21Shares Research Newsletter - Issue 36

Market Outlook

Needless to say, the crypto asset market has been off to a strong start thus far in 2020 with the entire crypto asset market posting extremely positive returns.

The key drivers of this early growth have been increased geopolitical tensions due to escalations of the conflict between the United States and Iran. Even today, Tuesday December 7, the market has surged, with Bitcoin up by 4.55% as investors seem to be increasingly seeing Bitcoin as a viable alternative to gold as a hedge against global instability — though gold's reaction to the tensions has been also noticeably strong in the last few days.

The performance of the top five crypto assets is a follows: BTC (7.42%), ETH (9.67%), XRP (15.02%), BCH (17.45%), and LTC (8.25%).

Average adjusted transaction volumes were up from $1.60B to $1.71B with the weekly highs having occured on Wednesday December 3 and Monday December 6, mostly driven by large absolute changes in Bitcoin's transaction volumes — BTC ($1.31B), ETH ($164M), XRP ($69.3M), BCH ($87.4M), and LTC ($18.7M).

Research - Bitcoin's Relationship with Geopolitical Uncertainty

Following the noticeable US-Iran tensions over the last week and growing concerns that such tensions could lead to growing global instability, as well as the upswing in the gold, oil, and crypto asset markets. It is an apt time to reconsider Bitcoin's role as a safe haven and several analysts already have done just that; for example, Bradley Keoun from CoinDesk wrote "For some market analysts and investors, bitcoin’s rally served to underscore the digital asset’s perceived value as a hedge against inflation, historically an economic consequence of major wars".

There are two pieces of evidence needed to confirm such an argument: (1) Proof that Bitcoin could theoretically act as a useful safe haven asset; (2) Proof that the market actually is treating Bitcoin like a safe haven asset. The argument and evidence for (1) is much stronger than that of (2) and, ultimately, (2) is what really decides how Bitcoin's price reacts to geopolitical uncertainty in the long term and therefore is the primary driver of its Bitcoin's long-term use as a store of value.

We have talked before about how Bitcoin's limited supply, economic security, decentralization, and censorship resistance make it theoretically an ideal safe haven asset.

The chart below shows Bitcoin's rolling 30-day correlation with GLD (the most popular gold ETF). We would expect that, if Bitcoin fulfilled a similar safe haven function as gold, the two assets would increasingly demonstrate a strong correlation.

As one can see, there has been no discernible trend over time in the BTC-GLD rolling correlation and, for the most part, the relationship almost looks like white noise. There is the other point that, it has not just been Bitcoin which has surged since US-Iran tensions reached their boiling point — instead the entire market has moved upwards. Bitcoin has experienced similar market volatility on days without changes in macroeconomic and geopolitical conditions and, while it is undoubtedly true that some investors have purchased Bitcoin, as of late, as a hedge against a global meltdown, this surge in-of-itself does not necessarily prove Bitcoin can now be seen as the de facto safe haven asset.

Looking at LocalBitcoin's volume for Iran in USD terms shows how Bitcoin, for many people, is still not a viable safe haven despite the theoretical grounds for it to be. As others have pointed out, there has not been a large spike in demand for Bitcoin in Iran despite increased tensions and uncertainty as the graph below shows.

The fact that people are credibly discussing Bitcoin as a safe haven asset shows just how far the industry has come. The theoretical reasons why Bitcoin may succeed as a safe haven are sound but we must be cautious before attributing all price spikes to geopolitical events which don't specifically pertain to the industry; though we believe that Bitcoin will increasingly be driven by such events going forward.

News - Telegram Will Not Integrate A Crypto Wallet into Its Messaging App, Until It Gets The Green Light from U.S. Regulators | CoinDesk

What happened?

Telegram will not integrate a crypto wallet into its messaging app, at least until it gets the green light from U.S. regulators, the company said Monday on its official website. The announcement comes ahead of Telegram’s CEO deposition in Dubai on Tuesday.

“In light of recent events, we wanted to take the time to publicly clarify certain aspects of the TON Blockchain and Grams as we continue to prepare for a successful launch of the project,” the post reads, apparently referring to the lawsuit the U.S. Securities and Exchange Commission (the SEC) brought against Telegram in October.

The statement purports to detail Telegram's dedication to legal compliance, even as the company fights the SEC on claims that it intended to flood U.S. capital markets with unregistered securities.

Why does this matter?

The Telegram Open Network's (TON) biggest draw was the potential exposure it would provide to Telegram's large existing userbase. Without TON's access to this, it could be a major drawback to the value proposition of the entire blockchain, especially given the existing regulatory issues surrounding the project and the a general uncertainty about what product-market fit the blockchain product aims to go after.

We believe that large digital currency projects like Libra, China's central bank digital currency (CBDC), and TON will dominate regulatory news over the next year as regulators' and policy makers' existing concerns around crypto assets are exacerbated by existing anti-trust and security issues. The Telegram Open Network will continue to struggle launching, just like Libra, and when/if it does launch it may be quite unrecognizable from the vision painted by the Telegram CEO's elder brother and fellow Telegram co-founder, Dr. Nikolai Durov, in the project's white paper.

Learn more here.

News - Binance CEO Says Some ‘Major’ Strategic Acquisitions Are in The Works for 2020 | The Block

What happened?

After acquiring several firms last year, Binance CEO Changpeng “CZ” Zhao has now said that some more “major” strategic acquisitions are in the works for 2020.

“We always have a number of strategic acquisition discussions in the works, a couple of them are major and will have a significant impact. We will announce it in due time,” said CZ, in his first letter to the Binance community, published Thursday.

Why does this matter?

2020 will likely be the year of acquisitions within the industry. It is common as a new industry matures and becomes increasingly institutionalised that a period of consolidation happens. Within the social media and networking industry: Facebook bought WhatsApp and Instagram, Google bought Waze, Twitter bought Vine, Microsoft bought Yammer, and Yahoo bought Tumblr all within the period of 2012-2014. As incumbents' balance sheets swell within a new industry as they consolidate existing profitable verticals, they often seek to acquire smaller and more innovative firms to maintain their competitive streak.

While no crypto asset company is nearly the size of the aforementioned networking incumbents, several such as Coinbase and Binance are likely to have large sums of cash or cash-equivalents on their balance sheet; as such CZ's comments seem natural. In fact, there were rumours of a planned acquisition of Tagomi — a crypto asset prime broker — by Coinbase and whilst the news was denied by both parties, we're likely to hear a number of similar stories going forward. In addition, the crypto asset industry is one where only one of the dominant American or Chinese technology monopolies has an active presence so there remains the possibility that more could enter — likely through acquisitions or acqui-hires as Facebook did.

Excess consolidation or monopolization can be extremely detrimental for industries, as well as stifling for innovation, and should be an issue to watch going forward given how ostensibly antithetical it is to the industry's belief in decentralization. It remains to be seen how concentration of industrial power within the industry will develop over time but the number and size of acquisitions are the key data points to watch in 2020.

Read more here.