OSL Trader View | Weekend Digest

Friday, August 28, 2020

At the cusp of a paradigm shift

We’ve seen tame digital asset price action after the market went through a healthy correction instead of the breakout it had suggested during the week. CME open interest has dropped by ⅓ to sub $400M and while they expire today, the impact of this has thus far done little to move markets. Judging by Federal Reserve Chairman Jerome Powell’s speech overnight, the musical chairs will continue as equity markets pony back up seeking fresh ATHs. With no new catalysts to speak of, it may well be that market participants are flipping back to equities in search of the next TSLA look-alike. Our often cited Pied Piper (Mr Portnoy) has certainly made an abrupt retreat back to his comfort zone having called it quits on crypto (following a $25K loss from his heralded debut alongside the Winkelvii) in favor of milking the Fed supported equity markets. He did offer some “help” to the community… but again, actions speak volumes… It seems the community didn’t shed a tear, likely unaware it was “going steady” to be torn apart by his public break-up. When the man left in charge of monetary policy has more pressing concerns over racial inequality and jobs we can brace for tougher times ahead, convexity will firm up as the backdated inflation-sensitive paper as they print away your wealth. Investors appear to be hedging their equity longs with shorts on DXY as net position in the greenback flips to short, the first time in two years. 

We’re seeing some commentary covering the record short positions in CMEs $BTC futures, but this is hardly new as that position has perpetually been so. The uptick in OI was initially triggered by RenTech’s Form ADV including CME’s $BTC futures and following that influx, we can’t imagine these direction-neutral quant funds laying on outright shorts. 

Also lets not forget that not only is the M2 supply at ATH, the velocity of this metric is approaching some depressing levels… For now it seems the age old adage don’t fight the Fed  still stands as the bearish report translates to more support for capital markets. 

Hong Kong looks intent on maintaining its world-class financial center status. Despite the knocks it's taken over the past year (plus) and most recently its status as a freeport having changed in the eyes of US officials - Hong Kong has thrived as the gateway for trade (and financial exchange) into and out of China. Almost every deposit taking bank, merchant bank, investment bank, asset manager, fund, etc have a presence in the city - and that says it all on the city’s importance. And the SFC is doing its part to see Hong Kong firmly in the midst of the future of capital markets too - through action not labels or marketing spin.  Last week, OSL was the beneficiary of their vision and their actions as the first to be granted AIP for virtual asset trading in Type 1 (dealing) and Type 7 (exchange/ATS) regulated activities. Whilst this is great news for OSL, and although just the first tiny step in greater leaps ahead, it is a significant win for the preservation (if not repositioning) of the financial services industry in Hong Kong.  The capital markets have been the engine in a service driven economy, and inclusion of digital assets provide a lifeline for all the ancillary specialists from crypto law to auditors and STO advisors and M&A, etc - all will be necessary contributors to the success and benefit from an expanded playing field and clear rules of engagement.  The regulators have done their part in acting, now the talking needs to shift to action with those who want to make good on this glorious opportunity. Hong Kong is the poster child for economic resiliency and entrepreneurship, shifting from a manufacturing sector to a service center decades ago it built itself up as a titanic hub for traditional finance and now shifts towards being a digital finance powerhouse. It’s certainly positioning itself on the right side of this new paradigm.

There have been so many players in the space that have contributed to confusing the public with their marketing driven business maneuvers - proposing to buy listed vehicles; acquiring licensed entities and calling themselves “regulated” without informing the regulator of changed business activities; not liquidating loans despite insufficient margins due to lack of risk controls whilst claiming to have strong CRM; and my favorite: calling their hot wallets “insured” with a specie insurance policy alone. But this should be the catalyst to separate the wheat from the chaff and offer the shift towards trusted and secure partners for institutions. Those that ‘fake it till they make it’ will not have a happy ending as the space continues to get regulated and we are seeing telltale signs of further problems ahead for the entities with an appetite for regulatory arbitrage by way of Bitstamp moving from the UK to Luxembourg or Bitmex being denied in Ontario. 

We also saw more endeavors that expand crypto’s mainstream penetration: FiCAS’s nifty Bitcoin Capital Active Exchange Traded Product permits users to allocate painlessly through a phone; Ribbit Capital prepares to launch a $350mn crypto SPAC; FTX acquires Blockfolio for $150M; Binance adds Florida to the 37 US states they service; Bitgo bites the bullet and files to become a NYFDS approved trust; a Brazilian congresswomen proposes regulation for the space; Huobi begins catering to Russia; Gemini and Archax get FCA approval as the British Authority issues a consultation paper for further adoption; Akon spills a few beans on his Wakunda project; Coincheck surfaces from the ashes to launch Japan’s first ICO and; drum roll… Fidelity debuts their first crypto fund with an entry ticket at US$100K. They manage over $8 trillion! 

But over in the US, it’s still more talk than action...As Congressman Tom Emmer continues to shill Ripple ($XRP) more voices in DC are starting to raise the alarm bell as the gap between China and the US widens, can you imagine how effectively the US government will disperse seized crypto bounties? It will be interesting to see how coin purity vendors assess these new developments. Trump dished out what could be as much as billions, calling it an emergency bailout, to his “friends” when he was dealing with state appropriated funds but with semi-pseudonymous crypto?



The Chinese continue to fire from all cylinders with Huawei being the latest to chime in by enabling all sorts of citizens’ data to be tracked and stored as the government prepares to roll out their DCEP for the 2022 Beijing Winter Olympics.

The one group that has not been invited to the party are the Chinese miners. Already suffering from record floodings, they now face a double whammy as Inner Mongolian municipal officials start cracking down on crypto miners, because why would they want peddling in someone else’s coin when they have their own?  

Compounded by the shortage of ASICs resulting from the soap opera at Bitmain, no one was looking for a pop in difficulty to ATHs…

Whatsminer is the only name in the game (at an industrial scale) with Riot Blockchain allegedly cleaning out the inventory of Bitmains S19s, and they have been much more selective in their sales preferring to partner with industrial large-scale mining farms. While the mining scene in China has taken a backseat, there have been various examples reflecting the burgeoning migration to more accommodating jurisdictions. It will be interesting to see how the geographical dispersion changes from the current status quo of ~65% of all miners currently being based in China. 

Ethereum ($ETH)  dropped 6.8% on the week, double the drawdown posted by $BTC as the euphoria of the hardfork dissipates. With EIP-2878 (an Ethereum Improvement Proposal) proposing a 75% cut on mining rewards ruffles the miners, a more pressing problem is with the >10% of ETH node operators who were bogged down by heisenbugs in the OpenEthereum client update, causing all-too frequent freezes. 

While there was nothing stopping Kraken from debiting $DOT, they certainly could have done a better job highlighting the denomination adjustment similar to a 1:100 stock split. Changes were guided to be implemented last Friday yet Kraken jumped the gun three days ahead. With the project having raised without an ICO, locking out John Doe, volumes exploded upon listing taking the coin more than 10x within the first hour. Issues well known surrounding Grayscale’s mind-boggling premium (and the management fees) are looking to be replicated on the latest new alt-coin offerings as volatility goes through the roof.

However, this has done nothing to stop the liquidity as, $BTC and $ETH volumes have subsided some, USDT volumes have gone from strength to strength eclipsing Paypal.

Surely the usual detractors will come out with the “crypto is for drug dealers and money launderers” song and dance. But, guess who the biggest players in the business of nefarious account dealings and practices in Mexico are?  For those non-Spanish speakers, it’s nary a digital asset broker/dealer to be found.  But plenty of household names in the banking sector. “Do as I say, not as I do” syndrome? 

Additional news that caught our eye this week:

  • Shapeshift files lawsuit against former senior engineer alleging a $900K theft. 
  • US prosecutors freeze 56 bank accounts of Reginald Fowler suspected to be tied to Bitfinex’s $850M hack.
  • Shinhan Bank KYC to be governed by ICON’s Iconloop enabling remote account openings.
  • YellowCard the Nigerian crypto exchange received $1.5mn funding.
  • Binance Coin ($BNB) announced Binance Darwin upgrade (blockheight 109999000 8/28/2020, 6am UTC) adding staking, interchain operability and onchain governance procedures 
  • Bitcoin Cash ($BCH) Bitcoin Cash Node (BCHN) rejects latest upgrade requiring 8% mining rewards be devoted to a development fund 
  • Prediction markets come to DeFi 
  • Aave ($LEND) pops post FCA approval for their Electronic Money Institution (EMI) license
  • Compound ($COMP) looks to amend governance to end yield farming craze.  

OSL Trader View and Weekend Digest are contributed by Stefan Chu and Santiago Nazaretti



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