The Breakdown - Diagnosing the Dip: Why Today's Leading Exchanges Are Powerful, but Not Inevitable

Episode Date: February 21, 2020

After settling in to the $10,000 price level, BTC suddenly and rapidly dipped more than 5% in an hour on Wednesday. As the market discusses possible explanations, some floated the unexpected simultaneous downtime of Binance and Coinbase as a causal factor.  In this episode of The Breakdown, we discuss the power exchanges wield - both in terms of market liquidity as well as the ability to shape news cycles. The good news is that new funding for insurgent exchanges suggest that power today is not inevitable.  Lastly, we discuss the latest in central bank digital currencies, with Sweden launching an e-krona pilot; a former head of China’s national bank saying Coronavirus could accelerate efforts; and a new member of the Libra Association. 

Welcome back to The Breakdown, an everyday analysis breaking down the most important stories in Bitcoin, crypto, and beyond, with your host, NLW. The Breakdown is distributed by CoinDesk. Welcome back to The Breakdown. It is Friday, February 21st, and today we are going to start by diagnosing the dip. We're going to be discussing some theories for why the Bitcoin price fell so dramatically a little earlier this week in such a short, amount of time. Second, we're going to be talking about fire in the exchange funding market and what it might mean for what type of products investors are interested in. And third and finally, we're going to take a little hop, skip, and a jump over to the world of central bank

digital currencies, looking at both Sweden, who has announced some interesting tests as well as analysis around the impact of coronavirus on China's digital currency plans. So let's break it down. We had been feeling pretty good about this 10K number. It had gone up to 10K and then fallen and then gone back up and then fallen and then gone back up again. And we were getting pretty settled at that level. When all of a sudden on Wednesday, the price dumped something like 6% in under five minutes. It was this huge, huge fall off. And we've more or less stayed at this 9,500 to 9,600 level ever since then. So the most common analysis that I saw on what happened had to do with Binance and Coinbase going down at the same time. Both of the sites had unscheduled maintenance, and that

creates potential liquidity issues, not to mention concerns of volatility or concerns of hacks, right? Because at the beginning of Binance going down, we weren't sure what the answer was. It wasn't clear why the site was going down. And so you potentially have a scenario where, if you have major providers of liquidity who are going offline and a few whales who can dump on the market, potentially you see this sort of dip. So that's the analysis that I saw from a number of people like Maddie Greenspan and others. And I'm not sure what the answer is. This is a little above my pay grade when it comes to actual market analysis. However, what I will say is that it is a reminder to me of the significance that a small handful of actors, particularly exchanges,

in determining confidence in the markets at any given time. And I think that that's something that we always have to keep an eye on. Earlier this week, Coin Metrics also did a study around concentration of wealth within different asset communities. And I think it's part and parcel of the same conversation, which is that if we are operating in an ecosystem, which is theoretically free from the ability for people to manipulate and debase the currency or whatever we're trying to escape from the old financial system, yet wealth, i.e. power. is concentrated in a very small number of hands. And in the cases of exchanges, we have not only power in terms of actual liquidity, but also influence in terms of market sentiment. The point is that

if power is concentrated in a few hands, it becomes potentially an approximation of what we're trying to leave behind. So my sense is that that's something that we shouldn't be worried about per se in terms of this specific instance, but it is something that we should continuously be vigilant about, right? and ask how we make sure that we're not just reliant on single points of failure. Today, as I'm recording this, we're getting another example of just how much Binance can dominate a news cycle. Both the block and CoinDesk are reporting on a memo from Malta saying that Binance is not registered there. And Binance is saying that they've never been registered there, but we all remember a tour a year ago where they seem to be touting the fact that they

were in Malta. And their official defense, is basically that they're based in many places. They've never had a single jurisdiction. They're decentralized, whatever. And honestly, I'm not even really sure why this particularly matters or why we care about where they're based, except in so far as, I guess, if it looks deceptive. But the point is that, again, they're dominating a news cycle for what effectively is kind of a non-story. So that's just another indicator of the power that Binance has relative to the rest of the industry. It is interesting to see then that we continue to find the most invested category, or at least one of the most invested categories in the entire crypto and crypto-adjacent ecosystem, is in exchanges. For as much power as this generation of exchanges have, it's clear that there is belief that this is not fixed, permanent, or inevitable for the future.

The first exchange news comes with regard to the Hong Kong-based BC group who operate OSL, which is an institutional-focused crypto exchange. Fidelity International has invested $14 million into the exchange operator. And again, to me, this is another example of one of those stories where the big, interesting thing, isn't necessarily the number, but is about the company who is investing. The fact that it's this globally renowned asset manager in Fidelity International obviously has implications for understanding who is spending time looking in at the Bitcoin and crypto markets. But in some ways, this was the second fiddle news when it comes to exchange fundraising to FTX.

FTX has hit the trading scene in crypto with incredible force. This is a company that's something like nine months old who are already seeing billions in volume of derivatives trading. And the block reported yesterday that they are out raising an equity round at a billion dollar plus valuation, which if that comes to fruition would make them one of the fastest growing unicorns in startup history. Now, it should be noted that the block report is saying that they're seeking to raise an equity round at that valuation, not that it is completed. And as anyone who's ever raised venture capital knows, the money is not there until it's actually in the bank. However, I think it doesn't take away anything from the ascent and the incredible rapid growth of

FTX. This is an exchange that has perfectly captured the zeitgeist of the crypto markets now, the shifting and growing focus on derivatives. They've even done interesting things like created futures markets around current presidential candidates. And there is a sense among people who are in the know in crypto that if a new generation of exchanges is going to challenge the dominance of the actors we have, it's going to be led by companies like FTX. So something very interesting to watch and a reminder in this case that for as much as we might be concerned about power concentration and influence concentration among leading exchanges and companies like that, there are contenders. Let's end this Friday breakdown with a quick trip through the status of the battle around

Central Bank digital currencies and their competitors. So first, we saw yesterday, news out of Sweden. Sweden's central bank is beginning to start testing its digital currency that it calls the E-Krona. The pilot, which is being built with R3's Corder Network and is being supported by Accenture, is designed initially to run until February of next year, so a year, but could extend farther. Now, there are two interesting details about this announcement for me. The first is what I believe is an under-discussed issue as relates to central bank digital currencies, which is the way in which they potentially make central banks compete with commercial banks. So Reuters wrote, this revised role in the payment system could lead to individuals holding money in risk bank accounts,

something that would overhaul the distinction between central and commercial banks, risk bank being the Bank of Sweden, the Federal Reserve of Sweden. It strikes me that one of the headwinds for central bank digital currencies could be this new competition that it creates. with central banks who aren't going to want to give up that role in the economy. Now, the other interesting detail came from the actual statement itself that said the E-Krona would, quote, reduce the risk of the Krona's position being weakened by competing private currency alternatives. So again, we are back to Libra and this idea that governments and part of why they're responding

is that they are afraid of currencies that are being issued by corporations, right? and in particular, I think, as is obvious, the Libra. So really interesting to see this play out in real time, not just theoretically, but to see central banks explicitly acknowledging that they are reacting to that type of threat. Now, the other threat and reason that central banks are so actively engaging in this digital currency battle is China. China has made it very clear that they are working towards a digital yuan, and banks like Japan's are very nervous about the type of economic influence that this might give them. Well, this week we saw some indication about how people involved with China's central

bank are viewing the coronavirus and what it might do as it relates to the digital currency project. China's economy is still effectively shut down right now, with no clear end in sight, despite some rhetoric here and there. Some have taken that to mean that the digital currency project could be moved back. However, the former president of the People's Bank of China in an interview with China Daily towards the end of last week, the beginning of this week, said that it might actually speed things up, that the efficiency, cost effectiveness, and convenience make it even more desirable during an epidemic. This is interesting also in the context of the role of physical cash in potentially spreading the virus. The government has actually quarantined

old paper notes and distributed new notes in the areas where the virus outbreak actually happened. So this is an interesting little wrinkle in the story of how the coronavirus might impact the economy in our crypto sector and beyond. Now, as I was recording this, we actually had a bit of interesting news coming out of Libra. Libra was, of course, the catalyst for so much of this activity, but has been beset by many, many challenges, many regulatory, but also companies and members of the Libra Association dropping out. Well, for the first time in a long time, we've had an announcement about a new company that is joining. Shopify has joined the Libra Association as of a blog post this morning on Friday. The post said, our mission has always been to support the entrepreneurial

journey of more than one million merchants on our platform. That means advocating for transparent fees and easy access to capital and ensuring the security and privacy of our merchant's customer data. We want to create an infrastructure that empowers more entrepreneurs around the world. So to me, this makes much more sense than legacy companies like Visa and MasterCard being involved with Libra. Libra is an assault on the traditional financial order as it relates to money. And certainly it makes sense for Visa and MasterCard to keep their enemies close, so to speak, by being involved so they have an insight into what's going on.

But when it comes to real alignment, you have to think that it's... These companies that are destabilizing and fundamentally challenging the old world that those institutions were built around. Put differently, the most ideal partner in the world for Libra would be Amazon, and the only reason that's not going to happen is that I assume that at some point we're going to see Bezos bucks too. Whatever happens with Libra, though, it is very clear, very, very clear that tech is looking increasingly to get in on the game of finance.

We saw it even yesterday with news that Patreon would start to get into the best. business of effectively payday loans for their creators, where they would be doing cash advances for their creators. And now, on the one hand, this makes complete sense, right? They have data about the track record of creators and what money is likely to come in, so there's no reason they can't advance that. However, at the same time, it shows very clearly that in their calculus, growth is going to come from financial institution-like factors, not just building this great service where fans connect to the favorite creators. The point is, again, that whatever happens with Libra, the tech assault on finance is in full swing. And it's going to keep playing out. And it's

hard to see how it ends. But for now, guys, I think I've given you plenty to think about for a Friday. I'm headed off for a good weekend, chilling at home with my family. I hope you are headed to something fun or something calming or whatever it is that you need. Thanks as always for listening. I will be back breaking down the news with you on Monday. Peace, guys.