turn decrease volatility - which has been seemingly the biggest barrier for institutional investors. Bakkt will compete against other companies offering institutional investment products such as Coinbase, Grayscale, Ledger, Gemini and BitGo but Bakkt will be the first CFTC-regulated company to combine physical storage and futures trading (see table).

|| DOUBLE-EDGED SWORD FOR GRAYSCALE?

While many continue to rejoice on the institutional drive that the venture could bring into the space, in reality, institutional investors have had the opportunity already through multiple avenues. Grayscale's Bitcoin Investment Trust has picked-up speed despite the market downturn. In their 1H18 report, Grayscale disclosed that the company's Bitcoin Investment Trust has seen an average weekly inflow to the tune of $6Mn - over half coming from institutional investors. And while seemingly celebratory, Digital Currency Group's Barry Silbert, who owns Grayscale, still took the opportunity to say "Game on."

Bitcoin Investment Products

wdt_ID Provider Investment Product Availability
1 Bakkt (Nov-2018) Bitcoin Futures (physically-settled) Nov-2018
2 Bitwise Cryptocurrency Index Fund (non-U.S.) Available
3 Cboe Bitcoin Futures (cash-settled) Available
4 CME Bitcoin Futures (cash-settled) Available
5 Coinbase Cryptocurrency Index Fund Available
6 CoinfloorEX Bitcoin Futures (physically-settled) Available
7 CoinJar Cryptocurrency Index Fund (Australia) Available
8 Flow Traders Exchange Traded Note (EU) Available
9 Grayscale Bitcoin Investment Trust Available
10 LedgerX Bitcoin Options Available


Key Bakkt Investors:
Microsoft, Fortress Investment Group, Eagle Seven, Galaxy Digital, Horizons Ventures, Pantera Capital, Protocol Ventures, Susquehanna International Group, Alan Howard (co-founder of Brevan Howard Asset Management LLP).

Select Funds with Grayscale's Bitcoin Investment Trust (GBTC)

wdt_ID Name Portfolio Owner Type
1 Kinetics Internet Fund Mutual Fund
2 Kinetics Paradigm Fund Mutual Fund
3 ARK Innovation ETF Mutual Fund
4 Ark Web x.0 ETF Mutual Fund
5 Kinetics Market Opportunities Fund Mutual Fund
6 Horizon Strategic Value Investment Instl Separate Account
7 Kinetics Small Cap Opportunities Fund Mutual Fund
8 ARK Disruptive Innovation Strategy Separate Account
9 Oxbow Advisors, LLC 13F
10 Horizon Small Cap Institutional Separate Account


Grayscale Bitcoin Investment Trust Cumulative Inflows ($Mn)


Source: Grayscale. Notes: Diar Calculation Approximates.


CBOE, CME Bitcoin Futures Move at Different Speeds

Bitcoin enthusiasts heralded the news out of Chicago at the end of last year that both cross-town rivals would be offering cash-settled Bitcoin futures contracts. And despite CME announcing the intent first, it was CBOE who beat them to the punch listing the contracts a week early. But  6-months in, CBOE has gone from having 55% of total volume for Bitcoin futures in January to only 20% in June this year. Accounting for spot markets also, the futures markets have doubled, but they still remain a measly 2% of total Bitcoin trading.


The CFTC approved listing of bitcoin futures in early December. Chicago Board Options Exchange (Cboe), the largest options exchange in the U.S., launched bitcoin futures trading on December 10 and CME Group soon followed on December 17. Futures contracts at both outlets are cash-settled but there are several differences (see table).

In February, J. Christopher Giancarlo, chairman of the CFTC, characterized the volume of the bitcoin futures markets as quite small when put in a perspective. He said that, in comparison, the notional amount of the open interest in CME’s crude oil futures was more than one thousand times greater than that of Bitcoin’s futures traded at CME and Cboe. Chris Concannon, President and COO of Cboe, recently acknowledged in a letter to the SEC that “the current bitcoin futures trading volumes on Cboe Futures Exchange and CME may not currently be sufficient to support ETPs seeking 100% long or short exposure to bitcoin.”

The daily traded volume as well as daily open interest of Cboe and CME futures combined has been growing albeit very slowly (see charts). When looked at separately, Cboe’s daily traded volume and daily open interest have both been declining quite rapidly. The declining open interest indicates that more positions are closed than opened or created. The CME futures, on the other hand, show the opposite trend (see charts) indicating that more positions are being opened or created.

CME also recently announced that Bitcoin futures hit record daily volume of more than 12,800 contracts. The average daily volume (ADV) at CME was a little north off 1,000 contracts in December while it surpassed 5,000 in July indicating a growth of roughly 400% in the last eight months (see chart). At press time, the traded volume of crude oil futures at CME is still about 200 times as much as that of Bitcoin futures traded at CME.


CBOE, CME Bitcoin Future Contract Details

wdt_ID Details Cboe CME
1 Contract Size 1 BTC 5 BTC
2 Symbol XBT BTC
3 Margin Rate 44% 43%
4 Settled in Cash Cash
5 Settlement Price Gemini's auction price Pricing: Bitstamp, GDAX, itBit & Kraken
6 Price Fluctuation Limits 10%; 20% 7%; 13%; 20%

CBOE & CME 2018 Monthly Bitcoin Futures Trading Volume ($Mn)


CBOE & CME 2018 Bitcoin Futures Open-Interest Holds Steady ($Mn)


CBOE & CME 2018 Daily Bitcoin Futures Trading Volume ($Mn)


Notes: * Until 24 July 2018.
Sources: BitMEX Research, Bloomberg, Diar.


Bitcoin Cash Remains Flatlined One-Year Post Fork

Despite a massive marketing push, and an impressive number of top exchange listings including a trust by institutional investment firm Grayscale, data shows that Bitcoin Cash has yet to win users over and remains flatlined on all fronts one year on since its fork from Bitcoin.


In what culminated to be the longest and remains the most controversial debate in Bitcoin's history, Bitcoin Cash forked in an effort to keep fees low by increasing the block size as an answer to the King of Coins scaling woes.

Bitcoin, of course, looks to the three development teams working on the Lightning Network as a scaling solution. The Lightning Network, which made headway at the start of the year when Blockstream inched forward onto the Mainnet, isn't without its problems however (Diar, 25 June).

|| HOW MUCH LOWER IN FEES?

The argument of low fees has now taken a backseat since major exchanges adopted the batching of transactions as well as Segwit at the start of the year for Bitcoin (see chart 1).

And while Bitcoin Cash fees remains largely cheaper than Bitcoin, this fact alone has not assisted the forked cryptocurrency in gaining any transactions further than being inline with that of Bitcoin - which has not seen any substantial increment in transactional volume either (see chart 2).

Where the two cryptocurrencies now diverge is in mining power (see chart 3). Miners have flocked to Bitcoin hitting record hash power month-on-month. The same cannot be said for Bitcoin Cash despite profitability being fairly equal.

|| CYPRUS...?

News has been circulating that 70% of merchants on the European island nation of Cyprus are to start accepting Bitcoin Cash. This publication, being based out of Nicosia, takes the prospect with a heavy grain of salt considering banks on the island have avoided cryptocurrencies like the plague.

Merchant processing in Cyprus has been greatly cornered by a single processor, JCC, whom have considerable ties to government and unlikely to push the envelope on an already heavily pre-cautious banking industry that is confronting massive pressure from US regulators on money-laundering operations.


Widening Price Gap Trend Between Bitcoin and Bitcoin Cash
1 = Peak Gap BTC/BCH

Bitcoin Segwit Support Skyrockets to Near 40% of Total Transactions


Source: BitcoinVisuals.com


Bitcoin, Bitcoin Cash Failing to Find New Audience? (Txs)


Source: Coinmetrics.io


Hash Rate: Miners Flock to Bitcoin as Bitcoin Cash Remains Flat


Source: BitInfoCharts.com


Initial Coin Offerings Tumble to One-Year Low

Raise amounts from Initial Coin Offerings (ICO) have tumbled to a one year low according to data released last week by Token Data. Versus last July, when ICOs had begun to gain traction, July-2018 saw a massive 47% decrease in total raise. Still, this year to date ICOs have raised a whopping total of $11.3Bn.

Excluding the mega-raise by EOS which accounted for an eye watering $4.2Bn, ICOs have still managed to raise more in 2018 than the total of the previous year.

|| ALWAYS IN DECLINE, NEVER HITTING BOTTOM?

Token Data highlights that there have not been any mega raises in June and July. Causes may point to more than investor exhaustion - mainly, the avoidance of teams raising capital in the US, who may have shifted to private equity rounds due to increased regulatory scrutiny.

ICO Raise 2017-18


Bitmain to IPO in Hong Kong
Bitmain will reportedly conduct an initial private offering (IPO) shortly and be listed on the Hong Kong Stock exchange this year. Bitmain reportedly earned $1bn profit in Q1 and has now raised more than $450Mn in VC. The valuation of Bitmain now sits at approximately $14bn.
OKEx Forced Clawback
A $400Mn long position in Bitcoin futures was force-liquidated on OKEx. The company injected 2500 BTC ($18Mn) from its own capital into the exchange’s insurance fund but the societal loss mechanism was activated resulting in a 17% clawback from all profited traders.
Philippines Unfriendly to ICOs
The Philippines Securities and Exchange Commission issued a draft of new ICO rules. The new regulations, which have yet gone into effect, assume that all ICO tokens are securities by default unless proven otherwise. Companies must submit the request at least 90 days prior to the ICO.
Publication Received
The Basics of Bitcoin and Blockchain - R3 Director of Research Antony Lewis has taken a sober look into Blockchain in his book set to be released this month. The comprehensive outlook is more than a 101 education and questions when Blockchains should be used. via Amazon.

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