2018 November 26 - Volume.2 Issue.46

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2018 November 26 - Volume.2 Issue.46

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Token Liquidity Plummets Leaving Bag Holders High and Dry

Despite cryptocurrency prices having plunged 80-95% from the start of the year, traders aren't taking a punt on the bargain. Token volumes have plummeted across major exchanges with 60% of listed cryptocurrencies trading below January levels. Order books are now filled to the brim on the sell side with November, to date, seeing an acceleration in depreciating volumes.

Over 20% of cryptocurrencies that remain listed on major exchanges (see note on examined exchanges) now have less than 90% of the trading volumes they witnessed at peak hype in January. More than half of those are effectively dead in the water with no traders looking to buy.


On the other end of the spectrum, 102 of 410 tokens that have seen volumes increase by more than 100% January vs October. November however shows that this number now dropped to 91 within less than a month. And the remaining tokens that have found some increase in volume are only a handful.


Liquidity from one exchange to the other differ however - quite dramatically in some cases. For Poloniex, quite literally all listed tokens have less trading volume than the start of the year. In the case of Bittrex - three tokens (see interactive chart below). The outliers, by reported volume atleast, are OKEx and Huobi, with Binance having a fairly equal share of trading volumes across the percentage bands. Just under half of Binance's listing have decreased volumes compared to the start of the year


No. Over 75% of the tokens that have been added to exchange this year have seen their volumes in complete decline October versus November (see chart).

Exchanges: Binance, OKEx, Huobi, Bitfinex, Kraken, Poloniex, Bittrex, HitBTC.
Assessment looked only at tokens being traded at the start of the year and continue to be listed on the above exchanges. Volumes are based on the actual token, not a conversion to fiat or crypto pairs.

No. of Tokens and % of Volume +/- For Jan vs Oct-2018

No. of Tokens and % of Volume +/- For Jan vs Nov-2018

Nov vs Oct Volumes of Coins Added in 2018

European Regulators Push Pause on Broad Access Token Securities

Earlier this month saw the European Parliament adopt a crowdfunding proposal tabled in March this year and is now set to enter into negotiations with the European Commission and the Council. Whilst many European Member States have established their own bespoke crowdfunding rules, it's likely the latest news out of Brussels has pushed national regulators on hold in relation to equity crowdfunding, a directive that would also likely cover tokenized securities. This has thrown a late spanner for equity-token offering platform Neufund who was set to launch several token securities this year aimed primarily at non-accredited investors.

Berlin-based Neufund has announced that the first company to raise capital on their Ethereum blockchain equity token platform will be the operator of the company itself Fifth Force. While Neufund conducted an Initial Coin Offering raising over €12Mn, the funds remain at the behest of investors and earmarked to kickstart companies looking to raise capital on the platform (Diar, 14 May).

That's as far as the good news goes.

Neufund from the start have stated their full coordination with Germany's Federal Financial Supervisory Authority (BaFin) to protect investor interests and equity record keeping by bridging corporate filings to the Blockchain through a Special Purpose Vehicle (SPV) investment agreement. And all seemed to be going as planned when Neufund announced in June six companies slated to conduct an Equity Token Offering (ETO). In all appearances it looked like Neufund was gaining momentum having also partnered up with Binance to issue an ETO for Founders Bank, as well as collaborating with the Malta Stock Exchange.


The regulator however has effectively pulled the brakes on who can participate on the platform citing requirements of a "technological audit" and raising the minimum investment ticket to €100,000 instead of the anticipated €500. This moves capital raising full back into accredited investor territory and far from the reach for the thousands of the initial Neufund backers who have also committed to an 18-month block before they can withdraw their funds should they not find an investment opportunity of interest.

Though Neufund has promised a second ETO in the new year open to all investors, the European Securities and Markets Authority (ESMA), the European Parliament, the European Commission and the European Council are likely to not move as fast. BaFin of course in the meantime could conduct it's own mandate, though unlikely.

EU Proposal to Address Crowdfunding & Securities In Tandem

"Crowdfunding represents a new type of intermediation where a crowdfunding service provider interacts with its clients through a digital platform without taking on own risk in order to match prospective investors with businesses that seek funding, irrespective of whether that funding leads to a loan agreement, to an equity stake or to another transferable security based stake. It is therefore appropriate to include in the scope of this Regulation both lending-based crowdfunding and investment-based crowdfunding, since they are comparable business funding alternatives."

Source: European Commission

US Securities Laws on Crowdfunding Limitations

[wpdatatable id=233]

Notes: *Within 12-Month Period

Europe now continues to trail far behind the US who have already started to steer the token ship right under securities laws enacted with the JOBS Act in 2012, and later, the 2016 amendments that covered equity crowdfunding (Diar, 19 November).

The adopted text this month by the European Parliament has made better concessions than originally proposed back in March. The maximum capital raise has been increased from €1Mn to €8Mn.

And while good in comparison to US securities law Reg CF, the upper limit however is still a far cry from the various paths issuers could opt to take(see table). And the structure of who is allowed and at what limits are yet to be defined by the European Commission.

Bitcoin Miner Margins Tighten, Hash Power Goes in Decline

Miner euphoria came to a screeching halt last week as the price of Bitcoin tumbled forcing a 20% decrease in the networks hashrate. In a best-case scenario, most miners are now switching off equipment and await a lull of opportunity as margins have taken a 30% hit on the weekend versus the start of last week. The decline does provide a gleam of information on large mining margins as hash power as well as revenues downtrend.

Along with price, Bitcoin’s mining hashrate has also started to decline, now seeing a downtrend, the first time this year. The drop in Bitcoin’s price is now seemingly affecting even larger miner operations, having fluctuated between 40-60Mn TH/s since August when it peaked at 62Mn TH/s and small retail miners began seeing no returns (Diar, 8 October). 

Despite miner revenues surpassing $5Bn this year, two major operations have closed up shop, BTCC Pool, and US-based Giga Watt who filed for bankruptcy last week and left massive debt in its wake. Court documents seen by Coindesk place estimated liabilities between $10-50Mn.

The downtrend does however give some data insight into operating margins. In a best-case scenario, mining on Antminer S9 and wholesale electricity costs, miners require a 30-45% gross profit margin to stay online. From Hashrate peak in August until November when power started to decline, miners earned a healthy 56% average gross margin. This dropped to 39% last week with Bitcoin’s price forcing 20% of miners to switch off equipment.


Bitmain, the largest manufacturer of Bitcoin mining equipment has opened pre-sale for their latest miners slated for shipping at the end of the year. With a limit set on quantity available for purchase, and a whopping 5x the price of their replacement flagship model, it's unlikely the more efficient equipment to come online en masse any time soon. (see table below).

Despite the new model, the Antminer S15 being capable of brining in more than double the profits, it would still require heavy capital injection by miners who are now biting nails in hope that Bitcoin's price doesn't collapse, or have hefty swings as seen last week before they can cover what they've already laid out on the limb.

To make matters slightly more troublesome for Bitmain who is seeking to list on the Hong Kong Stock Exchange, the upcoming halving of the bitcoin reward in May 2020 will twist the giants arm in deep price cuts should it wish to move  inventory.

Bitmain Antminer S9 Margins Begin Feeling Squeeze...

...As Electricity Costs as % of Revenues Jump 36% From Start of Month

Hashrate Downtrends

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Blockchain Cap. Backs Securitize

Token security platfrom startup Securitize has successfully completed a Series A funding round led by Blockchain Capital raising nearly $13Mn. The startup also saw the support of Coinbase.

This year has seem ample interest in fundraising platforms. Circle purchased broker-dealer SeedInvest. Binance led a funding round for Republic (Diar, 8 October). And Coinbase might just be looking to extend the use of this year's acquisitions that has secured them licenses that are more geared to accredited investors, now giving it the full-range of potential regulation path ways for companies looking to raise funds. The tally for these platforms? A cool $175Mn.

[wpdatatable id=236]

Notes: *Capital raised by Neufund's ICO are at the behest of investors to purchase equity on the platform.

Treasury Withdrawals Increase

Initial Coin Offering treasuries have seen total withdrawals of 170,000 ETH this month, marking it as the third largest withdrawal period this year. Last week alone saw treasuries take out over 100,000 ETH. Still, developers are holding tight having withdrawn only 22% from the start of the year. This could however spark a different debate. Had the developers raised funds with a hard-cap, meaning, raised what they needed, and "hodled", they are now effectively with a substantial amount of monies less begging the question, will they be able to fulfil their purpose? [See Diar Curated Data Platform]

Op-Ed: Stablecoins a Boon for Merchants and Unbanked

Omid Malekan

Crypto enthusiasts by and large don’t like fiat-collateralized stablecoins. They are too centralized, on account of the collateral being stored at a bank, and too censorable given the issuing entities power to freeze and destroy tokens. While some users tolerate them as a workaround to the lack of fiat onramps at crypto exchanges, most view them as anathema to the ideals of the industry. But this may be the incorrect way of looking at these products.

The value of tokenized dollars doesn’t come from a comparison to Bitcoin. It comes from a comparison to non-tokenized dollars, thanks to the sad state of our payment infrastructure.

Most of today’s payment rails are not very good, particularly in the United States. They either take days to clear, are too expensive, or both—problems familiar to anyone who has ever waited for an ACH or wire to show up.

At issue is the architecture of our systems, most of which were designed in the days of banking being done with pen and paper. The same processes were digitized once the internet showed up, but that’s not the same as being natively digital. This has thus resulted in a slow and inefficient system with comical limitations - operating only during banking hours on business days just for starters.

Stablecoins can revolutionize this system thanks to their decentralized blockchain rails. To users, the experience is not that different from today, where most payments are a series of ledger entries between third-parties who hold their money. But thanks to the speed, efficiency and transparency of blockchains like Ethereum and Stellar, the dollars involved can be moved faster and cheaper than ever.

There’s great potential for these products to take over global payments, especially once retailers in the US get involved. That industry has been at war with payment processors for decades, trying everything it can to circumvent the obnoxious swipe fees that—while making Visa the world’s 2nd biggest financial company and PayPal a profit machine—have crippled their own profit margins.

If your gross margins are just three percent (as is the case for many supermarkets) or three cents (as is the case for many gas stations) then 2% swipe fees on credit card transactions is an $80 billion a year problem—one set to worsen as credit card reward programs proliferate.  (The pricing structure of Visa & Mastercard incentivise card issuers to offer ever-higher rewards while passing the cost on to merchants.)

America’s outsized swipe fees have resulted in everything from massive class-action lawsuits against payment processors to the nation’s largest grocery chain no longer accepting Visa cards to gas stations charging more for credit to Starbucks literally offering free coffee to anyone who pays using their mobile app. Amazon now has a cash app where users can deposit dollars into their mobile wallet at thousands of brick and mortar stores.

Why would a retailer like GameStop team up with it’s biggest competitor? Because the only thing worse than losing customers to Amazon is losing profits to Mastercard.

Fiat stablecoins will finally give the retail industry the upper hand. For customers, the experience will be no different than using any other mobile wallet to pay at checkout. But for retailers, the blockchains being used will generate massive savings. The fact that the money is being held by a large bank, potentially in FDIC insured accounts, will be viewed as an added bonus.

Individual users will benefit as well, and not just from the savings off swipe fees resulting in lower prices. Unlike existing payment methods like Venmo, tokenized dollars can be used anonymously in peer to peer transactions. This will make them appealing to the unbanked, especially in countries with failing local currencies where hard money like the dollar—often purchased at a premium in the black market—will soon be a mobile wallet download away.

Lest we forget, most people are perfectly happy with fiat money, so long as it’s stable. This is why US Dollar remains the global reserve currency. The one drawback to using dollars has always been the lack of fast and free electronic payments that are now ubiquitous in places like China, but that problem is about to be solved.

The ability to send millions of dollars around the globe in seconds for almost free is going to rewire the global payment system, eliminating the need for everything from certain interbank transfers to Transferwise. The programmability of these products will also make them appealing on Wall Street where payments resulting from complex financial products are a logistical bottleneck.

There are several drawbacks to using these products, the biggest one of which might be the lack of chargebacks. The overall infrastructure of wallets and interfaces needs to be developed more as well before mass adoption.

But the tens of billions of dollars at stake are a great motivator to innovate, and the fact that Chinese companies like Ant Financial have become financial powerhouses by doing just that provides a good roadmap.

In the long run, mass adoption of stablecoins will be one of the best things to happen to the blockchain industry. Just as most users had to be eased into using the World Wide Web with half-way solutions like America Online, stablecoins will familiarize millions of people with the process of using a blockchain.

That way, at the outset of the next financial crisis or inflation scare, that many more people will be a hop away from going full crypto. When that day comes, fiat stablecoins will be viewed as one of the best things to ever happen to the industry.

Omid Malekan is the author of The Story of the Blockchain: A Beginner's Guide to the Technology That Nobody Understands - Link. He is currently working at Citi Ventures as a Blockchain consultant. His views in this article do not represent the views of his employer.

Bakkt Delays Launch into New Year
Intercontinental Exchange-led Bakkt has pushed back their trading of physically delivered Bitcoin futures into next year slated for launch on January 24 2019. The company's announcement highlighted that Bakkt has secured insurance for their cold storage facilities, and are in the process of gaining coverage for their warm wallet warehousing facilities. The release hinted at the possibility of more crypto assets in the future, but highlighted liquidity requirements for such a case.
Paxos Stablecoin, BitPay Enter Partnership
US Dollar pegged Paxos stablecoin has partnered up with payment processor BitPay in an effort to boost cryptocurrency payments. The announcement comes on the back of data from Chainalysis published by Reuters indicating that cryptocurrency payments have plummeted by 80% this year through to September. The move is unlikely to solve any problems given that BitPay's primary benefit is that merchants can accept crypto, but convert to fiat immediately.
Silvergate Banks Eyes NYSE IPO Listing
Cryptocurrency-friendly Silvergate Bank has filed with the US Securities and Exchange Comission for their IPO in their efforts to raise $50Mn. At the start of the year, Digital Currency Group led a $114Mn investor round in Silvergate Capital Corp., the holding company for the bank. Filing records show that the risk taken on by the bank has paid off having secured nearly 500 cryptocurrency-related clients and is now sitting on $1.7Bn in non-interest bearing deposits as of 3Q18.
US Add More Heat to Tether Manipulation Probe
Following last year's subpoena by the CFTC, the US Justice Department is now also weighing into the investigation in a broad cryptocurrency criminal probe looking into possible price manipulation according to Bloomberg. Neither regulators, nor Tether have commented any further, and ultimately no concrete accusations made as of yet. Earlier this month Tether's Bahamas-based bank Deltec confirmed reserves following an attestation published by Tether earlier this year.

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