On The Brink with Castle Island - Weekly News Roundup 9/27 (Deals, Kin, Abra, Hash Rate and more)

Episode Date: September 27, 2019

Matt and Nic from Castle Island Ventures review the top stories of the week in the cryptoasset industry. This week's topics include:  - Deals - Kin - Abra - CME  - Bitcoin Hash Rate

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. Welcome to the On the Brink podcast. I'm Matt Walsh. And I'm Nick Carter. And today is the 27th of September. And this is the weekly news roundup with Castle Island. And for those of you who are just tuning in for the first time, this is the episode where Nick and I pontificate and blowiate about the week's top stories. And there's a lot that happened this week. So we have a ton of headlines to get through here. It's a chilly morning in New England. And it's a quiet. It feels like the winds are shifting here. We're approaching the end of the quarter for the SEC.

Yeah, and apparently the SEC likes to backload their announcements of enforcement actions. So we are somewhat hopeful that the SEC has a few fun announcements of enforcement actions for us today. The price of Bitcoin is down over 20% over the past week. It feels like something's about to happen here. It feels like someone knows something. All right, so we're going to move on to a new segment that we're going to start this week. And this is a segment that we do in our weekly newsletter that you can subscribe to on castle island. So we're going to highlight the top deals and the top fundraising news for the week and call out some of the companies that have gotten funded and some of the funds that have raised additional capital. And for those of you who are listening, if you're looking to get into this industry, this is a good time to check out some of these companies that are,

just raised some capital and we'll be hiring, presumably. So the first one is one of our portfolio companies, Flipside Crypto, announced a $7.1 million raise led by Galaxy Digital, participation from Avon Ventures, CMT Digital, Collaborative Fund, Founder Collective, True Ventures, Digital Currency Group, Boston Seed, Castle Island. So I think the big takeaway here is Dave Balter and Jim Myers, probably the best hair of any founding duo we've come across. Moving on, immutable games, a blockchain gaming company raised $15 million from NASPERS and Galaxy Digital's EOS fund.

And these are the guys behind the game Gods Unchained, which was one of the original NFT collectible card games. The next one is securitized. So this is a security token technology provider. They raised a $14 million series A extension. It was backed by Santander's Inaventures Group, MUFG, IneVG, Interventures. Partners and Nomura. So hot right now, security tokens. And who's the NBA player that's tokenized his contract? You put me on the spot. I don't know. An NBA player tokenized his contract on Ethereum this week. Yeah. It's big. Yeah. It reminds me of a Bowie Bond.

The next one is a blockchain forensics company in New York named Elementus. So they raised $3.5 million from Morgan Creek, Avon Ventures, Stage 1,000. ventures and robot ventures. They also announced that Chuck Senator, former head of compliance at Fidelity, is joined as an advisor. So good hire over there at Elementus. They have some really interesting analytics and visualizations, especially flows on Ethereum, some of which are public. Definitely check this out. The next one is Fold app. So this is a wallet that allows users to earn Bitcoin rewards back. They raised $2.5 million. It was led by Kraft Ventures with participation from coin shares, slow ventures, goldcress capital, and Folger Ventures.

Fold also had that app where you could order Lightning with pizza. Sorry, pizza with lightning. The next one is skew. So this is a company that is focused on data analytics in the crypto asset derivatives market. They raised $2 million. It was a round that was led by first minute capital, participation from Seed Camp, Kima Ventures. QCP and Kleiner Perkins. So skew is great.

I'm a big fan of these guys. And if you're not familiar, they have a really great analytics dashboard for derivatives data in particular, for Bitcoin and Ethereum. And these guys are X-traders, so they really know their stuff. And I use their analytics all the time

to get a sense of market structure on Bitcoin. So highly recommended. So those are the big deals from the week. Why don't we move on to the news? So CME is going to be launching. Speaking of derivatives is going to launch options on its Bitcoin futures contracts in Q1 2020. Definitely good news here. The further development of this market infrastructure and the liquidity environment just maturing is, I think, is nothing but a positive.

So exciting news. Yeah, people forget we've only, you know, they launched at the, the almost the precise peak of the bubble in 2017. We've only had regulated futures for about two years now, just under two years. And, you know, a lot of people are underwhelmed by the back news as well. Look, we're just getting some of these essential pieces of tooling built out for the first time. Agreed. Another infrastructure development this week was SOFI. So they have had a federal MSB filing out there for a while. Some people were wondering what it was. They had an announcement a few months ago that they were going to be partnering with Coinbase. And this week they announced their

crypto asset brokerage platform. So right now it allows people to buy and sell Bitcoin, Ethereum and Lightcoin. And a third piece of news, Ken, which is forever a source of entertainment, announced that they are going to be shutting down the chat app. which is, from my understanding, the thing which they did, which actually had traction and people seem to like, and focusing exclusively on the token, which they had sold in that infamous ICO. Focusing on converting kin users to kin buyers was the exact language. Which is kind of mystifying because one wonders why anyone would buy the token in the absence of the app, which is the thing that people actually seem to use.

I feel like we have talked about this ad nauseum in our newsletter, but to reiterate our position, this thing is a complete debacle, and it's an unregistered security, in our opinion. What I liked was that Ted Livingston is apparently not backing down, and in some ways he seems determined to make himself the sacrificial lamb for the ICO industry, claiming he will keep fighting until, quote,

they have no dollars left. Well, that's going to be pretty soon. And the other interesting news on the regulatory front is that ABRA restricted a lot of U.S. users on their platform, in particular with respect to their synthetic assets. Huh. Huh. Huh. Well, we'll leave that one where it is, but suffice it to say, if anyone can explain exactly how this hedge works, specifically with the liquidity, we would be all ears, and we're completely baffled by this. And furthermore, we're not exactly sure how a product like this could be feasible from a regulatory perspective.

But maybe this news is one kernel of indication as to the end of the endowment. answer to that question. It reminds me of the Sand Hill Exchange, which was meant to allow retail investors to trade shares of private companies, synthetic shares. I know this is a really big theme in crypto with synthetics is being touted as one of the bigger DFI platforms. The CFDC is pretty clear on the creation of synthetic equity. So I'm

very, very skeptical that any of these things will actually pass any meaningful amount of scrutiny once they get it. We shall see. So there's some news out of Venezuela this week. Yeah, so Bloomberg reported that the central bank is considering whether they actually want to

take ownership of Bitcoin and Ethereum, which was acquired by the nationalized mining company. This is a little confusing. It's not clear exactly what's going on over there. I guess you can say it's adoption. Do you think it's a real story? From what I understand,

various government agencies over there have been confiscating Bitcoin miners from individuals. A lot of the time using the electricity, as a way to find these people that were mining because electricity is subsidized and very cheap in Venezuela. So naturally, a lot of people converted the subsidy into Bitcoins. And so, you know, various government agencies ended up owning a bunch of miners and operating them as well. So it could be that this is a function of that, although the story is still, I think there's a lot that remains to be uncovered. There's a lot of people on crypto, Twitter, getting very excited that central banks are beginning to aggregate Bitcoin and buy on the open market.

It's not clear that that's actually what's happening here. So moving on. So if you read one article this weekend, I think what we'd recommend is this Wall Street Journal article, the coming currency war, digital money versus the dollar. So the article posits that central bank digital currencies will start to compete with cryptocurrencies like Bitcoin, which we don't. agree with. We can get into that. But I thought that it was an interesting exploration of central bank digital currency and what we're potentially about to see here over the next few years. Yeah. And having spent time with a lot of, you know, policymakers and central bankers, a lot of them, for the most part, they believe that cryptocurrency is just kind of a proof of concept

for the much more interesting theme, which is central bank digital currency, which they really like because it would give them kind of granular control over interest rates and the economy and they'd be able to impose if all cash was digitized they'd be able to impose deep negative interest rates at the click of a button yeah so the the incentives for a government to want to have something like this are pretty clear which is why it's likely to start to happen it looks like china is going to be one of the first countries to adopt it yeah not to mention the surveillance that you get by digitizing everyone's financial history is very, you know, significant. Now, how about this choice of words in the article? It didn't make much sense to me that central

bank digital currencies compete with, quote, private cryptocurrencies such as Bitcoin. Yeah, it's a little mystifying that this is still the narrative. I guess, you know, you can compare the two in that they're both, you know, digital and non-analog, but ultimately, CBDC is still entirely permissioned, right? Whereas Bitcoin exists to give you the power to transact in a totally permissionless way. So if anything, the emergence of CBDC, to me, would catalyze the need for alternatives like Bitcoin, because you would be completely captured within the wild garden of the state otherwise. Certainly I could see this competing with private cryptocurrencies.

that are issued by one entity, for instance, looking at URIPL. Right. Those would be the obvious losers in this situation, as well as commercial banks. Commercial banks would be obliterated if normal citizens ended up having depository accounts directly with the Fed. Yeah, which is a great point. So if you think about where this could actually go, it's hard to imagine that in the United States, you would have a central bank issued digital currency directly to a retail user. To your point, that would obliterate the role of commercial banks.

We have a really powerful banking lobby here in the United States. It's impossible to imagine that this could actually happen in the next couple of years. Yeah, if there's any group of lobbyists that actually moves the needle in U.S. politics, it's the banks. But where this might actually make sense would be for institutional type of transactions, like overnight repo or something like that, bilateral repo, tri-party repo, where you're just moving funds between institutions. Maybe if you had a tokenized treasury bond, that would be an easier to imagine transaction. So my belief on this is that maybe in the United States this starts with institutional use cases

and maybe never gets to a retail use case. The other thing is you should also read Jerry Brito's piece from Coin Center. It's called The Case for Electronic Cash, Why Private Purefews. to peer payments are essential for an open society. And it gets into some of the dangers of a cashless society and why we do need some of these non-sovereign cash instruments. Yeah, and this is something that's always struck me, you know, in this industry, people will visit China and say, you know, wow, they're so like technologically progressive.

Everybody uses QR codes and AliPay and WeChat for everything. But, you know, in a way that, I mean, that really is potentially extremely dangerous. for normal citizens and obliterates their sovereignty, right? So we absolutely believe that there needs to be an alternative there. And if we give government full control over all the levers of your savings devices, the outcomes there can be really negative. So regardless, we think electronic cash and privacy is a big part of that too. We'll see how that manifests is absolutely critical for a free.

So moving on, so a lot of controversy this week around the Bitcoin hash rate. Talk about a crypto Twitter feud this week. Yeah, so we're diving into the Bitcoin hash rate controversy. So for those of you that aren't on crypto Twitter, what happened was blockchain. Not info has this chart of the implied Bitcoin hash rate, which apparently dropped 30% on the 23rd a few days ago. And a lot of people noticed this and, you know, grew very concerned. And they thought that, you know, a bunch of Bitcoin miners in China had been seized or some farm there had turned off all their miners. But that's not really what happened.

Or at least it's not likely that that's what's happened. So just to back up, can you define what the hash rate is and how it's calculated? Yeah. So hash rate refers to the number of hashes per second. that the entire Bitcoin network is doing. And the important thing to remember is that it is an implied figure. So it's not something that can be directly measured because you only really are able to know what it is based on the arrival of the blocks.

And, you know, Bitcoin mining rather is a Poisson distributed process, which just means it has a certain distribution. and it's probabilistic. Which is about every 10 minutes or so. Roughly, yeah. The network optimizes for that. But people don't realize that you can get 30-second blocks or you can get blocks that are 90 minutes apart.

And in fact, the 90-minute ones always seem to come when I have a transaction pending. Actually happened to me last year. Either way, what happened was, and I posted a graph of the block arrival times, there were three or four really, slow blocks a couple days ago. So one was 75 minutes, you know, it took 75 minutes to be mind. One took 63 minutes. And this caused the estimate of hash rate to plummet. But, you know,

it's a very noisy distribution. And as I said, the actual hash rate itself is not directly measurable. So what we have typically, you know, Bitcoin developers like Peter Willow, will smooth the estimated hash rate chart on a weekly or even fortnightly basis, as opposed to measuring it daily because, you know, the daily chart can be totally misinterpreted. And that's what happened. A lot of people mistakenly believed that, you know, a third of Bitcoin miners had left the network. Of course, what happened the very next day was the Bitcoin hash rate surged by 37 percent according to this measure and then today it's actually at an implied all-time high of a hundred ex-a-hashes i believe which is 10 to the power of 20 which is just an obscenely large number

so is there a learning from this is there a way that we should be measuring hash rate going forward yeah i think the advice is just to take a much longer window to estimate things because if you're looking at a noisy distribution and you're measuring, you know, 100 data points, it's going to be bouncing all over the place. It's going to be super volatile. There's going to be a lot of variance. Reading too much into any single, any single day's worth of data is going to lead you to get mistaken ideas about what's actually going on. And ultimately, Bitcoin's hash rate is just preposterously high. It's at all-time highs. It doesn't really matter if it's It's super jumpy, in my opinion.

We weathered a 40% actual drawdown in hash rate in late 2018, and everything was fine. You know, blocks were a little slow in that period when difficulty hadn't adjusted yet. But beyond that, Bitcoin was totally fine. I guess there was some speculation that if 30% of the hash rate did jump off of the network, then we might be looking for a pending attack on either another chain or perhaps Bitcoin. Yeah, although to attack another chain, any of the chains that share Bitcoin's proof of work would only require a couple percentage points of the total hash. But, yeah, ultimately, not somebody to get worked up about, although that didn't stop people.

It was a good opportunity for people with competing professor coins to get really angry about Bitcoin. And ultimately, it's a good learning opportunity, you know, re-familiarize yourself with the methodology, a lot of these distributions are inherently probabilistic and not truly knowable. And it also reminds us that we should hold our data providers accountable, ask them to be really clear with their methodology and their reasoning. That's absolutely been the case with my efforts with coin metrics. In fact, people don't know this, but coin metrics was created in part because blockchain not info was so obscure with their methodology.

and they didn't reveal their methods. And that was very frustrating to me because I wanted to know, for instance, how they created their adjusted measure of transaction volume. And so I set out to change that a couple of years ago. And then today, Quarometrics is very well documented. One of the things that it highlights is that, so we've spoken with a number of companies

that are trying to innovate on the derivative side and come out with hash rate contracts. And when something like this can happen, it really makes you question what the underlying methodology is. So it's really important stuff. Yeah. And I think some of those hash rate contracts should probably be difficulty contracts, because difficulty is much less volatile than hash rate. So that is the news of the week.

I think that's it. And, you know, we have a really, really fantastic interview coming out next week. That's with James Presswitch. We go into some controversial topics. James is very erudite, very clear thinker and he doesn't pull his punches. I'm looking forward to that one. Stay tuned for that one. That should be dropping next week. And we're just going to sit here and refresh our SEC

press release page to see if there's any enforcement actions coming here at the end of the fiscal year. And we'll keep you up to date. If anything happens, we'll be talking about it next week.