Sweeping generalisations by regulators set a concerning precedent for further regulatory & government intervention as the industry develops.
This week in Crypto
After a steady and significant drop in Bitcoin 30-day realized volatility, almost reaching 20% last week, BTC has broken out of its rather dull sideways consolidation and moved back above $11,000, much to the delight of social media. Markets, in general, are bid as we enter the final stretch before the US election and Trump and Pelosi argue and flip-flop over how much stimulus the US should have. Either way, the USD liquidity is coming, global markets expect it, and it’s being priced in accordingly.
Chart showing Bitcoin 3-month volatility approaching historic lows last weekBTC breakout, moving back above $11,000
Gold also broke out of its 2-month trading pattern as inflation wary investors continue to pile into ETFs and, in the process, set new records for yearly inflows at over 1000 tons for 2020 and still with 11 weeks to go until year-end. With the Fed explicitly intent on devaluing the USD in order to achieve the magical 2% inflation target, we expect to see continued upside pressure for precious metals as investors seek inflation hedges for the purchasing power of their cash. As discussed before in this Weekly, gold price appreciation is a net benefit for Bitcoin, and as Twitter thought leader Robert Breedlove likes to say… “demand for gold is just dammed-up demand for Bitcoin.”
Chart showing gold breaking out of its ~2 month down trend
Although gold and Bitcoin do exhibit strong correlation, an independent catalyst for Thursday’s BTC breakout was likely the bullish news that Jack Dorsey’s listed payments company Square Inc have followed the same path as a fellow public company, MicroStrategy and allocated part of their USD treasury to Bitcoin. The NYSE listed firm, with a market cap of over $84bn, allocated an initial 1% of their USD treasury to just over 4,700 Bitcoin and can now be added to the growing list of listed corporates that hold BTC as a treasury reserve…gradually then suddenly. In true Dorsey opensource style, he went one step further and published a guide of how other corporates can execute BTC purchases in the OTC market via TWAP orders as well as covering how to custody, insure, and account for treasury allocations.
The below table — www.bitcointreasuries.org — lists the growing number of corporates taking this step as well as the current ETNs and in aggregate represents an impressive 2.85% of all total Bitcoin supply that is locked away, for now.
With Bitcoin back above $11K, the expectation that Bitcoin will reach +$100,000 feels very ingrained now within the minds of holders as well as the understanding that long-term time preference is fundamental in order to reap the rewards from investing in Bitcoin, especially those who subscribe to the Stock to Flow models. Will investors that have accumulated at this now 11th week old +$10,000 price floor really be that motivated to sell at $20K, $30K, or even $50K? Surely buyers at these levels have “done the work” and have an expectation of higher prices…much higher prices.
It would be irrational to expect MicroStrategy or Square to sell anytime soon, and as more corporates exit fiat into scarce assets such as Bitcoin (and gold) and join the list above, the supply in the market will simply become increasingly restricted as evidenced by the continuation of the reduction in supply held at exchanges. $100,000 is really starting to feel inevitable eventually, especially when one acknowledges that the last time Americans voted in the 2016 Presidential election, Bitcoin was trading at ~$700.
Chart from CryptoQuant showing possible relationship between BTC spot exchange reserves vs BTC price
After last week’s bombshell news regarding US regulators and the DOJ’s handing down of civil and criminal charges to BitMEX’s founders, it’s clear that crypto regulation is gathering momentum. Last week, the UK’s Financial Conduct Authority brought in new rules banning the sale of crypto derivatives and exchange traded notes to retail investors citing reasons that due to the ‘’inherent nature of the underlying assets….they (crypto assets) have no reliable basis for valuation’’ and that ‘’the extreme volatility and inadequate understanding’’ of crypto assets by retail investors means that investors are at a significant risk of loss.
While we agree that retail investors should be afforded protection from leveraged products and complex derivatives, as they are in most markets, the notable part in this story is the reasoning given by the FCA for this ban. Their rationale is intellectually weak and patronising and indicative of the establishment’s general combative stance to “crypto assets.” Lumping all digital assets into one bracket is simply ridiculous and does a huge disservice to the industry building legitimate products and services for digital assets, notably Bitcoin and Ethereum. These sweeping generalisations by regulators set a concerning precedent for further regulatory and government intervention as the industry develops. This approach was evident in last week’s US Justice Department report from the Cyber-Digital Task Force, an 84-page sensationalist document littered with feeble arguments against cryptocurrencies and groundless accusations leveled at the industry. Rather than throw shade, surely authorities should provide constructive and valuable thought leadership to this developing and important industry?
‘’Today, few technologies are more potentially transformative and disruptive and more potentially susceptible to abuse than cryptocurrency.’’
‘’In the wrong hands, or without appropriate safeguards and oversight, these advancements can facilitate great human suﬀering. Just ask the political enemies of authoritarian regimes that deploy surveillance tools Orwell never could have imagined.’’
‘’…cryptocurrency is increasingly used to buy and sell lethal drugs on the dark web (and by drug cartels seeking to launder their proﬁts), contributing to a drug epidemic that killed over 67,000 Americans by overdose in 2018 alone.’’
There is such hypocrisy in these statements, especially when considering the US government, via the NSA, has essentially been spying on the world since 9/11, and linking 67,000 drug deaths to cryptocurrency is nothing short of offensive. We could go on…
The concerning part in all of this is should the ‘’Crypto Poses a Growing Threat to National Security’’ narrative gaining momentum as it provides the foundation and justification to take heavy handed action on the industry, instead of providing support and guidance whilst allowing innovation to take shape. Post-BitMEX, there are some obvious targets for the US to go after, should they feel threatened by crypto. Some actions would cause maximum damage to prices of digital assets, for example, stablecoins that provide much of the market liquidity could face a tougher stance from regulators, or certain Bitcoin volumes could become flagged by regulators and be permanently tainted due to past nefarious use, rendering them less valuable.
One of the latest generalised attacks on the wider encryption world (in which crypto sits) in the form of an International Statement by the US DOJ and is a prime example of how regulators could justify overzealous restriction and regulation for the crypto industry. One of the key considerations the signers of the statement want is as follows:
‘’Enable law enforcement access to content in a readable and usable format where an authorisation is lawfully issued, is necessary and proportionate, and is subject to strong safeguards and oversight.’’
This is entirely justifiable when dealing with genuine illegal activity, but encryption is an all or nothing play. Encryption is not encryption if someone can access the encrypted data. If technology companies and protocols leave legally required backdoors for authorities to use under the pretense of law enforcement then, as we have seen many times before, the use of these back doors is often expanded as per the political and economic will of those in charge over time. Interestingly this latest statement is likely to have added momentum to price rallies of privacy coins, ZCash and Monero’s, which have significantly outperformed the crypto market with Monero up 25% this past week.
What is clear is that regulators and governments must do a better job in understanding that Bitcoin (and a select few other assets) are entirely different from governance tokens, security tokens, meme tokens, or indeed food tokens. Bundling all digital assets into the same narrative is simply wrong, and currently, these reports do not differentiate between these subsectors within crypto, which taints Bitcoin’s image with the many fraudulent pump and dump tokens that still exist to this day.
We welcome appropriate regulation, and if crypto is to level up and become a significant asset class, then the correct regulatory framework must be in place to allow this transition. However, as we have seen, this may not be the smooth ride we hope for as questionable regulatory scrutiny already exists with encryption and coinjoin technologies and other privacy techniques that users can deploy to protect and maintain privacy. The fundamental right to financial privacy is being attacked by regulators, as further evidenced by the UK’s tax authorities demanding Coinbase give up the data of accounts holding more than $5,000 of crypto. There is balance to be found, and we hope the regulators find it.
As Bitcoin’s market cap increases, so will the attention of governments and regulators. Bitcoin’s comparatively tiny ~$200bn size is not a threat to fiat currencies…yet. Should we 10x from here during the next bull cycle, then we can fully expect the battle for governments to retain control of their fiat experiment to dramatically heat up. It is interesting to note the fiat currency experiment is only ~50 years old, coming into existence after the world moved off the gold standard in 1971. The Bitcoin experiment is now 11.5 years old.
Crypto weekly performance: 13th October 2020. Source www.bitgur.com
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