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Binance.US, an upcoming subsidiary of one of the world’s leading cryptocurrency exchanges that will be compliant to operate within the United States, has recently gotten investors excited with an announcement that the platform was reviewing 30 new assets for listing. Importantly, the news also shed some light on the Digital Asset Risk Assessment Framework — a novel set of criteria to determine blockchain projects that Binance deems worthy of adding to the platform. In the realm of digital finance, one of the biggest imaginable accomplishments for a blockchain startup is to get its coin listed on a major cryptocurrency exchange. The combined effects of earning the seal of approval from a reputable platform with millions of users worldwide on the asset’s brand recognition, audience reach, market price and trading volumes cannot be overstated. While in the early days of the crypto Wild West the procedures whereby exchanges vetted new tokens for their portfolios were often opaque, having a set of well-defined listing criteria is becoming an industry standard today. What are the leading crypto exchanges looking at now? Binance The criteria set forth in the new Digital Asset Risk Assessment Framework are organized around several core domains. As Binance U.S. operates in one of the world’s most complicated jurisdictions in terms of regulation, the list of standards opens with legal requirements, especially stressing candidate assets’ compliance with Anti-Money Laundering/Combating the Financing of Terrorism and securities laws. Other qualifications include the core team’s strategic vision to solve some real-world problem, the community’s ability to organize in a way that aides the project’s development, demands on the asset’s supply and demand, as well as technological feasibility and security. The framework appears to be a set of screening guidelines that assets have to pass in order to proceed to the more advanced stage of thorough internal review. According to Binance CEO Changpeng Zhao, also known as CZ, there are no hard requirements that are necessary for candidate projects to check: “We want good coins. It’s simple, and every coin is different. In general, we like coins with a proven team, useful product, and large user base.” There are no fixed fees, either: All listing fees are negotiated individually, and proceeds go to the blockchain-tracked Binance Charity Foundation. Coinbase Coinbase, a major U.S. digital asset trading platform, relies on a somewhat more specific set of standards. Grouped into six focal areas — i.e., conformity to the platform’s core values, technology, compliance, market supply, market demand and crypto-economics — the framework provides a lot of specific details of the review process, including, for instance, “Assessment of the engineering team and their track record of setting and achieving deadlines,” or making sure that there is a “demonstrable record of responding to and improving the code after a disclosure of vulnerability, and a robust bug bounty program or third party security audit.” Coinbase does not charge application fees initially, yet the company reserves the right to charge such a fee to cover the costs of services rendered during evaluation and listing processes. The platform, which has ramped up the number of new assets listed this year, both accepts applications from blockchain projects and proactively evaluates existing coins even if they do not seek admission. Bitfinex Paolo Ardoino, the chief technology officer at the Hong Kong-headquartered exchange Bitfinex, summarized his platform’s listing policy in the following statement to Cointelegraph: “Bitfinex uses a variety of parameters to decide which blockhains or tokens should be listed. These include the quality of the project, security audits of the smart contract or the blockchain itself, along with the availability and maintenance status of the source code. Above all these parameters, we adhere to all applicable laws.” Bittrex Bittrex, a Seattle-based cryptocurrency exchange, considers factors such as innovativeness of blockchain solutions, the range of use cases, experience and reputation of the team behind the project, as well as market indicators. The process that leads to new coins getting listed on Bittrex or Bittrex International entails two stages of review: preliminary and full. The latter step includes a full compliance review, which requires providing a memo of opinion from a U.S.-qualified external legal counsel for listing on the domestic platform, or a statement attesting that the token qualifies as a Virtual Financial Asset (VFA) under Maltese law from a legal firm licensed in the island nation if the applicant seeks to be featured on Bittrex International. Bittrex does not charge listing fees. The exchange is also quite open about its delisting policy. One of the key criteria that Bittrex considers a trigger for removing a token or market is a lack of interest from the community, as manifested in low trading volumes and lackluster communication. Other possible reasons include compliance issues, lack of technological robustness, the core team’s unresponsiveness and inability to address arising concerns, among others. Poloniex Poloniex, a U.S.-based exchange operated by the fintech company Circle, follows a set of listing standards similar to that of Coinbase. The main criteria on which potential additions are assessed fall into the categories of core tenets of the crypto industry (such as building new infrastructure and solving problems based on decentralization), robustness of underlying technology, experience and credibility of the project’s core team, capacity to create real value, and indicators related to liquidity and other aspects of market health. There is also a requirement that each asset pass a legal review in accordance with regulations of the jurisdictions where it is traded. Huobi Huobi, a major Asia-based digital asset trading platform, employs statistical modelling to aid decision-making on candidate coins. The exchange’s spokesperson from the listing department told Cointelegraph: “There are three ways a project can get listed on Huobi Global — general listing, Huobi Prime, and FastTrack — all of which are evaluated by Huobi’s SMARTChain. Huobi SMARTChain is a quantitative model which evaluates factors based on the five integrated dimensions of Strategy (strategic positioning), Management (project management), Activity (market activity), Reliability (team credibility), and Technology (advanced technology), as well as investment potential and risk. “On top of regular listing, Huobi recently announced two listing programs for premium tokens — Huobi Prime and Huobi FastTrack. The upgraded SMART Chain 2.0 quantitative model is applied to evaluate Prime and FastTrack projects based on around 100 factors that also take into consideration a project’s reasonable valuation, long-term value creation, team reputation, sensible token economics, and community support.” The Huobi representative added that the platform performs regular reviews of assets already listed on the exchange. Based on those reviews, the teams of underperforming projects may receive a delisting risk warning for such issues as wrongful publicity and market conduct, evidence of fraud or manipulation, the core team’s uncooperative behavior, security breaches, low trading volumes, and more. EToro Guy Hirsch, Managing Director of digital asset trading platform eToro U.S., said in a statement to Cointelegraph: “There are many factors eToro considers when determining which top ranking cryptoassets to include on our platform. Market capitalization and liquidity are two of the most important factors we look at. Then, we evaluate if it is a utility token or tokenized security and based on that legal analysis determine if and in which jurisdiction to list it and what compliance governance must be applied to it. Going beyond those, in certain cases we'll also look at the use case, the team, and the product roadmap.” EToro, Hirsch added, has never delisted a token. In order for that to happen, “there would need to be significant and persistent liquidity issues, or significant changes in rules and regulations.” From pay-to-play to better assets As the maturing crypto industry develops its standards and best practices, predatory exchanges and once-ubiquitous scam coins are gradually withering away. The biggest crypto exchanges are embracing their role as the space’s new gatekeepers, which is evident in increasingly well-structured processes for vetting new digital assets. The review of these policies and standards suggests that there is a degree of uniformity in admission requirements that various exchange platforms impose. Rowan Stone, the business development director of the Horizen (aka ZEN) cryptocurrency ecosystem, observed to Cointelegraph: “When it comes to listing cryptoassets, exchanges typically want to know that the asset is secure, is being actively developed by a team of competent professionals and has real world utility along with an active and passionate community to ensure suitable market demand. “ZEN has agreed to integration deals with more than 30 exchanges over the past two years, and although it was a wild west in the early days, most exchanges are maturing at a rapid pace, both in terms of security and business prowess. Many exchanges have realized that bringing strong, popular assets to their users is a much better business model than attempting to force the pay-to-play game with often ludicrous integration fees.” As in any field of financial activity, trust and reputation are key assets for successful players. Enforcing stringent requirements for candidate assets is the natural mechanism for maintaining exchanges’ reputations, which ultimately lowers risks for end users. Perhaps this is the best way to protect traders and investors in an ecosystem built on irreversible transactions and minimal room for redress in case something goes wrong. Source: https://cointelegraph.com/news/how-do-crypto-exchanges-select-coins-what-does-it-take-to-get-listed
Kirill Bryanov - cointelegraph.com
2019-08-21
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Coinone, a South Korean crypto exchange, has issued listing criteria, laying out in some detail what is required to be traded on the platform. The disclosure on August 8th came just a few days after the exchange announced the signing a deal with CertiK to undertake a security validation and amid a rush in the Korean crypto market to up standards and lock down platforms. According to the announcement on the website, candidates for listing will have to meet nine criteria. These include requirements for “a sound business model,” with a mid and long-term strategy and a clear vision. They also require a solid coin distribution plan and a transparent governance structure. The exchange will also judge the potential candidate on its marketing plan and communications with investors, the announcement stressing that both online and offline interaction are important. Coinone will review the potential market size of the candidates, checking whether the growth of the project will be limited or could be constrained in the future. The tokens must be usable, with a balance of supply versus expected consumption, and they must have a strong leadership team. After listing, Coinone will review the extent to which the coin’s roadmap has been followed and its benchmarks achieved. Coinone also provided a breakdown of possible reasons for delisting from the exchange. These include market manipulation, lack of transparency, disorderly trading and criminal activity. The exchange will also hold projects accountable for technical deficiencies, such as blockchain failures and insufficient product development, and will be on the lookout for the lack of continuity, especially when it comes to the makeup of the management team. The exchange will give warnings first, and if it doesn’t see improvements, delisting will follow. Coinone, which was founded in 2014 and had early support from Kakao, is one of the three largest South Korean crypto exchanges and number 70 globally by reported volume, according to data from CoinMarketCap. Its recent 24-hour volume was valued at nearly $90 million, the majority in bitcoin. In addition with engaging CertiK, it is also working with Xangle, a Seoul-based crypto currency disclosure platform. The exchange is one of the few in South Korea to have received Information Security Management System (ISMS) certification, which related to the management of sensitive data.
Richard Meyer - coindesk.com
2019-08-16
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A group of bitcoin enthusiasts just ran, biked and swam across Europe, all to promote the cryptocurrency they believe is leaving a powerful, positive mark on the world. The first “Satoshi Freeathlon” officially finished this weekend, in which a group of seven bitcoin enthusiasts flexing their athletic abilities by journeying from Switzerland’s “Crypto Valley” in the tiny city of Zug, Switzerland, to Munich, Germany – a 221-mile adventure in total. Running purely on bitcoin donations, the loose group dubbed “Team Satoshi” embarked on the quest in an attempt to raise positive awareness of bitcoin, which even 10 years after its release as open-source software, they believe gets too much negative press in the media. The brainchild of Vitus Zeller, a German who started the project with a 10-day adventure of his own dubbed “Tour de Satoshi,” Zeller used bitcoin to pay for his hotel stays as he biked across the country. He told CoinDesk: “In mainstream perception, bitcoin is mostly the money of the dark web [for buying drugs], an energy over-consuming technology or a purely speculative asset.” Zeller’s idea was to promote the values of bitcoin, including freedom of information and privacy, in a new way. “Bitcoin needs all kinds of voices that make people get curious about it,” he said. Meanwhile, sports spark a more rosy image. “Sports is a deeply emotional topic for humans. For thousands of years, sportsmen have been admired. Emperors in ancient times, as well as rulers in modern times, have been using sports for political reasons,” Zeller contended. ‘Monster lake’ and beyond Preparing for the “freeathlon” took quite a bit of time. “We have now together many hundreds of hours of intense training for this event. I, for example, ran about each week a half marathon,” Zeller said, which is running a distance of 21 kilometers. “The preparation meant truly a lot of going above and beyond my own personal boundaries,” he added. But after months of training for each of the participants, they were ready for the journey. Three of the Team Satoshi crew (Zeller, as well as Moritz Biersack and Thomas Bette) slogged through all four days. The rest of the group (including bitcoin podcast host Anita Posch, LocalBitcoins founder Jeremias Kangas, and Veronika Kuett) participated in one or more days of the event. Day 2 was swimming across a Bodonsee, a lake where Austria, Switzerland and Germany meet, which Zeller repeatedly called a “monster.” Measuring 12 kilometers in distance, it took the crew five hours to cross. “Crossing this monster lake […] was a crazy experience. The waves, the streams and the fact that for the longest time we didn’t even see the other side until it cleared up,” he said. For this, it wasn’t as simple as just doing the swim. Zeller said they “needed a doctors note as well as a cold water certification to prove that we know what we are doing and can endure this large distance swim.” Right across the lake, the team started Day 3 by cycling 190 kilometers (about 118 miles) from Friedrichshafen to Starnberg, cities in Germany. “With my 49 years of age the biggest challenge for me was keeping up with the young guys in the uphill sections. I think I managed that quite well, which is great,” said Anita Posch, bitcoin podcast host and one of the Satoshi Team. The last day was a marathon, running and sweating all the way to Munich. They hit the pub for a welcome celebration once they crossed the finish line. Cypherpunk sports Zeller’s idea with all this is a bold one: to promote cypherpunk values, honoring those who were among the first to warn about how the internet could introduce new privacy concerns. He refers specifically to “A Cypherpunk’s Manifesto” as a sort of guiding force – a short essay written by Eric Hughes in 1993, just a couple of years before the internet, tackling the topic of privacy. “With Team Satoshi I had the idea to create a decentralized …] marketing instrument for bitcoin and the values it represents (freedom of information, freedom of opinion, privacy, freedom of transaction and human rights) which derive from the Cypherpunk Manifesto,” Zeller said. It sounds like an odd idea to advocate for with sports, but Zeller makes a sincere argument for joining the two themes together. “Sports has been a powerful political tool to manipulate the people,” he said, pointing to gladiators, who entertained Roman people with life-threatening fights. He even pointed to the Olympic games, which pits members of different nationalities against one another. His idea is that anyone in the world can create their own Team Satoshi event: “[Anyone] can create [sports] challenges on their own,” he said, by updating the wiki website with the event. As far-fetched as it sounds, Zeller wonders if this could morph into a profession someday: “Team Satoshi members can even try to make this a profession all over the world, if they can find sponsors or people out of the ecosystem that support them.” He added: “I believe Team Satoshi can potentially become a powerful movement as a soft marketing layer on top of bitcoin which connects bitcoin to the rest of the world and helps push it to mainstream adoption.” Source: https://www.coindesk.com/they-biked-ran-and-swam-over-200-miles-across-europe-all-for-bitcoin
Alyssa Hertig - coindesk.com
2019-08-29
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It’s one of the worst-kept secrets in the alternative investment industry: net of fees, hedge funds struggle to outperform broad equity markets. In 2007, before bitcoin was even a glimmer in Satoshi Nakamoto’s eye, Warren Buffet famously bet a prominent fund of hedge fund manager $1 million that over the subsequent decade, an S&P 500 index fund would outperform any basket of hedge funds he could put together. Buffet won handily. It’s not that Buffet didn’t think there were capable investment managers out there; Buffet’s Berkshire Hathaway has often been described as a giant hedge fund. Instead, his confidence relied on his intuition that between fees and trading costs, even the best hedge fund managers would struggle to beat a low-cost index fund. We might logically assume that crypto hedge funds, which generally have a 2 and 20 fee structure similar to that of their traditional counterparts, would suffer a similar fate. But since the beginning of 2017, when reliable data became available, the result has been quite the opposite. An equal-weighted index of crypto funds significantly outperformed bitcoin and most other crypto assets. The CFR Crypto Fund Index tracks more than 40 crypto funds, mostly hedge funds, across a variety of strategies. It shows that even as bitcoin climbed about 1,000 percent between January 2017 and June 2019, crypto funds gained more than 1,400 percent. The outsized performance of crypto funds over this period might puzzle the Oracle of Omaha, a man who once described bitcoin as “rat poison squared.” Even without Buffet’s bias against crypto or hedge funds, there are a few reasons one might be surprised: Performance fees are by nature punitive to returns during bullish periods Creating a portfolio that can outperform skyrocketing single assets is no small feat Crypto fund managers tend to be less experienced than their traditional counterparts Despite these apparent headwinds, crypto funds did outperform. So let’s examine these perceptions a bit more. Performance fees are too punitive in bull markets Few investment assets have ever experienced a 12-month bull run like that of crypto assets in 2017. That’s fantastic for fund managers taking home 20 percent of profits, but certainly eats away at returns. Several crypto funds returned more than 1,000 percent in 2017 – meaning by year-end a fund manager could have taken home more in fees than the fund had assets to start the year. Still, most crypto funds have a 2 and 20 fee structure similar to traditional hedge funds and many have high water marks (essentially to ensure managers don’t get paid for performance when a fund is below all-time high). So while crypto fund performance fees have been staggering in absolute terms, the fee structure is no more of a hindrance to crypto funds than to traditional hedge funds. Diversified portfolios struggle to keep up with single assets It’s hard to imagine any asset overshadowing bitcoin’s 12x performance in 2017. But that’s exactly what happened. Some other coins were up 100x or more. The Bitwise CCI 30 Index, which measures the performance of the top 30 cryptocurrencies by market cap, was up 42x. So how exactly did crypto funds outperform during 2017? They didn’t. Not even close. Crypto funds collectively returned a relatively underwhelming 1,000 percent. Sure, these funds returned more in 2017 than traditional hedge funds have in the past 20 years. But everything is relative. And relative to top cryptocurrencies, crypto funds had a disappointing year. The story of crypto funds’ outperformance truly began when crypto winter cast a chill over the entire industry in 2018. Philanthropist and investor Shelby Cullom Davis said: “You make most of your money in a bear market, you just don’t realize it at the time.” It was one heck of a bear market. In 2018, bitcoin lost nearly 75 percent of its value. The CCI 30 Index lost 85 percent. The CFR Crypto Fund Index, however, was down “only” 33 percent. Or put another way, while crypto funds preserved 4/6 of their value, the CCI 30 maintained less than 1/6 of its value. As the chart above shows, this ability to preserve capital during 2018 propelled the crypto fund index ahead of bitcoin and other cryptocurrencies. From Q1 2017 through Q2 2019, the CFR Crypto Fund Index has returned 1,430 percent. This easily bests bitcoin’s 1,022 percent return and narrowly surpasses the 1,413 percent of the CCI 30. Crypto funds lack experience After overcoming their fee structures and whipsawing crypto markets, crypto fund managers had a final hurdle to overcome: inexperience. It’s difficult to directly compare the total financial experience of managers across disciplines. However, we can look at the average age of funds. A recent study published by Loyola Marymount University (LMU) found the median age of traditional hedge funds was 52 months. This is a lifetime in the crypto world. No crypto funds in the CFR index have been operational for 52 months and the median age is just 16 months. This inexperience should hurt crypto fund returns, right? Not necessarily. Somewhat counterintuitively, the same LMU study found traditional hedge fund returns decrease with age. And not by a negligible margin. Hedge fund returns in year one were more than triple those in year five. After year five, the study found, “some funds become liquidated and the pattern is somewhat mixed.” So inexperience, which would seem to be a significant headwind for crypto fund managers, may actually have been a tailwind propelling their performance past ahead of bitcoin and other benchmarks. Reasons for caution That crypto funds have outperformed various benchmarks is encouraging. But there’s also plenty of reason for institutions to remain cautious. The index covers barely one market cycle. Buffet’s index fund didn’t take the lead over hedge funds until year four of the ten-year bet. The index has less than 50 constituent funds. While the largest in the industry, it’s quite small compared to traditional hedge fund performance indices which can include thousands of funds. There are potential biases. Since reporting is voluntary, and the index includes less than 20 percent of eligible funds, we can reasonably assume that poorly performing funds are less likely to report. Funds with particularly poor performance might have already closed, creating a potential survivorship bias. Though not unique to crypto fund indices, these biases shouldn’t be overlooked by investors. Most crypto funds are quite small by traditional standards and it’s quite possible some strategies that perform well in illiquid markets will not support the same type of returns with more capital invested. Bridgewater Associates, the world’s largest hedge fund manages over $100 billion. Crypto funds manage less than $20 billion collectively. Despite the potential issues, it’s encouraging that crypto hedge funds seem to have done more or less what they are supposed to, namely preserve capital in bear markets. And with the majority of crypto funds in the index now employing outside auditors, custodians and fund administrators, the industry is becoming less haphazard. The crypto fund industry is still very much in a maturation phase, but with proper due diligence, crypto funds may present institutions, particularly those unwilling or unable to directly custody cryptoassets, an appealing way to get exposure to the sector. Some decentralized architecture is said to have an “Oracle Problem”, but at least so far, crypto funds don’t seem to have an Oracle of Omaha problem. Source: https://www.coindesk.com/crypto-funds-are-outperforming-you-shouldnt-be-surprised
Josh Gnaizda - coindesk.com
2019-08-26
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The Association of Cryptocurrency Enterprises and Startups, Singapore (ACCESS), has developed a Code of Practice in partnership with multinational law firm Linklaters. A Global Legal Post report published Aug. 19 revealed that ACCESS had the support of the Monetary Authority of Singapore (MAS) — the country’s central bank and regulatory authority — and also consulted the Association of Banks in Singapore to launch the new initiative. Tackling AML/CFT Risks The new Code of Practice falls within the scope of ACCESS’ “Standardization of Practice in Crypto Entities,” which provides detailed Anti-Money Laundering and Countering the Financing of Terrorism (AML/CFT) guidelines (including Know Your Customer (KYC) best practices) for entities in the digital asset industry. The new Code is intended to further promote regulatory compliance and tackle concerns connected with AML/CFT risks. In a statement, Peiying Chua — head of Linklaters’ financial regulation practice in Singapore — characterized the initiative as industry-changing and said it would “enhance the conduct of crypto-asset and blockchain companies in Singapore and further cement Singapore’s reputation as a leading jurisdiction in the blockchain and fintech space.” A bid for global fintech competitiveness ACCESS chairman Anson Zeall has pointed to recent developments in Singapore’s crypto regulatory regime, noting that it is becoming more competitive at the international level. He noted that newly-proposed changes to the country's goods and services tax (GST) in relation to digital payment tokens will help to diminish expenses and costs for businesses in the emerging sector. Zeall’s perspective was recently echoed by a partner at PwC Hong Kong’s corporate tax practice, who has argued that the government’s bid to drop the 7% GST for the use of cryptocurrencies to pay for goods and services will have a positive impact on crypto exchanges, asset managers and blockchain entrepreneurs. Source: https://cointelegraph.com/news/singapore-crypto-association-launches-code-of-practice
Marie Huillet - cointelegraph.com
2019-08-20
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The world’s largest cryptocurrency exchange Binance is planning to launch “Venus,” calling it an “independent regional version of Libra,” according to an announcement Monday. Astrologically speaking, Libra’s ruling planet is Venus. QUICK TAKE Crypto exchange Binance has announced the plan of launching “Venus” cryptocurrency The exchange defines Venus as a “regional version of Libra” Binance said it is going to launch Venus cryptocurrency because it has a presence in several countries, has its native blockchain Binance Chain in place, as well as it hopes to break the “financial hegemony” and reshape the world’s financial system. “We believe that in the near and long term, stablecoins will progressively replace traditional fiat currencies in countries around the world, and bring a new and balanced standard of the digital economy,” Binance co-founder, Yi He, told The Block. She added: “We hope to achieve a vision, that is, to reshape the world financial system, allow countries to have more tangible financial services and infrastructures, protect their financial security and increase the economic efficiency of countries.” Venus is an open blockchain project to develop “localized” stablecoins and digital assets pegged to fiat currencies, according to an English version of the announcement. “Binance will provide full-process technical support, compliance risk control system and multi-dimensional cooperation network to build Venus, leveraging its existing infrastructure and regulatory establishments,” it added. Binance further said that it welcomes more governments, companies and organizations with “strong influence” on a global scale to collaborate with it for the Venus initiative. Facebook’s planned cryptocurrency, Libra, also has a similar structure. It intends to serve the unbanked and facilitate low-fee money transfers globally. Libra is expected to go live sometime next year, but it has already faced scrutiny from central banks and politicians around the world. Facebook has itself recently said in a risk disclosure filed with the Securities and Exchange Commission that Libra may never launch due to “significant” regulatory scrutiny. Binance today said that it believes that Libra is growing at an “exponential rate” and will reshape the world financial system, bringing changes more than the Internet. “Instead of resisting change and losing the opportunity, it is better to embrace change. […] At the same time, ‘Libra’ needs to be developed in an orderly manner under the regulatory framework,” the exchange added. Earlier this month, The Block reported that retail giant Walmart could also be working on issuing a USD-pegged stablecoin, similar to Facebook’s Libra cryptocurrency.
Yogita Khatri - theblockcrypto.com
2019-08-19
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Everything flourishes with a bit of attention – even attention itself. You may have heard some rumblings recently about the bitcoin dominance rate. This measures the weight of bitcoin in the crypto universe, by taking its market cap as a percentage of the total market cap for all crypto assets. Traders and investors keep an eye on it as an indicator of market preference. It should surprise no-one that bitcoin is the dominant crypto asset, given its long track record and mainstream media attention. What is setting off alarms is its recent ascent: it is now hovering around 70 percent, a level not seen since April 2017, just before the previous bull market took off. (Source: CoinMarketCap.com) Some speculate that this means another bull run is imminent, one that will push bitcoin’s dominance to above 90 percent and effectively kill off any alternative crypto asset’s hopes of capturing significant market share. Others see it as a sign that alternative crypto assets are on the verge of a recovery as investors pivot in search of outperformance. As with any data point, there is much open to interpretation. Chart analysis aside, market metrics are rarely useful in isolation, and to get a feel for what the bitcoin dominance rate is telling us, we need a deeper understanding of what it represents – and why a rising number is not necessarily good news. So what? Why is the bitcoin dominance rate worth paying attention to? Surely everyone knows bitcoin is the leader? Because it’s a relative measure that points to preference, conviction and momentum. Price measures bitcoin’s popularity. Dominance measures its popularity relative to other crypto assets. In theory this could mean a “flight to quality” as investors get spooked by market risk and switch out of smaller cap tokens into a “safer” asset. Or, it could represent growing interest in the sector as a whole, along with conviction that bitcoin has the strongest fundamentals. Either way, it highlights that, of all crypto assets, bitcoin is the most attractive from an investor’s viewpoint. (It’s important to note that dominance can increase as the price goes down, and decrease as the price goes up – it’s a relative, not absolute, measure.) This matters for several reasons, one of which is what it says about market sentiment. While bitcoin is a speculative asset, it can be considered less speculative than smaller cap tokens, given its relative liquidity, history and network size. Its growing dominance points to a focus on fundamentals and on relative “safety,” which depicts a more grounded level of investor participation than in the ICO-fueled boom of 2017. While not necessarily predictive, sentiment indicators tend to be recursive – you can’t be sure the trend will continue, let alone with what energy, but positive sentiment generally has in-built inertia. If traders choose to buy based on these indicators, they reinforce them, which encourages more traders to buy, and so on. Another important consequence is market confidence, especially at the early stages of institutional involvement. Large traditional funds are not, on the whole, particularly concerned with the relative merits of one token versus another. They are more likely to be evaluating whether to invest in crypto or some other speculative asset class as part of their portfolio diversification. For most, if they choose to invest in the sector, bitcoin is the only viable option: it’s the only one that 1) has sufficient liquidity to absorb a small- to medium-sized allocation; 2) has a lively derivatives market; 3) can count on a wide range of on-ramps and 4) is definitely not an unregistered security in most jurisdictions. The protagonist role of bitcoin is likely to increase the confidence of traditional investors in the sector overall, burnishing its reputation and making their decision easier. In the absence of concrete valuations (difficult with bitcoin using traditional methods, since it has no cash flows), sentiment is usually as good a market indicator as any. Now what? No trend continues forever, though. Previous run-ups in the dominance factor have been met with a correction as investor attention pivots and new alternatives come into play. In spite of momentum, in virtually all asset classes there comes a reckoning, in which market leaders become overvalued relative to the runners-up, and knowledgeable investors take profits in order to re-invest in more attractive opportunities. But this is unlikely to happen in the short term, even though the last bull market saw bitcoin’s dominance drop from over 85 percent to below 40 percent. This time it is different. Why? Last time the latter stage of the bull market was largely driven by the hyped potential of initial coin offerings, many of which promised revolution and riches based on marketing documents masquerading as white papers. The retail market poured into speculative tokens, which ramped up their value relative to the more “boring” bitcoin – at one stage, it looked like ether was going to push bitcoin off its market leader pedestal. Recent market activity, however, has felt much more subdued (in spite of occasional shenanigans), largely due to increased regulatory scrutiny. The “sobering up” of the bear market, during which lawmakers and enforcers got to grips with the potential and threat of this new asset class, entrenched more rigorous standards for token issuers, promoters and investors. Many of the tokens issued in 2017 are now defunct, and while other interesting opportunities have emerged, the flow is more careful and calculated. What’s more, the expected role of institutional investors in the next bull run, with their focus on bitcoin as the representative crypto asset, is likely to push bitcoin’s dominance up even further. Then what? What will it take for that to change? All trends do eventually tire, to be replaced by new, more energetic ones. The same will happen with bitcoin. Once bitcoin investment by institutions is not such a novelty, and once deeper liquidity has dampened volatility, aggressive managers eager to beat their peers’ performance are going to start thinking about where to find alpha. That’s when they start to look at other assets. They may rotate out of bitcoin into more overlooked alternatives; or they may put in fresh money. Either way, the relative weighting of other crypto assets will increase. This is unlikely to happen any time soon, though. Institutional involvement is just getting started and has a long way to run. Current currency turmoil and macro uncertainty may accelerate this, but a more likely scenario is that the bulk of institutional money, which tends to be relatively conservative, will wait for signs of further momentum before risking their reputations and returns. The risk Meanwhile, growing bitcoin dominance presents a risk we should not overlook: that bitcoin becomes firmly entrenched as the go-to crypto asset for the bulk of crypto investment, to the extent that it smothers interest in other ideas. This would not be good for the sector, for two main reasons. One, it would suck funding out of other areas of the market and stifle development of blockchain applications. Blockchain technology’s potential goes beyond bitcoin; it presents the opportunity to re-think how business models work, how assets can be valued and how income and capital can be distributed in a more decentralized economy. Other crypto assets are manifestations of this potential, and should be able to approach the market for funding and validation. Two, concentration is a sign of an immature asset class. Imagine an emerging stock market in which one company accounts for 80 percent of the country’s market valuation. A diversified category will be more resilient, flexible and powerful, as internal connections and synergies empower a profitable irrigation of resources. We are entering a phase where more attention will be paid to the dominance metric, which is likely to continue creeping up for some time. Some analysts are suggesting alternative calculations, taking out “fake volumes” and even stablecoins (since they are not seen as a competing investment vehicle) – a re-adjusted figure could be as high as 90 percent. Could we get to a “tipping point” beyond which diverting attention from bitcoin will be extremely difficult? It’s possible, but unlikely. People generally want to differentiate themselves from others; that also applies to their investment portfolios. Not only will investments in not-so-high-profile tokens better reflect retail investors’ personal preferences; but professional competition will also encourage crypto diversification in a search for outperformance. Bitcoin’s dominance will probably continue to be unassailable for at least a few more cycles, though, and the inflow of funds, even if concentrated, will help the market infrastructure continue to mature. But, in the end, creativity and innovation always find a way to manifest. Meanwhile, we should celebrate that bitcoin has not only survived but thrived. Its growing dominance and rising liquidity are signs that a greater number of investors believe in its potential. However, as exciting as that may be, it’s not the only thing going on. As investors, we also need to keep an eye on what’s happening out of the limelight; from there will emerge the interesting opportunities of tomorrow. Source: https://www.coindesk.com/bitcoins-surging-dominance-is-this-time-really-different
Noelle Acheson - coindesk.com
2019-08-15
