Good morning from San Francisco!
Part of your editorial team (Ram) is currently at Blockchain Week in SFO, so Rohit will be mostly pinch hitting solo on the newsletter with support from Divyang. Great to run into Min Kim of ICON at SF Blockchain week, missed you Henry Hyunil Lee! Excited to be heading out to listen to Andreas M. Antonopoulos, the original, authentic crypto raconteur.
Are we seeing the beginnings of crypto convergence with other asset classes?
Next time someone tells you that crypto assets are uncorrelated with the rest of the asset classes, show them this snapshot!
The crypto meltdown in the past 24 hours was in line with the broad selloff witnessed in global equities and bond markets. The reasons for the price decline across the board might be many, ranging from growing US-China trade tensions, rate hikes and the unsustainable rally of tech stocks we have seen in 2018, but the fact that global macro movements had an effect on crypto assets might come as a surprise to many hyper-partisanal crypto flag bearers. Cryptocurrencies, due to their distinct and unique underpinnings, in theory at least, can be thought to have zero to very low correlation with traditional asset classes.
Correlation Between BTC and Other AssetsAs recently as Jan’17 things were still pretty uncorrelated. However, that theory is slowly being put to rest in recent weeks, with cryptos showing above average correlation with other asset classes.
One reason behind the recent unusual pattern can be narrowed down to the growing impact of fund flows. The low historical correlation between cryptos and other asset classes can be attributed to the trivial size of the crypto asset class back then, where low-liquidity driven volatility resulted in low correlation vs other asset classes. With cryptocurrencies on track to become a new global macro asset class, driven by growing institutional investments and mainstream media coverage (lambo ads too!), there is going to be increasing convergence with other asset classes. The price we have to pay in the medium term is that institutional adoption is going to make cryptocurrencies more dependent on macro events and price movements in other asset classes.
That said, in the long run, we believe that the correlations should revert back to historical means (low correlations) to be truly reflective of its Gold 2.0 properties.
“Crypto is Not Dangerous”Yesterday, the Financial Stability Board (FSB) issued a report titled “Crypto-asset markets: Potential channels for future financial stability implications”. The report highlighted that member institutions saw no danger in cryptocurrencies since the current market cap of $200 billion is barely 2% of gold’s market cap. The report also highlighted the possibility for price manipulation due to the fragmented market and illiquidity.
“Blockstream’s Liquid”Blockchain startup Blockstream has launched Liquid Network, a platform which connects a consortium of exchanges, brokers and financial institutions in an effort to increase liquidity in the system. The platform will allow exchanges to pool liquidity from others and already has tied up with multiple partners including Bitfinex and Bitmex.
“Switzerland’s Crypto Valley”A recent report published by Swiss investment firm CV Venture Capital talks about the booming “crypto valley” of Switzerland. The report asserts that the combined value of the top 50 cryptocurrency and blockchain based startups exceeds $44 billion, there are over 3000 people employed by crypto firms and 5 startups are valued at over $1 billion (unicorns).
“India Jumps on the Bandwagon”India might be the latest sovereign flirting with the idea of a national cryptocurrency. The government has set up a panel under the finance ministry to discuss the issuing of a cryptocurrency that could be named “Lakshmi” after the Indian goddess of wealth and prosperity. In case the idea goes through, India will join Venezuela and maybe even Iran as countries with state-sponsored cryptocurrencies.
Today’s NAV is ~$1.12, up roughly 14% since launch.
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Can Bitcoin bounce back? By Juniper Research