The Breakdown - Bakkt launch flop or fly? / Kik kicks the bucket, Kin lives on / SEC testifies before Congress

Episode Date: September 24, 2019

Much hyped Bakkt has launched, but the volume is...less than massive. What should we think about it? Is it a sign of failure; a sign that there simply isn't demand from institutions; or was this always the likely launch pattern? Meanwhile, in the "whoa" files, messenger app Kik has shuttered to focus all remaining efforts on KIN. Hail mary (or was the ICO the hail mary in the first place)? Finally, the SEC testified in front of Congress about crypto amongst other topics. Hope you're not hungry, because this was a nothingburger.  Watch: https://www.youtube.com/nathanielwhittemorecrypto

The first lady is not the only one making her Wall Street debut today. The long-awaited crypto platform-backed launches today offering the first physically delivered Bitcoin futures contract ever traded on a federally regulated exchange. Wow, that was a mouthful. Joining me is Adam White, the chief operating officer of Back. Congratulations. Thank you very much. Just explain in English what this means. What this means.

This is a big day we think not just for backed and for the intercontinental exchange, but for the whole space. because for the first time ever, you have an end-to-end regulated marketplace for the price discovery of Bitcoin. Welcome back to another crypto Daily 3 at 3. All right, guys. So what is going on? It is Tuesday, September 24th. And today we're going to be looking at first the launch of BACT. It has come out of the gates, whether thundering or not so much is kind of what we'll be talking about.

Second, we're going to look at the end of Kick Messenger and the shift of their focus over to Kin and what it all means. And third, we're going to talk about, do a quick recap of the SEC's testimony in front of Congress today. See if we can pull out some of the interesting bits that related to crypto. But let's start with backed. So, backed for those of you don't know, is they're offering the first physically settled futures contracts. You just heard Adam White, their COO, who was formerly at Coinbase, talk about why it's a significant move and what it means, and get into kind of the idea of physically delivered future, which basically requires holding the underlying asset versus cash settled futures, which never have to, they're never has to actually be a purchase of Bitcoin. It's all just kind of betting on the price. So in the lead up to this launch, a lot of people are really excited, obviously. They've been excited since last year around this time when the announcement was, made. And so you have here Dan Moorhead, who's one of the largest early investors in Back. This is Pantara Capital. And they wrote a letter kind of talking about what was so powerful about it to them.

So they go through actually the history of buying Bitcoin and just how scary it's been for institutions effectively to have to trade with these weird institutions or weird exchanges online, rather, and they gets into this idea of what's so different about physically settled futures. So that's all kind of the excitement. But coming right out of the gate, it has not necessarily been a huge explosion of activity, right? So you have here, CoinDesk says, update. It took almost 18 hours after launch for the first daily Bitcoin contract trade to show up on backed. Monthly contract volume so far totals 66 Bitcoin. So not huge. You have Alex Kruger, who says, backed first-day volumes, excuse me, equivalent of 71 Bitcoin plus

one Bitcoin, CME, first-day volumes, equivalent of 5,298 Bitcoin. So this was from when the CME launched this stuff. So obviously a huge difference there. And so what's going on? Is it that people aren't actually interested in physically settled futures and the CME sort of cash settled futures are more a lot of. aligned with what those investors already want. Does that simply reflect the state of the market when the CME launched last year, earlier in the year, comparatively? And basically, regardless of

what the answer is, you saw a huge amount of meming right away, right? So you see backed institutional investors entering Bitcoin, expectation versus reality. You have this meme, which was flying around everywhere, which is the John Travolta confused meme from Pulp Christian in an empty warehouse with backed on the side. You had people who are more willing to proffer their explanations. So Bryce Wiener here says basically that effectively argues that there's no way that the average day trader is going to actually care about this. That the difference between the CME product is simply that you get the thing at the end, but that it also trades at a premium. And if your whole idea is just to kind of short it or make bets on it, you don't care, right?

So you have all of these type of folks who are making all. arguments. And going back to Alex Kruger for a second, so Alex makes a couple interesting points. So he says, in finance, 98% of futures are not physically settled as traders do not want to take delivery, even for physically settled contracts. Comparing backed with CME is perfectly fine, particularly so with Back's monthly contract. But then he says, and I think this is interesting, was backed overhyped, debatable. Argument for no. Backed gives institutions a venue to hold and trade physical Bitcoin. It's a door. It's now open. Institutions will trickle in. Argument for yes, market wants to see institutions walk through the door. Volume looks like a flop. So he's not committing himself to one side or another.

He kind of shows that it could be either way. But there were a lot of folks who are willing to kind of step up and say that, no, this wasn't a flop. And in fact, to the extent that you believed that there was going to be some immediate pop that was kind of on you, right? So Bitcoin Tina, Tina standing for there is no alternative, which is a great handle. I have heard and read so much moronic commentary regarding backed that I just had to compose a threat about it. Is backed hugely bullish for Bitcoin? Absolutely. Was back going to start doing huge business in Bitcoin on day one? Never. And then he gets into why, basically arguing that it's a different type of animal and that traders know how to trade price. They've been doing it for years. That's different. It's basically physical

settlement of a brand new asset on Wall Street. You saw this kind of argument from a number of different people. So Luke Martin, venture coin, it says, backed does not equal a finance IEO. Backed allows for a few but none of them require piling on at launch. He talks about what it enables. More robust BTC borrowing and lending markets to form. Legitamase the asset. Ease manipulation concerns or ease price manipulations concern. Oracle risk, basis risk and potentially disrupt some of the over-the-counter market functions.

And then Suzu, I think, really, you know, kind of pinned down this side of the argument perfectly. He said, back to a likely first a trickle and then a flood. The reality is that most regulated futures contracts get low adoption on day one, simply because not all futures brokers are ready to clear it. Many people want to wait and see the tickers are not even populated on risk systems, etc. So why is it interesting? On the one hand, backed represents this huge new set of opportunities. You know, it's backed literally by one of the biggest, you know, exchange companies in the world,

the company ICE that owns the New York Stock Exchange. It has, it brings with it a huge pedigree in that regard. It is enabling a custody solution that is, is, you know, hugely institutional investor grade. And it actually is physically settled, which potentially has impact on the way that it creates demand for real actual Bitcoin. So there's all of these exciting new things. At the same time, the lack of volume is concerning, right?

It's not that encouraging, no matter what, even if you believe that it's a long-term likely play. So my take is that I actually didn't see and don't really see this as a move the goalpost type of a moment. I think there's plenty of those to go around when it comes to launches. But I think that in reality, you know, when backed was announced last fall, that was like we were really in the depths of the bare market. We hadn't gotten to the complete bottom, but we were hungry for anything that was positive news. We were still coming off the sort of like cycle of 2017, 2018, where the announcement of an announcement of a partnership of an announcement or whatever could make the price, you know, scream, right? it was a highly irrational market in some ways.

And so we were looking for news to be excited about and backed with the pedigree of the company involved and the sort of seeming entree to Wall Street that it provided was kind of tailor made to get that hype cycle moving. However, within that, even within that, I should say, I didn't see anyone who was like the second backed launches. It's going to create a huge price pop, right? I didn't see anyone who is saying like, this is what we're waiting for. everyone who was kind of looking at it rationally saw it as an important infrastructure

augmentation for the entire space and that it was likely to have long-term positive and significant impacts by creating new market options. To me, there's no part of this launch that suggests that that's not still the case. So my take is that we basically shouldn't, to the extent that we're putting stock in what the first day volumes are, we should do less of that. I think that this is a medium to long-term play. I think that it creates a new force in the market. Let's come back to it in a couple months. Let's see what's happening. I mean, I think it's certainly, you can say for sure that we didn't get that, you know, if there had been a huge flood, it would have been encouraging and really exciting. But I don't think that the lack of that

mitigates just how much long-term potential this has for the industry. Speaking of long-term potential and the lack thereof, let's go to number two. So, news broke yesterday. This is Udi who tweeted out, Mortimer. He says, news just broke in Israel that Kik slash Kinn Foundation fired at 70 employees who were building the Kinn blockchain in Tel Aviv. Kick raised $100 million in ICO. Article also cites rumors that Kicked the Instant Messenger might be shut down soon as well. So this is just a huge, huge, you know, bit of news that started to come in.

And over the course of the day, it just started to get weirder and weirder and weirder. So basically, Coin Desk published an article saying that they had received drunk text messages from Ted Livingston, the CEO of KIC, saying that he was quitting and that he wasn't willing to go to jail for this. and that it was over and all this sort of stuff. And so that got everyone flapping, right? And of course, the truth was always a little bit murkier. So first of all, that Coin Desk article ended up being retracted wholly and fully, right? So Pete Rizzo, the CEO of Coin Desk, or the editor-in-chief, excuse me, of Coin-Desk, said it was the first time in the seven years that he's been there that they retracted a story

unconditionally and wholly, right? So basically they fell victim to a telegram hoax. which someone was just kind of trying to spread misinformation. So that wasn't the case. However, somehow, because all of the focus has been on this crazy drunk texting story, it's kind of buried the lead that kick is shutting down. And theoretically, it's to go all in on kin, right? So Ted Livingston tweets, and this is real Ted Livingston,

you got that little blue checkmark to confirm it, we are all in on kin. Going forward, we'll be singularly focused on one thing, converting millions of kin users into millions. millions of KIC users, I think into millions of KIN buyers. And so they're basically shutting, going from 100 people who are working on the KIC messenger app and the KIN cryptocurrency to just 19 people who are focused entirely on KIN. So the key point here is that KIC is done.

Kick is out from, you know, glory days of having more than 100 million users to debt is basically. That's what the state of KIC is. Now, you have, let's talk about the spin on this, right? So the spin from KICC was 100% that they had to do this to keep resources to fight the SEC. This has been their tone for, you know, since we saw the Defend crypto campaign launched, since basically they countersued the SEC, since the SEC sued them, from Fred Wilson, a prominent investor in KIC. And so some people kind of took this at face value, right?

So Crypto Man Ran over here says, Kik, the messenger app is shutting down. Company will now focus all the efforts on KIN, the cryptocurrency, cutting staff down from 100 to 19. Why? To have sufficient resources to fight the SEC. Very sad. So obviously a lot of folks weren't really buying this particular explanation, right?

And you can just go through this thread here. So Udi again, he says, no, Kik is cutting staff because it's a failure of a messenger app with a failure of a shik coin, which got itself into trouble by selling an registered security. It's unfortunate that employees and retail investors have to pay the price, but that's not the SEC's fault. So that's kind of the other end of the extreme of the interpretation. So, and then then you have over here, I thought this is a pretty hot take that I think is kind of right on. Max Chaffkin says, this is sort of wild. Successful app basically ran itself into the ground after a big ICO. So I have kind of two thoughts. So put a pin in that one. The idea that the successful

Apple app basically ran itself into the ground after an ICO. So first thing, let's talk about just Kicks place in an involvement in the crypto world in general. This has been weird A-A-F from the beginning. I said that today in exactly those terms on Twitter. Like one, they kind of like popped in at a very weird time, way past Kicks kind of prominence and raised a huge amount of money. And then within weeks we're trashing the whole space on record in different settings. And then they created this dramatic defend crypto campaign where they tried to kind of assume the mantle of victim. And, you know, when I asked viewers like you guys and listeners about what you thought about Kicks defend crypto campaign, there were some people who were, you know, sympathetic to the idea of wanting the SEC to be clear.

but at the same time really uncomfortable with the idea of kick is some kind of standard bearer. Now this has all got sort of buried because Libra came out and all of our ire in the messenger app goes crypto world could turn over to Zuckerberg. But it was weird, right? And now this shutdown like, again, it's this screaming hollering that it's because of the SEC and, you know, they have to fight the SEC and stuff. It's just weird. And so I guess the thing that I want to talk about, let's go back to this idea.

Again, the successful app basically ran itself into the ground after a bit. ICL. I think it's at least reasonable to think that perhaps the story is reversed, right? So KIC was, for a time, a very popular kind of beloved messenger app, right? Like you can see, it got up over 100 million monthly active users. So this is a chart from, from BI, from Business Insider, from basically 2011 to 2015. You can see that KIC did get all the way up to just kind of, I mean, at this time, I guess it was a little under 100, but it eventually would 100 million users. That's huge. That's a huge success by any standard, except for the fact that it was basically totally buried by the competition, right? So you have WhatsApp, which had a billion

users, Facebook Messenger, which eventually had a billion users. I mean, this is in 2015, just on this chart. You had WhatsApp, Facebook Messenger, WeChat, Vibre, line, Snapchat, and Tangle, all of which had bigger audiences, even in 2015, than kick, right? You also, if you jump way ahead, let's look at where Kick is now. In March of 2019, by monthly active users in the U.S. You have Facebook Messenger as way ahead with 108 million monthly active users. You have Snapchat at about half of that, 50. You don't have Instagram on here, which is silly because Instagram Messenger is

obviously such a huge thing. What's App at 24? Messenger by Google at 16. Google Hangouts at 15. Discord at 12.5. Group me at 11. Skype at 7. and then KIC at six and a half, right?

So Discord at this point has basically double the monthly active users of KIC and is just sort of still coming up right now. Google Hangouts has, you know, almost three times the monthly active users. Kick died way long ago. And this is the reality of network effects is that they can be living long after they are dead, right? You can be a messenger zombie. You can be a network zombie. And obviously, this is the case inside these crypto assets.

networks too. There's a lot of crypto zombies floating around. But to me, what it always felt like, and again, I don't have any privileged information. I don't know for sure. So this is rampant speculation. And you can write it off if you want, is that KIC went all in on this crypto ICO because it was the best available fundraising to them because they had lost the messenger wars, right? They had lost. There was no coming back from where they were. The best that they could do was try to innovate in new ways to do something different, but there weren't other sources of funding or certainly other sources of funding on terms that they wanted. So they turned to retail. And that's what the ICO movement allowed them to do, is turn to a different type of investor who is hoping for a very different type of pop really fast rather than traditional venture and private equity investors. I think that the fact of, like, they're not in Hail Mary now. The Hail Mary was the ICO in the first place.

That was their chance to make the app work and do something different. And now they're just trying to hold off burn for as long as they can, right? They've reduced their burn by 85% and whatever. They'll go build. And maybe they build something really interesting, but, you know, they've lost the big asset that they had, which is their huge install base. So to me, I think that the narrative idea of somehow the ICO itself killed the app is backwards. I think that the app had one big ham.

Mary Pass left to go and it chose the ICO route. Didn't work. Or at least it hasn't yet. So I don't know. I never like to speak disparagingly. I'm sure that there's a ton of great people at, you know, the KIC and at the KIN Foundation. I wish them as individuals like nothing, nothing but well. And I'm all for free markets. And so if they turn this around, I'll be the first to cover it as something great. However, I think that it's a, it's a weird, just it's been a weird thing from the get-go. And whatever, right? All right, let's go on to number three and finish this off for the day.

So number three. So last week we heard that the SEC was going to testify before Congress. And basically, it was kind of a full reporting. All five commissioners were going to be there. So obviously those of us in the crypto space, what we were really interested in was the potential new nuggets from the crypto space. And so what actually happened? Well, a couple things. First, big applause to Nick over at Coin Desk for live streaming it or live tweeting it. Excuse me. It was live streamed. But he did a hell of a job,

live tweeting everything, all five, you know, people's testimony and whatever really highlighting both the crypto details, but also kind of the big details from the other area. I think a few things, just a few little reflections, and this will be a fast one. First, it was pretty, clear that the crypto was only one piece of what was going on. There was a lot of other, a lot of other topics, a lot of other focus on conversation. And so just it was a useful reminder that the SEC is dealing with a huge number of things. And although our world may intersect with them specifically around crypto, that's not necessarily where their focus is on any given day. So that was one thing. A second thing, which I think was notable, is that you really didn't, you're starting to see just

like everyone has their book and they talk it the same way every time. and we kind of just had more of that, right? So you had Clayton, Chairman Clayton, who more or less was unwilling to commit to anything that we didn't already know or say anything different than he's ever already said, but came back to the idea that ICOs didn't really follow the SEC process and everyone needs to follow

the SEC securities law process, right? So, again, nothing new there. You had the members of Congress, who we've seen before speak a similar book, right? So you had Representative Warren from Ohio who basically was, you know, was really big on the Token Taxonomy Act, and he brought that up and tried to kind of push for that. You had Brad Sherman, who's obviously extraordinarily antagonistic, basically saying that the only people who use cryptocurrencies are tax evaders, money launderers, terrorists, and so everything should just be stopped. And that, you know, the people who love

cryptocurrency are people who want the U.S. dollar to die. So again, nothing. new. Exact same. Use your five minutes or whatever for for the soapbox. God bless. And then you had Hester Pierce, Cryptoamom, who we talked about on Long Read Sunday this week. And she said, you know, we have work to do. So this is from Nick. He says, this is a quote from her. I would like us to see a bit like to see us be a bit more forward thinking. Says she'd like to see see the SEC think about creating a safe harbor for utility tokens as security laws don't really address it. And so I think that this is something that we've seen a lot is this idea of, you know, if the SEC isn't going to provide guidance. And in fact, I think in another spot,

Hester Pierce actually said enforcement isn't a good way to provide guidance, which I like a lot. I think that that's very true. Create safe spaces for people to experiment, right? People who are want to do different things, want to take advantage of these new technologies, but who want to be in compliance, that's a great use for basically safe harbors where people can try things out, right? It doesn't mean that you have to change the official policy. It means that you give people who are acting in good faith a chance to do things. So that's a message that I wish was more resonant. I don't think that it requires a total revision of U.S. securities law. It doesn't even require an intention to totally rewrite it. It doesn't require a new body, a new authority, to create safe

harbors where people can experiment, right? And there's models for this. You're seeing it in places like Wyoming. You're seeing it in places like South Korea where they're creating this space for experimentation. So anyways, long story short on the SEC, I don't think we really learned anything new. I think that the lines have been where they are for a long time. And I guess what this means is probably continued questions for crypto companies about whether they really want to be domiciled here, more and more bills for lawyers who get to provide expensive interpretation of existing law and give crypto companies an informed and expensive opinion about whether it works. So, you know, unfortunately, ultimately, this was kind of a nothing burger.

But we'll keep watching. Oh, and I guess the last thing to say before I wrap up is that it's very clear still that Libra is top of mind, right? I would say that the majority of the commentary that I heard or the questions had to do with Libra more than the rest of the cryptocurrency industry. It clearly has is still top of mind. So again, still nothing new. So anyways, that's the three at three for today.

Pretty interesting one. Lots going on. Kind of a weird vibe right now, which it always is, especially if the price rocks a little bit. So anyways, guys, I hope you enjoyed. Thank you for watching. Thank you for listening. And I will see you tomorrow.

Peace.