BKCOIN CAPITAL LP

Monthly Newsletter

June 2019
Market Overview

Bitcoin dominated the cryptocurrency markets in June going on a parabolic run, which has been rumored to be caused by institutional buying of the digital asset. Meanwhile, Binance is launching bitcoin futures trading on their platform, which will allow speculators to use up to 20x leverage to trade bitcoin (Coindesk). Binance hopes to overtake some of Bitmex’s liquidity as Bitmex had just recently hit an astonishing $11 billion in daily bitcoin volume (Forbes). Additionally, Google partnered with Chainlink, a blockchain company that acts as a secure “middleman” and will allow Google to use its technology to transfer data between Google and Ethereum smart contracts safely (CryptoSlate). Chainlink is now the best performing altcoin this year gaining 1,195% since the start of 2019 (Swingtradebot). Moreover, LedgerX has won approval of the Commodities Futures and Trading Commision (CFTC) to settle bitcoin futures in spot bitcoin, which will allow LedgerX to offer bitcoin derivatives to retail and institutional investors in the United States and Singapore (Financial Times). All eyes were on Facebook in June as they released the Libra cryptocurrency whitepaper (Libra Whitepaper) and captivated the cryptocurrency community making this release one of the biggest cryptocurrency news of 2019.

Libra, which will be used as a method of payment and used for transactional purposes, has a mission to bring financial infrastructure to the 1.7 billion unbanked across the globe. Facebook’s inspiring and revolutionary mission has aroused cryptocurrency enthusiasts claiming that Libra will spur mass cryptocurrency adoption. However, Libra’s inspiring mission did not excite all cryptocurrency enthusiasts. Several claim that Libra is the “Trojan Horse” of the decentralized cryptocurrency movement (USSA News). So, what’s behind the Libra token that is stimulating such extraordinary narratives among crypto enthusiasts?

The Libra cryptocurrency operates on the Libra Blockchain which uses Byzantine Fault Tolerance (BFT) consensus mechanism to verify transactions. There are going to be 100 validators on the network, which Facebook’s claims are the “decentralized” part of the blockchain. However, on the Libra blockchain, you must be a globally renowned “entity” to become a validator on the network. In other words, a firm/entity must reach two of the three following requirements: more than a billion dollars in market value, reach more than 20 billion people across the globe annually and/or be recognized as an industry leader by a third party association. Clearly, those worried about the decentralization of Libra’s blockchain is justifiable as it appears that Libra’s blockchain is quasi-oligopolistic. In addition, those also worried about the decentralization of Libra’s blockchain will only be instilled with more anxiety when discovering that the Libra blockchain is, ironically, not actually a blockchain, rather, a permissioned ledger with no concept of a block of transactions in the ledger history.  Fortunately, the Libra blockchain is pseudonymous, which means users can have one or more addresses that are not linked to their real-world identity (Libra Whitepaper).

Nevertheless, on the surface, the Libra cryptocurrency has all the characteristics of a stablecoin. The cryptocurrency is backed by a basket of the most “stable” global fiat currencies, which include the US Dollar, the British Pound, the Euro, and the Yen. However, unlike most stablecoins, Libra will not be pegged to a basket of fiat currencies. As a result, the Libra Association, the entity responsible for making decisions about Libra, will not actively manage its reserves, rather, they will only intervene if there is a currency crisis that could greatly affect the value of the basket of currencies. Lastly, the supply of Libra’s is uncapped and coins will be minted and burned in accordance with the flow of fiat when buying and selling into Libras (Libra Whitepaper).

In accordance with the invention of Libra, Facebook is also releasing a digital custodial wallet, dubbed Calibra, which specifically, enables the storage and usage of the Libra cryptocurrency. It will be available on Facebook platforms, but initially, it will be integrated with WhatsApp and Messenger. Although several have stated that Calibra will not share your personal data, that is actually not true. Rather, Calibra will not share account information or financial data with Facebook, Inc. or any third party without customer consent. In other words, it is likely that Facebook will have access to your personal transaction history when using the Calibra wallet (Calibra: Customer Commitment).

Being that the Libra blockchain is private, oligopolistic and not actually a blockchain, it is clear why crypto enthusiasts are skeptical about the project. Moreover, given Facebook’s questionable history regarding user’s privacy, it is justifiable to believe that this project is just another medium for Facebook to further capitalize on its user’s private data (New York Times). However, what is more worrisome is not so much the underlying technology of Libra, but the Calibra wallet. When transacting on the Libra blockchain, a person’s identity will be hidden, hence, it would be difficult for Facebook or any of Libra’s validators to capitalize on your personal data. However, the Calibra wallet will be integrated on all of Facebook’s platforms and Facebook has already hinted at utilizing your personal transaction data as long as they have your “consent” to do so. Hence, Facebook will not only have access to all of your social media platform data, but they will be able to specifically analyze what your buying and selling on a daily basis (Calibra: Customer Commitment). In fact, this concern over privacy has already promoted regulators to take action. Maxine Waters, House Financial Services Committee Chairwoman, has already scheduled a July 17th hearing for the social network’s ambitious cryptocurrency plans (The Mercury News).

Although safeguarding its user’s private data is not a primary concern for Facebook, even the largest data scandal of the 21st century, Cambridge Analytica, could not deter the 2.38 billion monthly users who continue to use Facebook’s platform (New York Times). As a result, it is clear that Facebook’s users value simplicity over privacy, which renders Libra to be a major opportunity for both Facebook and the digital asset space.
Today, the most challenging issue afflicting cryptocurrencies is adoption. Although there are around 32 million bitcoin wallets, the estimated amount of active bitcoin users, those used to make payments with bitcoin, is around 2.3 million (Bitcoin Market Journal). Meanwhile, bitcoin’s Chinese payment rival, AliPay has 900 million active users (China Daily). Hence, if Facebook is only able integrate the Calibra Wallet with only 1% of active users on both Facebook Messenger and WhatsApp (Dustin Stout), Libra will have around 8x-10x more active users than bitcoin (Zephoria). Likewise, if Facebook is able to integrate the Calibra Wallet with just a fraction of its users, it will likely render most ecommerce cryptocurrencies obsolete and will cause cryptocurrency enthusiasts to question if this digital asset movement is really meant to thrive on decentralization. However, let’s not forget that Facebook’s path to success is not as cushy as it appears as its permissioned ledger will have it competing with other centralized payment behemoths such as Apple Pay, which has over 300 million active users (Apple Insider) and PayPal, which has a user base of over 200 million accounts (Statista).

If regulators fail to intervene in Facebook’s cryptocurrency plans, Libra will inevitably impact the cryptocurrency space. However, Libra’s success will greatly depend on the logistical integration of Calibra across Facebook’s social media and messaging applications. Seamlessness integration of Libra will most likely lead to the cryptocurrency’s success, but consequently, will further exacerbate the lack of control over user data, which is one of the major issues the decentralized cryptocurrency movement is attempting to remedy.

List of all Libra “Founding Members” listed below by industry:

  • Payments: Mastercard, Mercado Pago, PayPal, PayU (Naspers’ fintech arm), Stripe, Visa
  • Technology and marketplaces: Booking Holdings, eBay, Facebook/Calibra, Farfetch, Lyft, Spotify AB, Uber Technologies, Inc.
  • Telecommunications: Iliad, Vodafone Group
  • Blockchain: Anchorage, Bison Trails, Coinbase, Inc., Xapo Holdings Limited
  • Venture Capital: Andreessen Horowitz, Breakthrough Initiatives, Ribbit Capital, Thrive Capital, Union Square Ventures
  • Nonprofit and multilateral organizations, and academic institutions: Creative Destruction Lab, Kiva, Mercy Corps, Women’s World Banking
Archive

November 2018
Market Overview

This month the crypto markets were a sea of red. As of November 29th, 2018 Bitcoin had lost around 30% of its value since the start of November. Likewise, the alt-market followed in lockstep encountering an even more volatile decline. The contentious Bitcoin Cash Fork greatly contributed to the crypto market’s steep decline. The fork has ignited a “hash war” between Bitmain, the largest BCH mining manufacturer in the world and CoinGeek, one of the largest Bitcoin cash mining pools. The quarrel has caused both parties to lose a significant amount of cash and could potentially have a devastating effect on the profit margins of crypto exchanges.

On the other hand, the decline in global markets has also contributed to the sell-off in crypto markets. As liquidity tightens we are seeing investors shift from a risk-on to a risk-off mentality. This is causing institutional investors to de-risk their holdings which has lead to a drop in prices across equity markets, fixed income markets and cryptocurrency markets. Our near-term outlook continues to be bearish, however, a favorable SEC ruling on the status of Bitcoin ETFs could ignite a bullish rally in Q1 of 2019.

December 2018
Market Overview

Cryptocurrency markets posted minor losses in December 2018 with most cryptocurrencies finishing either flat or down on the month. Jerome Powell’s decision to hike interest rates another 25bps, the trade tension between the US and China, global economic growth concerns spiraled equity markets around the world into turmoil and have caused investors to panic and flee to less risky assets like treasuries and gold. Likewise, instability continues to fester in Washington as the government shutdown and continuation of the trade war have caused increased uncertainty in the financial markets.  To add to the bearish sentiment in cryptocurrency markets, the Bakkt Bitcoin Daily Future contract, which was expected to be launched on December 12th, 2018 has gotten its launch date pushed back to January 24th, 2019.

On a positive note, Ohio businesses can now pay taxes with bitcoin and there are widespread rumors that Facebook is currently developing their own blockchain payment protocol. In other words, although we continue to witness a bear market in cryptocurrencies, both blockchain technology and cryptocurrencies are becoming even more embedded in our society. This reinforces our confident long term bullish outlook on cryptocurrency markets, although in the short term we continue to remain bearish.

January 2019
Market Overview

Cryptocurrencies remained flat in the month of January 2019. However, the end of a historical government shutdown and Chair of Federal Reserve Jerome Powell’s dovish monetary outlook are sparking bullish sentiment amongst investors despite trade war anxieties that continue to loom over global markets.

Meanwhile, the cryptocurrency and blockchain sector made major headlines in the month of January. Gemini Exchange, the digital asset exchange and custodian, founded by the notorious Winklevoss twins has just become the first digital asset exchange to acquire a SOC 2 Type1 Certification. In other words, Gemini Exchange is now the only digital asset exchange in the world to possess such a high level of security for their customers.

Following the end of the government shutdown, the Cboe resubmitted their Bitcoin ETF application to the SEC, which if approved, will be groundbreaking for the cryptocurrency space and what many believe to be a powerful enough catalyst to spark the next cryptocurrency bull run.

Fidelity Investments, the $2.48 trillion Financial Services firm, is in the “Final Testing” Phase of launching their cryptocurrency trading and custodial platform Fidelity Digital Assets. BKCC believes that the anticipated release of the platform could be one of the key stimulants needed to cause the institutional adoption of cryptocurrencies. The official launch is expected to take place in March 2019.

Lastly, Coinbase has integrated TurboTax to help US customers file cryptocurrency taxes. This partnership brings further transparency to the cryptocurrency space and is another strategic move made by Coinbase to encourage the mainstream adoption of cryptocurrencies.

February 2019
Market Overview

The ongoing narrative preached by cryptocurrency detractors that the digital asset industry will never blossom into something more than a retail market can now officially be put to rest as a cascade of prominent institutional players entered into the digital asset industry in February 2019.

Latin America’s largest investment bank, Banco BTG Pactual SA has recently announced and released its own security token collateralized by distressed real estate assets in Brazil, while one of Japan’s largest banks, Mizuho, is planning to launch its own Yen-Pegged stable-coin in March 2019. Meanwhile, the Swiss banking giant, Julius Baer, will soon be offering its clients access to an array of digital asset services. Additionally, the largest investment bank in the world, JP Morgan Chase, stole the spotlight when they announced that they had released their own stable-coin, JPM Coin, which will compete directly with Ripple’s tokenization model.

Investment banks are not the only institutional players making headlines within the digital asset space. Fairfax County’s Retirement Systems (fairfaxcounty.gov/retirement/) is now the first Pension Fund in the United States to allocate capital to digital assets. We strongly believe this move will ignite confidence in other Pensions Funds to further allocate capital to digital asset managers. Cryptocurrencies also made groundbreaking moves in the Fintech industry in the month of February. Kraken’s nine-figure purchase of regulated futures trading startup, CryptoFacilities (cryptofacilities.com), marks its entrance into the $1.2 quadrillion derivatives market. Conversely, Samsung’s flagship smartphone, the Galaxy S10, will now include a highly secure cold storage cryptocurrency wallet that will allow users to store Ethereum and Bitcoin on their smartphone.

As professional money managers, it is our job is to identify the narrative
underpinning financial markets, look for inflection points that could alter that narrative and then capitalize on the opportunity. Many people said that cryptocurrencies will never gain institutional adoption, now JP Morgan Chase, the world’s largest investment bank, has released their own cryptocurrency. Many people said that cryptocurrencies will never reach mainstream adoption, now Samsung, the world’s largest manufacturer of consumer electronics, is including a built-in cold storage wallet in their flagship smartphone. It is now more obvious than ever that the narrative has changed, but are investors willing to capitalize on the opportunity?

March 2019
Market Overview

Digital assets caught bids in March 2019 igniting investor confidence in cryptocurrency markets as Securities and Exchange Commission Senior Advisor for digital assets, Valerie Szczepanik, confidently told a crowd at SXSW, that she believes investors will see a “crypto spring” in 2019. In other words, Szczepanik believes that the SEC will approve a bitcoin ETF and set a regulatory framework for cryptocurrencies to come this spring.

While the SEC is in the midst of bringing further transparency to the digital asset space, Colorado Governor, Jared Polis, just recently signed The Digital Token Act on March 8th into law. By exempting cryptocurrencies from state security laws, Polis believes this act will spur a new digital asset driven job market in Colorado.

Outside of the regulatory sector, BlockFi, a digital asset-backed lending firm, received an astonishing $35 million in cryptocurrency deposits in just two weeks after launching its new lending product. This marks their entrance into one of the fastest growing digital asset sectors as they look to compete with both Celsius Network, a peer to peer crypto lending firm which did $600 million in lending in the past 6-9 months and Genesis Capital, an institutional crypto lending firm which, did $1.1 billion in lending in 2018.

On the other hand, WesternUnion, the $8.4 billion market cap global financial services firm, which has been dubbed one of bitcoin’s biggest rivals, has officially made a play in the cryptocurrency industry by partnering up with Stellar collaborator Thunes. Western Union customers will now be able to send funds directly into a mobile recipient’s wallet.

In global markets, e-commerce giant Rakuten has completed registration of its cryptocurrency exchange, Rakuten Wallet, which will go live next month. Rakuten is one of several billion-dollar market cap Japanese tech firms which is attempting to penetrate and capitalize on the digital asset revolution. Likewise, South Korean tech giant Kakao, is also entering into the cryptocurrency space by integrating a crypto wallet onto its famous messaging platform, KakaoTalk, for its 44 million users.

Lastly, it is interesting to note that in the past several months we have seen many prominent tech companies and traditional institutions enter into the cryptocurrency space such as Facebook, Rakuten, J.P. Morgan & Chase, Samsung, WesternUnion, and Kakao. Like the internet boom, global companies are feeling the need to adapt to the digital asset revolution in fear of becoming obsolete. As the cliché goes, “If you can’t beat them, join them”.

April 2019
Market Overview

“I think the role of the disruptors and anything that is using distributed ledger technology, whether you call it crypto, assets, currencies, or whatever … that is clearly shaking the system.” – Christine Lagarde, Managing Director of the International Monetary Fund

April 2019 was a monumental month for developments in digital asset markets. The month began with market participants in awe when it was discovered that a partnership was formed between the International Monetary Fund (IMF) and the World Bank to launch a private cryptocurrency. The cryptocurrency, dubbed ‘Learning Coin’, is designed to help multinationals better understand blockchain technology.

On the other hand, the British Virgin Islands (BVI) has partnered up with LifeLabs, a digital currency and tokenized reward system, for the purposes of providing Rapid Cash Response in the event of an emergency, such as a natural disaster, and for also creating an alternative payment method for ongoing financial transactions across the islands. It is important to note that this is the first time that the digital asset space has witnessed a national government attempt to utilize cryptocurrencies for crisis situations.

In financial news, two of the largest financial services companies in the United States, E-trade and TD Ameritrade will soon begin to allow their clients to trade digital assets. We believe that this will increase adoption in the digital asset space as it will make it easier for retail investors to trade cryptocurrencies. By entering into digital asset markets, TD Ameritrade and E-Trade pose a direct threat to Coinbase, which has most recently, been the most popular cryptocurrency exchange for retail investors. In addition, the New York Stock Exchange (NYSE) has acquired the Digital Asset Custody Company (DACC), in an attempt to gain regulatory approval for its financial products. The SEC had originally forced the NYSE to postpone its launch of its Arca ETF and Bakkt exchange due to a lack of an in-house custody service.

Interestingly, in the automotive industry, Jaguar and Land Rover have partnered up with the Internet of things (IoT) token, Iota, to reward users for sharing their data. Jaguar and Land Rover join the widely popular cryptocurrency driven internet browsing platform, Brave Browser, in the fight to allow users to take full control of and get compensated for their personal data.

Lastly, in one of the most groundbreaking digital asset developments of this year, Nike, the most iconic global retail brand, has filed a trademark application for ‘Cryptokicks’. In other words, Nike is planning to launch a cryptocurrency, a cryptocurrency wallet, a cryptocurrency reward system, and cryptocurrency collectibles.

May 2019
Market Overview

Digital Assets ripped higher in May causing bitcoin to be up an astonishing +100% year to date (MarketWatch). We believe that this is the result of “crypto spring” as digital asset hedge funds went on a +2400% bitcoin buying spree in Q1 of 2019 (CCN). More importantly, we are starting to see popular thematic trends play out in the digital asset markets such as widespread stable-coin developments, global regulatory approval of digital assets and the monthly adoption of blockchain and digital asset technology by the largest retail firms, which is now becoming somewhat banal.

In the regulatory landscape, G20 countries will meet in Fukuoka, Japan next month with plans on creating a cryptocurrency exchange registry to help prevent money laundering with digital assets (CCN). On the other hand, the Central Bank of the Bahamas (CBOB) unveiled a plan to launch its own digital currency in 2020 via its initiative “Project Sand Dollar” (Cointelegraph). In the United States, Montana joins Wyoming in its attempt to provide a regulatory friendly environment for digital asset firms by passing a bill to exempt utility tokens from security laws (Coindesk).

In the retail space, LVMH and Christian Dior released a blockchain in collaboration with Microsoft dubbed “Aura” to verify the authenticity of luxury goods and to put an end to the counterfeit goods market (Cointelegraph). Meanwhile, payment network Flexa has launched an app that will allow you to spend cryptocurrencies at physical stores. It currently supports payment at several of the most popular firms in the United States such as GameStop, Nordstrom and Whole Foods (Cointelegraph). In addition, AT&T has teamed up with BitPay to allow its customers to pay for bills using cryptocurrencies (Coindesk).

The most notable development in the digital asset space is Amazon’s recent filing of its Proof of Work patent. Although we are still unsure of Amazon’s digital asset and blockchain plans, it is interesting to speculate on the potential impacts of Amazon releasing a cryptocurrency of their own (Coindesk). Amazon’s cryptocurrency could integrate its +100 million prime users (Fortune), in other words, creating 100 million more cryptocurrency wallets, or greater than three times the amount of bitcoin wallets in existence (Bitcoin Market Journal). Interestingly, if Amazon releases a stable-coin, it could be a perfect opportunity for citizens in countries with precarious economic situations to hedge their currency exposure, while having an all in one place to shop for everyday necessities.

Lastly, in other digital asset and blockchain news, Microsoft is now in the midst of launching a decentralized identity system, “ION”. ION is built on top of the Bitcoin network and its goal is to create an ecosystem where each individual can have more control of both their identity and their data (Cointelegraph). On the other hand, Facebook has finally unveiled its plans for its long-anticipated stable-coin, which was recently dubbed “GlobalCoin”. GlobalCoin will act as a payment network where Facebook’s billions of users can transfer money to and from each other, while also being able to make online purchases (Coindesk). Spencer Bogart, Partner at Blockchain Capital, claims that Facebook’s entrance into the digital asset industry is a “…dramatic catalyst”, which can double or even triple the number of crypto users (To The Moon News). Facebook is hoping to launch GlobalCoin in a dozen countries by the first quarter of 2020 (Coindesk). In addition to Facebook’s stable-coin plans, Coinbase is expanding their stable-coin, USD Coin (USDC), into 85 countries seeking to act as a less volatile form of payment for citizens living in high inflationary environments (Coindesk). Finally, Russia is rumoring to release a gold backed cryptocurrency of its own. If true, they will join Iran in being the only two countries to have its own national cryptocurrency backed by gold (Coindesk).

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