 | The story behind the story More than a critique of price manipulation rife across bitcoin markets, the recent Bitwise report to the SEC shows cryptocurrencies' great potential, argues Michael J. Casey.
Read more in THE TAKEAWAY below. | | |
 THIS WEEK'S TOP STORIES | | |
Gaining interestEarning returns on crypto holdings – whether via staking or earning interest – is becoming the latest trend in the crypto space, with a number of startups announcing new ways to make your money make money.
Coinbase Custody, the institutionally-focused wing of the crypto exchange, will offer clients the chance to stake crypto assets, starting with Tezos (XTZ). The company announced Friday that investors can earn up to 6.6 percent return on their holdings (after Coinbase takes a deduction as its fee) through the exchange's new service. To protect client assets, Coinbase will hold all tokens in a fully insured cold storage vault, while putting up its own coins to participate in the staking process.
Battlestar Capital partnered with Celsius Network to similarly provide clients with high returns for holding users’ tokens, while TrustToken and the Universal Protocol Alliance are both looking to let customers using different fiat-pegged stablecoins to earn interest via lending programs. Luxury use caseLVMH, the luxury brand conglomerate which owns Louis Vuitton and other high-end labels, is preparing to launch a blockchain to verify the authenticity of its goods. Code-named Aura, the platform is expected to go live in May or June, sources told CoinDesk. Beyond just tracking its own brands’ goods, however, LVMH is hoping to bring its competitors onboard as well by giving each participating firm equal ownership over the platform. Ditching Bitcoin UnlimitedAmaury Séchet, a leading developer of bitcoin cash, is renouncing his membership in one of the projects that paved the way for the controversial bitcoin cash cryptocurrency: Bitcoin Unlimited. While he's sticking with bitcoin cash itself as lead developer of the code implementation BitcoinABC, Séchet wrote in a blog post that he was disappointed with Bitcoin Unlimited's development process, partly because lingering bugs allowed an unknown developer to crash most Bitcoin Unlimited nodes. "The BUIP process has turned into a sad joke, with proposals more and more absurd being voted on," he said. ETF extensionsThe U.S. Securities and Exchange Commission (SEC) punted on two bitcoin exchange-traded fund (ETF) proposals Friday, choosing to delay any decision on either to May. The first, filed by Bitwise Asset Management with NYSE Arca, was filed in mid-January, but the SEC won't decide whether to approve, reject or launch approval/disapproval proceedings until May 16. The other, filed by VanEck and SolidX with Cboe BZX Exchange, was pushed back to May 21. Another hackSingapore-based DragonEx says cryptocurrencies belonging to users and the exchange have been stolen due to a hack discovered last Sunday. While the company has not yet disclosed a total value for the heist, the attackers appear to have taken as many as 20 different cryptos, including bitcoin, ether, XRP, litecoin, EOS and tether. Appealing for help in tracking and recovering the stolen cryptos, the exchange said some funds have already been found and that it is cooperating with police over the breach. IPO movesCrypto miner maker Bitmain’s application for an initial public offering has officially lapsed, meaning the manufacturing giant will not be going public anytime soon. An update on the HKEX website, where Bitmain filed, showed that its IPO application had been shifted to the “inactive” list, after its initial prospectus was filed Sept. 26. In a blog post, Bitmain said it intends to “restart the listing application work at an appropriate time in the future,” though it did not specify when this might happen.
Nor is Bitmain even the only crypto miner manufacturer looking to go public (for a second time). Canaan Creative, which produces the Avalon bitcoin miner, is considering a bid to list shares on the newly-created Science and Technology Innovation Board with the Shanghai Stock Exchange. The plan is still under discussion, though a source told CoinDesk that Canaan is considering potentially listing shares in both China and the U.S. A firm decision is expected by the end of 2019.
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 QUOTE OF THE WEEK | |  | "There's also a shift away from only engaging in crypto assets via speculation – so buying and holding – to actually wanting to help secure the blockchain, to wanting to vote and have a voice and help these things evolve."
– Sam McInvale, head of product at Coinbase Custody, on the appeal of staking services like the one his company just launched.
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The Takeaway |  | | |
Michael J. Casey is the chairman of CoinDesk’s advisory board and a senior advisor for blockchain research at MIT’s Digital Currency Initiative.
The mainstream reaction to Bitwise’s recent report showing that 95 percent of total reported bitcoin trading is fake was, predictably, to see it as further proof of the lawlessness and scammy nature of the cryptocurrency world.
But just as important as that statistic were the ones that the asset manager used to describe trading activity on the 10 “real exchanges” hosting the 5 percent that is not made up of wash trades and other manipulations.
Within its presentation seeking approval from the Securities and Exchange Commission for a bitcoin-based exchange-traded fund (ETF), Bitwise included one slide with a screenshot from Coinbase Pro showing a mere 0.0003 percent bid/offer price spread and stated that it had to be “among the tightest quoted spread of any financial instrument in the world.”
This supports one of the key arguments in favor of cryptocurrencies: that by cutting out the many financial intermediaries needed to execute trades in the traditional financial system, this technology achieves impressive efficiency and cost reduction for market participants.
More than merely a critique of the price manipulation rife across bitcoin markets, then, the Bitwise report is a demonstration of cryptocurrencies’ great potential.
Ironically, it also convincingly makes the point that to achieve that potential, there needs to be greater regulation of crypto trading.
Thin liquidity, yet high efficiency
The thin price spreads are especially remarkable when you consider that authentic bitcoin trading represents a drop in the ocean compared with those traditional markets where price spreads tend to be tight.
For example, daily turnover in the U.S. Treasurys market, considered one of the most price-efficient markets in the world, tends to range between $550 billion and $1 trillion, whereas Bitwise estimates worldwide daily authentic bitcoin trading to be just $273 million. Consider also that bitcoin exchanges are typically open to retail investors, whereas Treasurys are almost entirely traded by institutional investors moving very large amounts of money.
In traditional markets, size dictates liquidity, which in turn determines price efficiency. But this data shows that bitcoin is capable of highly efficient outcomes at a much lower scale.
All of those efficiency gains occur because bitcoin eliminates the fee-charging trusted intermediaries that carry out a variety of back-office execution and settlement processes within the legacy financial system. But here's the catch: the Bitwise report shows that in order to enjoy those payoffs, traders must rely on trustworthy entities to carry out the front-end function of finding buyers and sellers.
Further, it would appear from Bitwise’s list of 10 real exchanges that, at least for now, those that willingly put themselves under the scrutiny of regulators are the ones earning that trust.
All those annoyingly cumbersome and costly know-your-customer procedures might actually be worth it. They provide the regulatory framework within which bitcoin’s other, back-office magic can safely occur.
It’s perhaps tempting to argue that this regulated exchange advantage will disappear when new decentralized solutions such as the model developed by Arwen allow traders to retain full custody of their coins and exchanges are left to perform solely the price-matching function. But while that will help protect investors from abuses that lead to losses such as the evaporation of $190 million at QuadrigaCX, it doesn’t solve for the core function that exchanges provide: price discovery.
For now, and perhaps forever, there’s no getting around the network effect advantages that centralized platforms like Coinbase Pro bring to the price discovery process. But if the exchange isn’t compelled by a regulator to refrain from manipulating prices, investors can’t be assured that it isn’t trading against it. In those cases, price discovery is an illusion.
Regulated price discovery
In this context, it’s noteworthy that the key selling point that the Intercontinental Exchange uses to promote its yet-to-be-launched bitcoin trading platform, Bakkt, is that it will give financial institutions the peace of mind of “federally regulated price discovery.” Only with the full backstop of federal oversight, Bakkt says, can large institutions be assured of reliable prices and thus maintain the fiduciary duty they owe their customers.
Coinbase and other exchanges that are competing with Bakkt for the potentially very large institutional market will of course disagree with this assessment. They’ll argue that their regulatory framework, founded on state-by-state money transmission licensing rules, will sufficiently protect investors. Perhaps Bitwise’s report will help them make that argument.
In any case, far from representing another damaging blow to bitcoin’s reputation in the public eye, Bitwise’s damning report on scammy exchanges should be viewed as a big boost to bitcoin’s bid for legitimacy in the wider world.
It shows those who are skeptical that there are real public-interest benefits to be gained from this technology while demonstrating to bitcoin's true believers that it's to their advantage to submit to some degree of regulatory oversight. — Michael J. Casey |
 BEYOND COINDESK... | | |
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TECHCRUNCH: The popping of the bitcoin bubble was a “somewhat predictable sell-off,” says Galaxy Digital’s Michael Novogratz – even if only in hindsight. But despite the ongoing crypto winter, companies have continued to build within the space, including Novogratz’s crypto bank, he explains in a comprehensive interview with TechCrunch.
BANK OF ENGLAND: Stablecoins’ entire existence hinges upon the fact that they are pegged to a fiat currency, but are these tokens genuinely able to maintain that peg? The Bank of England's Ben Dyson analyzes the different types of stablecoins and examines what might cause one of these cryptocurrencies to fail. In particular, he warns that algorithmic stablecoins may hide fatal flaws. |
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