Crypto Long & Short: Dogecoin, Market Manipulation and the Downside of a Coinbase IPO

This week saw a 125% rise in the price of dogecoin, a cryptocurrency based on a popular 2013 internet meme, created in the same year as both a parody and a “let’s see if this sticks” experiment. Much to even the founder’s surprise, it has not only survived, it has accumulated a loyal following. Clearly.

A group of teenagers on the extremely popular but recently beleaguered social platform TikTok decided to use their voice and audience to move the price of dogecoin up. It has nothing to do with fundamentals, potential or even government handouts – most participants probably don’t even understand what cryptocurrency is (many of the videos refer to DOGE as a “stock”). It’s about manipulation, just because. 

Why is this relevant? Because it is an irresistibly fluffy yet alarming symptom that trust is fundamentally broken in markets. 

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.

When you have the next generation of investors blatantly flaunting that markets are a meaningless casino, when you have them advertising that markets can be manipulated, then you do have to wonder what role markets will have in their lives as they get older.

And much like the day traders picking stocks from a bag of Scrabble tiles, this does raise questions about the role of facts in our interpretation of value. 

When markets don’t make any sense, when fundamentals no longer seem to matter, it becomes clear the rules are being rewritten or even thrown out the window. We could be in the creative destruction phase that will give way to a new wave of innovation. And in that wave, new types of assets could have a respectable place in new types of portfolios. 

Meanwhile, however, the untethered nature of current price logic is disconcerting, and a reminder that creative destruction can be vicious to those caught in the transition. Uncertainty is not good for trust, and a lack of trust is not good for progress. 

So, while I can chuckle with glee at the adorable takes that I can’t resist sharing with you here… 

…I’m also wondering what will have changed most in markets two to three years from now. Maybe sanity will have been restored. Or maybe this is sane in comparison to what’s coming. 

A Coinbase listing would not necessarily be good for the market

We can’t not talk about the unconfirmed rumors that Coinbase is planning a stock market listing. These rumors are not new, but they have suddenly taken on a renewed relevance. Earlier this week, Reuters reported on the plans, citing sources familiar with the matter. And Coinbase has called an investor meeting, sparking speculation as to why.

Should this happen, it would be a big deal for the cryptocurrency industry, but not necessarily the boost many seem to think.

It would be a big deal for three main reasons:

1) It would focus a lot of mainstream attention on the industry as a whole, as financial reporters throw around the word “crytpo,” as equity analysts scramble to produce reports and as investors are taken aback by the sheer numbers at play in these relatively overlooked markets. 

2) We the public would finally get detailed insight into the inner workings and accounts of one of the industry’s most prominent businesses (as an analyst, I’m really looking forward to that). 

3) It would provide a listed and liquid opportunity for investors to get exposure to the cryptocurrencies. This could put crypto, albeit indirectly, within reach of any investor, retail or institutional, and possibly give it a home in pension funds, exchange-traded funds, 401(k)s, etc.

How would this boost the cryptocurrency markets? 

Increased mainstream attention could encourage more people to learn about cryptocurrency fundamentals, and possibly trigger a wave of new investment. 
Also, new funding from an initial public offering could mean further growth for Coinbase through a broader reach or a more extensive service. 

Now here is where the “buts” come in.

Rather than an IPO, the move could merely represent a handsome exit for the initial investors through a direct listing. Even if so, however, it would set up a pipeline for further financing, which could influence growth further down the road.

And, this is even more important, a public listing of a significant company such as Coinbase would not necessarily encourage mainstream crypto exposure. Investment would be going into a company, not the cryptocurrency market. True, the investment in that private company could encourage more investment in the cryptocurrency market further down the line, but the effect would not be linear.

It could even be a self-defeating proposition. Investors en masse could choose to buy shares in Coinbase instead of buying cryptocurrency directly, which ironically could end up hurting Coinbase’s prospects. 

Ok, that’s an extreme extension of the theory, but it’s not totally out of the question. 

The net effect of a Coinbase listing, or any other significant cryptocurrency business heading to the frothy stock markets, could be net positive for crypto assets. But it may not be the investment trigger many are hoping for. 

Hashrate highs

Bitcoin’s hashrate has hit an all-time seven-day moving average high, less than two months after a miner reward halving led to a 40% drop as unprofitable mining equipment was switched off. The hashrate metric is significant in that it is a proxy for network security – the higher the hashrate, the more computational power is spent on validating transactions and maintaining the network. 

So, the hashrate reaching all-time seven-day average highs is being taken as a bullish signal by some. But the numbers don’t bear that theory out.

As we can see, usually after a hashrate peak, both price and hashrate fall over a seven-day and 30-day timeframe. But not always. So, hashrate is worth keeping an eye on, because a growing hashrate indicates growing confidence in the cryptocurrency’s outlook. But it should not be used as a trading signal without a lot of caution and additional information.  

Anyone know what's going on yet?

You’re probably all aware of how previously underused and reconfigured words and phrases have been given a new life with the current crisis. “Lockdown,” “social distancing,” not to mention “unprecedented”… And some new words are emerging. Here’s one: coronacoaster. I kid you not.

The market has been alternating between fits of euphoria and depression. With the highs higher than the lows, the net effect is up.

The main new factor that impacted the market over the last week was the sharp rise and fall in the Chinese market. While not a large market by U.S. standards, this rally underlines a significant difference in market influences. In the case of the U.S., part of the rally has been encouraged by likes of Davy Day Trader, pushing the retail frenzy to new highs. Whilst, in China, the stock market moves were largely from the government telling retail investors to buy. And then, to not buy. 

The bitcoin market, meanwhile, has been … well … uninteresting in terms of price and volumes. Maybe a strong breakout is building, maybe not, and either way, who knows in which direction. Meanwhile the developments in the sector are galloping forward as you will see below in CHAIN LINKS, so the lack of notable market trends does not mean that we get to put down our pencils for a bit and take a breather. Unfortunately. 

CHAIN LINKS

Los Angeles-based fund manager Arca has launched its Arca U.S. Treasury Fund, an SEC-registered closed-end fund that invests in U.S. T-bills and notes, and whose digital shares – ArCoins – move on the ethereum blockchain. TAKEAWAY: This is the first time the SEC has allowed a fund represented by blockchain-based tokens to trade under the 40 Act. Technically the fund’s shares will be crypto asset investments, although their value will be based on one of the most stable securities available: short-term U.S. government debt. This is fascinating because it could change the perception that markets and regulators have of crypto assets in general, and it could start to wake general capital markets up to alternative trading mechanisms. Whether this fund takes off or not, it is a pioneering step towards what could be the capital markets of tomorrow. 

Kraken Futures, previously known as Crypto Facilities, has been granted a Multilateral Trading Facility (MTF) license from the U.K.’s Financial Conduct Authority. TAKEAWAY: This makes Crypto Facilities the first licensed crypto derivatives platform for the European market, and we could soon see the launch of EUR-denominated crypto products.

The London Stock Exchange Group has added 169 digital assets to its SEDOL Masterfile service, a global database that assigns unique identifiers to financial instruments. This helps LSEG customers keep track of traded assets from execution to settlement. TAKEAWAY: This is not an official seal of “approval,” but it’s worth asking why they would do this if it’s not to include digital assets in their offering at some point in the future. 

The CFTC, which regulates the U.S. bitcoin and ether derivatives markets, plans to develop a digital asset innovation blueprint by 2024. TAKEAWAY: That may sound like a long time in the future, but in terms of new regulatory frameworks, it’s actually not, and it does strongly suggest the Commodity Futures Trading Commission is already working on it. So, we can expect more investigation, communication and events from the world’s principal derivatives regulator over the coming months, which should hint at the stance global derivatives regulators around the world could take. 

The CENTRE Consortium, which issues the dollar-pegged USDC on top of the ethereum blockchain, blacklisted a USDC address in response to a law enforcement request, freezing $100,000 worth of the stablecoin. TAKEAWAY: That this is even possible – the freezing of a cryptocurrency account – highlights the centralized nature of most fiat-backed stablecoins circulating today, and should reassure regulators that they are not necessarily going to lead to greater money laundering and financial crime. CENTRE’s cooperation with law enforcement, while anathema to original crypto libertarians, could also position it as a complement to the eventual digital dollar, should that come about. There will always be demand for monetary transfer systems with no seizure risk; but institutional participants need to stick to the regulated space, in which the seizure option is likely to be a requirement.

My colleague David Pan outlines the potential impact on crypto market infrastructure of Hong Kong’s national security law. TAKEAWAY: For instance, the Hong Kong Autonomy Act passed by the U.S. Senate this week in retaliation stipulates that the U.S. government should restrict foreign banks and subsidiaries of U.S. banks in Hong Kong from accessing the U.S. dollar system if they conduct significant transactions with China. That could increase market friction as it becomes harder for Hong Kong-based companies to access U.S. dollars. Hong Kong is a significant crypto market hub, so it remains to be seen if this will affect trading volumes. It’s also worth keeping an eye on stablecoin flows, as they could be a short-term workaround.

Ten-day realized volatility is at a two-year low, according to data from skew.com. The last time it was this low, it preceded a sharp price drop. This time, investors point to increased call buying as a sign the breakout might be on the upside. TAKEAWAY: That feeling when an absence of activity is news. 

Continuing on the theme that not much is happening in the crypto markets, CryptoCompare’s monthly Exchange Report highlights the relative lack of spot and derivative volumes.

Switzerland-based crypto lender Nexo is preparing to become a prime broker with help from oracle provider Chainlink, which will power audits to bring more transparency to Nexo’s operations. TAKEAWAY: Audited lending and borrowing would be good news for the industry, enhancing trust in the collateral and the yields. I am, however, beginning to sense the emergence of a buzzword (“prime broker”) that is starting to lose its original meaning.

Nic Carter and Matt Walsh of Castle Island Ventures wrote a compelling overview of the evolution of digital dollars, worth a read for anyone trying to keep up with what’s happening in stablecoins (fiat-backed as well as synthetic) and central bank digital currencies. 

Podcasts worth listening to:

• Central Banks Cannot Print Jobs: Understanding Real Economic Recovery, Feat. Daniel Lacalle – The Breakdown, Nathaniel Whittemore
• Inequality, Social Chaos, Bankruptcy Rallies: The Best Insights From FinTwit June 2020 – The Breakdown, Nathaniel Whittemore
• Raghuram Rajan On Why MMT, Authoritarianism And Bailouts Won’t Work – Macro Hive, Bilal Hafeez
• Rafael Schultze-Kraft – How Many Bitcoins Are Being HODLed? – Stephan Livera Podcast, Stephan Livera
• Outraged: Why Everyone is Shouting and No One is Talking, with Ashley ‘Dotty’ Charles and Ash Sarkar – Intelligence Squared