Now, I have no idea how old you are, nor do I want to make any assumptions. I will assume, though, that since you are reading this, you have an interest in markets and/or crypto assets. And since this is a newsletter aimed at professional investors, I will assume that you care about a bit more than prices going up/down/sideways. That should put us on more or less the same page as to what we explore here. 

However, this week I want us all to question the lens through which we judge the evolution of markets. Not just crypto markets – all markets, because it is becoming increasingly clear that sooner or later the distinction will be irrelevant.

You’re reading Crypto Long & Short, a newsletter that looks closely at the forces driving cryptocurrency markets. Authored by CoinDesk’s head of research, Noelle Acheson, it goes out every Sunday and offers a recap of the week – with insights and analysis – from a professional investor’s point of view. You can subscribe here.

What those markets look like is relevant, though, and I am increasingly aware that my view on that may be influenced by my age. So might yours. It could be useful, then – perhaps even fun if not slightly discomforting – to try to see the evolution of markets from the point of view of a different generational label. 

Here’s an example: Many market observers, myself included, have been celebrating the emergence of prime brokerage services that have clout and experience. The latest to join the growing list of big names is London-based B2C2, which started providing OTC liquidity to crypto markets in 2015, and this week announced a partnership with and investment from Japanese financial conglomerate SBI Holdings which will enable it to move towards adding prime services to its already active distribution. 

We’re excited about this because it represents a maturation of the crypto markets and removes one of the significant barriers standing between institutions and crypto investment: the structural inefficiency of capital. Given a choice of crypto prime brokers with strong balance sheets, the reasoning goes, more institutions will be willing to participate, and the influx of demand and liquidity will push up asset prices. A new crypto market era could be dawning.

But what if the real dawning is coming from a totally different direction? What if a cultural shift is emerging that could end up reshaping traditional markets to look more like the crypto markets?

Young people

Generation Z is now the largest generation in the world, accounting for almost 30% of the U.S. population. They’re teenagers and in their early 20s, and most won’t be actively investing due to a lack of income and savings – but, according to surveys, they’re well-educated and politically active, and have been given a loud wake-up call when it comes to the need to protect whatever wealth they may accumulate. 

They are also digital natives and, when they are old enough, will see nothing strange in allocating their savings to assets via swipes on their phones (or movements of their headsets or digital glasses, who knows). It is unlikely they will find the fragmented nature of crypto markets alarming, and the creativity of many crypto asset products on the market today could appeal to their strong sense of individualism.

What’s more, the young and future savers will come of investing age in perhaps the worst recession in generations, with employment security at record lows, markets increasingly divorced from fundamentals and growing doubts about the resilience of fiat currencies. They will have plenty of reason to question established financial wisdom, and plenty of opportunity to explore new investment formats.

Earlier this year, the Edelman Trust Barometer showed that confidence in governments, media and business is at record lows, and that over half of respondents believe that capitalism is failing them. While the poll does not cover Generation Z (survey participants are over 25), it would be a stretch to assume that the teenagers of today will emerge from cancelled classes and lockdown with their parents with greater faith in governments’ ability to protect them than their predecessors have.

Changing habits

Moving up the age scale a bit, you’ll have seen the headlines about the perceived influence millennials are having on the stock market via apps such as Robinhood. The day-trading frenzy may disappear should prices crash, but the underlying gamification will most likely create investment habits that will persist as a new generation of investors enters the market.

This will be supported by the continuing separation of market prices from underlying value – why do investment homework when fundamentals don’t really matter any more? 

What’s more, some experts claim that Generation Z is the DIY generation and is therefore less likely than even millennials to use the services of professional investment advisers. YouTube, TikTok and social investment apps, where strategies are shared, give ample opportunity to mimic and learn from others.

(For the record, I have a Gen Z daughter who was not particularly helpful in my superficial research – she would never day trade, doesn’t trust banks and is excited about her meager bitcoin investment which she holds in a hardware wallet. But she has no idea what her friends think about all this and would just die of embarrassment if I asked them.)

New markets

So, combine a distrust of centralized institutions with a high degree of comfort with digital platforms and a relative lack of respect for traditional financial expertise, and you have a generation with the potential to rewrite how markets work.

This generation will emerge into a market in which traditional investment standards no longer apply, and for which the word “unprecedented” has lost most of its meaning. They will do so without the clear asset differentiation that their parents and older siblings have relied on to make portfolio decisions. 

True, their combined personal wealth is likely to be minuscule compared to the money managed by traditional institutions. 

But these institutions are rarely immune to mainstream investment culture. They operate under different rules, with much less freedom as well as entrenched checks and balances. But most of them – pension funds, mutual fund managers, insurance companies – are there to serve retail investors. And their results will most likely be affected by the growing influence of retail investors on the market. 

As the investing culture evolves, so will they. The result is likely to be an acceleration of the blurring of boundaries between traditional and new investing. Crypto markets are likely to increasingly look like traditional markets. But what traditional markets look like will also evolve, possibly beyond current recognition. 

We could already be seeing signs of this happening. Max Boonen, CEO of B2C2, the crypto OTC firm I mentioned earlier, hinted that his firm was looking at trading other assets alongside cryptocurrencies. The market reach that the alliance with SBI Holdings gives B2C2 will push this amalgam into new areas, ready for a new generation of investors. 
It doesn’t hurt that SBI is the largest online brokerage in Japan, a country with an active retail investor baseknown for its contrarian thinking. B2C2 will facilitate the platform’s crypto asset trades. 

This will not only continue to blur the lines between crypto and traditional asset investing. It will also continue to blur the lines between retail and institutional interest. 

I, for one, plan to continue to get excited about big steps forward in the professionalization of crypto markets and in their appeal to institutional investors. 

I will even more enjoy, however, watching the very nature of markets evolve. And I will be proud of the younger generation of investors helping to make this happen.

Anyone know what’s going on yet?

As the number of new COVID-19 cases in the U.S. and around the world reaches all-time highs, hopes for a vaccine and a swift economic recovery continue to push markets higher. 

True, every day that passes puts us one day closer to a vaccine being available for everybody. But between now and then, there’s a lot of hurt coming, and we have no idea what the final cost will be. And markets are acting like the cost will be negligible. 

Not all stocks are affected equally, however – the Nasdaq has now not only significantly outperformed the S&P 500 since the beginning of the year, it has also reached all-time highs, surpassing even the dot-com bubble.

This represents a widening gulf between tech stocks and more traditional industries, as well as an insidious shift in corporate priorities. It’s almost as if investors are encouraging companies to ignore the health of their balance sheet in favor of future earnings potential, especially in a market that assumes that potential defaults will be bailed out. 

Bitcoin continues to trade in a relatively tight range, which some claim is a classic build-up to a breakout. That may be the case, but no one knows when that breakout will happen, or, for that matter, in what direction.

CHAIN LINKS

SBI Holdings has taken a $30 million stake in crypto OTC firm B2C2. TAKEAWAY: This positions B2C2 to enter the race to become one of the industry’s anchor prime brokers. Recently we have seen Genesis*, BitGo and Coinbase announce prime brokerage plans. With B2C2’s execution track record and SBI’s access to a range of other crypto asset services through various crypto industry investments, B2C2’s OTC clients could soon also be able to access a range of support functions including leverage and custody. The relationship will also improve crypto trading services for clients of SBI Securities, one of Japan’s largest online brokerages. (See more analysis above in THE BRIEFING.) (*Genesis Trading is a subsidiary of DCG Group, parent of Coinbase.)

Bitcoin may seem to be more volatile than traditional assets but in crypto markets it is considered relatively stable compared to other cryptocurrencies. However, that pricing situation may change during the third quarter, according to options market data, which indicates that BTC volatility will be higher than that of ETH in coming months. TAKEAWAY: This is notable as, traditionally, ETH’s volatility is higher than that of BTC. It is also surprising, given the recent boost in activity in decentralized finance tokens that run on the ethereum blockchain. The switch could be due to a build-up of expectations that BTC’s recent tight trading range will be broken with a sharp move. But, historically, except for the late 2017 run-up, periods in which ETH’s volatility has exceeded that of BTC have coincided with slumps in BTC’s price. 

Crypto analyst and investor Chris Burniske hypothesized that, given the relentless rise of equity markets, we could well soon see a large crypto company go public – and that this would be a catalyst for greater mainstream interest in the industry. TAKEAWAY: It does sound plausible, and could be a catalyst not just for mainstream interest, but also for regulatory clarity from the SEC. Can’t have a splashy IPO for a company that operates in a sector whose regulatory future is uncertain, now, can we?

Crypto data firm Coin Metrics has revealed a new methodology for measuring the size and depth of digital asset markets, which involves excluding coins and tokens that have been inactive for over five years. TAKEAWAY: Given that some protocols intentionally lock up coins for long periods or have large founding treasuries, not all ecosystems can effectively use market capitalization as a meaningful gauge of size and depth. Also, in some older networks, a sizable portion of issued tokens have been lost. This makes it challenging to compare market capitalizations with a standardized measure – focusing just on “active” coins should remove some of the protocol-specific token management differences. One interesting result: Bitcoin’s free float is nearly 25% smaller than the commonly cited 18.4 million bitcoins issued to date.

Crypto data firm Glassnode produced a detailed look at the recent activity of bitcoin whales(entities with at least 1,000 BTC). TAKEAWAY: After declining since 2016, the number of BTC whales is increasing, as is the total balance held. What’s more, the market share of these whales is seeing its largest sustained increase since 2011, after declining for almost a decade. This growth implies growing confidence of long-term holders, supported by the apparent flow of BTC from exchanges into whale wallets.

Source: glassnode.com

Bitcoin miner Hut 8 has raised $8.3 million from selling a 6% equity stake to investors, approximately $800,000 more than the original funding target. TAKEAWAY: The raise itself is not surprising – my colleague Matt Yamamoto hinted it would be forthcoming in his in-depth report on Hut 8. And even though it ended up being higher than the original target, it is still small, and so should not cause significant dilution. Unless the bitcoin price appreciates significantly in the short term, it’s possible that Hut 8 will still need to find more financing for an equipment upgrade. 

The stock-to-flow model that predicted strong price appreciation for bitcoin post-halving is not having its best moment.

• Nico Cordeiro, CIO at fund manager Strix Leviathan, presents a detailed analysis that points out some fundamental flaws and misunderstood definitions of the stock-to-flow model of bitcoin price prediction. He shows that it does not hold for gold, and questions the selection bias that assumes it has held for bitcoin. 
• Eric Wall, the CIO of Arcane Assets, takes the critiques a step further, by listing the main arguments against the model made by analysts over the past year. 

The New York Digital Investment Group (NYDIG) has raised an additional $190 million for a bitcoin fund called NYDIG Institutional Bitcoin Fund LP. TAKEAWAY: The raise is a hefty amount, especially when combined with the $140 million raised by the firm in May for its NYDIG Bitcoin Yield Enhancement Fund. Apparently the fresh raise was from 24 unnamed investors, which puts the average investment of each at around $8 million – this signals a strong institutional commitment. 

Norwegian cryptocurrency investment firm Arcane Crypto is planning to go public through a reverse takeover of Swedish firm Vertical Ventures, which is listed on Nasdaq First North. Arcane will become the majority owners of Vertical Ventures, which will trade under the Arcane name. TAKEAWAY: Nasdaq First North is Nasdaq Nordic’s alternative stock exchange for smaller companies in Europe. While not exactly a large market, it is seen as a way to get some liquidity and market valuation experience, and as a stepping stone towards a listing on the main market. Meanwhile, we get more insight into crypto company financials.

A bitcoin exchange-traded product (ETP) managed by 21Shares, a Swiss-based product provider formerly known as Amun, has listed on Xetra, Deutsche Boerse’s electronic trading venue. TAKEAWAY: As with ETC Group’s bitcoin ETP last month, this will boost mainstream access to crypto investment. Xetra is one of the largest electronic trading platforms in Europe, and has a much more international reach than SIX Swiss Exchange and Boerse Stuttgart, the other exchanges on which 21Shares has listed crypto products. 

Podcasts worth listening to:

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