Grant's Almost Daily

CRYPTO CRISIS?

Hodl on loosely

Ah, crypto-currencies. Whether in a bull or bear market (sometimes we see both before lunch), they bore neither fans nor skeptics.  The still-young 2018 has been rough for the nascent asset class, as the four most prominent vehicles (bitcoin, ethereum, ripple and litecoin) have declined by 42%, 39%, 40% and 74% respectively after logging spectacular gains last year.

 

Beyond financial losses, the pullback seems to be taking a toll.  According to Bloomberg: “Online searches for ‘bitcoin’ fell 82 percent from December highs, according to Google Trends. Tweets that mention the coin peaked Dec. 7, at 155,600, and are now down to about 63,000, BitInfoCharts says. And the number of bitcoin transactions is off 60 percent from its record on Dec. 13, according to Blockchain.info” (Almost Daily Grant’s, March 16).

 

Crypto-ficcianados have lately contended with more than falling prices and waning public interest.  Yesterday, Reuters reported: “Twitter, Inc. will start banning cryptocurrency advertising [today], joining Facebook and Google in a clampdown that seeks to avoid giving publicity to potential fraud or large investor losses.”  In other words, the ubiquitous social media ads featuring author and investor James Altucher will be no more.  Altucher himself voiced his approval, telling Recode: “There are many scams and illegitimate services out there.” This afternoon, Coinbase reports that Reddit (which bills itself as “the front page of the internet”) no longer accepts payment in bitcoin for its Reddit gold membership program. 

 

Regulators, too, are taking a stricter stance.  On Thursday, the Wall Street Journal reported that the Securities and Exchange Commission is scrutinizing up to 100 crypto-focused hedge funds: “Examiners are keen to inspect whether fund managers have bought the type of assets they advertised to investors in disclosure documents. Regulators also worry about the risk of crypto assets being stolen because hackers often attempt to breach exchanges where crypto-currencies are kept.” On March 2, Bank of England Governor Mark Carney told the Scottish Economics Conference that “the time has come to hold the crypto-asset ecosystem to the same standards as the rest of the financial system.”  

 

Meanwhile, efforts at wider implementation of the blockchain in the financial industry have recently suffered what appear to be major setbacks.  Today, Reuters reports that three separate projects undertaken by financial institutions to incorporate the distributed ledger technology have been halted.  One such example:

 

DTCC, known as Wall Street’s bookkeeper, recently put the brakes on a blockchain system for the clearing and settlement of repurchase, or repo, agreement transactions, said Murray Pozmanter, head of clearing agency services at the DTCC.

 

The project, which had successfully tested with startup Digital Asset Holdings, was shelved because banks and other potential users believed the same results could be achieved more cheaply using current technology, he said. “Basically, it became a solution in search of a problem.”

 

As prices fall, regulators circle and big tech heads for the hills, some investors are doubling down. Yesterday, Bloomberg reported that: 

 

While ICO’s [initial coin offerings] were supposed to disrupt venture capital, such funding in blockchain-based companies is surging, with startups raising $434 million since December, the most ever in a three-month period, according to CoinDesk data.

 

“If a company goes on and gets an ICO, my equity is worth more,” Frank Meehan, partner at SparkLabs Group, said. “That’s really the game right now.”

 

CoinDesk calculates that ICO’s have raised north of $3 billion through February, more than half of their 2017 intake.  For the sake of their limited partners, VCs best choose wisely. Bloomberg goes on to note that 46% of such offerings either failed of were unable to attain funding, while 50 of 340 ICO’s have already failed this year.

 

Last week, CryptoKitties (which bills itself as an ethereum-based “game centered around breedable, collectible, and oh-so-adorable creatures” who can’t be “replicated, taken away, or destroyed”)  raised $12 million in seed funding led by Andreessen Horowitz and Union Square Ventures, with Mark Pincus (founder of Zynga) and Fred Ehrsam (former founder of Coinbase) lining up as investors.

 

Meanwhile CoinDesk reports that ethereum founder Vitalik Buterin recently penned a blog post arguing for the institution of rent fees on his network, where “users would be asked to pay to use the network based on how long they’d like their data to remain accessible on the blockchain.”  Evidently, permanence is a relative concept.