This Week in Crypto: is Coinbase too powerful for its own good?


The world of crypto is notoriously fast-moving. News happens fast, and the effects on asset prices are instantaneous. It is both challenging and time-consuming to distill what’s relevant amongst all the noise. Element Group’s digital asset managers keep their finger on the pulse of crypto news so you don’t have to. “This Week in Crypto” is our take on the most significant news that has affected the digital asset markets in the past seven days. In the spotlight on December 23rd: bitcoin futures, Coinbase adding BCH and a 30% drop in the price of bitcoin.

CME bitcoin futures begin trading

On Monday, December 18th, the CME launched bitcoin futures. The media did pay some attention to a similar CBOE announcement last week, and we did comment on the fact as well, but the CME launch mostly flew under the radar. To us, the reason for a nonexistent reaction is simple: both of these are non-events. What made the CBOE announcement noteworthy was it setting a precedent. In truth, there is nothing particularly exciting about observing bitcoin futures right now, since the informational value of the listed derivative, to us, is meager. The prices are trading nearly at spot, which is trivial for an asset with a minimum of 20% of monthly volatility. For now, the only thing we can infer is that a handful of natural shorts (miners and whales) likely just hedged some of their long positions to lock in January cash flows.

What is interesting about these emerging futures products is that they could present a solution for those who want to express opinions about the bitcoin marketplace without having to deal with the emerging asset class itself. Since futures are cash settled, it is, in theory, not a prerequisite to own bitcoin to trade in bitcoin futures. That being said, unlike traditional markets, a small minority of market players can influence and control the price of bitcoin. This small minority is likely to become a keen participant in futures trading. To understand why this is important, imagine this: you want to bet on the outcome of the Superbowl. In the meantime, both quarterbacks, both special teams, both offensive and defensive lines, and both coaches are taking the other side of your bet. Knowing this, would you still place your bet?

Coinbase adds BCH to the mix

We commented on this extensively in our post on Thursday. The BCH price dynamics surrounding the Coinbase announcement have left many within the space uncomfortable. Conspiracy theories aside, these price dynamics illustrate a concerning trend in the market: the price of an asset doesn’t seem to be defined by fundamentals, it seems to be defined by an exchange adding said asset. Although BCH fundamentals are promising, and some even speculate that it could surpass bitcoin as the go-to cryptocurrency in the future, current buyers care little about fundamentals. In the eyes of a naive and emotional investor, the price of 1 BCH is still much lower than the price of 1 bitcoin. When it’s added to Coinbase, it becomes accessible through a practical and intuitive interface.

To us, this is a cause for concern when it comes to the health and wellbeing of the marketplace as a whole. At approximately 11 AM EST on Friday, Coinbase disabled buying and selling entirely. The fact that the most commonly used trading platform for US investors shuts down every time there is a significant spike in price or volume means the retail investor is basically boxed out from the best trading opportunities. In an already volatile and emotional market, this means that trust becomes directly proportional to the technical capabilities of one platform. It is dangerous to have a point of failure that is so pronounced. Should there be a significant technical fault or a breach of security, it would take the market a long time to recover from such a breach of trust.

BTC price drops by 30% and counting

Many of the new participants in the space have spent Friday in a panic, while experienced traders and investors did not seem too concerned. The graph below illustrates the price of bitcoin going back approximately 12 months, on a logarithmic scale. We can see that there have been five independent major price corrections in that period, averaging about a 30% peak to trough move. In that context, the recent move of bitcoin from 20k to 13k represents about a 30% price swing and in range of what we have seen historically with bitcoin corrections.

the price of bitcoin going back approximately 12 months, on a logarithmic scale

That being said, while today’s negative move is in range of what we’ve seen historically, the marketplace has changed from a year ago. We wouldn’t be surprised if this move continued a bit more to the 11k and 10k levels given the amount of fear amongst the retail community. As the street attempts to “buy the dip” (or catch a falling knife), the current environment has given us some pause for thought. Every asset is moving lower and seemingly in conjunction with one another. Correlation amongst individual asset classes is never a good thing for a system as a whole or a fund manager. We have seen this behavior many time in emerging markets when the sign flashes “risk off” and the tide of recedes with the fund flow. Or it could be just some prudent 1031 tax artistry ahead of the new bill taking force.

For many new participants in the marketplace, this week has been tough. Not everyone can stomach -30% days. For those of us that have done our homework, for those of us that are bullish on the long-term utility of blockchain technology and for those of us that believe there is considerable future value for digital assets, Santa has come early. Happy Holidays All.