On The Brink with Castle Island - Weekly News Roundup 12/20 (ErisX's one trade day, PlusToken, EMH in Bitcoin, Deals and more) (EP.27)

Episode Date: December 20, 2019

Matt and Nic from Castle Island Ventures review the top stories of the week in the cryptoasset industry. This week's topics include:  - ErisX's futures launch - PlusToken - Efficient Markets at the halvening? - Deals of the week and more

Brought down by bad mortgage investments, Lehman, which has 25,000 employees, will be liquidated. The federal government loans American International Group, AIG, $85 billion. This is a different kind of market, and the Fed is asleep. The federal government is stepping it to stabilize Fannie Mae and Freddie Mac, the two mortgage giants that have been threatened by the housing crisis. The Bank of England has pumped 75 billion pounds more to Britain's ailing economy with a new round of quantitative easing. You print a couple trillion dollars, and all of a sudden, people start to worry.

So out of this worry, we have something called a Bitcoin. Bitcoin. Welcome to the Unbring podcast. I'm Matt Walsh. And I'm Nick Carter. And Nick, we have matching vests on today. This is the most VC thing ever. We actually got a nice gift of the Fidelity Digital Assets vest.

They're awesome. It's like my favorite vest now. They're very good, actually. So shout out to Fidelity Digital Assets. Thank you for the Vest. Let's move in. A bunch of stuff happened today. This could be an action.

hacked episode. Why don't we start it off with the deals and fundraising in our favorite company leading the way here? So Ripple has raised a $200 million series C. And what can you say? You know, because like Ripple was really in desperate need of money because they didn't, you know, it's not like they had like their own currency or anything. They had just sold to a global retail audience or anything. You know, why do you need money if you just print your own money and and give it to retail investors. It does actually raise the question of why they feel the need to raise from institutional capital if the XRP things, you know, like if they run out of XRP, they can just make more.

Yeah. Why wouldn't it? There's no constraint there. Blue oil, they call it, gushing forth. And Ripple Labs was just the lucky enough wild catter to find that spigot of blue oil sitting in a reservoir beneath the ground. in New York. They were just searching the internet for magical internet money and they found some. They found it. They did not create XRP. Let's be very clear. They somehow discovered it. It's like math.

You know, was math discovered or was it invented? Who can say? Age old question. Who can say? Well, Mary Jo White and their cast of lawyers seem to be doing a really good job over at Ripple. So congratulations on the $200 million fundraise. Why don't we move on? A couple more deals. that got done this week. Alchemy, which is a blockchain infrastructure company. They provide node hosting services. They raised a $15 million series A led by Pantara Capital. Another deal that got some attention was the Maker Foundation, which is the group behind obviously the Maker Dow Protocol. They sold $27.5 million worth of MKR tokens, which is about 5.5% of the network to investors, including Paradigm and Dragonfly Capital Partners. Would you make of this

protocol deal? I guess it's been interesting. You know, Maker hasn't really been really issued in the conventional sense. It's been done on a piecemeal basis to funds, so it has a very small effective float. Partly this could be due to the fact that unlike some tokens out there, you actually have the ability to influence the protocol if you hold Maker. And there's this very well-publicized piece about a potential attack on Maker if you controlled a sufficient threshold of the coins. And I think this tight concentration of ownership among friendlies, you know, VC funds that clearly have an interest in the health of the protocol is their way of combating that. So of course, investors can be activists and they can interfere with the protocol

if they want, potentially for profit. But the people that actually own MKR are generally speaking altruistic or have an interest in the long-term success of the protocol. So that's kind of the security model, which is interesting. Yeah, that makes sense. And then the last deal is actually one of our portfolio companies, Zen Ledger, which is a company that builds tax software to allow people to better understand their crypto asset exposure and have a unified view of how to pay their taxes. They raised $3.4 million in a round that was led by Vestigo Ventures. We participated at GumiCripto, unblock ventures, and migration capital. So pay your taxes early and often this year. The thing about taxes for crypto is they're not getting any easier to do. In fact, they're getting harder.

A lot harder. So you can thank the IRS for that. Yeah, exactly. So congratulations to the Zen Ledger team. Now, why don't we dig in? Actually, why don't we start with another one of our portfolio companies? So ErisX, I thought this one was an interesting and a little bit overlooked story of the week. So ErisX, for those of you who are not familiar, is a company that is doing spot market and, you. derivatives market, basically, they're trading, they're in exchange. And so over the past year, they have introduced a spot market as well as a physically settled Bitcoin futures market. And so they have a DCM and a DCO so they can actually clear these trades in addition to facilitating a derivatives marketplace. So this week, a little bit below the radar, they announced the launch of their physically settled Bitcoin futures contract. And there was one trade on it. And so this was there was a couple kind of wise-ass Twitter mentions of this.

I don't love the crypto Twitter. Just like, hey, one trade. Like, congratulations. So crypto Twitter, just keep, you know, never change. But so this is actually a bigger deal than I think a lot of people went on. And certainly it's not like they just launched this exchange and like two people showed up and did one trade. That's not what happened here.

So ERIS's previous business was an interest rate swap futures market where they had a DCM license, which is, of course, under the CFTC's purview. And so that business was essentially spun out. And ERISX is using that license and has been building this clearinghouse infrastructure from the ground up for the entire year, basically. And there is a, they had to do one trade. They could not go over a year without having a trade on the venue, less they let that DCM lapse. And so they just tactically speaking, needed to execute one trade. And it was sort of a rush to get that done within a year.

And so that's what happened. They did one trade. So more to come. Obviously, the business model is not going to just be to have one trade every day. Yeah. So, you know, dunk on them of your peril. I think the bigger story here, though, is, you know, this is a real. really critical piece of market infrastructure. And so the pace of infrastructure development that

we're seeing just across the industry writ large and certainly at RSX is pretty staggering. So they rolled out the spot market this year. They went out and they got the swath of money transmitter licenses and then the derivatives clearing organization license, the DCO. And so these type of things is what makes it possible for a wide variety of traditional quote unquote institutions to get involved with this. It's like tedious, complex, time-consuming work, but these are the things that they have to happen in order for institutional capital to actually participate in these markets and to face off. And so, you know, building this stuff is critical. And I think the other thing that was interesting about the announcement was at the end of the day for a marketplace like this,

they're really going to need the FCMs, the futures commission merchants, to plug in here. And that's where this is going to get really interesting. And so the participation, of Wed Bush and the EDNF main capital, these participants that are at the table working with RISX and either investors or customers, this is going to be a big catalyst. So we took note of that, and obviously E-Trade was in the press release as well. So just really interesting below the radar niche type of businesses here that just have to be built in order for the intersection of public blockchain. and traditional regulated financial services

to actually be a good intersection to be on. It's amazing to see how far we've come from, you know, even 2017 when, you know, Bitmex was the biggest venue for synthetics. It may still be, actually. But just the amount of piping, which kind of comports with the way that people expect these financial markets to operate, which has been built in that period, is kind of astonishing, you know.

And crypto is also kind of so hard to integrate. It's kind of toxic to this. So it's amazing the distance we've come already. It really is. So shout out to those guys. We thought that that was a really interesting below the radar development that happened this week. Another one, this one got a bit more press.

I feel like we're just pumping the tires of all of our companies. And this one's actually our former company. So Fidelity digital assets announced that they will be expanding their footprint into Europe, they're rolling out F-DAS Europe. Chris Tyrer, who is a former MD at Barclays, is going to be running that piece of the business. So that's exciting. Slow and steady progress here for Fidelity,

just commitment to this asset class and commitment to that business unit. Yeah, fun fact about the international branch of Fidelity, before I joined Fidelity U.S., I'd gone through the recruitment process for equity research at Fidelity International, made it to the final round and didn't get hired. We're very, that's a, we're very glad you did not.

So I could have been covering like oil and gas stocks for the London based Fidelity branch. I'm glad we didn't have a CRM. I would have seen that you were dinged and maybe it wouldn't. Yeah, exactly. Thank God that they don't share information between the silos. Yeah. Well, congratulations to the team at Fidelity for that. So why don't we transition into something that we always talk about,

which is SEC settlements with ICO projects. Did you see this one this week? So there's an ICO called blockchain of things. Do you see what they did there? They combined Internet of Things and the blockchain. It's like Internet of Things with blockchain. With blockchain. Oh, that's good.

Yeah. It's good enough to raise $13 million, which, you know, I would have thought that that blockchain of things name would have been worth like $25 million. Yeah, should have been more. You know that the SEC. get into these deep cuts where you've actually never heard of the token at this point. That's where they are. Which is kind of funny because there's so many ones that were very high profile ICOs, which they've

completely neglected to do anything about. Maybe they'll just like get around to them. But I don't, there doesn't seem to be a lot of rymaries in the way that they're selecting the projects here. I had never heard of this thing. And there's probably scores of others that I've never heard of that they'll get to before they get to some of the bigger ones. This is a very lengthy process that much is clear. Yeah, and so what it looks like with this one is a $250,000 penalty payment, and surprisingly, this network does not appear to have launched and no one's using it, which shocker. I saw that the rescission offer was for, I think the language was for all investors who opted for rescission, which kind of makes it look like it's an opt-in situation instead of the company having to proactively identify everyone who participants. which signals to me that there's a chance that some of the money they just doesn't get collected, you know?

I think it's highly likely that in all of these ICOs, you're not, you're going to have a category of participant that will never come forward because they don't want to be known. Right, right. So that's kind of the silver lining for some of these issuers that there's a fraction of the ether and the treasury wallet or whatever that won't be claimed by this global fragmented base of investors that doesn't want to make themselves known to the authorities. It reminds me a little bit. Peter McCormack, the host of What Bitcoin did, did a podcast this week with the guy's name escapes me, but the Vanity Fair columnist that wrote the Quadriga article. And there's a $75 million chunk of assets that were lost on Quadriga that we will not have,

no one will be coming forward apparently on that because it is presumably an entity or an individual or a group that just doesn't want to be known to the authorities. which what does that lead you to believe? That's crazy. The Quadriga story gets more sinister by the day. Yeah, they are trying to dig up the body this week. I don't know if they actually did that. Standard crypto drama.

As one does, yeah. Verifying, you know, corpses. Yeah, that's going to be a good movie. Yeah, that'll make for a film too. Someone should make a Gox film. I think that one said enough twists and turns. Gox one would be an interesting one. I saw Fortress revived.

They're revised rather. offer on buying some of those notes, some of those people that are, that lost money that are trying to go through the bankruptcy claim right now. So yeah, there are a lot of good, there could be some really fascinating movies about this industry. There's some excellent dramas for sure. The next Gawks deadline, by the way, it sort of coincides with a having, actually. So the next phase of this Gawks process is due to hit. And I believe it's May 2020. So what is, your take on the Gox processor. Are we going to have a lot of cell pressure coming into the market? That's what you might expect, but it doesn't look like there's actually going to be any

resolution at that point. That's just the next threshold for the trustee to kind of give information to creditors. So it doesn't look like that's going to be a critical moment. But who knows, maybe it would be. And then that could actually be, you know, potentially very negative signal because we're talking about a huge amount of BTC being released back into the market. It's already priced in that, right? You got in a gutter war on Twitter about whether or not the halving is priced in or not. We'll get to that at the end of the episode. Why don't we move on to another news item? So Circle has sold their OTC trading desk to Crack-in. So this is kind of the once mighty Circle OTC desk. So in a blog post, the company articulated a move,

they're going to focus on their stable coin platform. So obviously from the outside in, it looks like been a bumpy road over at Circle. But obviously we're big fans of Jeremy and the team over there. So rooting for those guys. I hope that they get it together. And if you want to learn about the origins of the legendary desk, our most popular podcast is the one we did with Dan Matyshevsky, who used to run the desk.

So check that one out for sure. Dan brought the heat on that episode. That was a great one. It looks like Circle is transitioning into its next phase of life here with USDC. being the main product. You know, TBD on seed invest, I guess. But USDC has a decent amount of float. You know, there's actually a good deal of it that exists.

So potentially that might be the new kind of business model here. Could be, could be. Well, so speaking of stable coins, Fred Wilson from Union Square Ventures, had a really thoughtful blog post this week on this idea of gateway technologies. And so he discussed how the CD-ROM and online services like AOL and Prodigy were gateway services that acclimated users towards what eventually became the internet, like the web browser, the consumer web. And his argument was that if you look

at the crypto asset space, just the nature of the speculation on these markets. So that number one and number two, stable coins could be two gateways that are setting the stage here for more widespread adoption of crypto assets, kind of suggesting that we're before the browser moment for this technology, but those two things will be looked upon as the gateways, which I tend to agree with. And then I'd maybe add a third gateway, and we hammer private blockchains all the time. But the one good thing that these private blockchain networks have done, I think, is get a lot of big institutions just having discussions around how would they integrate a digital asset, like how would they make it possible to buy a cryptographically secured asset that is on a

blockchain. And these private blockchain things, in my badgers, that they're not going to work, but it's probably setting the stage for a bunch of people internally at these big firms to be able to onboard a public blockchain oriented asset at some point. So I think it's a gateway technology too. I'd add that to the list. And the existence of something like quorum or hyperligerate familiarizes the engineers with the processes involved, even if these aren't production, public blockchains. Totally. So really thoughtful blog post, I thought, and we'll keep an eye on that. Did you, I know you did, but what was your take on this chain analysis report of the, they did a really comprehensive analysis of the plus token Ponzi scheme, and I thought it was

pretty breathtaking. Yeah, it was great, really interesting. It's always good to see chain analysis producing content because they have great data back there. And I thought it was a great analysis. Some of my trader friends have been saying, you know, the number one driver of market structure in 2019 was plus PUS token, both on the way up and the way down. And I'm inclined to agree with that. If you're sucking in 200,000, you know, market relevant bitcoins and inducing scarcity in the market relevant supply, which is much less than the total supply, that can tuffly lead a meltup, like what we saw at 14, and then you spit them out on the other end and you have the opposite result. So I totally buy the explanation. I know there's been some back and forth,

but some of the pseudonymous chain archaeologists, which are pouring over the same data and claiming that chain analysis doesn't have the numbers quite right. But either way, it was a staggering amount of Bitcoin and Ether that plus tokens sucked up. The big mystery to me is, is it a member of the team that's on the run that still has access to these wallets because the coins are moving? or were all of those, was all the leadership behind that Ponzi arrested? And this is actually the authorities selling off those coins. Yeah, that's interesting, right? Because a lot of the selling's happening on Huobi, right?

Yeah, and you'd think if the government was aware and we're all aware that, you know, these coins are being liquidated in Huobie, they would just tell them to stop processing the orders. So potentially this is actually happening with the blessing of the authorities. It's very hard to know. And also the coins are being mixed. Some of them are going through wasabi. That's like the remaining mystery that I'd love to know the answer to. Yeah.

Like why would the government put it through wasabi? Why wouldn't they just sell it? Why wouldn't they just liquidate it? You know, like the trusty liquidated gocks, just OTC and on exchanges. And presumably, if they're selling on Hwobie, they've had to go through a KYC process, though, right? I mean, wouldn't we know who has these accounts? Yeah. And so if it somehow was the plus token scammers, you know, directly liquidating on Hube,

wouldn't Hobi have realized immediately what was going on? Because the Bitcoin's under management, if you look at their cold wallets, have been growing unbelievably in the last, you know, a few months. So they would have known what was going on. So would they really have just been able to turn a blind eye, especially after all this press coverage? The scope of some of these Ponzi schemes, they can get so large. before people even realize that they're operational. Because they're on these settlement rails, which are, you know,

blockchains, there are many, many exchanges globally support them. This is, that's the first killer app of crypto. It's like unstoppable Ponzi's global, global Ponzies. That's why BitConnect and One Coin were so big because the localization element was taken away. I mean, I remember watching BitConnect in the early days being like, wow, this is, you know, there's like $100 million in this. This is a pretty big Ponzi. And then it grew to multiple billions.

I couldn't believe it. Each time it grew by, you know, another order of magnitude. We're going to start to see more and more of these, I think. I know that we've already had some lotteries, but that would appear to me like another opportunity for someone to just pop up a public lottery that anyone could participate in and maybe potentially abscond with the money while they're at it. I think you could make a trustless lottery.

There's probably a way to do that. Yeah. But yeah, that's interesting that we haven't really seen these quote unquote fair lotteries that much. Because you could design a smart contract, which was a, I guess the difficulty would be inserting randomness, which people acknowledge is fair. Right. There have been problems pulling randomness from the on-chain data in the past. But yeah, I'm shocked we haven't seen more kind of fair lotteries emerge. Call for project.

I'm not sure they're strictly investable. Strictly probably uninvestable and potentially illegal. But I think that we're probably going to see one. Better than a Ponzi? Potentially better than a Ponzi. Maybe better than a Ponzi. A couple odds and ends. So a bunch of good podcasts this week.

I'd recommend checking out that Quadriga one that was on what Bitcoin did. Hunter, Horsley was on Pomp's podcast. Tom Jessup was on The Scoop, which is the Block's podcast. So just a bunch of good, really we're in the golden age of podcasting. Yeah, and we're contributing to that glut. Yeah, so turn on that 1.5 to 2x speed for your holiday season. Do you want to talk a little bit about stock to flow and the halving? Yeah.

We mentioned that you got into a little bit of a dust up about whether or not the efficient market hypothesis works out. So I'll talk about the EMH a little bit because Bitcoiners really seem to resent this concept, the efficient market hypothesis. So I think it's actually missold. I don't believe it's a hypothesis at all. So I'll probably elaborate on this in writing at some point. But basically what it says is, you know, ceteris paribus, everything else equal, markets reflect available information.

That's really what it says. So to the extent that something is known, it's involved in, it's incorporated into the market price. So if Apple has a supply shock, the moment that that becomes known to the market, the price-setting entities that gets incorporated into the price. It's very basic stuff. It's almost tautological, you know, because if you think about what markets exist to do, you know, facilitate commerce and so on, but really they exist to provide information to us

in the form of prices. That's what prices are, their information. So it's kind of a tautology because you're saying information gets expressed. in the form of prices and prices are information, so information is information. So I consider it almost a mathematical truism. So in the context of Bitcoin, the Bitcoin's supply was fully known from origin, from inception. The entire trajectory of what supply would look like, it hasn't changed since the first edition of the code, which is great.

That's something we like about Bitcoin. So there's never been new information brought to market about Bitcoin supply. The halvings, people call them a shock. They're not an informational shock. They might be a supply shock, but that's everything proceeding according to schedule, which is great. We've never had a commodity like that before. We don't know the amount of gold mined next year. We might have a good guess.

So there's no possibility for an informational shock in Bitcoin supply unless there were to be some covert inflation, which somehow remained in the protocol. That hasn't happened. I mean, we did have a brief episode where that occurred, but we undid that. So from my perspective, there has never been any new information as far as supply is concerned. So models that use this as the sole explanatory variable, they just don't work. You know, what really drives the price of Bitcoin? Well, it's expectations of buyers. It's the actual adoption. It's forward-looking views of Bitcoin holders about potential growth trajectories, which are discounted back to today. Those are all demand side variables.

So to the extent there are any models of Bitcoin's price, I would like to see the demand side incorporated. To me, it's a priori incoherent to presume that supply changes are what's driving the price action. If you ask any trader or any CFA charter holder or anybody that works professionally in finance, they'll probably believe in the weak form of the official market hypothesis. Now, people argue against the EMH and they say, well, actually, these markets are irrational so EMH doesn't hold. It doesn't really disprove the EMH. The EMH is just kind of a baseline, kind of standard function which describes markets, generally speaking. So individual instances don't disprove it because the core of the AMH is there is financial gain to be obtained by taking

non-market relevant information and acting upon it and incorporating it into the market because we're all strong and incentivized to do that. If I know that the Apple supply chain is going break down next month and no one else knows, I can achieve a significant return from expressing that opinion in the form of trades. So because that basic biological fact is true, you know, we as humans seek to obtain financial return will take information incorporated into market prices by trading on it. That's why the EMH is true. And that's just a reality. It's not going to change. So that's my EMH take. So you're not buying the stock to flow model. I guess it is just a It's one of these things that since it says the price is going up, I feel like that's the reason why it's so popular.

People are continually engaging with it. It's just it would be very nice if it were true, but it's really not grounded in any reality. Yeah, and we're talking Bitcoin issuance, not inflation, issuance going from 3.6% to 1.8% next year annualized. That's the difference of 900 BTC a day. That's not going to be the causal, you know, driver of prices. section here. It's just not. There's so many other factors which cause more than 900 BTC to become market relevant, market irrelevant. Coins getting lost, old coins and cold storage becoming market relevant. Those are the supply side drivers that matter. You get those by looking at on-chain data.

The demand side is almost impossible to model. And that's the other thing, yeah. You can't forecast it. You can't forecast it. And the things, you know, if you were trying to understand that demand side more the things that I believe you'd be looking at would be just the piping to actually make this accessible, make this an asset that more people and more sources of capital can engage with. Totally, yeah. It's just understanding where we are infrastructure-wise and what the likely effect would be. And whether available sources of capital that might want exposure to Bitcoin will have the ability to get that. And understanding the growth of the lending market, understanding all of that infrastructure component, I think would be critical there.

And by the way, that's a great story. It's just very difficult to predict when some of that will hit and then what the impact will be. Yeah. So it's kind of intellectually barren to reduce Bitcoin price action to a single variable. There's so much going on, which is a rich patchwork of interesting things from the demand side, that it's worth contemplating all of that when you think about price action. And there's no single convenient answer. It's just a complex, somewhat intractable problem.

And if you have a particular understanding of it, the market doesn't have, then you'll profit from that. So I think that's a great place to leave it. Just a little bit of housekeeping. We're going to drop an interview on Monday with Joe Luloo's, the co-founder and CEO of Bison Trails. Really exciting interview. We're not going to do it round up next week,

but we'll be back the week after. So plan accordingly for your podcasting needs. And thank you for listening. Everyone, have a great weekend. Happy holidays.