2018 October 22 - Volume.2 Issue.42

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2018 October 22 - Volume.2 Issue.42

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Trading Flows Back to Bitcoin as Stablecoins Lose Perceived Peg

Concerns surrounding the bank reserves of Tether continue to bubble on the surface with the stablecoin still not be able to regain its 1-to-1 US Dollar peg weeks after confidence jittered investors. Along with the sentiment around Tether, other stablecoins have actually gained against the Greenback shifting dollar-pegged cryptocurrencies into a forex realm, none actually stable, deviating from their perceived peg. Still, markets have responded correctly and actual dollar value of Bitcoin remained the same, despite appearing to carry a premium. 

The dust around Tether hasn't completely settled with the stablecoin still a few pips off dollar parity. The close connections between Tether and Bitfinex who last week paused customer fiat deposits caused markets to discount the price of Tether from insolvency fears (Diar, 15 October & 25 June).

To add fuel to fire, when Bitfinex did reopen their deposits, it was a selective process administered by the exchange with a peculiar warning about sharing their banking relationship with anyone cautioning that “there may be serious negative effects associated with this information becoming public” further deteriorating faith in the closely exchange-linked stablecoin.


The opportunity was not lost on cryptocurrency exchanges who last week were quick to respond to market concerns with many adding more stablecoin offerings, and announcing that more are to come.

In fact, the number of dollar pegged cryptocurrencies have become so many that the third largest exchange Huobi have decided to amalgamate major stablecoin deposits into its own house dollar stablecoin "HUSD", allowing to on-ramp and off-ramp into the exchange with USDC, Gemini Dollar, Paxos Standard, and Tether.


While the crypto-sphere took to highlight the risks of Tether by indicating the price of Bitcoin on exchanges that use the controversial stablecoin as a "risk premium", the math indicates otherwise.

Markets have correctly valued the Bitcoin/Tether trading pair should someone which to convert out to US Dollars, via for example, Kraken who has a USD/Tether trading pair (see chart). The value of Bitcoin in actual Dollar terms hasn't changed - it's only changed against another cryptocurrency whose perceived value of $1 has dropped.


New stablecoins that have stolen headlines in recent months, USDC, Paxos, Gemini Dollar, all come with the approval of the New York Department of Financial Services (NYDFS), the orchestrators of the contentious BitLicense. This oversight has very well given investors peace of mind, all now trading at a premium.

But there is a problem. And it’s the same problem that has caused Tether to be seen as a systemic risk to the cryptocurrency ecosystem.

"There is no financial report framework with respect to audit conformity with a stabelcoin. So you can't perform an "audit." You must instead rely on a 3rd party to attest to whether an assertion (that there is a 1:1 peg) is accurate."

Cameron Winklevoss, Co-Founder, Gemini 


While Tether has now repeatedly failed to produce and release an ever so promised proper audit of their banking reserves confirming outstanding tokens, they have released an attestation (Diar, 25 June).

And according to Cameron Winklevoss, Co-Founder of Gemini, and the recently launched Gemini Dollar, an attestation might be as good as it gets (see quote box.) Mr Winklesvoss asserts that there is no reliable way, currently, to audit a stablecoin.

The disconnect between a blockchain ledger and a bank ledger hasn't gone unnoticed on a basic auditing level and unlikely to sit well with cryptocurrency crowds. However, it is notable that all NYDFS regulated stablecoins have appointed audit firms, whereas Tether have in fact, fired theirs.


While other stablecoins are beginning to gather pace, their market share of stablecoin trading volumes remain minute. With few token trading pairs, Tether still dominates. In the case of Binance, for example, Tether volumes still account for 98% of the total stablecoins traded volume (see chart 3).


What is evident, however, is that traders have now become more amenable to the volatility of Bitcoin rather than risk holding Tether. Trading volume of USDT pairs have dropped by a whopping 25% from the 15 October “peak crisis” and 17% down from the start of the month on Binance (see chart).

And trading volumes on OKEx, the largest token exchanges following Binance also saw an uptick of trading volume in BTC pairs. Whether or not temporary, market data of this blip in stablecoin trading is telling.

Binance Flippening: USDT Volumes Hit Low, Flows Move to Bitcoin %

OKEx, With The Most USDT Pairs Sees BTC Pairs Increase 8-10%

No Risk Reward as Markets Value BTC/Tether/USD Equally

Kraken: Tether/USD Trading Volumes Subside, Tether Still Not at Parity

Binance: Tether Still Dominates at 98% of Volume Against Other Stablecoins

Source: Diar Calculations, CoinAPI.


"Getting audited as a crypto company is extremely hard, sometimes impossible. The things which "constitute proof" in crypto are ignored/irrelevant to auditors, and the things they often rely on are don't exist or can't be relied on when combined with crypto."

Erik Voorhees, CEO, ShapeShift

Digital Asset Custody Solutions Find Institutional Interest

Fidelity stole headlines as they made their move into the space offering custody solutions, as well as a white-glove client service for trade execution. And Goldman Sachs, alongside Michael Novogratz's Galaxy Digital, backed custody solutions provider BitGo who currently boast clientele the ranks of the CME Group and Genesis Capital.

Wall Street may have yet to move their chips into Bitcoin and other digital assets en masse, but last week the contentious cryptocurrency industry won some majors over laying down the architecture for the potential future.

While the "Not your keys, not your Bitcoins" adage may hold true for individuals, institutions and institutional investors will likely seek assurances as well as the insured safety of their digital holdings, not in whole, but neither in small part due to regulatory requirements and protection of client assets (Diar, 8 October).

Last week saw two of the largest institutional endorsements for Bitcoin to date with Fidelity and Goldman Sachs entering the foyer of digital currencies through custody solutions. And earlier this year Swiss bourse SIX Exchange also announced that they too will provide a custody solutions sometime in the new year.

The solutions don't come cheap. Coinbase Custody, as well as Gemini Custody both charge a cool $100K minimum annual fee for a segregated cold storage solution of client assets. And services charges as well as withdrawal charges have effectively turned cryptocurrency outfits reminiscent of banking services before PayPal.

Monero Hardfork Showcases Benefits in Lightning Speed

In their bi-annual upgrade to its blockchain, Monero introduced "Bulletproofs" technology that would remove a great deal of data bloat that the privacy cryptocurrency has until now been suffering from.

Coinmetrics was quick to track and highlight the effectiveness of the deployed tech with fees plummeting from an average of $0.7 at the start of October, to $0.02 average a few days in (see chart). Coinmetrics data shows transaction size have dropped by a whopping 455% (see here).

Monero Average Fees Drop to a Ridiculous $0.02

Source: Coinmetrics.io

Genesis Loans Out $553Mn
Digital Currency Group's lending arm Genesis released a 3Q18 report highlighting the company having loaned out $553Mn since March, and currently holding $130Mn in active loans. While the Over-the-Counter outfit saw investors seeking short positions in March, compositions have shifted from a speculating majority to an equal split for investors seeking trading opportunities and working capital.
Binance Grows Up
Binance announced a partnership with criminal forensic focused blockchain analytics firm Chainalysis. The exchange will use Chainalysis tools to alert them on possible illicit activities. But with no banking or regulatory oversight, it remains unclear who exactly Binance would report criminal activity to. The move either indicates that Binance is close to securing banking facilities, or is already working with regulators.
Blockchain Airdrop
With nearly 30Mn downloads by their count, major wallet provider Blockchain has announced a program that will support airdrops of tokens into their wallets. Blockchain will be studying the projects that it will allow within their walled garden to ensure that there is an actual function for the token. The vetting might prove a necessary component of success considering the ineffectiveness of airdrops thus far (Diar, 26 March).
dYdX Raises $10Mn
Andreessen Horowitz and Polychain Capital have doubled down on their investment with a further $10Mn funding for decentralized derivatives and margin trading protocol dYdX. Earlier this month dYdX, which was founded by a former Coinbase employee went live with their margin trading protocol, and has been a favorite project within the 0X financial ecosystem and is now eyeing the prospect of options.

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