Q9 Markets: Crossing the Chasm
11th February 2021
Q9 Capital: www.q9capital.com
- Double digit weekly gains for most crypto assets
- DOJ recovers $4.5bn stolen crypto from Bitfinex hack
- Crypto entering “Hyper Adoption” phase (Wells Fargo)
Crypto markets extended huge gains this week with the total market cap of all crypto re-emerging above the $2tn watermark. BTC (+17.3%) has recovered from under $35,000 to over $43,000 in the past week and Ethereum (+14.9%) has risen to over $3,000. The recent gains have narrowed Bitcoin’s losses to just -8.6% in 2021 — a similar deficit to the -6.1% year-to-date loss for the S&P 500.
Metaverse tokens also fared particularly well with Gala (GALA) + 75%, Axie Infinity (AXS) +32%, Sandbox (SAND) + 20%, and Decentraland (MANA) +18%. The Crypto Fear and Greed Index has returned to Neutral for the first time this year.
Market Cap of NFTs Avatar-get
According to NFT analytics platform NFTGO the NFT market cap now exceeds $16bn, or around 1% of crypto’s two trillion-dollar industry. Avatar NFTs represent the largest sub-sector, accounting for $8bn of the market cap, while gaming, art, and collectibles follow, all within the $2.3 — $3.3bn range. Art NFTs currently make up a small part of the $1.7tn global art markets — expect this to converge as the industry matures.
Hack That
If you’re ever feeling down about yourself just remember that this odd pair nearly got away with a $4.5bn heist of stolen Bitcoin.
In case you missed the story of the DOJ’s largest-ever crypto recovery: Agents arrested married couple, Ilya “Dutch” Lichtenstein and Heather Morgan, on Tuesday on charges they conspired to launder proceeds from the Bitfinex hack in 2016. The defendants used a number of techniques to launder the stolen Bitcoin, including splitting transactions into “thousands” of smaller transactions, using darknet markets and converting into other types of crypto such as Monero. It’s not known if they perpetrated the hack, but police were able to access the stolen funds after decrypting a file “saved to Lichtenstein’s cloud storage account,” which included 2,000 crypto wallet addresses and their private keys. The value of the stolen crypto was just $71mn when it was hacked in 2016 but has since ballooned due to the staggering gains of Bitcoin ever since.
Although their money laundering process was very sophisticated and elaborate, their big mistake was to keep all the details on a public cloud in the US (eg Google, AWS) which the authorities were able to subpoena including the Bitcoin addresses (over 2,000), the private keys as well as details on “personas” they were using to create fake accounts.
This incident goes to show 1) how hard it is to launder crypto, and 2) keeping your keys protected in cold storage is crucial for security. Keeping $4.5bn of addresses and private keys on a Google or AWS is simply, well, stupid.
Another question is whether the government will now return the funds to the wallets where they were stolen from?
The Corporate Charge is on Balance
The stampede of institutional investors entering crypto is gathering pace. As Mike Novogratz has alluded to “the herd is coming”.
Word on the street is that BlackRock, the world’s largest asset manager with over $10tn assets, will offer digital asset trading via its in-house Aladdin integrated investment management platform. The company also has plans to launch the iShares Blockchain and Tech ETF and owns 16.3% of MicroStrategy, the Bitcoin-holding software firm.
“KPMG in Canada is also bullish on crypto and has acquired BTC and ETH onto its balance sheet. This is big news. “Having gone through this process ourselves now, we’re confident we can guide clients and prospective clients through the process of cryptoasset treasury allocation,” KPMG said. “Our investment allows us to share our journey, our experiences, our challenges with them so that we can help them navigate the cryptoasset world.” “We believe they are here to stay and we’ll consider other innovative investment opportunities in the future”
Tesla also revealed in an SEC filing it was holding nearly $2bn in Bitcoin at the end of last year. The electric car maker invested close to $1.5bn in BTC during Q1 2021, and crystallised a profit of $128mn in March to show that the world’s largest digital asset had sufficient liquidity.
The “Hyper Adoption” Phase
Is it too late to invest in crypto? The answer is “No” according to financial giant Wells Fargo.
Cryptocurrencies are near a phase of “hyper adoption”, similar to what the internet experienced in the mid-to late 1990s, Wells Fargo said. Crypto has turned in the best performance of any asset class over the past decade, with investors fearing that they may be too late. “We understand the ‘too late to invest’ argument but do not subscribe to it… We believe that cryptocurrencies are viable investments today, even though they remain in the early stages of their investment evolution”.
Like the internet in the 90s, crypto “could soon hit a hyper-infliction point”. About 13% of Americans bought or traded cryptocurrencies in the past 12 months, similar to the internet’s adoption rate in 1995, the report notes. With other technologies “adoption typically started slowly, hit an inflection point, and then steeply accelerated,”
Technology S Curves
Internet Usage History vs Crypto Users
Market Size of Crypto vs Selected Assets (in trillions)
Every single week there are significant headlines about major asset managers, banks, insurers, and multinationals laying out their strategies for crypto. Whether it be treasury allocation, venture investments or a strategy for the metaverse, things are gathering pace. The market cap of NFTs has hit $16bn in a staggeringly short amount of time and digital art sales are converging with “real world” sales. The Wells Fargo report shows adoption is accelerating and following a similar path to internet, cell phone or electricity usage.
Technology adoption typically starts slowly, hits an inflection point and then steeply accelerates. In the seminal tech marketing book ‘Crossing the Chasm’ Geoffrey Moore lays out the most difficult part of client growth, moving from the early adopter to mainstream. We are now perhaps at that inflection point or even earlier. Global adoption of crypto is still only about 3 to 4% by estimates and if you take the chart below that’s very early. However, adoption in the US and other developed markets may be as high as 25% which is just across the chasm into mainstream adoption. By that metric crypto looks pretty underpriced at 1/5th gold and less than 2% of stocks (which are dominated by the wealthiest economies anyway). And don’t forget that crypto and digital asset markets can do many things that equity markets can, and much more cheaply. So the long term story isn’t about allocation but about being the future of money and value. It may take time to get there but digital assets are going mainstream.
In the News…
- BlackRock planning to offer crypto trading, sources say
- China debuts digital yuan at Winter Olympics amid warnings from US senator
- KPMG Canada adds crypto to its balance sheet
- Binance, led by the world’s richest crypto billionaire, is taking a $200mn stake in Forbes
- EOS community weighs legal action against Block.One seeking $4.1bn
- Fitch downgrades El Salvador to “CCC” weeks before Bitcoin Bond issue
- Canadian Trucker Protests bypass fundraising restrictions with Bitcoin
- Blockchain company Alchemy triples valuation in just three months to $10.3bn as Web3 fever rages
- Japan’s largest bank to float yen-pegged stablecoin for trading securities
- Treasury official says stablecoin issuers must be banks to ensure security
- Kazakhstan floats 500% tax increase on Bitcoin miners, leading some to eye relocation
- Andreessen Horowitz seeks an investment in Bored Ape Yacht Club
- Manchester United legends to create world’s first Soccer DAO
Legacy Markets
Oil futures slipped 10 bps this week while the SPX drifted +0.6% higher. 10-year US treasury yields rose 20bps, the US Dollar index rose 50bps and the Gold & Silver index advanced +3.3%.
Crypto Markets
- BTC/USD climbed +17.3% and ETH/USD rose +14.9% over the week. The total market cap of the crypto universe reclaimed the $2tln mark and Bitcoin’s dominance hovered around 41%
- Among old timers, LTC/USD and BCH/USD rallied +22.5% and 22.1% from last week’s levels. Metaverse token GALA jumped +75.4%
- Annualised volatility continues to stay at lower levels: 63% for BTC and 82% for ETH
Flows
- Strongly bid client pad (4.19x buyers vs sellers)
- Net buyers in, BTC, ETH and SOL
- Net sellers in AXS and GALA
Q9 Capital: www.q9capital.com
