The Breakdown - Is Crypto Converging With Public Markets?

Episode Date: October 16, 2020

Today on the Brief: Initial jobless claims rise to highest level since August BTC as a DeFi reserve asset Twitter reactions as Filecoin goes live Our main discussion focuses on the convergence of the crypto and public markets. NLW looks at: Narratives of bitcoin’s correlations to stocks Growing overlap of retail and institutional traders SPACs and public crypto companies  Bitcoin treasuries  Geopolitical intrigue around ANT Financial

The days of being able to think about crypto as totally separate from public markets feel very, very numbered. In fact, if anything, I think it might be right to view crypto networks as a different alternative type of public market that will interact sometimes uncomfortably with traditional public markets. I don't want to overstate this because obviously there's so much that goes on in crypto that still really is a private market tech startup type of world. But still, it feels like the real huge chasm between public markets and this private space is closing by the day. Welcome back to The Breakdown with me, NLW. It's a daily podcast on macro, Bitcoin, and the Big Picture Power Shifts remaking our world.

The breakdown is sponsored by crypto.com, nexo.io, and elliptic, and produced and distributed by CoinDesk. What's going on, guys? it is Thursday, October 15th, and today we are talking about where Bitcoin and crypto meet the public markets. First, however, let's do the brief. First up on the brief, it is Thursday, which means we have new jobless claims, and they were on the rise this week. They were the highest since August. Initial claims rose to 898,000, which, like I said, was the highest since late August, and this is obviously holding above the pre-pandemic high of 695,000. We had seen a steady decline from the peak of about 7 million claims in March

until about a month and a half ago, two months ago, and now it's just been sideways. That said, continuing claims are down from around 11 million to 10 million, and that's good news, right? Well, yes and no. The yes is that it's obviously in the right direction. The no is that some portion of those represent people who have simply exhausted the maximum duration of benefits payments through state programs. Some of those folks are now collecting through a federal program that's providing an extra 13 weeks. The number on that federal program grew from $2 million to $2.8 million in the last week of September. So the question, of course, is what's happening now?

And the reality is that this is reflective of companies readjusting headcounts to account for changes, in demand. In other words, while the first round of layoffs might have been really temporary, it's not unreasonable to view a lot of these new claims to be more fundamental long-term layoffs that deal with businesses changing their expectations for the future. Obviously, this puts a lot more pressure on Congress to figure something out when it comes to fiscal aid. Next up on the brief today, a quick follow-up on the idea of Bitcoin as the crypto or defy reserve asset. Last week, I had Chowang on, and one of the things that we discussed was Bitcoin's use as a reserve asset for Defi via a tokenized wrapper. Two interesting follow-ups on that.

First, Coinless just recently minted the most wrapped Bitcoin in a single day ever. They minted 5,000 BTC worth approximately 57 million. It's a funny and random little note that the minting, the single-day minting of wrapped Bitcoin has become something of a behind-the-scenes competition. Last month, Alameda and Three Arrows were both trying to one-up each other, but CoinList basically doubles their previous record. According to CoinList, this is all going into things like liquidity pools on Uniswap, and basically it reflects long-term Bitcoin holders who want to have their money working for them, but who don't want to give up the underlying. A second interesting piece on the wrapped Bitcoin front comes from the Pocodot ecosystem, where we're seeing

tokenized Bitcoin coming to Pocodot in Q121. The Poka BTC project is being launched by the interlay startup, which is funded by Web3, and it's trying to differentiate from either WBT or TBT by being without central authority right from the beginning. This one is particularly interesting, I think, because as these Ethereum killers try to position themselves, I think, Bitcoin benefits hugely from a multi-chain world. If you zoom out and think that DeFi does become a thing that some number of people are doing, but they're doing it across PocaDot, across Cosmos, across Ethereum, in many ways I think that it reinforces a separate asset, i.e. Bitcoin as the reserve asset even more. Last up on the brief today, a launch that people have been waiting for since

2017. Filecoin is going to Mainnet after years of waiting. Filecoin is the native token of IPFS, the interplanetary file system, which is a protocol for peer-to-peer data storage, which has been in use for years. Filecoin slash IPFS went through Y Combinator in summer of 2014, which was the same class as Blockstack. And Munib from Blockstack actually wrote a thread remembering the founder as just totally heads down and focused on doing what it takes to bring this extremely ambitious project to, market. Still, Filecoin is probably best-nows in the community for a token sale that raised something like $200 million from accredited investors only. It was out of sync in some ways with the 2017 ICO boom because of the only accredited investors, but because of that, it was also out of sync with the larger community. There were lots of people who loved the project who weren't able to

participate. A tweet from Eric Voorhees from ShapeShift and a response, I think show the two sides of what I'm seeing about this launch on Twitter. So Eric tweets, the biggest news of tomorrow, Filecoin launches. Yeah, it's got a boring name, but this is easily one of the most professionally built, carefully executed, and valuable projects that has emerged from the ICO era. Eric Wall responded, is there any reason to not view Filecoin as a depressing utility coin remnant of the ICO era that still assumes that it was ever a good idea that goods and services are paid in separate currencies for each, and that it won't cause unnecessary friction dragging the project down.

Basically, Vorhees is saying this is one of the best things to come out of this era, where Eric Wall is saying effectively that the fundamental premise of the era that you had utility tokens on top of decentralized protocols was flawed, and this is just a reminder of that. Now, of course, I'm talking nothing about price here, because I really don't talk about price, except in terms of how Bitcoin fits with macro conditions. But at current price, the fully diluted valuation, according to Coin Gecko, a file coin would be 371.8 billion, which for those keeping track at home is about 7 billion more than the total crypto market cap, so make of that what you will. This episode is brought to you by crypto.com,

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business. Visit elliptic.co slash coin desk to talk to a crypto compliance expert today. That's elliptic.co slash coin desk. Let's shift to our main discussion, crypto meeting the public markets. So what got me thinking about this? Well, it's a few things. First, throughout the year, there have been questions of Bitcoin's correlation with stocks. This has been a major source of fud from mainstream media. In other words, if Bitcoin just performs the same as stocks, what good is it?

Why wouldn't you do the less risky stock thing if you can get the same? same sort of performance. This argument and this version of the FUD really stemmed from the March Deleveraging that we saw across basically all asset classes, where Bitcoin, along with gold, along with stocks, cratered down in the wake of the coronavirus shutdowns. I made the argument before on this show that actually that sort of shared de-leveraging shows maturation in terms of who is holding Bitcoin. In short, we have to expect that in short-term, highly volatile market moves, Bitcoin is likely to see temporary correlation based on the fact that more people who participate primarily in traditional markets are now participating in Bitcoin. That's just table stakes now.

What's more, and I've talked about this as well, the point of Bitcoin was never a hedge against stocks. It's a hedge against currency devaluation. Still, regardless of the good answers to that fud, it definitely has been a bigger conversation this year. The next reason I've been thinking about crypto and Bitcoin in the context of public markets is the confluence of trader types. We saw the rise this year of the Davy Day Trader set. We've even seen the flirtation of Portnoy with crypto, which is clearly an indicator that it's something that is likely to get closer and closer. Right now, stocks are acting enough like a casino to satisfy the instinct of this new breed of Robin Hood investors. What's more, the barriers to entry on the places that

people are making money from crypto this year, like yield farming, are a hell of a lot higher than simply buying stocks through one of these apps. However, it feels to me like there is an inevitable convergence. I just don't believe that millennials are going to see somehow crypto and traditional financial assets as two totally separate things for two totally different types of people. They will understand on some level the differences, but I don't think that when they think about portfolio construction or just investing, they're really going to separate them out. They're going to be adherent only to where there is financial opportunity, especially as the apps through which people buy these assets converge and offer interfaces that make it easy to

flow from crypto to traditional markets and back again. There's also an institutional side to this trader convergence. I just made that point about correlation when it comes to the deleveraging, suggesting so, but also, we learned yesterday that Grayscale is having its best year ever. It had its best quarter ever, and its year overall, $2.4 billion in investment is more than double what it saw between 2013 and 2019 combined. We also learn more about the New York Digital Investments groups, which has a billion of Bitcoin and other crypto assets under custody. It's very clear that it's both retail traders, but also institutional traders who are getting more interested in this asset class. Then we have actual crypto companies coming to the public markets. The INX exchange is in the

midst of an on-chain IPO. CoinDesk reported, in fact, that 300 investors have contributed with more weighting. The Ethereum blockchain also shows that more than 650 transactions, where investors have been whitelisted or registered, have been completed. The idea of this INX offering is to make the traditionally opaque IPO process transparent. That said, because INX is self-offering and national exchanges can't list digital securities, it's actually only available in 15 states as well as some countries abroad. But then there are the SPACs, the special purpose acquisition companies. I did a primer show on this a couple of months ago.

Go back and check it out if you haven't heard it. Basically, these are an alternative way to bring companies to the public markets that circumvents the IPO process. Effectively, a blank check company is listed on a market, that then goes out and merges with some company by virtue of the merger bringing that company public. We saw Ribbitt Capital file in August for a $350 million SPAC with an intention to list on the New York Stock Exchange. Ribbitt is focused on fintech with this SPAC, but we're not sure yet if it's crypto. However, Ribbitt is an investor in Coinbase, Chainalysis, Robin Hood, and was a founding member of the Libra Association,

so it doesn't seem unreasonable to think that it might be. Now, there actually is now a SPAC that has gone live with a crypto merger. DigenX, which is the Hong Kong company behind the Equus Exchange, went live via merger with the 8i SPAC, making it the first crypto exchange on NASDAQ. We've also seen Coinbase come up frequently as a rumored SPAC candidate, and the reason or the thinking behind that is many people think it'll be hard to get bankers excited about the type of valuation they got during their last round in 2018, which was based on extremely high numbers from the 2017-2018 boom. A SPAC may be a way to get the company public without having some

massive reduction in valuation from where they were privately. What's more, adding fuel to that Coinbase rumor fire, is that SPACs are a trend on the rise with one of the biggest champions being Chamath Palahapitia, who has intimate knowledge of this space, Bitcoin specifically, but obviously these companies as well. Yet another reason that I'm thinking about the confluence of crypto and public markets is the rise of this Bitcoin Treasury trend. This was the whole focus of our discussion yesterday, and although MicroStrategy and Square are the big ones that have had a lot of attention on them, Bitcoin Treasuries.org shows that there's 6.8 billion worth of Bitcoin on public company balance sheets right now. I think this is unlikely to slow down as a trend, and it sort of opens up

an entirely new category of demand that by definition has some serious scale. So summing up, what you're seeing is a growing overlap in the buying classes of people who are purchasing traditional equities as well as Bitcoin and other cryptos, both on the retail side, who are drivers of new types of trends via Davy Day Trader and Robin Hood, as well as from institutional money. You're also seeing Bitcoin getting comfortable as something different than a stock, as something in fact that does its key purpose as a reserve asset. And finally, you're seeing a new mechanism for crypto industry companies to actually come to market via SPACs. Just thinking about SPACs, it really feels to me like once it happens with one big company, it really will open the floodgates.

And there's even one more dimension to this convergence story, which is a geopolitical one. News from Reuters suggests that the Ant Group is potentially going to be blacklist. or at least the White House is considering a blacklist of Ant Group, which is a blockchain-friendly fintech arm of Alibaba. Ant is ready to go public with a record, or potentially a record, $35 billion offering and has been working on blockchain operations as well as their own cryptocurrency as part of the blockchain services network initiative in China. The Trump administration seems to be warning people off of this IPO by leaking this news, or at least letting this news, out. So basically the TLDR for me is this. The days of being able to think about crypto as totally

separate from public markets feel very, very numbered. In fact, if anything, I think it might be right to view crypto networks as a different alternative type of public market that will interact sometimes uncomfortably with traditional public markets. I don't want to overstate this because obviously there's so much that goes on in crypto that still really is a private market tech startup type of world. But still, it feels like the real huge chasm between public markets and this private space is closing by the day. Anyways, guys, let me know what you think. Is Bitcoin and Crypto ready for public market prime time? Is it still time to be behind the scenes? Hit me up on Twitter at NLW. And until tomorrow, be safe and take care of each other. Peace.