Current market overview of digital assets

特邀专栏作者

2019-10-31 06:25

This article is about 12356 words, reading the full article takes about 18 minutes

Over the past 11 months, as the overall technology and asset class matured, it was necessary to revisit the situation and provide some substantial updates.

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Over the past 11 months, as the overall technology and asset class matured, it was necessary to revisit the situation and provide some substantial updates.

This article represents the author's point of view only and is not intended as investment and financial advice

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institutional development

In the past year, in many discussions with institutions such as Fidelity and TD Ameritrade, one thing has become obvious to me: as early as 5 years ago (2014~2015), they Started to explore and experiment with Bitcoin, this attempt was as early as the fourth quarter of 2017 when Bitcoin reached $21,000. Whether in a defensive or offensive posture, these agencies recognize the potential of Bitcoin and the technology that underpins it, and provide resources internally to investigate. Lastly, and in my opinion, and equally important, this exploration is empowered at the very top.

One of the major hurdles to overcome for Bitcoin and other digital assets is custody; unlike 2 years ago, there are now multiple legal, regulated service providers. User experience has come a long way in a very short period of time, and investors don't need to be crypto experts any more than investors don't need to be HTTP experts to invest in internet stocks. Based on this, Bitcoin's service platform has been very busy in 2019, including:

The professional institutional tools needed to manage digital asset investments also took a major step forward in 2019, with companies like Digital Asset Data bringing together companies like Bloomberg and GitHub by providing data and analytics. In addition, asset management companies for digital assets also need front-end systems, and new companies like Lumina meet these market needs.
Fidelity successfully launched Fidelity Digital Assets in March this year: a qualified custodian providing custody and trade execution services for digital assets.
Anchorage, a cryptocurrency custody platform for institutional investors, raised $40 million in Series B funding; notably, Visa included in the round.
Gemini is a New York trust company regulated by the New York State Department of Financial Services (NYSDFS). As a New York trust company, Gemini is licensed to provide digital asset exchange and custody services.
TD Ameritrade also entered the space this year, offering its 11 million retail clients and thousands of investment professionals the ability to invest in bitcoin futures through a partnership with ErisX.
Bakkt, a cryptocurrency derivatives exchange launched by NYSE/Intercontinental Exchange (ICE), launched at the end of September this year.
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Bitcoin is not dead

A common theme in the mainstream media over the past few years has been what has been called the "death of Bitcoin." The 99 Bitcoin website lists the number of times Bitcoin has been “killed” by traditional media and social media.

At the time of writing, Bitcoin is trading at $8,300. In November 2018, the price of Bitcoin was around $6,400, and fell to $3,100 in mid-December. If you invested in Bitcoin in December 2018, your return on investment was 2.7 times.

It’s also worth noting that the types and sizes of addresses holding Bitcoin have changed over the past few years. In the chart below we can see that the number of wallets holding more than 1,000 BTC has increased significantly over the past year.

In the Bitcoin overview, besides the price growth and the number of investors, there are some data worth mentioning:

Since January 3, 2009, Bitcoin has maintained a 99.99% network uptime.
a. In June 2018, Visa had a "network service interruption"
b. In February 2019, Wells Fargo also experienced a "service interruption" that prevented customers from withdrawing funds.
Hacking: This is a question many family offices and institutional investors have been asking; Coinbase’s response to this is: “While there have been threats related to Bitcoin in the past, this does not reflect the security of the Bitcoin network itself sex. Bitcoin-related theft is often the result of misconduct or negligence by the individual or service holding the Bitcoin.”
Bitcoin Halving: This is an important concept, but it can be a bit complicated for those who are not familiar with Bitcoin, so let's try to simplify it:
a. A total of 21 million bitcoins;
b. As of this writing, approximately 85% of all Bitcoins have been mined;
c. Miners are rewarded with new bitcoins every time they mine a bitcoin block.
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at the same time

As CNBN reporter Kate Rooney reported: "Companies going public this year are expected to generate the lowest profits since the dot-com bubble, according to Goldman Sachs analysis."

David Kostin, chief U.S. equity strategist at Goldman Sachs, recently told clients that only 24% of companies that went public in 2019 had positive net profits — the lowest level since the tech boom and bust two decades ago.

We’ve also witnessed some dead valuations that could have devastating effects on private equity markets: WeWork, which was worth $47 billion on paper, had laid off 5,000 people as of last week. One theory now is that the company's new valuation is $10 billion or less. At the same time, it was reported last week that WeWork’s debt rating was also recently downgraded to CCC+. After acquiring a 35 percent stake in Altria, Juul was valued at nearly $40 billion, but Juul investor Darsana Capital Partners recently slashed its valuation to $24 billion. In addition, Juul is also facing regulatory pressure from the Trump administration, as well as product line issues that caused its CEO to "step down" recently. Finally, as of Oct. 8, as Teddy Schleifer writes, in an example of this new reality, Postmates, a food delivery startup valued at more than $2 billion and expected to go public in 2019, recently told its IPO advisors that , due to market conditions, the company will delay its initial public offering (IPO) time.

In late 2015, the size of Square's IPO fell from $6 billion to about $3.9 billion. The Wall Street Journal reported in 2015:

"Square's pricing serves as a reality check for more than 120 tech companies valued at at least $1 billion, a company whose valuations have skyrocketed this year."

I remember a lot of family office investors suggesting this was a sign that valuations were finally starting to normalize. but it is not the truth. Why?

According to Pitchbook in the first quarter of 2018: "There are more than $10 trillion in capital in the accounts of global private equity funds and venture capital funds. To be exact, as of the end of June 2017, funds available to fund managers are close to 11070 billion, of which $145.4 billion was allocated to venture capital and $961.5 billion to private equity.”

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Beyond Bitcoin

We believe that there is a divide in digital assets and that the taxonomy is evolving. In addition to proof-of-work and proof-of-stake, there are programmable currencies like bitcoin and alternatives to traditional stores of value like gold, with a market cap of about $100 billion. Then there are assets like Ethereum and other protocols to rebuild the Internet, forming Web 3.0, learning from the mistakes made in the past, the new Web 3.0 is built on a distributed and decentralized stack, enabling the new Apps are not owned by a hub like Google.

The friends at Outlier Ventures call it the Convergence Stack, and it looks like this:

When we Google the latest Met, Liverpool, or best brownie recipe, many of us don't realize the layers and processes that hide behind the screen; stored data, indexes, queries, and more. The diagram above is a good example of what it takes to replace Web 1.0-2.0 and move it into a decentralized effort. Every layer has projects from what we call testnet to mainnet, but what does that mean? OKEx explains it this way:

"As the name suggests, the testnet is a sandbox environment for developers to experiment and test the functionality of running projects described in the white paper. Developers can perform various tests in a secure, isolated network without the risk of breaking the main blockchain .In contrast to testnet, mainnet is the main blockchain network where projects run after several rounds of testing on testnet. It is considered the final product of a project, the result promised in the white paper.”

In simple terms, I like to think of sports as going from the farm team to the major leagues. Why is this so important? During what the media dubbed the “crypto winter,” when Bitcoin went from $21,000 to $3,100, a lot of projects were in the testnet. They fixed various issues, installed more validators on their network, etc. As 2019 rolls around, we start to see projects like Cosmos launching mainnets. Essentially, what we saw in 2019 was the transition from theoretical "ideas" to real systems.

What started to take shape in 2019 was that many of the underlying layers that were effectively rebuilding Web 3.0 also began to streamline their consensus methods, many of which were proof-of-stake. These systems use incentive schemes, i.e. tokens, where in a POS-based public blockchain, a set of validators take turns proposing and voting on the next block, with each validator's voting weight determined by its deposit (i.e. stake) the size of. We’ve seen Ethereum start changing its consensus method this year, moving from Proof of Work (what Bitcoin does) to Proof of Stake.

Another area that will be critical to the re-establishment of Web 3.0 in distributed systems is governance. As Ryan Zurer (formerly Polychain Capital) wrote:

“Crypto governance will enable new ways to achieve social consensus and accelerate the development of crypto networks, allowing us to use the wisdom of the crowd to allocate funds, conduct network upgrades and organize online communities.”

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Defi (decentralized finance)

Much of the energy and drive of Bitcoin and digital assets is to remove as many "middlemen" as possible. This is becoming increasingly evident in the explosion of decentralized (or "open") finance in 2019, but some may ask: what is decentralized finance?

Brendan Forster, co-founder and chief operating officer of crypto lending service Dharma, explained to Quartz that the idea of DeFi is that "financial services can be 10 times better than they are today." Compared with traditional financial services, DeFi is more global, more accessible, and more transparent,” he wrote. “Wall Street (provides) financial services, the ultimate ‘settlement layer’ is courts and legal procedures, and DeFi (provides) financial services , the final settlement layer is 'code'. "

This huge ecosystem powered by Ethereum has exploded in 2019. From lending platforms like Dharma, Compound, BlockFi, to decentralized exchanges known as "DEX's," and everything in between. Here's a great picture of a nice ecosystem:

I tested most of these platforms to see how they work. Example: I went to Dharma earlier this year, lent out a small amount of Ethereum (30+ days), and received interest (this depends on time and platform). The guy on the other side borrowed my Ethereum in less than 5 minutes and we closed the deal. No banks, no brokers, and you don't need to be a tech genius to figure it out.

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Security Token (STO)

About a year ago, a famous New York hotel hosted a group of foreign investors who wanted to buy the iconic place. In theory, a portion of this investment would provide a security token to other investors. This got people talking... what is a Security Token?

Definitions around security tokens vary, but most refer to them as any blockchain-based value (using smart contracts on the ethereum blockchain) that is subject to security regulations. This includes tokens representing traditional assets such as stocks, debt, derivatives and real estate. Reading this, a question may arise: Why should I tokenize an asset, such as a piece of real estate?

Traditionally, investors put money into GPs to buy hotels, sports teams or other assets, which are then frozen for years. If an investor wants or needs liquidity from that asset, they go to a secondary broker who will find a buyer for your portion of the investment—and at a good price. Token investing allows investors to access liquidity without secondary brokers. If this sounds worrisome, there are allocations of tokenized products in “smart contracts” that prevent investors from selling their assets on the open market for a limited period of time.

In 2019, companies like Tokensoft started to gain market attention. Tokensoft enables issuers, financial institutions, broker-dealers, real estate companies and funds to meet compliance requirements for digital securities on the blockchain at the time of issuance, distribution and transfer.

Additionally, Harbor Corporation recently announced that it will be partnering with real estate firm iCap Equity to create an ERC-20 token (Ethereum) representing iCap’s over $100 million real estate fund. The move will allow iCap's 1,100 investors and 17 placement agents to trade these real estate funds conveniently, according to a company statement.

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Potential Market Beyond Bitcoin

If we look at the entire Internet market, we see that as of June 30, 2019, more than 4 billion people were "online". Here are some statistics about the Internet that help us determine its value:

In 2018, the Internet’s impact on retail sales reached $2.84 trillion and is expected to reach $3.45 trillion in 2019.
It is estimated that 1.92 billion people will shop online in 2019.
Google has more than 5 billion searches every day.

With a market capitalization of $820 billion and a search market share of more than 70%, Google is undoubtedly the most popular search engine right now. Many of those 4 billion users use Google products every day, from email to video (YouTube). Here are the most common user activities on the internet two years ago:

There is no doubt that Google is the "800-pound gorilla" of the Internet, and AWS is undoubtedly another important part of the system, but let's focus on Google, because an interesting phenomenon has emerged recently, which Might mark some cracks in our reliance on it:

In the past few weeks, about 40 attorneys general have announced their plans to investigate Google. There are allegations that the tech industry is stifling start-ups, charging more or worse for online users, stealing too much personal information and generating rich revenue for the companies at the expense of consumer privacy.

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Crypto Asset Fund Outlook

Investors may ask: "Should I invest in a little Bitcoin? How?", it all depends on several variables:

Do you want to keep these assets yourself?
What is your risk tolerance and expected return?
Which is better for you, diversification or concentration of investments?
How much time do you want to allocate to monitoring these assets?

These are the questions you should answer before evaluating a crypto asset fund. If you only want to invest a small amount in Bitcoin, and feel that buying Bitcoin and setting up a wallet on a centralized exchange like Coinbase is a breeze, then first make sure you've done enough research to feel comfortable with the asset.

Second, you need to buy a wallet like Trezor or Ledger. The user experience has improved a lot over the past few years: writing down a 24-word seed phrase might feel a bit foreign to you at first, but it’s for the safety of investors. If you want a larger presence in the bitcoin space, then institutions like Fidelity, Anchorage, etc. may be more suitable for you because they are qualified custodians and can help you manage these assets.

Also, if you answered "over 10%" to question 4, that's an important factor too. Digital assets or "crypto" is a rapidly changing asset class with more new projects, new regulations, and more news that is constantly updated. In the news cycle for this asset, what happened a month ago is actually six months ago.

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How to conduct due diligence on crypto asset funds

The first question is: Do I want to invest in the liquid market of digital assets (those that are traded every day) or do I want more venture-capital-style investing (taking equity in companies across the ecosystem). As we have seen above, the overall fund landscape has diverged. According to some encrypted asset funds, 80% of the total assets should be traded in the liquid market, and 20% of the assets should be invested in "pure" venture capital.

In terms of the overall liquidity token investing landscape, my take is that the vast majority of the 2,957 tokens listed on CoinMarketCap (CMC) are non-investable. Most funds operate in CMC's "Top 50 or 100" range for the following reasons:

Liquidity risk: If your digital currency is not on a more mature exchange, you may face liquidity and counterparty risk issues.
Research, analyze these projects: Most of the digital currencies that entered the top 100 list have been monitored and analyzed.
a. In the past two years, service companies such as Messari and Delphi Digital have sprung up in the market, and they can provide more in-depth research, similar to the research of institutions in traditional markets.
b. Coverage of digital currencies outside the top 100 is much smaller, so the quality of research and analysis suffers.

There are pros and cons here: Most liquidity funds are able to get their money back in a much shorter period of time than traditional VC lock-ups of 5-7 years (or even longer in some cases). The problem, in the eyes of some, is volatility — these assets are still relatively new and held by only a few people, so they do maintain a certain level of volatility, but it’s not for everyone. As Howard Marks said:

"While volatility is quantifiable and actionable, it falls far short of the definition of 'investment risk'". In fact, "I don't think most investors are afraid of volatility. I've never heard anyone say, 'The expected return isn't high enough to take all this volatility.'" What they worry about is the possibility of permanent loss . "

Permanent loss, which leads me to a discussion of risk management. When researching crypto asset funds, I would recommend applying for a due diligence questionnaire, all funds should have a questionnaire ready to discuss their investment management, risk management and, equally importantly, operational risk management, which is the key to digital assets key. Where are the assets hosted? If not through Fidelity, Anchorage, Coinbase, or other channels, then where? The set of questions posed to digital asset managers is different from that of traditional asset managers.

direct investment

Throughout the digital asset ecosystem, many family offices and institutional investors have participated in direct investment. In March, the Witte family invested in Silvergate, one of the few banks serving the digital asset ecosystem. Li Ka-shing’s family office, Horizon Ventures, has invested in Bakkt, which recently raised about $182 million. There are also family offices that rely on some well-known venture capitalists and have also been quietly investing in this space.

Conducting due diligence on early-stage opportunities in digital assets is a daunting task. One of the biggest hurdles is that valuation metrics are still not agreed in principle. The debate surrounding the use of stock-to-flow models continues, with many now attempting to apply these models to Bitcoin and Bitcoin-related platforms. Should we use Metcalfe's Law? The law is a law about the value of the network and the development of network technology, and the debate is happening in real time.

Unlike more traditional venture capital deals, most companies in the digital asset ecosystem remain negative in revenue. That's not to say all companies are negative, but revenue also remains a mystery as adoption rates and product-market fit continue to shift. Now there are new companies like Lolli, which partner with more than 800 retailers including Walmart, Bloomingdales, Casper, and more, to offer a way for those who make online purchases to be rewarded with Bitcoin. Others like Bitpay allow users to use their bitcoins to pay for things like AT&T bills.

Companies like Flexa also launched the "SPEDN" app this year, allowing bitcoin holders to use bitcoin at traditional retail locations such as Dunkin Donuts and retailers such as Gamestop. More and more “bridges” from digital assets to traditional commerce and lifestyles are emerging, and many in the ecosystem are excited about what 2020 and beyond will hold. But there is no doubt that LTV, user retention rate, CAC and other indicators used to evaluate traditional risk trading are currently difficult to use on digital asset platforms.

Supervision

There has been a lot of activity related to the regulation of digital assets, from agencies working to push for the passage of ETFs, to the passage of pro-blockchain laws in Wyoming, to the latest SEC ruling.

In a letter to the Cipher Technologies Bitcoin Fund dated Oct. 1, the U.S. Securities and Exchange Commission (SEC) rejected the investment firm’s registration statement, citing among other reasons that bitcoin is not a security.

This is important because SEC Chairman Clayton mentioned Ethereum in the first few months of 2019:

“I agree with Director Hinman’s explanation that a transaction in a digital asset may no longer represent an investment contract. For example, if the purchaser can no longer reasonably expect a person or group of May not represent an investment contract under the Howey framework."

At the recent Yahoo Finance Summit, CFTC Chairman Heath Tarbert said that he believes that Ethereum is regulated by the CFTC and expects that the CFTC will allow ETH derivatives to be traded in the US market in the near future.

“Our position on Bitcoin is very clear: Bitcoin is a commodity. So far, we have not mentioned Ethereum. As CFTC chairman, I think Ethereum is a commodity.”

While these statements about Bitcoin and Ethereum come directly from the SEC and CFTC chairmen, they should not be considered legitimate investment advice. In fact, the speed of change in the digital asset space is sometimes awe-inspiring. The information on crypto rules, and the comments from Chairman Clayton and Chairman Tarbert should indicate to readers that the digital asset ecosystem is starting to gain some clarity and a sense of direction, something that has been missing from the minds of many institutional investors over the past few weeks.

Another area of regulation that many have been paying close attention to is ETFs. From VanEck to Bitwise, many institutions are working hard to gain SEC approval. In the first few days of writing this article, Bitwise felt they were close to good news:

“The U.S. Securities and Exchange Commission (SEC) has set an October 13 deadline to approve Bitwise Investments, a Bitcoin-based exchange-traded fund (ETF), a move that could become a long-term challenge for Bitcoin. A meaningful milestone in the growth story. We are closer than ever to the approval of a Bitcoin ETF." Matt Hougan, former CEO of Inside ETF, said on CNBC's "ETF Edge" recently.

Many in the digital asset space believe that ETFs will further enhance the potential investment and audience of Bitcoin and other digital assets. As Hougan puts it: “Bitcoin ETFs will give ordinary investors safe and simple access to the wealth created by bitcoin and crypto. It will make it easy for financial advisors to put money in the hands of clients instead of letting them run amok. "

However, the Bitwise ETF, which again represents the velocity of news and information in the digital asset space, has not been approved.

“SEC Rejects Latest Attempt to Create Bitcoin Exchange-Traded Fund (ETF),” the SEC announced Wednesday (October 9), in a joint filing by Bitwise Asset Management and NYSE Arca The ETF proposal does not meet legal requirements to prevent market manipulation or other illegal activities. The SEC places the blame on NYSE Arca, not the Bitwise proposal itself.”

The rest of 2019 has been a very busy few weeks as far as regulators and digital assets are concerned. The IRS is also involved in providing additional clarity by issuing new guidance in the form of a tax ruling to address the tax implications for existing crypto asset owners. The Tax Ruling 2019-24 begins by asking two questions, which it then attempts to answer in a six-page analysis, as the block report shows:

“According to the guidance, the answer to the first question is “No” because the taxpayer has not “received” the cryptocurrency and therefore has not “acquired wealth” and distributable gross income. The answer to the second question is “Yes”, Because taxpayers effectively “receive” cryptocurrencies. The guidance raises many questions that are not clearly answered, including what “receiving” cryptocurrencies actually means. It also creates the risk that “phantom income” from cryptocurrencies is both It’s not actually received, and it’s not easy to liquidate.”

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Summarize

Bitcoin has existed for more than 10 years. Rep. McHenry called Bitcoin "an unstoppable force" at this year's Libra hearing. Digital assets have entered the daily language of millions of non-technical people. The entire digital asset ecosystem has grown from a crawling toddler to a teenager who starts to think about who they are and what the future holds. Day after day, the teenager is surrounded by best friends with years of wisdom and experience. We will continue to learn from it, but the more people who want to see it succeed, the better the chances of success.

Regulators are starting to give institutional investors more guidelines to use when reviewing investments. It has seen some large traditional institutions come to participate and provide services for those who want to participate. Although ETFs are still not approved, we can gain a clearer picture of why and how they will be approved in the distant future.

There is a growing divide in the field of programmable currencies, which are meant to provide a hedge or insurance against the next Cyprus-style event, rather than a project to create the next web. We learned that building the next week's process in a decentralized way is not easy, but not impossible.

Institutional-grade funds have created a 1-year track record and have found their niche in this market. The logistical and administrative services that help the funds run have come online this year, offering a more institutional level of service that many investors have become accustomed to.

Ethereum has been working with Microsoft, and companies like Chainlink are working with Google. Enterprises have been vetting and testing blockchains for the past few years and are finally starting to find real use cases for them.

There's a lot to be excited about, but investors need to do their homework and ask a lot of questions when getting into this type of asset, whether they're driven by the global macro economy or by factors like interest in the technological innovation that's happening , to ultimately determine the reward of risk, and many in this field are ready and willing to assist in answering these questions in a pragmatic and reasonable manner.

OrderBit is committed to quantitative trading research and strategy development based on big data research and judgment, and also provides digital asset investment consulting advice for high-net-worth clients and institutional clients. Clients currently serving include digital asset exchanges, mine owners, wealth management institutions and family offices.

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