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When the Tide Goes Out…

When the Tide Goes Out

“Only when the tide goes out do you discover who’s been swimming naked.”

Warren Buffett

Key Takeaways

  • Bitcoin’s price recovered 63% from its low of $3,125 in December. JP Morgan, Fidelity, Nasdaq, Goldman Sachs, Swissquote, Vontobel, and Twitter are preparing the drinks and food for guests in preparation of a new bull market.
  • Investors have historically priced in each Bitcoin halving 458 days prior to the halving. We are currently about 400 days away from the May 2020 halving.

New bull market gains even more momentum if negative interest rates are charged on personal bank accounts held by retail investors as recommended by the International Monetary Fund.

It’s still chilly in cryptoland, but with the Twitter founder and the bosses of Fidelity and Nasdaq, the circle of Bitcoin fans is getting bigger and bigger. Even JP Morgan is doing crypto now.

Back to the Roots

What’s the purpose of Bitcoin This question is often answered with far reaching visions. The word “revolution” is often used. “Blockchain” of course. But sometimes a news item surfaces that makes things much clearer. Bitcoin’s purpose is to give financial sovereignty; not for a state or a company, but for the smallest of all minorities: the individual.

In February, the International Monetary Fund once again raised the question of how negative interest rates could be implemented in the event of the next recession. You should know that conventional monetary policy has only one answer to a crisis: cheap(er) money, i.e. lower interest rates. But since the great financial crisis we have reached a limit. If the interest falls below zero, someone has to pay. Either the banks or their customers, the savers. They can tolerate negative real interest rates. It’s not so obvious. But when it comes to actually losing money from their account, they get restless. This has not yet happened for private individuals, but it has happened for companies in Europe. Their reaction: they started stashing cash in vaults.(1)(2)

In the next crisis, when the negative interest rates become even more extreme and also hit private customers, they will react similarly, according to the experts of the Monetary Fund. Their “solution” is to massively restrict the use of cash in order to make it more difficult to escape expropriation through interest rate policy. Ironically, they even want to introduce an “electronic currency”. With that in place, negative interest rates can be easily implemented according to economists. At the same time, they have in mind a two-tier society.
Anyone who wants to pay cash in the supermarket could do so – but with a penalty
surcharge. This “nudging” will herd us all into the clutches of the state electronic
monetary system that they have in mind.(3)

Luckily, nothing is eaten as hot as it is cooked. These ideas are neither economically sound nor politically feasible. But the proposal should serve as a warning to us. By now it should be clear why Bitcoin is here to stay. Why it’s needed. It’s the antidote to such crazy ideas. Bitcoin makes it possible to get out of a system that is becoming increasingly hostile towards the users.

Of course: Bitcoin is still young. The extreme volatility is a deterrent. The technical difficulties, the hacks, scams and criminal cases as well. All these are growing pains that are to be expected when building a completely new, alternative monetary system. The Crypto Research Report has been documenting these developments for almost two years now and our sister report, In Gold we Trust has been covering cryptocurrencies since 2014. We offer an alternative explanation to the mainstream media’s fixation on Bitcoin’s price.

The falling price since January 2018 has curbed Bitcoin’s attractiveness and the crypto winter is still underway. The industry is bleeding. More and more companies have to reduce their staff. We are not even talking about the big and small investors who have lost a lot of money – at least on paper. The comparison with the dotcom bubble is certainly fitting. Too many people have invested too much money in ambitious projects that have often failed to deliver on any of their promises. But where there’s shade, there’s also light. And we can see some big rays shining through. But first we have to talk about the shadow.

How Long Will This Bear Market Last

According to Coindesk, Bitcoin is officially in the longest bear market in its history.(4) However, this is very hard to estimate. Since December 2017, when the price of one Bitcoin briefly rose to $19,764,  the price fell for 360 days before reaching its most recent trough at $3,125 in December of 2018. Shortly after, Bitcoin actually surpassed $4,000, realizing a gain of over 29.92%. Although, the price dropped down shortly afterwards. Defining a bear market by a percentage loss or gain in cryptocurrencies is difficult because of the strong volatility associated with the asset class. Talking about stock markets usually the beginning of a bear or bull market is defined by losses or gains of 20%, respectively. Empirically, Bitcoin has only had three downturns that lasted more than three months, and each saw a loss of over 80%. In contrast, Bitcoin has only had several bull markets with returns over 1000%, but only two of them lasted longer than five months. In the Crypto Research Report, we define a bear market as a drawdown of over 30%. We define a bull market as a gain of 30%. Therefore, we have officially begun a new Bitcoin bull market.

The crypto winter saw a maximum drawdown of 84%. In contrast, the first bear market lasted only 163 days. This was in 2011, when the price fell from $31.50 to $2.01, which equates to a loss of 93%. Between 2013 and 2015, prices fell by 86%. Although we are hopeful that the movement from $3,125 to the current price around $5,000 is the beginning of a new bull market, we will only know in hindsight whether or not the tide has come back in. However, a hint may lie in the Bitcoin’s monetary policy.

Every 210,000 blocks, the reward the miners receive per block is halved. This roughly corresponds to a four-year cycle. Observers pay very close attention to the schedule, because the so-called “halving” is regarded as an important indicator of price movement. There is only little experience so far, since there have been only two such “halvings”. But they show that the price has always risen in the months before the actual event. Specifically, the Bitcoin price found its bottom in the first bear market exactly 378 days before the first halving. And in the second bear market 539 days before the second halving.

This equals an average of 458 days, and we are currently approximately 400 days from the next halving. The next halving will probably take place towards the end of May 2020. If the pattern observed so far is confirmed, the bottom should occur somewhere between December 2018 and May of 2019. So far so good, but again: in retrospect, we’ll be smarter.(5)

A Tragic Story Traverses the World

Since the megaboom at the end of 2017, no Bitcoin story has been as present in the mainstream media as the one about the mysterious death of Gerry Cotten. The founder and CEO of Canadian crypto exchange Quadriga CX died unexpectedly at the beginning of December on a trip to India. Complications with his chronic bowel disease were given as a cause of death. Quadriga had money problems before, after their bank had frozen nearly $26 million of their funds. But what followed Cotton’s death was much worse. His widow told the Canadian authorities that Cotten had used his encrypted laptop to handle all the finances of the exchange. And that, despite the involvement of experts, she has not yet succeeded in cracking the laptop.(6)

As a result, almost $140 million in client funds are no longer available. It is understandable that major customers now want to take legal action. There is also wild speculation within the community. After so many cases of frauds and rip-offs that the crypto world has seen in the past months, the distrust is enormous. Is Gerald Cotten still alive? Does his wife pretend she doesn’t have access to the money? There are more than 20,000 Bitcoin and a number of Altcoins missing. The Reddit community watches the well known Quadriga wallets with eagle eyes.(7)(8)

On a meta-level, the case underlines two things: crypto exchanges are a damn bad place to store your coins. If you don’t want to take responsibility for your own funds, you should fall back on professional providers of custodianship solutions that are insured by regulated insurance agencies.(9) Or even stay away from cryptoassets altogether. Quadriga was not the first and probably not the last case in which an exchange did not deal professionally with its customers’ funds. Many exchanges have experienced rapid and tremendous growth. Their systems did not always grow with them. Scaling problems affect not only the blockchains themselves but also the infrastructure of the market.

When the tide goes out…

“Only when the tide goes out do you discover who’s been swimming naked.”
Warren Buffett

It was to be expected that scams and half-baked projects would be uncovered and disappear in a bear market. This is what happened in the “normal” market after the great financial crisis in 2009. But now a second wave is also hitting the crypto sector. A phase that was also to be expected: it is shrinking. Jobs are being cut from companies that want to slim down for winter so that they can still exist at the end of the crypto winter. 

The most prominent case is probably ConsenSys. This “decentralized company” serves as a kind of umbrella fund for around 50 Ethereum projects, which Ethereum co-founder Joe Lubin himself has selected. Lubin announced in December 2018 that 13 percent of the 1200 employees will leave the company and that the entire project will be restarted as “ConsenSys 2.0”. This also fits in with the plans to rebrand Ethereum as “Ethereum 2.0”

Lubin himself is considered one of the richest men in the scene because he has a large amount of ETH at his disposal. But that is not enough to keep ConsenSys running in the form of 2017 and 2018. According to Forbes, the “decentralized company” consumes about $100 million a year. And developers report that they never had to present a business model to get money. All it took was a thumbs up from Uncle Joe.(10)

Even the Chinese crypto giants Bitmain and Huobi are not getting off scot-free. Bitmain is the world’s largest manufacturer of mining hardware. The company will experience “some adjustments in the workforce”, according to a press release. Followed by a phrase that is often used in bad times. Bitmain says that they want to concentrate again on “their core business”. Bitmain denied rumors that more than half of the employees had to leave.(11) Bitmain also closed a research center in Israel and fired 20 employees there. Huobi, one of the world’s largest exchanges, also announced that it would “optimize” its workforce. The employees with the worst performance would have to leave. Bitmain had almost 2600 employees in its prime, Huobi more than 1000.

Other prominent victims of the bear market were the decentralised social media platform SteemIt and the NEM Foundation, which is behind the cryptocurrency XEM. SteemIt had to reduce staff. The NEM Foundation slipped into a real bankruptcy – only to ask the community for the equivalent of $8 million in order to be able to continue until February 2020. AKA, in order to make a “restart”. That’s a very popular word in the scene at this stage: restart. Soon it’ll all be “2.0.”

“Downsizing is a natural cycle in new, rapidly growing industries and blockchain is unfortunately no exception.”

Jehan Chu

Jehan Chu, the co-founder of Kenetic Capital in Hong Kong said in an interview with the South China Morning Post “We have also seen this with the Internet in the early 2000s. But this period has also produced some companies that are today the largest in this sector. I’m looking forward to a better, more focused version 2.0 of the blockchain industry.”

Admittedly, this is a dream for the future. At the present time, we must tighten our belts in Europe too. In the famous Crypto Valley in the Swiss city of Zug many cutbacks have already been announced. During the boom, too many start-ups had generously hired people who they can no longer afford or want to pay. Shapeshift, which is based in Switzerland, let about 37 employees go – a third of the workforce.(12) Locally, Crypto Finance in Switzerland had to lay off seven staff members mostly coming from their sales team.(13) In Liechtenstein, the Binancesupported exchange LXC is rumored to be having major problems.

Some crypto projects, such as Hosho’s Smart-Contract auditors, had to reduce up to 80 percent of their employees to get through the cryptowinter.(14) But there are also success stories: Blockdaemon, for example, which hosts nodes for blockchains, had a good year: “This is the most productive phase we have ever been in,” said CEO Konstantin Richter. Many start-ups have to step on it to deliver what they promised – and they are turning to service providers such as Blockdaemon: “The projects now have to show what they are made of. The time is up of raising a lot of money and talking a lot of talk.” Some investors are even happy about the cryptowinter. Many projects that were previously overvalued can now be entered at more reasonable prices.(15)

A State Cryptocurrency?

Bitcoin was originally invented to offer people an alternative to state currencies. Therefore, we are sometimes very surprised when the crypto fans absorb every message of an alleged “state crypto currency” as if it were honey. Especially since the nations in question are often a little questionable. We are not talking about the “electronic currency” that the IMF experts have in mind, but about Venezuela and Iran. The allegedly planned “crypto rial” is currently fascinating the media. In Venezuela, it was the Petro. The motivation is the same for both countries: they want to avoid US sanctions. Neutrally speaking, that is understandable. But the “Petro” of Venezuela can be considered a grandiose by most accounts.

Be that as it may, Iran is allegedly in talks with eight states from Europe and Africa (including Switzerland, Austria and Russia).(16) The content of the talks is whether international transactions could be carried out with cryptocurrencies. At the same time, there are reports of a “crypto rial” that may be linked to gold. Iran has been cut off from the international monetary and banking system for months. Europe, on the other hand, has a strong interest in circumventing the new US sanctions. and maintaining trade relations. Even an own agency was founded, the INSTEX. It is intended to facilitate trade between European countries and Iran. At the same time Tehran signals to consider everything that could harm the “great Satan” USA.(17)(18)

Against this background we ask ourselves: Why does it need a “crypto rial”? Is this all about propaganda? Misinformation? Which European country, which Russian company should accept such a new coin? If Tehran were really serious about using cryptocurrencies, wouldn’t the Iranians immediately resort to Bitcoin? Especially since the First Mover would have enormous advantages in such a scenario. As long as no such plans are known, we will not take the news from Iran too seriously. A “crypto rial” would probably have the same success as the “Petro” from Venezuela. None at all.

The Swedish plans for an E Krona are of course different. They are to be taken quite seriously. Especially since Sweden is a test laboratory for the “cashless society”. But here, too, we are still years away from implementation. And if it comes in the end, it will be a kind of cash substitute on a blockchain basis, not a cryptocurrency with its own monetary policy.(19)

Meanwhile in Europe, central banker Ardo Hansson has attracted attention – as a harsh critic of cryptocurrencies: “I think we will come back in a few years from now and say how could we ever have gotten into this situation where we believed this kind of a fairy-tale story”, Estonia’s central bank chief said in January. Crypto currencies are a “complete nonsense” and will probably disappear, says Hansson.

We need to point out that there are 19 national central bank governors and one ECB president in the euro zone.(20) These 20 people do not always agree and do not automatically speak for the Eurosystem when they express an opinion. It’s also not surprising that a central bank chairman, no matter which country, has nothing good to say about Bitcoin. Let us recall the IMF story we mentioned at the beginning of the report. Bitcoin is not only the enemy of state fiat money, but also hinders the implementation of extreme monetary policy elements. But it is a pity, nevertheless, that an ECB man is so derogatory. For the economists of the ECB were the first of a large central bank to deal with the advantages and disadvantages of Bitcoin in detail as early as 2012. It would be a pity if such a differentiated point of view from a serious source was forgotten, because the bosses prefer to make pithy remarks. That is why we recommend that everyone read the two ECB reports on Bitcoin. These come from a time when the central banks did not yet see the cryptocurrency as a threat, but as an enrichment.(21)(22)

Support is Increasing

Economists and central bank leaders who reject Bitcoin are truly no new phenomenon. What is striking, however, despite the ongoing bear market, is that the number of celebrity names that openly support Bitcoin is growing strongly. There’s Twitter’s CEO Jack Dorsey who said in a podcast,

I believe the internet will have a native currency and I don’t know if it’s bitcoin. I think it will be bitcoin given all the tests it has been through and the principles behind it, how it was created. It was something that was born on the internet, was developed on the internet, was tested on the internet, and it is of the internet.(23)

Dorsey even went so far as to say that in the end the world knew only one currency, and that Bitcoin was that currency. The timeframe he has set for this unique revolution is very ambitious: Ten years, maybe faster. Of course, Dorsey is also behind Square and its Cash App, where Bitcoin can be traded. Like all other proponents (and opponents), he therefore has a certain self interest. Dorsey also recently confirmed that he wants to integrate the Lightning Network into his cash app as soon as possible.(24)

Not only the Twitter founder, but also another social media giant is playing with the idea of integrating cryptocurrencies into his apps. We are actually talking about Mark Zuckerberg. He already said at the beginning of 2018 that he wants to deal more closely with cryptocurrencies. It was a New Year’s resolution back then. What has come of it now? Less than a year later, reports appear that Facebook is developing its own cryptocurrency to enable money transfers via WhatsApp.

This is not about Bitcoin, but about a stablecoin that is supposed to be pegged to the dollar. In any case, Zuckerberg is fully in line with the trend. The competition of Kik and Telegram is also tinkering with its own currency. And in China, WeChat has long since dominated the market for mobile payment.(25)

We also can report remarkable news from Samsung. It has equipped its new top smartphone, the Galaxy S10, with a crypto wallet.(26) This is a big step towards user friendliness for Bitcoin. And the South Koreans are also putting massive pressure on Apple. In any case, it seems appropriate, because in South Korea cryptocurrencies are still extremely popular despite the crypto winter.(27)

Preparations are also underway by the major financial institutions. Vontobel and Swissquote from Switzerland have both just introduced custodianship solutions for banks and asset managers. Bank Vontobel says it is the first in the world to meet all the standards of financial institutions and regulators. The product is called Digital Asset Vault and enables other banks and asset managers to offer their customers the purchase and sale of cryptocurrencies. Vontobel positioned itself early on as a Bitcoin-friendly bank and has been offering a Bitcoin certificate for some time, enabling traditional investors to bet on the Bitcoin price.(28)

In March, Fidelity Investments wants to follow up and enter the market with its own solution for the storage of Bitcoin and other cryptocurrencies. Fidelity’s CEO, Abigail Johnson, is a supporter of Bitcoin and has repeatedly advocated making digital assets available to a wider range of investors. It’s convenient that she’s in the executive chair of a giant in the financial industry. Fidelity is currently testing the technology with a small group of investors and their own employees. They want to start with Bitcoin, then follow up with Ether. Fidelity is one of the largest fund providers in the US with $7 trillion in assets under management, and they already work with 13,000 financial institutions. If this company gives its customers access to Bitcoin once, you can confidently call it a game changer.(29)

Nasdaq boss Adena Friedman also outed herself as a Bitcoin fan in early 2019. “Cryptocurrencies can still become the global currency of the future,” Friedman wrote in a blog post in the run-up to the World Economic Forum in Davos. Cryptocurrencies “deserve the chance to take a sustainable future place in our economy.” Bitcoin’s invention is “great evidence of human resourcefulness and creativity”. The ups and downs of Bitcoin’s price are due to the classic life cycle of a new invention and are no longer worrying, according to the Nasdaq boss. But the well-known technology exchange has a lot of catching up to do.(30)

More than a year after the introduction of Bitcoin futures, Nasdaq still has no such product on offer. We already reported in our last report that Nasdaq wanted to introduce such a system soon. Little has happened since then. It almost seems as if players like Nasdaq and the Bakkt project (of ICE, the operator of the New York Stock Exchange) are taking their time because they don’t want to risk embarrassment of launching a flop in the middle of the crypto winter. Only when prices recover can they be sure to receive full attention for their new products. After all, the Nasdaq boss’s comments show that the path is clear, it’s only a question of timing.

Speaking of Bakkt, on December 31, 2018, the new digital assets platform raised $180 million in investor funds. Among the donors were the Boston Consulting Group and Microsoft’s Venture Capital Arm, M12. A company called Horizons Ventures has also joined. Behind this one is a certain Li Ka-shing. The billionaire is number 23 on the global list of the super-rich. But Ka-shing is no stranger in the Bitcoin scene. He invested in BitPay with Horizon Ventures in 2013 and in Blockstream in 2016.(31)

Most recently, Jeremy Allaire, CEO and co-founder of the crypto company Circle, said in an AMA session on Reddit: “In my view, crypto is a much more significant and disruptive innovation than the web, and its impact on society, politics, economics, governance will be far, far greater for humanity over time.” Circle was making waves last year when the startup bought the established crypto exchange Poloniex. The company is also behind the Stablecoin USDC, which is operated jointly with the Bitcoin giant Coinbase. But what makes Circle special: None other than Goldman Sachs is heavily invested in Circle. Rumor has it that Circle is Goldman’s crypto experiment.(32)

And then shortly before the editorial deadline of this issue, an almost unbelievable message fluttered in: JP Morgan is the first large bank to develop its own cryptocurrency. Even if Jamie Dimon, the boss of JP Morgan, is known as a particularly vocal Bitcoin opponent. Admittedly, JPM Coin is not a competitor to the number one cryptocurrency Bitcoin. Instead, JPM is supposed to be a cheap vehicle for money transfers between banks and companies. Therefore, JPM Coin is more of a competition for Ripple than for Bitcoin.

The JPM coin is a currency tied to the dollar, i.e. it is a stablecoin. The idea seems to be to make it easier, faster and cheaper for large corporate customers to move dollars around the globe. “Pretty much every big corporation is our client, and most of the major banks in the world are, too,” says Umar Farooq, who heads the blockchain projects at JP Morgan. “Even if this was limited to JPM clients at the institutional level, it shouldn’t hold us back.”[33]

Spring setting in?

So, there is also a lot of good news from the sector, despite crypto winter, layoffs, and deaths. We suspect that the recent low of $3,125 is the trough of the last bear market, and that we are actually beginning the next bull market. However, we will only be able to tell in hindsight if this premonition was correct. The well-known Bitcoin bull Mike Novogratz recently said,

“There’s 118 elements on the periodic table, and only one gold […] Bitcoin is going to be digital gold, a place where you have sovereign money, it’s not U.S. money, it’s not Chinese money, it’s sovereign. Sovereignty costs a lot, it should.”(34)

What does that mean for the price? Well, Novogratz, has often been wrong here. But for the sake of completeness: he sees $8,000 dollars as an acceptable value in the medium term, which would make sense if investors price in the 2020 halving. Since bitcoin’s inflation rate will half, a doubling of the value is what is required in order to keep miners online.

What we know: Mark Dow, a trader who opened his Bitcoin shorts at an almost perfect time at the height of the last bubble, closed this short at the end of 2018. As it looks today that was great timing. However, as we have just seen, there are good reasons to stay with Bitcoin. Not only because a number of institutional investors are thinking about entering positions and more and more prominent names are standing behind crypto currencies but because the original fundamentals of Bitcoin have not changed. The original use case for Bitcoin – i.e. its use as an independent, censorship resistant currency – is still intact, and we don’t know how many of the current competitors to Bitcoin really have a future.(35) To see that, we just have to look at Venezuela again. There, Bitcoin transactions have recently reached new all-time highs. People do not trust the already broken Bolivar or the state crypto currency Petro. They want Bitcoin. And they buy Bitcoin.(36)

Bitcoin is needed in a world full of crazy money experiments. We also know that Bitcoin as a currency and digital gold is still at the beginning of its life cycle(37). That technical innovations such as the Lighting Network will be needed to start the next phase. That the next halving, i.e. the halving for block rewards, is due in less than two years. The charts are already circulating on the web today. Bitcoin cycles slow down over time. In other words: The halving alone does not guarantee a new all-time high. But if Bitcoin continues to evolve as before, some calculations suggest that the price will be between $100,000 and $200,000 per Bitcoin by 2023.(38)

Is that a prognosis on our part? Not at all. A buy recommendation? No! But that is the basis for those who are continuing to work on the infrastructure even in a prolonged bear market and for those who plan to buy now – or at least soon, when the bottom is really reached, somewhere between $2,000 and $3,000 dollars. And it is also the reason why we will continue to document the development of this sector until 2020 and beyond.

(1) See “Bargeld soll in den Tresor statt zur EZB”, Handelsblatt, June 8, 2016
(2) See “Immer mehr Schweizer Firmen bunken Bargeldberge”, Die Presse, September 13, 2016

(3) See “Cashing In: How to Make Negative Interest Rates Work”, IMFBlog, February 5, 2019

(5) See “Bitcoin is Now Officially In Its Longest Bear Market Ever”, Coindesk, February 2, 2019

(6) See “QuadrigaCX Shutters, Claiming It Lost Access to Crypto Accounts After CEO’s Mysterious Death”, BREAKERMAG, February 1, 2019

(7) See “Digital exchange loses $137 million as founder takes passwords to the grave”, Arstechnica, February 2, 2019
(8) See “Zwei mysteriöse Todesfälle erschüttern die Bitcoin-Welt”, Die Presse, February 5, 2019

(9) Last Crypto Research Report we had a closer look at different custody solutions.

(10) See “Insiders Say ConsenSys Faces a Hurdle to 2019 Rebound: Joe Lubin’s Grip”, Coindesk, January 9, 2019
(11) See “China’s Bitmain Technologies and Huobi plan lay-offs as cryptocurrency crunch begins to bite”, South China Morning Post, December 26, 2018

(12) See “Schweizer “Crypto Valley”: Bitcoinkrise bringt viele Jobverluste”, Futurezone, February 1, 2019
(13) See “Swiss Crypto Firm Pares Staff”, Finews, February 5, 2019

(14 )See “Smart Contract Auditor Lets Go 80% of Staff in Crypto Winter Cutbacks”, Coindesk, February 1, 2019
(15) See “Crypto Winter Isn’t Fatal For All ‘Picks and Shovels’ Makers”, Bloomberg, January 16, 2019
(16) See “Talks with 8 countries over using cryptocurrency in monetary transactions going on”, TehranTimes, January 28, 2019

(17) See “Iran’s Crypto Experiments Are a Shield Against Trump’s Unilateralism”, BREAKERMAG, February 1, 2019
(18) See “Europa legt sich mit König Dollar an”, Die Presse, February 2, 2019
(19) See “Difference between e-krona and crypto-assets”, Sveriges Riksbank, October 18, 2018
(20) See “Virtual Currencies To Go Down as ‘Load of Nonsense,” Says ECB’s Hansson”, Bloomberg, January 7, 2019
(21) See “Virtual Currency Schemes”, European Central Bank, October, 2012
(22) See “Virtual currency schemes – a further analysis”, European Central Bank, February, 2015

(23) See “Twitter CEO Jack Dorsey Has Made A Bold Prediction About Bitcoin”, Forbes, February 4, 2019
(24) See “Square CEO Jack Dorsey Says Bitcoin’s Lightning Is Coming to Cash App”, Coindesk, February 11, 2019

(25) See “Facebook Is Developing a Cryptocurrency for WhatsApp Transfers, Sources Say”, Bloomberg, December 21, 2018
(26) See “Blockchain Goes Mainstream? Samsung Confirms Digital Wallet Integration for Galaxy”, Cryptovest, April 2019
(27) See “Cryptocurrency Was Their Way Out of South Korea’s Lowest Rungs. They’re Still Trying.”, The New York Times, February 10, 2019
(28) See “Swiss Multi-Billion Dollar Bank Vontobel Launches Regulated Crypto Custody”, Cointelegraph, January 14, 2019
(29) See “Fidelity Is Said to Plan March Launch of Bitcoin Custody Service”, Bloomberg, January 29, 2019
(30) See “„Potenzial zur globalen Währung der Zukunft“ – Nasdaq-Chefin outet sich als Bitcoin-Fan”, Handelsblatt, January 23, 2019

(31) See “World’s 23rd Richest Man Invests in Cryptocurrency Exchange Bakkt’s First Funding Round”, Cryptoslate, January 8, 2019
(32) See “Circle CEO Says Crypto Is a “Much More Significant” Innovation Than the Web”, BREAKERMAG, January 10, 2019

(33) See “JP Morgan is rolling out the first US bank-backed cryptocurrency to transform payments business”, CNBC, February 14, 2019
(34) See “Mike Novogratz: Bitcoin Will Be Digital Gold, “Sovereignty Should Cost A Lot””, February 13, 2019
(35) See “The Trader Who Nailed the Bitcoin Top Just Covered His Short”, Bloomberg, December 18, 2018
(36) See “Bitcoin trading in crisis-stricken Venezuela has just hit an all-time high”, CNBC, February 14, 2019

(37) See “The Original Crypto Bull Thesis, Revisited & Reinvigorated”, Zerohedge, January 2, 2019
(38) See “Bitcoin’s journey to the new peak will be longer this time”, Tradingview

Gold and Bitcoin: A Crypto Strategy, also for Institutional Investors

Gold and Bitcoin A Crypto Strategy also for Institutional Investors

“Digital gold and physical gold make a highly interesting combination as a portfolio. Excess volatility is dampened by gold, while you still can participate in much of Bitcoin’s optionality.”

Mark Valek

Key Takeaways

  • Practical problems and structural hurdles have so far prevented most institutional investors from entering the crypto asset arena. A generally low level of expertise and exorbitant volatilities, among other things, were decisive factors in this wait-and-see attitude.
  • The two assets Gold and Bitcoin have partly similar characteristics but different patterns of price movement. In combination, volatility can be reduced disproportionately due to the diversification effect.

A rebalancing strategy with broad rebalancing bands and an option overlay can further improve the risk-adjusted return significantly and together this combination of assets represents an uncorrelated portfolio building block for a traditional portfolio.

Where are the Institutional Crypto-

The crypto-community has been asking this question for a few years now. Given the last hype of 2016-2017, the interest in the young asset class has naturally increased dramatically even among professional investors. However, not many conventional investment vehicles were available for this class of investors during the boom time. This has changed in the meantime. Certificates, futures and regulated funds are now on the market. With falling prices, however, the appetite for the asset class has somewhat disappeared again. At least for now.

An announcement of the investment manager Morgan Creek Capital recently has attracted some attention (1): its Blockchain Venture Capital Funds is backed by USD 40 million coming from traditional investors. These include two public pension funds, a university endowment fund, a network of hospitals and an insurance company. Nevertheless, investments by traditional institutions still seem to be rare.

In our view, this is due on the one hand to special features of the asset class, which cause practical problems for institutional investors. On the other hand, structural hurdles within the asset management sector are also responsible for the current reluctance of many institutional investors.

Practical Problems for Institutional Investors

The following practical issues can be identified in the context of digital asset classes:

► Legal (un)certainty
► Custody
► Liquidity
► Investable vehicles

These practical problems inherent to the new asset class are not trivial, but in our view, are already largely solved.

Legal certainty regarding crypto-assets is of course crucial for institutional investors. The rise of digital assets meant that a whole range of legal issues had to be identified and regulated. First of all, legislators and regulators – as well as the entire investment industry – had to become familiar with and understand the phenomenon of crypto-assets and where necessary create appropriate legal foundations. For a long time, it was unclear whether cryptocurrencies should be treated as securities, cash or commodities. Meanwhile, many regulators have decided that distinctions must be made. The Swiss authority FINMA, for example, has commented on this topic and has provided an important foundation stone for the classification of crypto assets with the FINMA ICO guidelines. For corporate financing Security Token Offerings (STO) have to be used instead of the Initial Coin Offerings (ICO), which were misused in the early years. In the case of STO the rights of investors are better protected. Apart from these rulings, legislators by now have decided on the tax treatment of cryptocurrencies and have thus solved the central elements of previously prevailing legal uncertainty.

Custody of digital assets is an essential issue. Traditional securities investments have a settled infrastructure that has grown over decades, which has now become a standard procedure for the seamless transfer and safekeeping of assets. The new phenomenon of digital asset management industry is once again facing challenges in terms of safekeeping. In particular, the phenomenon of “cybersecurity” is inherent in this context. In recent years, however, many companies have offered safe and professional solutions for this area. Some of them have already developed so far that they have been approved by the regulators of the European fund industry as safe custody solutions. In our last Crypto Research Report, we dealt with different custody solutions (2).

Cryptocurrency liquidity is also of great importance to institutional investors. They have to make sure that the large volumes they manage can be invested without significant impact on prices (slippage). The measurement of liquidity in this area, however, is problematic. Many large transactions are processed OTC (“over the counter”) and not through an exchange. As a result, existing liquidity is underestimated. However, when looking at exchange-traded liquidity, it is probably too high. The background is that crypto exchanges have an incentive to identify their own market share as high as possible. In any case, apart from the difficulties of accurately measuring liquidity it is remarkable how different the liquidity between the individual cryptocurrencies is. By far the most liquid is Bitcoin. For liquidity reasons Bitcoin is by far the most attractive for an institutional investor, perhaps even the only realistic form of investment within the crypto universe in the current market environment.

Investment products could not be found in the regulated area until a few years ago. Although in principle, a direct investment in cryptocurrencies would also be an option from the prevailing perspective, from the point of view of institutional investors there is much to be said for investing securitized securities in this asset class. Thus, the custody does not have to be dealt with independently. Furthermore, consolidating crypto-assets with the remaining portfolio values becomes a much easier task.

If anything, crypto-investment for institutional investors was originally only possible via moderately regulated offshore hedge fund vehicles, which often do not separate the depositary from the manager. In the meantime, investment in cryptoassets can be done through an increasing number of conventional investment products. For instance, already regulated blockchain and crypto-funds, certificates and ETPs have appeared on the market. Below some examples.

Blockchain & crypto-funds:
► Polychain Capital
► Pantera Bitcoin Fund
► Galaxy Digital Assets

► VONCERT on Bitcoin by Vontobel
► Tracker certificate on Bitcoin by Leonteq
► Bitcoin Tracker One – SEK (COINXBT – ETF type)

► Amun Crypto Basket Index
► Amun Bitcoin ETP
► Amun Ethereum ETP

As we can see, many of the practical issues surrounding legal uncertainty, custody and investment products have already been defused or resolved. As far as liquidity is concerned Bitcoin is currently primarily suitable for institutional investors. Speaking of which, learn some of the easiest ways to buy Bitcoin, and be ready when there is an opportunity available.

Structural Hurdles within the Asset Management Sector

Even more relevant than the initial practical problems today are probably structural hurdles within the asset management industry, which slow down the entry of many players. This includes in particular

► The expertise and the decision-making structures within the asset management
► The extraordinary volatility of most cryptocurrencies
► The principal agent dilemma

Expertise and decision making structures within large organizations such as asset managers are highly relevant when it comes to the question of adding a new asset class into the investment universe. In principle, new asset classes do not often emerge during the career of a portfolio manager. The asset management industry’s last asset-class “revolution” was probably the spread of hedge funds in the late 1990s and early 2000s. At that time, endowment funds at universities in the US were among the first institutional investors regarding hedge funds as an own asset class. Only gradually institutional investors followed and introduced hedge funds or alternative investments asset classes.

Over the next few years, players in the asset management industry will gradually have to come up with answers to how they handle the phenomenon of digital assets. The majority of institutional investors will for the time being ignore or negate it. However, the longer crypto assets are in the market, the more professional investors will make strategic allocations in this area.

One of the reasons for the sluggish entry into established institutions is probably that crypto-affine individuals within the organizations tend to be younger while the decision makers tend to be older. Of course, a young person does not automatically have to be comfortable with the crypto phenomenon, but an affinity may be more likely because younger generations as “digital natives” are more likely to be in touch with the developments in the crypto-world and therefore better able to understand it. Even though there are counterexamples, there is one thing that catches your eye: young crypto-savvy employees repeatedly come up with suggestions and ideas about crypto-assets in the executive team of many traditional institutions, as conveyed at any rate by anecdotal accounts of their experiences.

In addition, as everywhere, even among the asset managers the average level of knowledge is still quite low. It takes time for the executive levels of these organizations to allocate resources to educate their staff or set up their own departments that are committed to cryptocurrency. The number of banks and asset managers that are dealing with the issue on a project-related basis is growing. Some entities have recognized cryptocurrency and blockchain technology as a strategic business and openly admit to it. These include banks such as Bank Frick in Liechtenstein, Falcon Private Bank and SEBA Crypto AG in Switzerland, SolarisBank and Fidor Bank in Germany, but also Fidelity Investments in the US.

One of the largest obstacles for institutional investors is the exorbitantly high volatility of most cryptocurrencies. Fluctuations in prices of up to twenty percent within just a few hours have been recurring in Bitcoin over the past few years, while other cryptocurrencies have shown even more excessive volatility. When US stocks dipped by just five percent in February 2018 Wall Street was already in turmoil. Handling such high price fluctuations is also difficult for institutional investors and poses some problems.

The volatility or risk weighting of a single position in the portfolio context can actually be easily managed by adjusting the portfolio weighting accordingly. A position with high volatility should correspondingly have less weight if one wants to control the influence on the overall portfolio. For risk-return reasons, rightskewed asset classes such as Bitcoin should be particularly attractive as an addition since a large impact can be achieved with a small positioning.

From the point of view of the responsible portfolio manager, however, despite all this there is a weighty reason against even a small position in the crypto sector: the principal-agent dilemma. (4) If well-paid asset managers do not manage their own capital, they have an incentive not to take higher risks on a single position, even if from a capital theory perspective these are endowed with attractive risk-return ratios despite high volatility. The motto is: even with satellite positions one does not want to justify oneself as “agent” with the “principal” for high losses if they become striking.

Gold and Bitcoin – Stronger Together?

Market timing is difficult for any asset class. With such a volatile asset class as cryptocurrencies, one would like a favorable entry and exit time all the more. In practice, however, it can almost be ruled out that investors choose the ideal deadline to make their investments or to realize the gains.

Here we want to introduce our proprietary investment strategy, which defuses the volatility problem or even converts it to the benefit of the investor. In order to achieve this, our strategy draws on an old wisdom in portfolio management: Rebalancing. More on that later.

We already discussed in last year’s sister report, the In Gold we Trust report, that gold and Bitcoin cannot be seen as enemies but rather as complementary friends. (5) At a philosophical level, the investment assets are very similar because:

► Their stock cannot be inflated and devalued by a central bank
► They are nobody else’s obligation (no counterparty risk)
► They are easily transferable
► They represent liquid assets outside the fiat system

In addition, both forms of investment are difficult to confiscate and have a good chance of succeeding in an environment of over indebtedness, impending negative interest rates and financial repression. To a certain degree, this also applies to other “payment tokens” or “store of value tokens”. This strategy can be implemented with gold and an index of store of value tokens instead of gold and bitcoin. This would ensure that potential competitors of Bitcoin are on the radar and in the investment strategy in the future. For the sake of simplicity, we will examine the combination of Bitcoin and gold below.

To a certain extent, this also applies to other “payment tokens” or “store of value tokens”. This strategy can therefore be implemented with gold and bitcoin or gold and an index of store of value tokens. Including other “store of value tokens” would ensure that potential competitors of Bitcoin are on the radar and part of the investment strategy in the future. For the sake of simplicity, we will examine the combination of Bitcoin and gold below.

The Diversification Effect

Despite these similarities, the returns of gold and Bitcoin show low and sometimes negative correlation. This situation is welcome for an investor because the fluctuation of a combined strategy is reduced.

Of course, the volatility and thus the price risk of a crypto strategy will change significantly if gold is added to the investment strategy. Since gold is subject to significantly lower price fluctuations, the overall volatility decreases as the share of gold increases. In addition, the low correlation due to the well-known diversification effect helps to reduce fluctuations disproportionately.

The Rebalancing Bonus

In addition to exploiting the diversification characteristics of gold and Bitcoin, this investment strategy allows unlike any other to benefit from the “rebalancing bonus”.

What exactly is the rebalancing bonus, and what is the best way to receive it? Price fluctuations cause portfolio components to change dynamically over time. Thanks to so-called “rebalancing”, shifts in the portfolio are balanced out by resetting the portfolio to the original, strategic asset allocation.

In order to benefit from the rebalancing bonus, a strategic allocation and a rebalancing method must be defined for both assets. For example, an institutional investor may choose to assign 30% to Bitcoin and 70% to gold as a strategic allocation, as this mix creates an overall risk that is familiar to professional investors. As a rebalancing method, one can either set a fixed time interval or make adjustments only on an ad hoc basis when predefined portfolio shifts are reached (see info box). Our comprehensive quantitative analysis has shown that event-based rebalancing is more useful, especially considering transaction costs. In the strategy presented here, we have provided a wide range of Bitcoin allocations between 15% and 60%. The method therefore calls for the strategic allocation (or the initial allocation) to be restored through corresponding buy and sell transactions as soon as the Bitcoin allocation falls below 15% of the total portfolio or exceeds 60% due to price fluctuations. In case Bitcoin develops better than gold, it has to be sold and replaced by gold and vice versa.

Various studies confirm that the more the asset classes fluctuate in value and the lower their correlation, the stronger the rebalancing bonus.(6) (7) This circumstance must be taken into account against the background of the high price fluctuations in Bitcoin.

In a comprehensive quantitative analysis, we tested this investment strategy in several variants. As the graph below shows, rule-based rebalancing can significantly improve the risk-return ratio. Correspondingly, the Sharpe Ratio could be consistently improved with the help of the rebalancing strategy, irrespective of the Bitcoin allocation. (8)

The fact that the risk-return ratio can be significantly improved with this strategy becomes particularly evident when considering the maximum drawdown as a risk indicator.

A drawdown in financial literature refers to the price loss that lies between a high and a subsequent low in a given period. The maximum drawdown is the total loss that an investor has to accept for a period after investing at the time of peak.

Additional Income through “Covered Call Writing” and “Put Writing”

In addition to the diversification effect and the rebalancing bonus, a third element allows the investor to profit from high volatilities and thereby further improve the strategy. To achieve this, one uses the options market, which already exists for Bitcoin. On exchanges such as Ledger X or deribit one can trade options for over a year. Options can be used as a speculative element, for hedging or generating yield. The decisive factor is whether you write options without holding the underlying (“naked”) or in combination with the underlying.

Covered call writing is a well known strategy that can be used to exchange the upside potential of a position (or part of a position) for a premium. If you have a position in the portfolio that you want to hold or even sell, you can write a call option on it and thus generate the option premium. In the worst case, you no longer benefit from the full upside of the underlying, but at least you still generate the premium.

Conversely, selling puts is a good way to build a position. In this case, a contract obliges you to buy an underlying at a certain point in time at a given price. In this case, you also receive the option premium for it. If you execute, you will receive a net purchase price (taking into account the generated option premium) that is more favorable than the one that you would have been able to obtain by purchasing the underlying in the normal way. If the option is not exercised due to the price movement, then you will collect the entire option premium and the contract expires. The risk of this strategy is that the option will not be exercised and the price later explodes.

The prices of the option premiums are based on the expected fluctuations of the underlying and the volatilities implied in the option prices. As the price of Bitcoin has an exorbitantly high volatility, the option premiums are correspondingly high. According to our calculations, assigning a 10% share of the portfolio to at themoney options would produce an annualized additional return of 10 to 15%.


Bitcoin and gold are similar in certain characteristics and can be an attractive investment strategy as a portfolio. By combining both assets, investors benefit on the one hand from the low correlation of both assets. On the other hand, they can use the volatility of Bitcoin to their advantage through a rule-based rebalancing and thus reap the rebalancing bonus. In addition, option strategies generate an interesting return by collecting option premiums. Overall, this approach allows for a strategy that, in view of its volatility, seems to be better suited for institutional investors than highly volatile pure crypto strategies.

(1) In December, we had the honor of holding an exclusive Advisory Board Meeting with Mark Yusko of Morgan Creek.

(2) See January 2019 Crypto Research Report: Crypto Concepts: Cryptocurrency Custody Solutions

(3) Average daily trading volume in March 2019

(4) See https://en.wikipedia.org/wiki/Principal%E2%80%93agent_problem

(5) See https://ingoldwetrust.report/download/1373/?lang=en, pages 177 following.

(6) See “When Does Portfolio Rebalancing Improve Returns?”, HodlBot, October 26, 2018

(7) See “THE REBALANCING BONUS”, www.efficientfrontier.com

(8) Obviously past performance is no guarantee for future returns.

Cryptocurrency Mining in Theory and Practice

Cryptocurrency Mining in Theory and Practice

“The purpose of mining is not the creation of new bitcoin. That’s the incentive system. Mining is the mechanism by which bitcoin’s security is decentralized.”

Andreas M. Antonopoulos

Key Takeaways

  • Cryptocurrency Mining can be seen as global arbitrage on electricity prices. Mining firms can strike lucrative deals with energy providers in Switzerland, the U.S., and Scandinavia. To stabilize the capacity of networks, some energy providers are actually willing to pay miners to use electricity during off-peak hours of the day.
  • All three of the mining companies interviewed use 100% renewable energy for mining cryptocurrencies. Alpine Tech SA and Blockbase DWC-LLC have minimum investment amounts that are bar most retail investors. Unity Investment AG has a minimum investment of $100.
  • Before investing in a mining company, due diligence includes checking whether the mining pool software is secure with no backdoors and that the pool is actually capable of delivering the reward for allocating your computation resources to their pool. With cloud mining services, due diligence includes verifying that the data center exists, that the computer or computers that you are renting exist, and are solely dedicated to your exclusive use, and that their software is secure with no trap doors.

Introduction to Cryptocurrency Mining

As discussed in the chapter on consensus mechanisms in the June edition of the Crypto Research Report, decentralized networks need a strategy or algorithm for stopping double spends of digital information. Normally, people state that the two main consensus mechanisms employed by cryptocurrencies are proof of work and proof of stake; however, this is wrong.

Recently pointed out to us by Ed Thompson of Web3 in Zug, Proof of Work is not Bitcoin’s consensus mechanism per say. Agreement on the latest state of Bitcoin’s transaction history is based on the longest chain policy. Despite that subtle difference, mining is one of the most important aspects of  Bitcoin as well as many other blockchains, because mining serves the purpose of creating a new block in a blockchain. 

A block is very similar to a page in a financial ledger that documents the order of any debits and credits to its accounts, along with a third entry performed by an auditor, a miner, that commits these debits and credits to each address account. This is known as triple entry accounting, a significant innovation in accounting. Therefore, the entire blockchain (a chain of blocks), is like all the pages of a financial ledger.

In Bitcoin, a new block is created approximately every 10 minutes. This block contains the most recent set of transactions among Bitcoin addresses, that have been verified among the network of computers. The act of mining is performed by computers configured for mining. In Bitcoin, these miners perform a computation that is known as a Proof of Work function. This Proof of Work function is computationally difficult and requires many attempts by the computers in the network to discover the solution. The computers in the network compete to find the solution to this Proof of Work before the others. The computer that finds the solution before the others is rewarded with a reward of coins from the blockchain. This is how new coins are created and enter the ecosystem.

Mining Business Costs and Risks

With that said, there are real world costs associated with running a computer that performs these computations. These costs are in the form of depreciating hardware assets, electric bills, maintenance costs, labor, as well as many other costs. When the price of the cryptocurrency goes up, these costs can be manageable for sophisticated miners. When the price of a cryptocurrency goes down or flatlines, or if a serious mismanagement of expenses has been overlooked, there is risk in spending more in electricity and hardware than the amount you earn from the rewards of mining. Mining is a very risky business unless you have an enormous number of mines and can out compete others because of cost savings stemming from economies of scale. Even then, many miners suggest that buying cryptocurrency is more profitable and less risky than mining for cryptocurrency. The advantage to mining and earning a reward is that you know where the coins came from because they are being issued directly from the Blockchain itself. When you buy the coins, you might not know where the coins have been along their path before they got to you.

Bitcoin Block Reward Emission Schedule

Proof of work uses two main types of financial rewards to incentivize users to maintain the network: rewards and transaction fees. Before confirming a new block of transactions, the miners compute hashes until they find a desirable number that is less than a specific number set by the software protocol called the difficulty target.

In the Bitcoin protocol for example, miners must find the right “nonce”, or arbitrary number, that produces a hash lower than the difficulty target set by the software. This is called a hash-puzzle because the miner must add the nonce to the hash of the previous block in the blockchain. The computational output is a number which basically falls into a target space which is comparatively small in relation to the large output space of the entire hash function.(1) This number becomes that block’s identification number, which is used as an input in the next block’s hash puzzle. The first miner to find a hash that is lower than the given difficulty target will be entitled to “print” new Bitcoins and receive the transaction fees that the senders paid to the network when they broadcasted their payments. The first transaction of every block is a “coin-creation transaction”. The coincreation transaction allows the miner of the block to mint new Bitcoin and to send these new Bitcoin to his or her wallet. In 2016, the value of the block reward was about 25 Bitcoins. However, this rate drops roughly every four years and is currently 12.5 Bitcoins.

There are other variables that must be taken into account to determine the true emission schedule, for example, the number of computers and their total computation capacity. This determines how quickly a block is discovered but that rate is estimated to be every 10 minutes. The network self adjusts the block creation rate every 2016 blocks in order to account for increases or decreases in the amount of computation capacity among the entire network of computers competing to mine the next block.

Updating the Network

In Bitcoin, mining is how all new coins are created. Once the solution to the Proof of Work function is discovered, the computer that found that solution broadcasts their discovery to the network of miners. Once this broadcast is received, the other miners are tasked with crosschecking that solution for verification purposes. Once there has been enough verifications by other miners in the network, a transaction is said to be verified and becomes a permanent record within a block stored in the blockchain.

Security Layers and Known Attack Vectors

Another purpose of a miner is to act as a security layer for the network. There are many known attack vectors for Blockchain and other cryptocurrencies. In Bitcoin’s case, the 51% Attack is where an attacker or group of colluders gain control of 51% or more of the computation power performing the Proof of Work function. With this much computation power, an attacker could potentially begin unraveling the transactions that have been previously verified within a block. However, the attacker must start by attacking or unraveling the most recent block. Once the most recent block has been successfully attacked, each subsequent block which came before, would need to be attacked, and this attack only gets harder and more expensive for the attacker as they attack more and more blocks in the blockchain’s history.

Different Ways to Mine

In the early days of Bitcoin, miners would use regular computers, such as a laptop or desktop, and the calculations would be performed using code processed by the central processing units (CPUs) of that computer. When more sophisticated participants started mining, they saw opportunities to improve on how fast they could perform calculations by looking at solvers other than CPUs. This led miners to perform those same Proof of Work calculations using the graphical processing units (GPUs) of their computers. GPU’s are typically capable of performing this Proof of Work calculation orders of magnitude faster as well as being capable of performing multiple calculations simultaneously far beyond a CPUs capability. This eventually led to even more sophisticated technologists entering the space, and miners began using field programmable gate arrays (FPGAs) which are devices that are even faster than GPU’s. Finally, the market evolved into using application specific integrated circuits (ASICs) which are chips designed for the sole purpose of performing a single calculation, and in Bitcoin’s case, the Bitcoin Proof of Work function.

Mining Pools

The cryptocurrency mining industry started with hobbyists who thought mining Bitcoin was a novelty, as no one really knew what the future would hold for Bitcoin. From there, as the block rewards got harder and harder to earn, and hobbyists had a more difficult time earning a reward, we saw the introduction of a concept known as mining pools. A mining pool is where individual miners could contribute their resources to a pool of miners and if one of the pool members achieves the reward, that reward gets split amongst the members of the mining pool. As the stakes increased, we saw the market evolve yet again, where computer manufacturers, graphics card manufacturers, FPGA manufacturers, and ASIC Manufacturers, entered the space by building specialty products for performing cryptocurrency mining. We even saw cloud mining companies develop. Rather than building or buying your own cryptocurrency mining machine, or joining a cryptocurrency mining pool, one could just rent computing power from a company that purchases and maintains the mining machines on behalf of their customers.

Three Interviewed Mining Companies

To bring the theory of mining into practice, we interviewed three cloud mining companies, Alpine Mining SA, Unity Investment AG, and Blockbase Group DWCLLC. With that said, we rely on the companies and people that we interview to give us the facts from their perspectives. As writers of the Crypto Research Report, we must let our readers know that we began this article naively. We held the erroneous notion that not all mining companies were bad actors, and that every company was doing the best they could. Unfortunately, we uncovered very suspicious and concerning information regarding two out of the three mining companies interviewed. We are still presenting this article to you for your information; however, we want to clearly state that we do not endorse these companies, and we hope that each investor does an extremely thorough investigation if they are considering investing in mining companies.

Investigating cloud mining companies to invest in requires proper due diligence, which involves many factors and is not easy to perform or get right. If you lack the sophistication for performing due diligence, seek out those who are capable as well as trustworthy to perform the due diligence for you. Or choose a company that performs this due diligence in a public fashion using cryptocurrency industry best practices. This might include inspections of computer manufacturers to see their manufacturing processes, inspections of cloud mining facilities, inspections of any software code, database accounting to ensure the number of users matches up with the number of machines available, performing financial audits of the company bank accounts, verifying the reserves of the company’s cryptocurrency holdings, among many other things. Due diligence is not something to be taken lightly when evaluating making an investment. If you are considering an investment, never risk more than what you’re willing to lose. Now let’s move onto the first interview.

Alpine Mining Tech SA

Another company we interviewed was Alpine Mining SA.(2) We spoke with Ludovic Thomas (3), who is CEO and cofounder of Alpine Mining. In the interview, we discussed how Alpine Mining came to be, what services they offer, and how they fit into the cryptocurrency market.

According to Thomas, Alpine Mining is dedicated to their activities and is a team of young, ambitious people, and they strive to have the utmost in ethics and desire to maintain a solid reputation. Thomas and his business partner Christophe Lillo (4), who is CTO and cofounder at Alpine Mining, bootstrapped the company with their own capital and efforts. They started mining cryptocurrency for themselves and have been mining Ethereum since it was $0.30. They started their first cryptocurrency mining data center at a location in Gondo (5), Switzerland. Gondo is a very small municipality on the Swiss Italian border with only 40 residents. For years, the municipality of Gondo, was trying to attract companies to the area by offering extremely low electricity costs but this small municipality was unable to attract people to the area. Thomas mentioned that this municipality offered the lowest electricity prices in all of Switzerland and that’s what made them decide to set up their first data center in Gondo. They were able to power their cryptocurrency mining data center using the hydroelectricity produced from the local river in Gondo.

They soon realized that they would be unable to scale their operation further because the municipality only had one transformer and there was a limited amount of land for them to expand to. According to Thomas, the transformer provided a total of 1.2 megawatts and half of that was being used by the municipality.

When they first started out mining cryptocurrency, they focused their efforts on coins that were mineable with GPU’s. According to Thomas, Lillo used his technical skills to figure out how to optimize the GPU’s to perform above and beyond their default configuration. This is referred to as “overclocking”. They started out mining for themselves, but eventually opened up their mining operation to others, mainly Swiss customers. Because they chose Gondo as the location for their first data center, they received a lot of exposure in the news and ended up going viral within the French part of Switzerland.

What Services Alpine Mining Offers

2018 was a difficult year for many companies in the mining space. Many companies ended up shutting their doors and declaring bankruptcy. Luckily, for Alpine Mining, Thomas says they avoided such a tragic outcome with their business flexibility. In 2018, they transitioned into being a service provider offering to build cryptocurrency mining data centers for other companies. They signed their first contract with a Hong Kong based company called Diginex and were tasked with building out a first data center in Sweden for Diginex.

According to a press release (6) found on the Alpine Mining website dated May 2018 this partnership was projected to cost around $30 million.

Alpine Mining was tasked with sourcing all the hardware, finding the right locations for the data center, to build out the location for the customer, and to manage the location for the customer. In addition, they needed to assemble all the mining systems, set up and configure the data center with the appropriate monetary tools, and software to increase network efficiency. 

This marked the beginning of their cryptocurrency mining data center development as service. According to Thomas, they are also extremely focused on hiring skillful people as they continue to develop their company. Thomas stated that at one point, they were managing 40,000 graphics cards mining various cryptocurrency’s such as Ethereum and Monero.


Alpine Mining is currently going through a transition phase and will most likely be renamed Alpine Tech. Thomas stated that they are still mining cryptocurrencies, but they are now working on creating blockchain solutions for other companies. Thomas mentioned that they will soon be working in collaboration with the university where many of their team members have graduated from. According to Thomas, that project is focused on Blockchain Artificial Intelligence, but the project is currently in stealth mode and Alpine Mining is not publicly announcing details about that project at this time. If you or your company is in the market for building out a cryptocurrency mining data center, you might want to consider reaching out to Alpine Mining to see if they are able to assist you with your needs.

Unity Investment AG

Unity Investment is a Swiss company developing a cryptocurrency mining solution (7). For this interview, we spoke with Richard Kobler (8), Senior Program Manager of Unity. Richard is very knowledgeable about the mining industry. During our interview, Richard walked us through what Unity Investment AG is, opportunities they see in the space and how you can learn more about them.

Beginnings of Unity Investment AG

The founder and CEO of Unity Investment AG is Sean Prescott (9). The Unity Investment office is based in Schindellegi, Switzerland, which is a 40- minute drive to Zürich city. Their mining facility is based in Jona, Switzerland.

When they first got started offering cryptocurrency mining services to their clients, the cryptocurrency markets were experiencing their all-time high prices. In December 2017, Unity Investment was offering their clients the ability to invest in units of mining machines. Richard described a unit to be a bundle of 10 cryptocurrency mining machines. So, when you became a client and you purchased a unit, you would have 10 cryptocurrency mining machines mining for you. In January and February of 2018, the market started to experience a selloff from the all-time highs and Unity Investments quickly realized that the cost of cryptocurrency mining machines started to drop and with that, their own prices had to drop. This put earlier purchasers of the units at a disadvantage to new purchasers of units at a lower price. This is when they began to think of ways to restructure their offering to clients so that it would be fairer to all purchasers, no matter when you decided to get started mining with Unity.

Mining Pool

This is how they came up with the notion of mining participation in a pool with other participants rather than the notion of a unit. For example, if a pool of participants comprised a total of 1 million CHF and each participant purchased 100,000 CHF worth of the pool, then each participant’s share would be 10% of the pool, and therefore, would receive 10% of the eligible mining reward that particular pool of participants earned. 30% of the total mining reward of the pool is allocated by Unity to reinvest into new machines, labor, infrastructure, and other costs, and the remaining 70% of the pool gets distributed to that pools participants as the eligible mining reward.

Being that Unity is based in Switzerland, they have figured out how to keep costs under control, mainly electricity, rent, and labor, and are able to operate as lean as possible. They run on renewable energy: 85% of that being hydroelectricity, 10% wind turbines, and 5% solar electricity. Switzerland is also known for having a stable regulatory environment as well as known for providing a very secure physical location close to the Swiss Alps. They have been able to negotiate fairly good terms with the power company, for example, and if they are able to increase their efficiency, they are able to claw back 30% of the costs of electricity that they use, and with very low taxes on the cost of electricity already, Unity appears to be in a great position to compete in this competitive market. According to Richard, there are also no taxes in Switzerland on mining cryptocurrency.

Unity only invests in ASIC powered cryptocurrency miners. They have a partnership with Bitmain and currently have around 1000 ASIC miners. The mining facility is 3000 M² and the machine inventory includes the Bitmain S9, L3, and A3. They have also placed orders for the S15. Having a range of machines allows them to mine various cryptocurrencies, including Bitcoin, Bitcoin Cash, and Litecoin – basically any cryptocurrency that is mined using the SHA-256 or Scrypt hashing function. In addition, Unity has engaged BDO AG as their auditor so that potential investors have more confidence in their operation. They also encourage all potential investors to come to their offices as well as visit there mining facility to see the operation.

The Unicrypt Platform

Unicrypt (10) is a product developed by Unity Investments that is an online portal that provides access for clients to their account as pool participants. Unicrypt also introduces a proprietary algorithm known as Proactive Mining (11). Proactive mining has been developed by Unity and is unique because every minute, the algorithm scans various blockchain’s and checks the prices of each blockchain that they support for mining, and based on a proprietary risk to reward ratio, the algorithm determines which cryptocurrency to mine at any given point in time. Once the algorithm has determined which cryptocurrency to mine, it sends instructions to each of the machines to mine that cryptocurrency.

Additional Businesses Outside of Mining

The Unicrypt platform has two other cryptocurrencies created by Unity. The first is the Unity Aurix Coin, and the second is the Unity ExaCoin. Aurix is purportedly backed by physical gold and all deposits are verified through auditors and stored securely in vaults; however, the amount of gold actually tokenized in these coins is unknown to us, and Unity Investment has not released any public documents regarding the quantity of physical gold stored in their vaults or the quantity of tokens that are backed the gold. ExaCoin is backed by Fiat, either CHF, USD, GBP, or EUR. These coins are ERC 20 tokens and investors are able to convert their cryptocurrency into either Aurix, ExaCoin, or both.


As with all things crypto, always do your own due diligence before participating in any project. We highly recommend for anyone interested to visit their mining facility, office building, and to meet Mr. Prescott and the rest of the team in order to begin proper due diligence on Unity Investment (12). Visits are by appointment only.

Blockbase Group DWC-LLC

For the final interview, we spoke with Vlado Stanic (13), the Founder and CEO of Blockbase Group DWC-LLC (14), which is headquartered in the United Arab Emirates, with mining facilities based in Sweden.(15) In the interview, we learned how Stanic got his start in cryptocurrency mining, the history that led to the creation of Blockbase Group, and also received insight into how their business operates.

Scrappy Startup to Large Operation

Stanic first learned about Bitcoin in 2013 and was turned on to the technology after reading the Bitcoin whitepaper. He started his first cryptocurrency mining company in 2015 based in Austria, by raising money from friends and family. Soon thereafter he partnered with his now Chief Technology Officer, Alexander Dietrich (16), who also provided startup capital. Together, they setup their first cryptocurrency mining company, named Techdisplay, which was based in Austria. Techdisplay’s first data center was setup near a hydroelectric power plant inside of a shipping container.

They got their start by filling the shipping container with custom built GPU cryptocurrency miners and began mining Ethereum. During this time, they also started onboarding their first cryptocurrency mining clients which allowed them to grow. They helped their customers figure out which GPU’s made the most economical sense and began buying GPU’s in bulk, anywhere from a few hundred, to 1000 to 2000 at a time, from hardware suppliers in both Hong Kong and Europe. They eventually ran into issues with keeping these rigs cool because running GPUs all hours of the day at its highest level of performance creates a tremendous amount of heat. According to Stanic, some of the GPUs caught fire because the heat was so great. 

Techdisplay eventually grew from one shipping container to three shipping containers, and suddenly faced scalability limitations. Three shipping containers full of mining machines was the maximum number of containers the hydroelectric power plant was able to support with its energy production. These limitations were partly due to the winter months when the flow of water slowed due to freezing, causing the production of energy to drop. Stanic described that when the snow is melting there is a large flow of water which produces a lot of energy, and that the opposite occurs when everything is frozen. In order to keep growing they decided to explore their options.

In the quest for finding a more scalable solution, Stanic learned of Sweden, where the energy tax laws were beneficial compared to other parts of the world. Initially, Techdisplay had planned to move their shipping containers to Sweden. Stanic traveled to Sweden in February 2017 to investigate, then in March 2017, they set up Blockbase in Sweden, and by May 2017 they started their new mining operations. They eventually sold the shipping containers based in Austria, and the cryptocurrency mining infrastructure to another Austrian-based cryptocurrency mining company because moving everything to Sweden would have taken a great deal of effort.

Blockbase Mining-As-A-Service

For those who are familiar with KNC Miner, one of the original ASIC Bitcoin manufacturers, they had a mining facility based in Sweden. KNC Miner met the unfortunate fate of going out of business, but this unfortunate outcome became an opportunity for Stanic and Blockbase, as they were able to move into the facility of previously occupied by KNC Miner (17). One of the benefits of the Swedish mining facility of Blockbase, is that it also makes uses of hydroelectricity to power the data centers. According to Stanic, this energy is 100% clean and green energy.

The website describes Blockbase to be mining-as-aservice and lists that they offer three purchase options for potential customers interested in mining: “Order Miners in Bulk”, “Buy Hosted Miners”, and “Send us Your Machines”. For the first two purchase options, they source, setup, and configure all of the desired mining hardware for the client, and all of the equipment is owned by the actual client, not by Blockbase. If a client has their own mining machines, the client could send them to Blockbase for hosting, but the website lists a minimum quantity of 1000 machines.

For those who don’t have their own machines, one of the other packages available seem more appropriate. The website does mention on the pricing page (18) a minimum purchase of 30,000 EUR worth of mining machines and the “Standard” plan is priced monthly, with 58 EUR per  kilowatt per month. If you pay by the half year, there is a 6% discount applied, with a rate of 55 EUR per kilowatt per month. If you pay by the year, there is a 13% discount applied, with a rate of 51 EUR per kilowatt per month.

As for their inventory, Blockbase offers a Canaan AvalonMiner 841 (19), which is an ASIC machine produced by the company Canaan (20), and this is used to mine Bitcoin. The website lists these machines as currently in stock. As for the power consumption of these ASICs, they consume 1290 watts, and produce a hashrate of approximately 13.6 TH/s. The other mining machine options available is a GPU Miner P 102 100 (21), used for mining cryptocurrencies such as Ethereum, Monero, and Zcash. These machines are listed to be on backorder and require a 50% deposit per machine. As for the power consumption of the GPU miners, they consume 1582 watts, and produce a hashrate of approximately 380 MH/s.

99% Uptime

Stanic described how Blockbase is different from other mining services in the space, in that they offer a 99% uptime guarantee. Mining machines do experience failure due to continuous and rigorous operation, and when a failure happens to a client’s machine, that client is exposed to downtime until the machine is fixed. Sometimes this could take weeks for a manufacturer to repair the machine if it is under warranty, and by this time, the client will most likely lose money on their investment because when the network difficulty increases and more mining machines come online competing for the block reward, the window for achieving profitability with a mining machine gets smaller and smaller. To fix this exposure to risk, and to guarantee a 99% uptime, Stanic described, for example, that they could purchase an additional 20% of machines, so that in case a machine goes down, they are able to replace the failed  machines with a new machine quickly, so their clients are back online mining right away and experience very little downtime. Further, Blockbase has implemented an online portal that allows clients to connect their own cryptocurrency addresses for receiving their rewards, and the rewards are paid out daily.


Overall, Stanic seems very knowledgeable about mining cryptocurrency and Blockbase appears to have a great location in Sweden with a long mining history. For the most part, the pricing of the service seems out of reach for the hobby miners and seems more like a service for well-funded companies who are serious about getting into the mining space. Stanic and Blockbase welcomes all their potential clients to visit their facilities in Sweden to check out their operations, and anyone interested in doing so, should reach out to them through their website. Always do your own due diligence71 before making any investment decision.

No Room for Trust in A Trustless World

One of the greatest innovations of Bitcoin is being able to transfer digital money in a peer to peer fashion without having to trust a centralized intermediary. Many refer to Bitcoin as trustless, there is no need to trust person or entity, all that is required is to trust the computer source code, the math, and the cryptography behind the system. Being that the computer code is open source, this allows anyone in the world with a computer and internet access to perform an audit.

The moment a centralized intermediary comes into play in the cryptocurrency ecosystem, trust is required. Purchasing specialty cryptocurrency mining equipment, using a mining pool, or renting computation power from a cloud mining service requires extreme trust. With cryptocurrency mining equipment manufacturers, you must trust that the supply chains for sourcing the materials are in place, that the materials arrive on time and on budget, that the machines actually get assembled and delivered, that the software on those machines is secure with no backdoors, and that those machines actually perform as their supposed to, among many other factors. With a mining pool, you must trust that the mining pool software is secure with no backdoors and that they are actually capable of delivering the reward for allocating your computation resources to their pool. With cloud mining services, you must trust that the data center exists, that the computer or computers that you are renting exist and are solely dedicated to your exclusive use, and that their software is secure with no backdoors.

With that said there have been many companies who have been leading examples by following industry best practices that security conscious consumers would expect. There have also been many poorly managed cryptocurrency mining operations, bad actors, and outright scams. In the early days of Bitcoin, companies began popping up claiming they were going to manufacturer specialty computers or chips for mining Bitcoin or other cryptocurrencies and they would offer “presales” of their equipment on fancy looking websites with incredible statistics. After the “presale”, the company would suddenly disappear, leaving unsuspecting purchasers at a loss of their hard-earned Bitcoin or fiat currency. In addition, there were incidents with mining pools that were compromised, whether from insiders or from external hackers, and the miners who contributed their precious computation resources had to suffer the consequences and loses. There have also been cloud mining operations that claimed to have data centers full of specialty mining computers without actually having the number of computers, or even any at all at their disposal for their customers.

We would like to point out important information to those who are new to the cryptocurrency space. It is unwise to give someone access to your private keys. In the same thought pattern, unless you are in direct possession of or control over the cryptocurrency mining machine, and that machine has open-source software that has been audited or reviewed by the community passing a community credibility check, you are essentially giving someone else access to your private keys. Make sure you trust the service provider who manages your cryptocurrency mining machines for you.

(1) Narayanan, A., Bonneau, J., Felten, E., Miller, A., & Goldfeder, S. (2016). Bitcoin and Cryptocurrency Technologies. New Jersey: Princeton University Press.

(2) See https://alpinemining.ch/en/

(3) See https://ch.linkedin.com/in/thomasludovic1991

(4) See https://ch.linkedin.com/in/thomasludovic1991

(5) See “Cryptocurrency mining to restore Alpine village’s goldrush fever”, swissinfo.ch, January 10, 2018

(6) See https://alpinemining.ch/2018/05/14/communique-de-presse-mai-2018/

(7) See https://unityinvestment.ch/

(8) See https://www.linkedin.com/in/richard-kobler-0310252/

(9) See https://www.linkedin.com/in/seanprescott/

(10) See https://unicrypt.com/

(11) See https://unityinvestment.ch/#proactivemining

(12) See https://unicrypt.com/contact

(13) See https://zw.linkedin.com/in/techdisplay

(14) See https://blockbasegroup.com/

(15) See https://blockbasemining.com/

(16) See https://at.linkedin.com/in/alexander-dietrich-b90681154

(17) See https://blockbasemining.com/mining-farm-sweden/

(18) See https://blockbasemining.com/pricing/

(19) See https://blockbasemining.com/hardware-servers/asic-miners/

(20) See https://canaan.io/

(21) See https://blockbasemining.com/hardware-servers/gpu-miners/

(22) See “The Blockbase Mining Connections”, The Financial Telegram, June 30, 2018

Technical Analysis: Spring Awakening?

Technical Analysis

“Technical analysis is not the holy grail but the best approach to grasp the hyper complex markets at a glance.”

Florian Grummes

Key Takeaways

  • Technically, Bitcoin and thus the entire crypto sector was definitely in a bear market until the end of March 2019. Since the sharp outbreak of over $4,150 and the rise to $5,330, however, the situation is no longer quite so clear.
  • At the moment, the Fear & Greed Index is increasingly providing warning signals and indicates that market participants are too optimistic or greedy. At any rate, the ideal time to buy based on sentiment analysis is now clearly behind us.
  • As long as Bitcoin cannot regain the psychological $6,000 mark, any price recovery remains only a bear market rally below the decisive resistance zone.

Winter has had a firm grip on the crypto sector for over a year. However, we were able to see who was swimming naked when the tide went out. The last two months saw a bottoming out and respectable recovery. The price has already increased $2,200 from the low of $3,125. This is an increase of almost 70%. This recovery may merely be a temporary thaw. However, it could also be the beginning of spring.


Last year, in the March 2018 edition of the Crypto Research Report, we suggested a further correction could occur and warned about a potential crypto winter, when Bitcoin was still trading at over 11,500 US dollars.(1) Since then, prices have ultimately only gone further south despite sharp and profitable counter-movements. With the failure of the round psychological mark of $10,000 at the end of April 2018, a series of even lower highs could no longer be stopped. Nevertheless, Bitcoin prices were able to remain above $6,000 during the summer. It was not until autumn that this extremely important support became fragile.

Technically speaking, Bitcoin has had a descending triangle/ bearish wedge (2) during the first 10.5 months of 2018. After bouncing off the support zone around $6,000 six times and at the same time establishing a series of lower highs, it was just a question of time before the support around $6,000 would break. Breaking such a strong support makes any market crash. A similar formation in the goldmarket occurred in 2013, when gold was priced around $1,520. The same is true in an uptrend as well. The more often a market runs against a resistance zone the less strong the resistance line becomes. This is similar to Bitcoin’s resistance around $1.000-$1.200. It took a few attempts before Bitcoin finally broke through that number to the upside. After that, the massive rally in 2017 really started to gain steam.

Further falling prices were also suggested by us in the October edition of the Crypto Research Report. (3) Consequently, after the $6,000 support was broken, Bitcoin’s price halved again. However, a non-laughable recovery of 70% has been observed since mid-December when Bitcoin hit its low of $3,125. Meanwhile, Bitcoin is  trading around $5,000, and has completed its first bottom formation. However, Bitcoin will experience numerous resistances levels going forward!

Parallel to the bleak price development of Bitcoin, most Altcoins had lost between 80% and 100% of their peaks. Many projects have now been buried. Fraud, mismanagement, and lack of a good business model were widespread. Rightly so, utility coins garnered a shady reputation for the entire blockchain industry.

However, we are still convinced that the public blockchain technology has fundamental value as a non-confiscatable asset for wealth preservations. Highly motivated and specialized tech teams worldwide are still working in the background on the further development of numerous blockchain and crypto projects such as Blockstream’s Liquid, the Lightning Network, and Plasma. Therefore, the epic popping of the 2017 bubble could actually offer an enormous opportunity. Generally, small investors lack knowledge and discipline, and trade and invest very emotionally. They usually don’t have deep pockets and give up at the lows and buy at tops. Smart money, which is not necessarily institutional money, does the opposite: buying when prices are low and nobody is interested, while selling once everybody wants to buy. Strong hands have a plan and are patient. Right now, crypto markets are quiet, and investors can slowly accumulate during this depressed environment. To handle the volatility of the cryptocurrency market, a radically countercyclical approach is needed.

Is Bitcoin Dead?

Of course Bitcoin isn’t dead. Even though the first crypto currency has only existed for a decade, the Bitcoin has been declared dead countless times. During this period, however, the value of a Bitcoin rose from 0.003 US dollars to almost 20,000 US dollars in the meantime. Basically an incredible success story! And even at current exchange rates of around 5,000 US dollars, you still have to pay almost four times as much for a Bitcoin as for an ounce of gold.

The collapse of the crypto sector is weeding out the bad business models. A similar situation occurred after the bursting of the dotcom bubble at the beginning of 2000/2001. More than 75% of the tech companies founded during the Internet boom in the late 1990s went bankrupt. But some of the biggest and most powerful companies of all time emerged from the ashes: Amazon, Google and eBay, for example, not only survived the crash, but are now an integral part of our everyday lives. The share prices of these companies have increased more than a hundredfold in the last 15 years. The same can be expected for the cryptocurrency market over the next ten year.

Of course, the market capitalization of the entire sector, currently around $160 billion, is negligibly low compared to other sectors and is far removed from the almost $850 billion in January 2018. The daily trading volume, at just under $30 to 40 billion, is also 60% below its highs of December 2017. Many small investors either sold their crypto investments at high losses or are blindly holding onto their underwater positions. At any rate, speculative money has left the sector at the moment. This lack of speculative money can also be observed by the decline in blockchain conference participants throughout Switzerland. Conference organizers have to give free tickets away in order to fill the hall.

Market Sentiment in the Short and Medium Terms

The mood in the crypto sector reached an absolute low in mid- December. One tool for determining the exact trend reversal point is the Fear & Greed Index. The index reached a low of 10 in mid-December, which lasted several months. As in all asset classes, returns are based on the individual behavior of countless market participants. The vast majority of buying and selling decisions are made very emotionally. Medium-term turning points often observe extreme fear or blind greed. Mass psychology is an underlying factor drives prices in any market. At market tops like the one in December 2017/January 2018, everybody is bullish and invested. Exactly at this stage you can observe blind greed. At bottoms the contrary is true, everybody is afraid, depressed and has lost his beliefs plus sold his positions in blind panic.

Generally, sentiment analysis makes the following assumptions: extreme fear can be a sign that investors are worried. That could be a buying opportunity. When investors are getting too greedy, that means the market is due for a correction. The Fear & Greed Index consists of five different data sources and is calculated automatically on a daily basis. Values of 0 mean extreme fear, while the maximum value of 100 stands for extreme greed and exuberant optimism. The index is comprised of several variables. Bitcoin volatility makes up 25% of the index. An unusually high volatility is a sign of an anxious market, similar to the stock market. The market momentum or trading volume contributes a further 25% to the index calculation. Market sentiment on social media including keywords on Twitter, are weighted 15% in the calculation. Weekly surveys among crypto investors and the Bitcoin dominance compared to the more speculative Altcoins make up 15% and 10% of the index respectively. The index is rounded off with various Bitcoin search queries (Google Trends data), which provide the last 10% for index calculation. An example of this is the query “Bitcoin price manipulation”, which is clearly a sign of increased fear in the market.

At the moment, the Fear & Greed Index reads high optimism values, which could be a cause for concern. According to market sentiment analysis using the Fear and Greed index, the ideal time to buy based on sentiment analysis is already behind us. It should also be noted that an extreme euphoria can rarely be observed in a bear market. Should it arise, it must be interpreted as a good sell signal. If a market is in a bear market, which we are, then any rally/recovery will create too much optimism, which cannot be fully supported while the overall trend is still down. The most extreme number for this sentiment index was around 75, therefore, 51 is not extreme optimism but rather this is moderately too optimistic.

The Bitcoin Optimism Index (Optix) published by Sentimenttrader currently comes to a similar conclusion. Sentimentrader.com do not share their formulas; however, each measure is ranked against its historical norms to determine whether or not the current level is at an extreme. The Optix can go from 0 (maximum pessimism) to 100 (maximum optimism), though it generally stays above 20 and below 80. As with most contrary indicators, when sentiment gets extremely pessimistic, below 30, we would become alert to a possible reversal to the upside as expectations improve from very low levels. When sentiment is very high, above 70, then we would become concerned about a correction as expectations may have gotten too optimistic.

For bitcoin, the Optimism Index has worked best when using a moving average, such as 10 days. “There is curretly a neutral optimism indicator. The psychological low of the last mass panic was measured on December 14, 2018. The calculation is based on future volatility expectations, the average discount of an unspecified Bitcoin fund against its net asset value and general price behavior. Overall, the sentiment analysis recommends a wait-and-see approach in the short term.

Technical Analysis: Possible Price Targets and
Accumulation Zone

Technically, Bitcoin and thus the entire crypto sector was definitely in a bear market until the end of March 2019. Since the sharp outbreak of over $4,150 and the rise to $5,330, however, the situation is no longer quite so clear. On the one hand, the downward trend line of the last sixteen months was clearly broken and since the low of December, the share price has already risen by over 70%. On the other hand, the price continues to move clearly below the former support zone by $6,000 – 6,200, while the stochastic oscillator on the weekly and daily charts is completely overbought. As long as the Bitcoin cannot regain the psychological level of $6,000, any price recovery remains only a bear market rally below the decisive resistance zone.

At the end of March, the Bitcoin was able to free itself from its threeand- a-half months of soil formation on the daily chart. The rise above 4,150 US dollars resulted in massive short covers, which drove prices up almost vertically. The price target from the ascending triangle was in principle worked off at 5,330 US dollars.

As a further rising triangle is emerging in the very short term, the Bitcoin exchange rates could also rise to 5,700 – 5,800 US dollars in the coming days and weeks. However, the resistance around 6,000 US dollars is extremely strong and should by no means be underestimated.

Of course, the newly established series of higher lows is positive. The strongly overbought Stochastic Oscillator, on the other hand, is negative. In any case, the air is now getting thinner and thinner with every further rise.

The imminent setback should lead at least to the still falling 200-day line (4,575 US dollars). It is also possible that only the rising 50th day line will catch the reset. In any case, the constellation of the two moving averages indicates that there is still some need for consolidation overall.

The large picture therefore still lacks a clear trend reversal. In the months to come, an irritating sideways phase is more likely to be planned. Similar to the closing of the last bear market in late summer 2015, a final slip of less than 3,000 US dollars might even be 1,500 US dollars. Only then would the sector be ready for a new bull market. 2019 should therefore be a year of transition.

However, as soon as the Bitcoin manages a weekly closing price above 6,200 US dollars, all bearish doubts will be dispelled. Then we have to assume that the correction has already reached its final low in December and that the Bitcon is already in a new upward wave. In this case we have to buy every backstop (Buy The Dip).

(1) Technical Analysis: Is a Crypto Winter About to Start? Grummes (2018). Crypto Research Report, pg. 51

(2) See “Descending Triangle”, www.stockcharts.com

(3) The Network Effect As a Valuation Methodology. Hays and Zapke (2018). Crypto Research Report, pg. 42

Equity Tokens

Equity Tokens

“Fractional ownership is not unique to blockchain, in fact, it’s not even unique to this century. Joint ownership dates back to the Roman Republic, or the Dutch East India Company in more modern times. However, some assets classes such as commercial real estate and fine art continue to be characterized by high unit costs.

A typical retail investor cannot harness the resources required to buy a Manhattan high rise. The investor is left with two options: (1) Forego exposure to Manhattan commercial real estate in their investment portfolio, or (2) gain exposure through an intermediary, for example a publicly traded Real Estate Investment Trust (REIT), where it is often bundled with a portfolio of other buildings of varying quality and characteristics. Security tokens offer an efficient path to fractionalize a single high value asset.”

Stephen McKeon,
Professor University of Oregon

Key Takeaways

  • Equity tokens enable companies to raise equity using blockchain technology without locking up investors.
  • Issuers of securities tokens are seeking to access the large pool of institutional money that has not yet penetrated the crypto currency market. Institutional investors expect KYC/AML, data protection and see a hurdle in one of the core elements of the blockchain, namely its immutability.
  • In 2019 there will be a race between stock exchanges, which can offer the first regulated market for securities tokens.

The Austrian Financial Market Authority approved the first financial prospectus for a fully regulated tokenized security in the European Union in late November. The Financial Market Authority in Liechtenstein already approved Liechtenstein’s first security token in August. Mt. Pelerin, Tokenestate, and Securosys are also purportedly offering security tokens in Switzerland. This means that a cryptocurrency can represent legal ownership in a company or can represent other securities, such as certificates and bonds, if they also register as a security. Unfortunately, there are no cryptocurrency exchanges that are licensed to trade security tokens. However, equity tokens are not for the standard cryptocurrency investor. Instead, equity tokens are trying to access the large pool of institutional money that has not entered the cryptocurrency market yet.


Institutional Money-Steering Innovation

The public blockchain technology reduces the cost of raising capital, and this matters for small firms. One of the main benefits of trading digital assets on the public blockchain infrastructure is that anyone can issue a digital asset, and anyone can invest in a digital asset. This saves immense amounts of time and money for issuers who no longer need licenses, underwriters, or lawyers. The large cost of listing a company on a stock exchange erects barriers to entry for small and medium-sized enterprises (SMEs). The blockchain also removes the barriers to entry posed by regulations that limit investment possibilities for retail investors like grandma.

In addition to enabling financial inclusion in the market, the public blockchain technology allows investors to trade “shares” of companies for much lower fees with instant settlement times. This means significant savings for retail investors and smaller profits for stock brokers.

However, some investors, especially institutional investors, want features of the traditional capital market to be incorporated into the token market. Enter “Security Token”. Over the past few months, the term “Security Token Offering” (STO) has been growing in importance compared to initial coin offerings. There are three main problems institutional investors have with the Wild West of blockchain:

  • Not all cryptocurrencies follow the laws such as know-your-customer, anti-money laundering, sanctions, etc.
  • Large investors want privacy. They do not want transparent blockchains that allow outsiders to see their transaction amounts and destinations.
  • Public blockchain cryptocurrencies are impossible to retrieve if a private key is hacked or lost. Large investors will not want their shares of Visa stock being controlled by a private key. Instead, cancel and reissue features will be required before the security token market can gain adoption.

In order to manage these concerns, several companies are working on private blockchains that will allow equity tokens to be stored and traded. The Swiss stock market’s Swiss Digital Exchange (SDX) near Sihlcity is working on a pilot project that wants to tokenize four main groups of assets.

  • First, native tokens for SMEs that only exist on SDX will be issued, stored, and traded.
  • Second, tokenize existing securities on the SIX Swiss Exchange.
  • Third, tokenize non-bankable assets.
  • Fourth, tokenize cryptocurrencies, such as Bitcoin and Ethereum.

In addition to SDX, Daura, a partnership between MME and Swisscom, is also working on a private blockchain. Blockchains specifically designed for trading securities will have KYC/AML integration, privacy, and cancel and reissue features that allow the stock exchange owner or broker to reissue shares to companies that lost their private keys or were hacked. Blockstream’s LIQUID and Polymath are also both examples of blockchains targeting the security market. However, important legal issues, such as whether or not tokenizing a fund violates fund distribution rights, still need to be answered.

Define Token and Security

A token is a digital representation of value on a particular distributed ledger. Tokens can represent voting rights, ownership shares, bonds, and much more. ERC 20 smart contracts on the Ethereum Blockchain and NEP5 smart contracts on the NEO blockchain are currently being used to pay out company dividends and vote on managerial decisions. On the other hand, the definition of a security differs from jurisdiction to jurisdiction. In the US, a financial product is legally classified as a security if the four following criteria are met:

  • Investment of value
  • With an expectation of profit
  • In a common enterprise
  • With the profit to be generated by a third party

As mentioned in the next chapter, these criteria came from the 1946 Supreme Court case between a Florida citrus grower named Howey and the Securities Exchange Commission. In response, US cryptocurrency issuers are applying for Reg D. and Reg S. exemptions from security law. They are also exploring how Airdrops can circumvent security law.

However, Europe does not have any concept of the Howey test. This is because the US has common law where court cases set precedents for future judgements. In contrast, mainland Europe has civil law, which is a principle-based approach to law. According to Article 2 let. b FMIA in Switzerland, a security is defined as, “standardized certificated and uncertificated securities, derivatives and intermediated securities, which are suitable for mass trading.” Subsequently, FINMA has already reported that many cryptocurrencies are securities.[1]

Should I Tokenize or Securitize or Both?

Tokenization of assets existed before cryptocurrencies were created. They are called certificates. However, certificates cost money to set up and maintain. Unlike issuing an ERC token on Ethereum, certificate issuers must have a business structure that can legally issue structured products, and often certificates are limited to qualified investors. According to the Swiss Collective Investment Schemes Act (CISA) of 2006, a qualified investor is one of the following[2]:

  • Supervised financial intermediaries (such as banks, securities dealers and investment fund managers)
  • Supervised insurance companies
  • Public law institutions and pension funds with professional investment operations
  • Business enterprises with professional investment operations
  • Wealthy private persons (German: vermögende Privatpersonen) with CHF 2 million worth of financial assets, and direct real estate investments do not count!
  • Investors who have a written asset management agreement with a supervised bank, securities dealer or investment fund manager

One type of structured product is a certificate. A certificate can be a tracker certificate that tracks the value of an asset, or a certificate can be actively managed. The asset could be an IBM share or a cryptocurrency index, or a physical plane, for example. Bank Vontobel, for example, creates many certificates. A certificate is similar to a bond because it represents a predetermined payoff promise that the issuer gives to the investor. This means that the investors can read in the terms of conditions what they will get from the certificate when the certificate expires. For example, the promise could be that “In two years you get the performance of IBM shares.” However, certificates can be actively managed as well. Actively managed certificates (AMCs) can contain any type of cryptocurrency, including privacy coins, pre-ICO coins, and ICO coins. Investment managers can also employ riskier strategies than UCITS or AIF can such as shorting and taking leverage.

Certificates are like tokens in the sense that they can be used to securitize anything. The only difference is that certificates contain normal investor protections and they can be easily purchased through security brokers. Since they adhere to existing regulations, they have certain costs. Therefore, securitization of an asset using a certificate only begins to make sense for assets worth over ₣ 10,000. Unlike UCITS and AIF regulated cryptocurrency funds, such as Incrementum’s, structured products are exempt from the collective investment scheme regulations.

GenTwo Digital, a joint venture of GenTwo AG and Inacta, is a Swiss consultancy firm based in Zug. GenTwo Digital was founded by Patrick Loepfe, a previous Vontobel Deritrade specialist, and the Vice President of the Board or/and Managing Partner of Forstmann, Philippe A. Naegeli. In an exclusive interview with Patrick Loepfe from GenTwo, we discussed the innerworkings of how securitizing a cryptocurrency works. The company helps financial intermediaries, high net worth individuals, and family offices turn bankable assets, such as actively managed accounts and structured products, and non-bankable assets, such as art and cryptocurrencies, into tradable certificates with Swiss International Securities Identification Number (ISIN) numbers. An ISIN number is code that uniquely identifies a specific securities issue.

 In Switzerland, obtaining an ISIN code for a security requires a prospectus, term sheet, and offering memorandum. In traditional finance, ISINs are used for stocks, bonds, funds, hedge funds, mutual funds, and other securities, whether for a private offering  or going public with an IPO (initial public offering).

What GenTwo does is build a financial company for each investment manager, and then the investment managers can issue multiple certificates within the company. GenTwo’s issuing structure is a unique dedicated issuance vehicle in Guernsey. Once GenTwo sets up the special purpose vehicle company, investment managers can build structured products as they wish. The advantage of setting up a dedicated issuance vehicle is that issuers can have balance sheet control where liabilities are stored off the balance sheet. Normally, issuers risk balance sheet risk from holding assets on the active side and liabilities that can be impacted from operational issues. Instead, an SPV structure leaves only the assets on the active side of the balance sheet and the certificates on the passive side. Since the certificate tracks the value of the assets that are held on the active side, there is almost no risk of a default. For example, Bank Vontobel has an SPV in Dubai from which they issue their certificates. Julias Bär has a SPV in Guernsey, EFG has a SPV in Guernsey.

Certificates are not really competitors for tokens. Tokens can be issued by retail investors and anyone in the world can invest in them. At Incrementum, we suspect that one will not completely replace the other for the time being. Instead, some market participants will choose to invest in the regulated world and other market participants will choose to invest in the unregulated world. Many companies will raise capital in both markets. As Oliver Völkel said during the Crypto Christmas Market Outlook, the main problem with equity tokens is that a licensed exchanged where investors can trade these assets does not exist. 2019 will be a race for the first legal platform that can trade cryptocurrencies that represent securities.

[1] See Wegleitung für Unterstellungsanfragen betreffend Initial Coin Offerings, FINMA, February 16, 2018.

[2] See “Qualified Investors,” Swiss Fund Data AG, 2018.

Disclaimer: GenTwo is an official partner of the Crypto Research Report. None of the information you read in this article should be taken as investment advice, nor do the writers of the Crypto Research Report endorse any project that may be mentioned or linked to in this article. Please do your own due diligence before taking any action related to content within this article.

Legal Challenges for Blockchain-Based Capital Markets

Legal Challenges for Blockchain-Based Capital Markets

“Blockchain technology can achieve what governments wanted to achieve for a long time: a fair, secure and attractive capital market for start-ups, SMEs and investors.”

Christian Meisser, LEXR AG

Key Takeaways

  • Tokenization seems to be interesting for small and medium-sized enterprises, as the cost of raising capital via tokens is sometimes lower than on the traditional capital market.
  • The regulatory classification of whether an issued token represents a security has far-reaching implications and is of the utmost legal relevance. The assessment of whether a token is to be treated like a security under supervisory law is fundamentally different in various jurisdictions.

Capital Flows to the US

Start-ups as well as small and medium-sized enterprises (SMEs) are praised for being a driving force of economic growth. In principle, Europe offers excellent conditions for growth, with a mobile and well-educated talent pool, a huge domestic market, and modern infrastructure. Nevertheless, risk capital for start-ups is scarce and promising start-ups move abroad. According to a press release of the European Commission,[1] in 2016 venture capital providers invested only € 6.5 billion in the entire EU, just about one sixth of the € 39.4 billion invested in the US. According to the same release, only 26 European companies were regarded as “unicorns” at the end of 2017 (unlisted companies with a theoretical market capitalization in excess of $ 1 billion), while 109 such companies existed in the US and 59 in China.

Not only start-up funding but also financial market support for SMEs appears to be lacking. One reason why start-ups are left wanting is widely considered to be the lack of “exit” opportunities in the form of listings: in 2017, the number of European IPOs of SMEs was still down 50 percent from the time prior to the financial crisis.[2]

With public markets for SMEs weak, venture capital firms hesitate to invest in SMEs at all. While the EU tries to improve the situation with subsidies, harmonization of capital markets and mild deregulation, the world of start-up funding is fundamentally changing because of the blockchain technology. The possibility of transferring assets directly between two parties without intermediaries enables an enormous simplification of issuance and trading of capital market instruments. Thus, start-ups raised $ 5.5 billion worldwide in 2017 by issuing tokens in the framework of ICOs – and this year the total amount has already swelled to $ 14.3 billion.[3]

But not only primary markets (i.e., the initial issuance of ICOs) are thriving. Daily trading volume in tokens in secondary markets amounts to several billion USD.[4] Thus, blockchain technology has already furnished impressive proof of its application potential in capital markets. From the perspective of investors, it was evidently worth the risk – according to one study, the average return on investment on ICOs stands at 82 %.[5] However, the legal design of such tokens as this new technology emerges has received little attention so far and investors rarely enjoy enforceable rights. The trend is clearly moving toward issuance of so-called security token offerings: more and more ICO teams want to tie tokens to enforceable rights, which provide token owners with a legal position akin to that of shareholders. Thus, the vision of a capital market in which start-ups and SMEs are able to access needed growth capital without having to move offshore and which offers investors safe and simple access to diversification opportunities is coming within grasping distance.

This article presents legal challenges for effective blockchain-based capital markets in different countries by way of examples and in particular discusses the following subjects:

  • Challenges posed by the classification of tokens in financial market regulations
  • Legal preconditions for the issuance of security tokens
  • Legal framework conditions for trading in security tokens

Classification of Tokens as Securities

Classification of tokens within the existing framework of civil law is already quite difficult and the opinions of legal scholars differ widely: for instance, in Switzerland it is debated whether tokens are digital assets, contractual rights, or a special form of assets in their own right.[1] This represents a difficult task for regulators with respect to a legal assessment in terms of financial legislation. Obligations under financial market regulations with respect to the issuance and trading of tokens directly depend on their legal classification. For example, if tokens are classified as securities[2] under a specific legal order, public offerings of such tokens without an appropriate prospectus may make issuers liable to criminal prosecution. Accordingly, correct classification is quite important, but it is anything but trivial: not unlike a blank sheet of paper, tokens can be configured with any combination of rights and obligations, or in the framework of smart contracts even with complex, automated processes. Various countries are trying to meet this challenge in very different ways:

Classification of tokens within the existing framework of civil law is already quite difficult and the opinions of legal scholars differ widely: for instance, in Switzerland it is debated whether tokens are digital assets, contractual rights, or a special form of assets in their own right.[6] This represents a difficult task for regulators with respect to a legal assessment in terms of financial legislation. Obligations under financial market regulations with respect to the issuance and trading of tokens directly depend on their legal classification. For example, if tokens are classified as securities[7] under a specific legal order, public offerings of such tokens without an appropriate prospectus may make issuers liable to criminal prosecution. Accordingly, correct classification is quite important, but it is anything but trivial: not unlike a blank sheet of paper, tokens can be configured with any combination of rights and obligations, or in the framework of smart contracts even with complex, automated processes. Various countries are trying to meet this challenge in very different ways:

The approach that has been historically established in US case law is based on flexible rather than static principles, which makes it possible to adapt regulations to the countless different possible designs.[8] This is primarily based on the Howey Test and the term security is tied to whether “an investment in a common venture is premised on a reasonable expectation of profits to be derived from the entrepreneurial or managerial efforts of others.” Whether there is indeed “a reasonable expectation of profit” is sometimes questionable, particularly in ICO projects which refrain from according any rights to investors. Supervisory authorities can strengthen legal certainty by regularly publicizing relevant rulings.

The legal situation in the EU is more formal. The EU directive on markets for financial instruments (better known as MiFID, or MiFID II) has largely harmonized financial markets in the single European market; the term “financial instrument” was defined in Annex I, section C. Unfortunately, it remains essentially unclear under what circumstances a security token is actually classified as a financial instrument. The definitions in the directive refer to “old world” terms (i. e. before blockchain technology), which simply cannot accommodate the plethora of possible designs associated with tokens. The Malta Financial Services Authority has at least attempted to provide some clarity in the form of a financial instrument test.[9] Without practical examples, the definitions nevertheless exhibit a degree of abstraction that leaves market participants unsure if tokens are deemed to represent financial instruments in view of the multitude of possible configurations.

The Swiss financial market supervisory authority Finma has decided on a compromise in its ICO guidelines.[10] Similar to the method adopted in the US, a functional approach is used with respect to investment purposes. At the same time, formal criteria are taken into account as well, and essentially every token that represents an asset is considered a security token. Due to these comparatively clear criteria and the possibility of asking Finma to provide regulatory information on specific cases in advance, the legal situation pertaining to various token configurations can be easily assessed in Switzerland.

The tokenization of traditional securities, such as stocks or bonds, is the easiest to assess: The laws were written for these types of securities and issuers are unlikely to face surprises with respect to tax consequences either. In order to prevent the erection of inappropriate barriers to innovation in virtual worlds and the tokenization of real assets, a restrictive application of the various terms designating securities would be welcome. For example, if one were to tokenize tickets to an event, such tokens may already be regarded as securities in several countries: for one thing, a real asset is underlying the token, for another thing one may well purchase event tickets for investment purposes, i. e. in the hope of being able to sell them at a higher price at a later date. At the same time, it seems hardly appropriate to having to issue a prospectus or to trade such tokens on a regulated exchange.

Primary Market: Issuance of Security Tokens

From a technical perspective, the internet makes it easy to market token offerings globally, and cryptocurrencies allow investors to buy tokens globally. Expensive intermediaries such as investment banks are barely needed anymore. The rapid growth of ICOs demonstrates that such a global capital market offers highly attractive funding opportunities for companies. However, upon issuing security tokens one is faced with a patchwork of national regulations. The most important aspect in this context: potential prospectus obligations.

A prospectus is intended to provide investors with the information required to make an investment decision. What information precisely has to be included varies from country to country and ranges from (for the time being) a few pages in Switzerland to almost book-sized tomes in the US. Prospectus requirements in the EU are so demanding that small funding rounds are barely worth the investment of time and money needed to draw up and publish a company’s financial statements. As an illustration of the costs involved: according to the Official Journal of the EU, the cost of drawing up an EU prospectus for offers of securities to the public with a total consideration of less than € 1,000,000 is likely to be disproportionate to the proceeds.[11] And that is just the prospectus for the EU. For every additional country in which tokens are to be offered, one has to verify whether a prospectus needs to be published and/or has to be reviewed by the local authorities.

Prospectus obligations may be limited or waived entirely below a certain threshold and plans by a number of countries to raise such thresholds for prospectus publication obligations have to be welcomed in this context (in the EU to around EUR 8 million or in Switzerland to CHF 2.5 million). Further relief is to be provided by various exemptions, such as thresholds on the number of investors or the focus on professional or accredited investors. While prospectus obligations and restrictions on distribution represent barriers to security token offerings, there already exist numerous projects which are able to implement such offerings successfully and with legal certainty. Along with growing interest, the required know-how will spread in the marketplace and costs will be lowered further, not least through the use of legal-tech software for drawing up documentation in various countries.

Secondary Markets: Trading in Security Tokens

The most impressive efficiency gains are possible in trading. Thanks to smart contracts, so-called decentralized trading platforms can be built, which enable trading between two parties without any intermediaries or counterparty risks. The assets to be traded are safely stored via the smart contract, and once the required conditions are fulfilled, clearing and settlement takes place automatically on the blockchain. Infrastructure costs, such as centralized security depositories, security settlement systems, or banks, and counterparty risks disappear. It is simply not possible in such a system to be affected by a default such as that of Lehman Brothers.

A sensible function that remains in place consists of match-making platforms similar to those operated by stock exchanges or other trading platforms, which are in particular aimed at efficient price formation and the prevention of market abuse. From a regulatory perspective, risks, such as insider trading and market manipulation, remain extant in the blockchain world as well, and modern-day regulations are in essence applicable to trading platforms for security tokens. In the meantime, both established exchanges such Switzerland’s SIX[12] and blockchain enterprises in a number of countries have made public announcements regarding the development of security token trading platforms. As “old-world” regulations remain applicable, a license is necessary, which has so far not been granted in any (developed) country. Moreover, the focus of proposed or already implemented blockchain-related legislation in various countries is on cryptocurrency trading and on utility tokens – which has largely no effect on the regulation of security token trading venues. Nevertheless, advisory practices and press releases by numerous enterprises in the industry give cause for confidence that trading venues for security tokens will be established shortly. After all, for ICO teams the tradability of a token is an important criterion affecting its design.

Final Remarks

The consummate ease with which tokens can be issued, transferred, and equipped with automated payment functions could be the basis for an “internet of finance” – a new generation of financial markets in which even the smallest projects can quickly and safely obtain external funding without intermediaries. Imagine for example a small bakery in a village which can get funding for a new oven from its loyal customers by issuing a tokenized micro-bond with automated interest payment features, or a movie project which automatically pays out a share of its revenue to the community of fans that funded it with every download. The indirect interaction between capital seekers and capital suppliers makes not only large, global funding rounds possible but also promotes stronger relationships between small investors and their local economy.

Moreover, a blockchain-based, decentralized trading system provides greater stability and safety, as the absence of intermediaries removes potential points of failure and middlemen whose incentives are not necessarily aligned with those of investors. In order for this technology to achieve its full potential for creating an attractive capital market for companies and investors, existing regulations have to be applied with sound judgment and a sense of proportion. Luckily the legislative pendulum is currently swinging toward deregulation again, and more and more regulatory exemptions are planned, particularly for start-up companies and small and medium-sized enterprises.[13] However, in order to make it possible for unicorns and already successful companies to obtain adequate funding in their home markets, more than exemptions for small projects will be needed. In a global financial market characterized by mobile talent, courage on the part of regulators to open up and liberalize markets stands to be rewarded.

[1] See “EU: €2.1 billion to boost venture capital investment in Europe’s innovative start-ups” [press release], European Commission, April 10, 2018.

[2] See Building a proportionate regulatory environment to support SME listing [public consultation], European Commission, 2017.

[3] Figures according to Coindesk ICO Tracker, accessed September 19, 2018.

[4] Figures according to CoinMarketCap, accessed September 19, 2018.

[5] See “Digital Tulips? Returns to Investors in Initial Coin Offerings,” Hugo Benedetti and Leonard Kostovetsky, SSRN, May 20, 2018.

[6] See “Verfügungsmacht und Verfügungsrecht an Bitcoins im Konkurs” (“Authority to dispose of and right to dispose of Bitcoins in insolvency proceedings”), Christian Meisser, Luzius Meisser, and Ronald Kogens, Jusletter IT: online, May 24, 2018.

[7] The term security is used as an overarching term herein for all designations of a similar type used in different jurisdictions, such as stocks/bonds or financial instruments.

[8] See Report of Investigation Pursuant to Section 21(a) of the Securities Exchange Act of 1934: The DAO, Securities and Exchange Commission, Release No. 81207, July 25, 2017

[9] See Guidance Note To The Financial Instrument Test, Malta Financial Services Authority, July 24, 2018.  

[10] See Guidelines for enquiries regarding the regulatory framework for initial coin offerings (ICOs), Finma, February 16, 2018.

[11] See “REGULATION (EU) 2017/1129 OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL of 14 June 2017 on the prospectus to be published when securities are offered to the public or admitted to trading on a regulated market (prospectus directive 3),” European Union, Official Journal of the European Union, June 30, 2017.

[12] See “SIX to launch full end-to-end and fully integrated digital asset trading, settlements and custody training” [press release], SIX Group AG, July 6, 2018.

[13] See “Fact Sheet Frequently asked questions: Easier access to financing for smaller businesses through capital markets” [press release], European Commission, May 24, 2018.

Institutional Requirements for an Investible Crypto Index

Institutional Requirements for an Investible Crypto Index

“Creating an index that accurately tracks the market requires consideration of three main factors: reflecting market dynamics, maintaining/governing the respective rules, and preventing manipulation.”

Patrick Valovic

Key Takeaways

  • Indices that act as benchmarks must be investable and replicable.
  • In order for institutional investors to be able to invest, crypto currencies must be able to be held in custody by professional custodians.
  • The LY Incrementum Krypto Index takes into account the requirements of institutional clients with regard to investability and replicability.

Creating a Benchmark for a Premature Market

The complex cryptoasset market environment inspired a joint innovation between LIMEYARD and Decentriq, two Swiss-based companies. They combined their expertise to develop a comprehensive cryptoasset index aimed at capturing the dynamics of the overall cryptographic assets market whilst dealing with unique regulatory and economic challenges embedded in this premature market. For investors, an index must be tradable, meaning that liquidity and rebalancing are feasible. Furthermore, the cryptographic assets market presents specific challenges regarding regulatory requirements, such as the exclusion of investments in privacy coins or coins that are only traded on one exchange.

  • Active asset managers typically use a benchmark to measure the performance of their portfolio in relative terms. They assess market efficiency and price systemic risks using benchmarks. Prior to setting up a fund strategy, asset managers apply various risk models and compare the past performance of the strategy against the underlying benchmark, long-term outperformance being their aspired goal. The benchmark itself is performance-agnostic.
  • Passive asset managers (e. g., ETF providers), on the other hand, invest into a portfolio which tracks an index. Their underlying question is: what new strategy, theme, region, sector, etc. could be a great investment opportunity for investors? The ETF provider simply tracks a factor/risk model-based index, e. g., a low volatility index, a momentum index, a quality index, etc.

For active and passive managers, “tracking the market” has the same meaning; however, for the latter, the index concept reflects an investment strategy. In other words, active managers use the benchmark to track the market as a whole, and is therefore performance-agnostic, as long as the performance is in line with the overall performance of the market. On the other hand, for passive investors the index represents an investment strategy with the clear ambition to achieve long-term positive performance. In both cases, the index is rules-based, meaning it’s not subject to discretionary decisions.

Creating an index that accurately tracks the market requires consideration of three main factors: reflecting market dynamics, maintaining/governing the respective rules, and preventing manipulation.

  • Reflecting market dynamics: This requires compliance with data sufficiency, as data are the main ingredient of every benchmark. Insufficient availability of data bears the risk of not adequately representing a market.
  • Maintaining/government rules: To be fully rules-based and transparent, the methodology of an index has to be applicable under all market circumstances avoiding the necessity for a discretionary interference.
  • Manipulation prevention: Internal operational processes have to be designed to prevent index manipulation (last experienced with the LIBOR scandal in 2011). IOSCO, the international body of the world’s security regulators, defined the IOSCO Principles for Financial Benchmarks, consisting of 19 principles for index providers to adhere to, all of which are implemented in LIMEYARD’s governance structure and audited on an annual basis.

The Creation of the LIMEYARD Cryptoasset Index (LYCAI)

LIMEYARD and Decentriq faced two main challenges when creating a comprehensive cryptographic market index: How to handle (1) a highly dynamic market with numerous, partly unknown factors influencing its overall development and (2) practical requirements of a benchmark that make the index rules-based, transparent, and compliant. The result of this challenging endeavour is the LIMEYARD Crypto Assets index (LYCAI), consisting of the largest 20 cryptoassets that are publicly tradable.

To be part of the LYCAI, an asset has to fulfil several parameters to ensure sufficient robustness, liquidity, and tradability. The index is calculated in real-time 24/7, using trading data from eight different exchanges. The aggregation over several trusted exchanges improves robustness against exchange-level failures and price manipulations, providing an adequate representation of the underlying market. The selected exchanges have, among other things, a comparably high monthly liquidity. LIMEYARD is only considering assets that are traded on at least two trusted exchanges. This ensures that, if one exchange experiences any technical issue, the index can continue to pull price data on the full predefined set of assets. The price data aggregation algorithm factors in both volumes and outliers, reducing undesired spikes in the index level which could happen in a young and fragmented market. Additionally, only the assets that are in the top 60 % in terms of trading volume are eligible for inclusion in the index.

The index considers only those assets whose protocols are not designed to enable anonymity, avoiding the risk of being associated with illegal transactions and maintain a certain degree of transparency for taxation purposes. With this criterion, LIMEYARD and Decentriq anticipated concerns by regulators and aimed to limit the infringement of KYC/AML standards when using the LYCAI as an underlying for financial instruments. To provide diversification and compensate the high skewness of the market through Bitcoin, the index smoothes each constituent’s market capitalisation by an exponential moving average over the month prior to the relevant review date. The weights are then derived from a sigmoid function which penalises high values without imposing a hard cap.

As a result of the weighting methodology, an allocation of large assets is well-balanced compared to other indices. For instance, Bitcoin and Ethereum’s weight as of the end of October 2018 corresponds respectively to 39.30 % and 17.80 % compared to more than 60 % and 13 % for the Crypto Market Index 10 and 30 % (cap) and 23.46 % for the Bloomberg Galaxy Crypto Index.

The LYCAI index is the true benchmark for measuring fund performance by cryptographic asset managers. The index meets all IOSCO requirements and the regulators’ current concerns that they have explicitly stated regarding cryptoassets.

Incrementum Investible Cryptoasset Index

Different clients have different requirements. For this reason, we tailored the LY Incrementum index to Incrementum’s requirements. The LIMEYARD Crypto Asset Index is the basis concept for the LY Incrementum Index, with the following deviations:

  • Coins in the index must be able to be stored in cold storage using hardware in order to be insured by Swiss insurance companies.
  • Coins must have market capitalisation of more than $500 million.
  • The number of assets is fixed at ten in order to reduce rebalancing transaction costs.

This slightly revised index concept proves to be very solid resulting in a one-year return of 16.10 % compared to LYCAI’s 0.58 % one-year return. The one-year annualised volatility is 96.49 % compared to LYCAI’s 97.06 %. The one-year volatility is, of course, mainly driven by Bitcoin, the largest asset in both indices. The lower number of assets in the LY Incrementum Index makes the index more tradable compared to the 20 assets in the LYCAI, which is designed to primarily represent the overall crypto market.

Final Remarks

The Bitcoin market is entering a more mature state. Relevant markets are regulated (e. g., CBOE) with rules designed to prevent potential manipulation. There is a steady growth of Bitcoin futures traded on the CME platform to currently more than $162 million average daily volume (ADV). Various leading investment banks and traditional exchanges run internal projects to further evolve the maturity not only of Bitcoin, but also of other large cap digital assets. Many projects have already been announced, others are expected to be announced very soon. That’s why LIMEYARD continues to invest into strategic partnerships and the development of a broader crypto index family, also covering investment strategies for the passive asset management segment, derived from its leading LIMEYARD Crypto Asset Index methodology.

A Bitcoin Standard? Saifedean Ammous Musing with the Crypto Research Report

A Bitcoin Standard Saifedean Ammous Musing with the Crypto Research Report

“Sound money is money that gains in value slightly over time, meaning that holding onto it is likely to offer an increase in purchasing power”

Saifedean Ammous

Key Takeaways

  • One reason gold has been used as a store of value and medium of account is because of its low annual supply growth. The optimal money would have zero supply growth.
  • In a free market for money, money would appreciate in value every year. Therefore, banks would no longer pay interest on deposits. Instead, depositors would choose between a deposit contract, a mutuum contract, or a private equity investment.
  • A debt-based monetary system must be inflationary because interest payments must be made. As investors gradually purchase cryptocurrencies and pay off debt in the fiat system, the fiat money supply will contract over time.

We want to Thank Saifedean Ammous for having an exclusive conference call with Demelza Hays and Mark Valek from Incrementum. Saifedean Ammous is a Professor of Economics at the American University in Lebanon, and he is the author of the bestseller The Bitcoin Standard.

Bitcoin’s Stock-to-Flow Ratio catching up to Gold’s

A starting point for Saif’s analysis of different monies is the stock-to-flow ratio. Readers of our sister report – the “In Gold we Trust” Report are well aware of this concept, as we have discussed it at length. Most people fail to understand why gold has been used as a store of value for thousands of years. It is true that Gold is scarce. However, it is definitely not the scarcest metal at all. Rather its above-ground quantity has the most constant quantity of any rare commodity available. The quantity of a good can be expressed in the stock-to-flow ratio. A high stock-to-flow ratio means its quantity is not inflated very much. An ideal unit of account for measuring value obviously needs low fluctuation of the ‘yard stick’. The master of the British Mint and inventor of the gold standard, Sir Isaac Newton, said,

“Gentlemen, in applied mathematics, you must describe your unit.”

Even though gold has a very high stock-to-flow ratio, Bitcoin will soon have a higher one. Its capped supply is one reason Saifedean Ammous claims that Bitcoin is even better than gold.

In the figure below, Bitcoin has a stock-to-flow ratio of around 71 currently, but by 2020, because of the halving, the ratio will be going up to 119.

Taming Bitcoin’s Volatility?

In The Journal of Structured Finance, Saif wrote a paper, “Can Bitcoin’s Volatility Be Tamed”, about how the price of gold is affected by the demand from the jewellery market and industry. When people sell gold excessively, the price of gold drops. However, demand from jewelry makers and industrial fabricators absorbs the price drop, which creates a lower bound for the price of gold and has a moderating effect on the volatility of gold’s price.

In Paul Krugman’s article on why he is a crypto skeptic, he explained that Bitcoin is not “tethered” to the real world like gold.[1] Since there is no real-world market that has demand for Bitcoin, the price of Bitcoin has no lower bound, and therefore, Bitcoin can never ascend to the role of money. However, Saif answers Krugman’s critique with a quote from Theory of Money and Credit by Ludwig von Mises,

“The significance of adherence to a metallic-money system lies in the freedom of the value of money from State influence that such a system guarantees. Beyond doubt, considerable disadvantages are involved in the fact that not only fluctuations in the ratio of the supply of money and the demand for it, but also fluctuations in the conditions of production of the metal and variations in the industrial demand for it, exert an influence on the determination of the value of money.”[2]

As Saif explains, fluctuations in the demand from industry cause gold’s value to fluctuate and prevent it from being a purely monetary asset that reflects monetary demand only. He says that gold is not money because of its industrial activity. Industrial activity is secondary in the determination of the value of gold. For Mises, a money that has only a monetary demand will be a superior form of money because the value of money will be based purely on time preference. According to Saif, in a situation where Bitcoin becomes the only money in the world, hypothetically speaking, then the demand for Bitcoin is just the demand for cash balances. In other words, Bitcoin demand is a reflection of time preferences.

Mark Valek, author of The Crypto Research Report and fund manager at Incrementum, compares Saif’s idea with the “reservation demand with gold”. The volatility of gold, due to this reservation demand, will probably always be lower than Bitcoin as long as Bitcoin is only a store of value and only potentially has monetary demand. However, in the future, if hypothetically a majority of people adopt Bitcoin as unit of account, the volatility would be lower than gold because Bitcoin would be the denominator of goods and services. In fact, if one starts using Bitcoin to measure goods and services the volatility would go to zero, like during a gold standard.

Saif explains, “That is the idea of the stock-to-flow because, with gold, and especially silver, yearly mining production does not significantly impact total above ground supply compared to other metals. You want your money to be purely your money.

Mark compares the predetermined stock-to-flow ratio of Bitcoin with other rule-based monetary policies, such as Milton Friedman’s automated k-percent rule[3] and John Taylor’s Taylor Rule, that attempt to stabilize the purchasing power of money over time. On the other hand, these attempts do not achieve long-term sustainability because of political tension explained by Gordon Tullock and the Public Choice literature on economics.

However, Saif does not believe that the k-percent rule and Bitcoin’s algorithm are equivalent. “The key thing for me is that the value of money should be determined by the market for money, which is the supply and demand for cash balances.” The supply and demand for money are what determines the price and the interest rate for money. It is very different from the rule-based monetary policies because they want to calculate the right price, and then they want the market to adjust.

While discussing the topic of Bitcoin with Larry White, he argued that gold has an advantage over Bitcoin because its supply is elastic in the long run. Gold supply increases by 1–2 % every year and inflation compounds. Within a 40 to 50 years, the supply of gold will double. However, Saif couldn’t disagree more. According to him, what makes gold a good money is the fact that it has the least supply growth. Larry White is a supporter of fractional reserve banking on top of a gold system because he holds that a fully backed gold standard would have a shortage of money. Therefore, for Larry White, the reason gold became an international money is because of the small 1–2 % in inflation every year. In contrast, Saif says, “Gold wins out because the demand for money is always a demand for a money that can be inflated the least. The demand for money is always growing and the value of non-inflationary money always grows in the long run. If we follow Larry’s argument, then we have to ask why did silver or copper not become money instead of gold since they have supplies which are more elastic to demand?”

Can a Deflationary Monetary System Work?

Mark Valek gets right to the point and asks, “Does the monetary system need inflation at all?” Some gold proponents would argue that the monetary system needs some monetary inflation to keep up with population growth. Saif claims the following: “From a mathematical point as well as from the perspective of a Bitcoin maximalist, I think the argument against inflation is quite strong as outlined by Philipp Bagus’ book on deflation[4]: the hardest form of money is one with constant money supply and zero elasticity.

Demelza Hays, author of The Crypto Research Report and fund manager at Incrementum, mentioned her 2017 Forbes article based on the work of Professor Dr. Antal Fekete. She posited the question to Saif, “For me, it looks like we want to have a currency with a high stock-to-flow ratio, but if we take to the logical conclusion, why do we need money that has any flow at all?

“We don’t need any flow! But we also don’t know any other economic good that is more reliable at limiting flow other than Bitcoin, which has a small annual inflation rate still. The government will make more fiat money flow, the miners of gold will make more gold flow, the miners of silver will make more silver flow. If you could find a way to make a money that doesn’t have any flow, then go for it! That is what Bitcoin will be doing in about 100 years from now.”

Saifedean Ammous

The Current Monetary System is Debt-Based

Mark Valek holds that central banks follow inflationary monetary policies and governments support inflation when the monetary system is debt-based. “If we have debt as the basis of our money, that requires an ever-increasing money supply. Otherwise, I don’t know where the interest for the debt should come from. Do you agree with that?”

“Yes, I definitely agree on that,” answers Saif. “I go even farther than most Austrian economists. In a free market for banking, depositors would not earn any interest on their deposits because the money would be appreciating in value, which is the real return. Essentially, lending money to the bank enables depositors to save on the cost of securely storage money. The second kind of money would be the direct equity and that is the model of Islamic banking, which is also the model of traditional banking. If you are going in on an investment, I think what it comes down to is what society accepts to be legitimate. If a society accepts that it is ok for the government to impound the property of the borrower if they can’t pay back, then effectively you are monetizing the property of the borrower, which is the collateral. Thus, you are effectively monetizing the collateral. Interest lending carries collateral that can be impounded and repossessed by the bank. Effectively, it makes the certain asset monetized because you have issued a loan backed by that asset which is not money, it is a house or car or a piece of land. That kind of business model is only accepted in places when it is fine for the government to impound that property when the borrower defaults. On the other hand, if the borrower’s collateral cannot be impounded, then lenders often reject these kinds of deals and banks do not engage in them.

In a world where banks can only lend deposits or invest in direct equity and they cannot repossess collateral, then the bank cannot make guarantees obviously, because there is always a risk in business. Since the bank cannot create money from fractional reserves and must first bring in money deposits from clients, they cannot guarantee the solvency of their depositor accounts. So, the depositors are accepting unlimited downside of complete default of the bank, and the bank is asking them to accept limited upside. So, the notion of interest without risk of default is untenable in that kind of world. Nobody would put their money with someone who tells you,

“If we lose, you lose all your money and if we win you only get 3 %. Consequently, everybody would go into equity investments. Either you put money into a bank as a deposit available for maturity in which case you pay the bank a fee for the storage and for making the money available for you. Or if you have money that you are willing to sit on, you invest it as equity in some other business and it is the job of the bank to match maturities between the borrowers and the lenders.”

Saifedean Ammous

Although, Mark Valek does not agree with Saif 100 %, he thinks that in addition to full deposits and equity investments there will also be demand for debt instruments or deposits. “I think also in a zero-inflation monetary system there would definitely be demand for investments not only in equity but also in debt. A differentiated capital structure of a company enables different payout characteristics for investors. Low returns on bonds or also lending accounts at banks, enable the investor to receive predictable cash flows with higher seniority in case of bankruptcy. It’s important to note that these would not be riskless investments.”

However, in this monetary system, investors would not necessarily need to risk their Bitcoin in a security investment, such as stocks or bonds, but they would still experience an appreciation of the currency in form of a real increase in the purchasing power of money. If investors do lend out Bitcoin to a bank or financial intermediary who pools the risk of their borrowers, then the bank should pay a fee to the depositor for accepting counterparty risk.“ So, there may be a case for such a thing as a low-risk interest rate investment but probably the tendency would be much lower to take this kind of risk. This is just a minor disagreement,” Mark adds.

Mark responded to the full reserve argument with the common critique posited by mainstream economists, “Will a deflationary monetary system hamper growth like the Keynesians claim?” Mark holds that a debt-based monetary system needs inflation in order to stimulate research, development, expansion, and intervention. However, under the classical gold standard, capital markets still existed. Even though there was some kind of gold flow or inflation, the productivity was higher than the inflation rate of gold.

“Yes absolutely,” Saif believes. “In order to create interest in a debt-based system, the bank monetizes the collateral, and in order to run fractional reserve banking, it allows a central bank to create money and a fractional reserve system would be unstable without a central bank. The central bank can become more inflationary by manipulating interest rates downwards, which enables the government to borrow and spend more. There are different layers of inflation, and the key is to create parts of the economy that are dependent on this credit money. They end up with all these industries and all these people employed because of that money; they are politically connected, and they need to keep that money going. This is a bug, not a feature, you would want to get rid of that, you would want to make it that there is no money creation going on so that investments have to come from real saving. In this case, you would have an actual functioning capital market. Maturity matched.”

A Free Market for Money

Transitioning to the future outlook for the money market, Demelza asked, “If all the central banks around the world respond to Bitcoin by decreasing the flow of their currencies and making their currencies harder, do you think that Bitcoin and central bank-issued fiat currencies will compete alongside each other like Uber and taxies or Airbnb and hotels? Or do you think one is going to completely substitute the other?”

Saif’s answer: “For the first time, people have an alternative; they can opt out of central banking. This was not possible before Bitcoin, but it is possible now. Bitcoin will limit the ability all these government from inflating. You can imagine Bitcoin developing a so-called monetary Batman that is hanging in the shadows of every central bank and is waiting for that central bank to begin inflating the money supply, and then people in that country would jump into Bitcoin. When they jump to Bitcoin, its value will significantly appreciate.

Saif thinks it is good to think of Bitcoin as a small side bank account that you have for a rainy day. He said, “The important thing is that you may be stuck in a country one day where you got robbed, you don’t have access to your bank account, and you do not have money. If you have Bitcoin, you can get out of trouble by buying an airline ticket with it. I think it is important to understand the value proposition.

Mark echoed Saif. “We are very much on the same page because, even though we are optimistic, I think that from a portfolio point of view investors do not have to allocate a huge amount to have an impact. Investors can allocate a low-digit percentage, even as low as 1 percent of their entire net wealth, and it will have a huge impact if Bitcoin monetizes. Mark explains that Bitcoin is a binary investment. Either Bitcoin becomes some kind of monetary asset and store of value, or Bitcoin will be succeeded by something else and the price will go to zero.

Bitcoin: Two Paths to Monetization

If we muse about the future, how will the transition from being a store of value to a unit of account look for Bitcoin? Mark Valek considers two scenarios:

  • Positive scenario: Bitcoin becomes a reserve asset for central banks. A domino effect could prompt more nations to buy Bitcoin to protect against speculative attacks and to ensure that public debt can be paid off with investments in Bitcoin. The Marshallian Islands already have investment in Bitcoin, and the Central Bank of Barbados wrote a paper on the topic in 2015.
  • Negative scenario. Loss of confidence in the fiat system, and there will be a huge rush into the new safe haven being Bitcoin.

On the other hand, Saif sees a scenario in which Bitcoin ascends into monetary supremacy by each person slowly transitioning to Bitcoin. “Just a monetary upgrade. Install healthy software on a crappy windows PC, and it starts functioning better. The monetary system that we have creates money when debt is created. The flipside of that is that it destroys money when debt is paid off. We have had this sort of system for the past 40 to 50 years, and now we have another alternative, and everybody will jump into this new system (Bitcoin). Eventually, people can use Bitcoin to pay off their fiat debt. If we just keep paying off our debt, an orderly unwinding of the global monetary fiat system will ensue. Basically, everyone pays off all of their debt and the money supply contracts until it drops to zero, and then a new monetary system that is functional takes over the world. It might be slow or quick, but it doesn’t have to be messy and ugly.”

[1] See “Transaction Costs and Tethers: Why I’m a Crypto Skeptic,” Paul Krugman, The New York Times, July 31, 2018.

[2] See “The Theory of Money and Credit”, Ludwig von Mises

[3] See A Monetary History of the United States, 1867–1960.

[4] Bagus, P. (2015). In Defense of Deflation. Springer.

Solutions for Crypto Currencies

Solutions for Crypto Currencies

“The next level for the crypto community is for additional institutions to enter the space. They will only do so if there is a super secure way of storing the assets or the private key.”

Philipp Vonmoos,
CEO of Swiss Crypto Vault AG

Key Takeaways

  • At no point should a crypto custody solution provider have access to a client’s unencrypted private key. The industry standard may very well become Hardware Security Modules (HSMs) for the creation of private keys.
  • Reputation and experience should be considered when evaluating a crypto custody solution for your organization.
  • Consider that outsourcing your private key storage is similar to outsourcing your gold storage. In case of an emergency, will you be able to access your cryptocurrency if someone else is the gatekeeper?

In this article, we explore solutions for institutional cryptocurrency custody. Cryptocurrency custody solutions are needed because improper handling and storage of cryptocurrencies can result in loss or even theft. Self-managed cryptocurrency accounts are not insured against loss or theft, and law enforcement may have difficulty in recovering stolen cryptocurrency such as Bitcoin depending on the different ways thieves attempt to mask their efforts. From a regulatory point of view, professional custody solutions can also be compulsory. As is the case with investment funds. Thus, there is an increased demand for professional solutions.

Not All Institutional Storage Solutions Are Made Equal

Let’s begin with a brief overview of some of the components required to use cryptocurrency. One such component is a cryptographic key pair in the form of a public key and private key. The public key is used to derive a public cryptocurrency address that may be made available to the public. A cryptocurrency address is very similar to an email address, meaning, anyone with knowledge of the address can send information to that address, in the form of a balance of coins or tokens. A cryptocurrency address has a record of its balance and is able to receive and send an amount of cryptocurrency, provided the owner of the cryptocurrency address has access to its associated private key. The private key must always remain private and is much like a password for a particular cryptocurrency address. Only the owner of a cryptocurrency address should have access to the private key. Revealing the private key to an unauthorized party puts a cryptocurrency address at risk for theft of its balance. Further, to spend any balance associated with a particular cryptocurrency address, access to the private key of that address is required to authorize the transaction. One wouldn’t want to give an unauthorized party access to their email password, so in the same respect, one would not want to give an unauthorized party access to their cryptocurrency private key. The cryptocurrency address or the balance associated with a cryptocurrency address is not the asset that needs protection. A user’s private key associated with a cryptocurrency address is the asset that needs protection.

In the last issue of the Crypto Research Report, we explored this topic and titled the entire issue (“Handy Theft Edition”). The private key requires extreme care and consideration with its storage and security and failure to maintain the utmost of care may result in loss or theft of cryptocurrency. Anyone who has been around the cryptocurrency space for some time has probably seen news related to theft of cryptocurrency. Theft of cryptocurrency has been a focus of cyber criminals because once stolen, it is impossible to reverse a transaction. The only way to recover any funds would be to gain access to any private key associated with any cryptocurrency address that has taken custody of the stolen funds. Good luck locating extremely sophisticated cyber criminals in this day and age.

Theft is not limited to criminals hacking into computer systems of an organization. Theft could also originate from within the organization if one or more of the wrong personnel are put in charge of the safekeeping of the private keys associated with any cryptocurrency address holdings. Let’s consider how institutions are organized, for example, a corporation or other similarly organized entity. Being that an institution may be made up of more than one individual, comprising personnel that makes up a board of directors, executive management, and other such employees, how should a company decide who should have the rights to access and secure the private key associated with a cryptocurrency address? Should it be the chairman? The board? An executive, such as the CEO or the CFO? A particular employee such as a software developer? What about a combination of one or more of the preceding options? An organization might ultimately decide that a combination of personnel comprised of a board member, an executive, and a software developer is required to transact with any cryptocurrency holdings. With the complexities associated with storing and securing cryptocurrency, we should be able to see that there is an opportunity for businesses to provide cryptocurrency custody solutions for those lacking the sophistication or resources required for securing private keys for cryptocurrency addresses that are associated with large holdings.

Via our Twitter Channel @cryptomanagers, we invited institutional custody solutions to provide us with some information about their products. The following five companies which offer custodian services of cryptocurrencies reached out to us. In exclusive interviews with the security officers, we gained knowledge of how these different firms attempt to solve the custody problem for investors. Our research results lead us to the conclusion that not all storage solutions are made equal. Many thanks to all contributing companies for their helpful cooperation. The results presented here are based on the information provided by the providers and are not guaranteed.

Crypto Storage AG

The first crypto custody solution that we investigated was Crypto Storage AG.[1] Crypto Storage AG is a subsidiary company of Crypto Finance AG which was founded in 2017 and is based in Zug, Switzerland. Crypto Storage AG offers services for storing blockchain based assets securely through a compelling infrastructure solution. We had the pleasure of speaking with the CEO, Stijn Vander Straeten, and the Technical Sales Engineer and Implementation Project Manager, Maria Sommerhalder. According to the company’s material, they have over 40 internal and 13 external professionals involved with creation and implementation of the solution.

The infrastructure of Crypto Storage AG is made up of a transaction user interface that communicates with a backend server infrastructure that specializes in bookkeeping and relaying of messages between the Hardware Security Modules (HSMs) and the Hardware Approval Terminals (ATs). An HSM is a computer with cryptographic processing capabilities that operates within a tamper-resistant hardware device that is capable of performing encryption and decryption, key generation, and digital signature creation and verification. Some HSM manufacturers allow for customizing the processing capabilities through programmable extensions made possible with software development kits or by special request.

The backend server infrastructure and the HSMs are distributed across Switzerland in a georedundant fashion, and one of the locations used to be a military bunker located in the Swiss Alps. Georedundancy provides strong assurances that if one location goes offline there is another location available as a backup. The ATs are installed at the client’s facility and are linked cryptographically with the backend servers and HSMs through encrypted communication. The company behind the HSMs and the ATs is called Securosys, which is based in Zürich, Switzerland. The company involved with the operational security aspects and backend software development is AdNovum, which is also based in Zürich, Switzerland. These companies assisted in the development and implementation of Crypto Storage AG’s solution.

What is unique about the Crypto Storage AG solution is the combination of HSMs and ATs that are cryptographically paired. This allows for both hot and cold storage capabilities for the client where the private keys are generated on the HSM and never leave the device, thus, being the cold storage aspect. Crypto Storage AG is unable to access the client’s private keys stored on the HSM due to its secure tamper-proof construction. In addition, the cryptographically paired ATs provide hot-wallet-like capabilities where the client may initiate withdrawal transactions out of cold storage while being able to rely on a secure device. Crypto Storage AG refers to this as “deep cold storage allowing for the flexibility and speed of a hot wallet.”

Further, the client is able to design a custom approval framework where the client can mirror their own operational processes for approving crypto transactions. The approval framework allows for the design of rules which are then stored with the private key inside the HSM. For example, an m-of-n approver scheme might be configured for initiating any transaction, where one or more groups of approvers are required. Time delays may also be configured to ensure that any withdrawal transaction follows the appropriate governance procedure suitable for the client. The ATs have the same security standards as the HSMs and the ATs require a personalized smart card and pin code per approver to initiate any withdrawal transaction. This solution is an extremely powerful yet highly secure means of storing and transacting with crypto.

Crypto Storage AG supports 59 out of the top 100 cryptocurrencies by market capitalization and new cryptocurrencies are added regularly. Target clients are banks, asset custodians, family offices, brokers, insurance companies, pension funds, exchanges, and foundations. As for insurance, the technical infrastructure is covered which may include some client assets but not all. How much of one’s assets may be insurable is definitely worth investigating when exploring Crypto Storage AG as a potential custody infrastructure provider.

Overall, Crypto Storage AG has a very compelling solution worth exploring for any institution or private individual that desires extremely secure storage with near immediate withdrawal capabilities and a highly configurable governance process if desired.

Card Wallet

Card Wallet is another company that we reviewed, which is a co-production between Coinfinity and the Austrian State Printing House. Coinfinity is a Bitcoin broker based in Austria that offers services to both businesses and consumers. Coinfinity also offers consumers the ability to purchase Bitcoin at retail outlets throughout Austria at nearly more than 4,000 locations and is also known for installing the first Bitcoin ATM in Austria. In addition to retail locations, Coinfinity also provides services that allow merchants to get paid in Bitcoin. The Austrian State Printing House is known for their services in printing identity documents in a highly secure facility and controlled fashion. Together, their services are used for operating Card Wallet.

Managing Director of Coinfinity, Max Tertinegg explained in an exclusive interview that Card Wallet is a credit-card-sized tamper-proof card that allows customers to store Bitcoin in an offline manner, similar to how one would store Bitcoin using a paper wallet, that is, writing down the private key on a piece of paper. The difference is that Card Wallet is a polycarbonate plastic card and a Bitcoin private key is laser-etched directly onto the card and then covered and sealed with a tamper-proof sticker. The private key is generated with what Card Wallet defines as Secure Entropy Technology (SET).

According to Max, SET leverages three random number generators for generating the entropy for deriving a Bitcoin private key printed on the card. Entropy is a way to generate an unpredictable output of information that is nearly impossible to reproduce. The random number generators are made up of a hardware device provided by the Austrian State Printing House, a software solution provided by the 

Austrian State Printing House, and a human-derived random number generator performed by the personnel of Card Wallet by rolling dice and then documenting the results to produce the random number. When these three generated random numbers are combined, they are used as inputs for generating a Bitcoin private key that is then laser-etched onto a physical card.

The printing of cards is performed in a secure room of the Austrian State Printing House and, according to Max, is protected by approximately seven or eight different physical firewalls, so one could imagine how secure the facility may be. No copy of any private key is stored on any permanent storage means, and, assuming the facility maintains its security guarantees, in theory, the personnel at the facility will never gain access to the private keys.

The card is reasonably priced at €59 and currently supports Bitcoin. In the future, Ether along with other cryptocurrencies will be supported. Card Wallet is very similar to a pre-paid gift card and seems most appropriate for insignificant amounts of cryptocurrency, maybe for gifting a family member or friend. Given the counterfeiting possibility of card storage solutions, the party who receives this as a gift should be told to only purchase new Card Wallets directly from the manufacturer.

For the institutional or wealthy investor looking to securely store hundreds of thousands, or millions, a different custody option may be more appropriate. In view of the possibility of forgery, Card Wallets should only be purchased directly from the manufacturer.

Daenerys & Co.

Daenerys & Co. is another crypto custody solution that comes from the Silver Bullion Group. Silver Bullion Group was founded in 2009 by Gregor Gregersen and is based in Singapore. Silver Bullion Group offers secure storage facilities for precious metals, provides insurance, as well as liquidity services. Since 2009, Silver Bullion Group has done over $400 million in sales. As Silver Bullion Group has done with safeguarding precious metals, Daenerys came from a need to solve custodial and compliance issues as they pertain to digital assets. Gregor Gregersen and Clint Mark Gono are positioning Daenerys to be a leader in the space with a one-of-a-kind business and security protocol called the Gregersen-Gono Physical Crypto Storage (GGPCS) standard.[2] GGPCS is currently being used at Silver Bullion Group’s vaulting company called The Safe House.

The process begins in a secure vault on computers that have no Internet connection. These computers generate a Bitcoin private key within the temporary memory of the computer, then encrypt this private key with a first encryption key, and then encrypt it once again with a second encryption key. 

Each of these encrypted private keys is then laser-etched, in the form of a QR code, onto its own polycarbonate plastic card, a primary card, and a recovery card. Once the encryption process is finished, the private key is then wiped from the computers’ temporary memory and is not stored anywhere in the permanent storage of the device. The cards are then analyzed to ensure the etching process performed as expected and that the QR code is readable. The polycarbonate plastic is a material that is capable of surviving long periods of time, although the material is not fireproof but supposedly readable even if up to 30 % of the card become damaged. This is why it is useful to have a primary card and a recovery card. If the primary card suffers any sort of damage, the recovery card stored at a different physical location could be used to recover any assets associated with that Bitcoin private key. Once the etching process is complete, the card is then placed in a lockbox that resembles a gold bar, and that lockbox is then stored in the facility in a manner similar to how gold bars are secured.

Once the client has access to the deposit address associated with a particular
private key, the client is then able to initiate a deposit to that address. On the other
hand, withdrawals from this address require a multistep process to ensure the
withdrawal request is coming from the actual client initiating such a withdrawal.
Prior to a withdrawal, the client is required to configure Authorization Mandate

These rules might reflect the client’s governance structure within their own organization, where one or more authorized representatives, such as the CEO, the CFO, and/or the compliance officer, are all required to approve such a withdrawal, or possibly two of those three. Daenerys uses a live video conference to authenticate the representative initiating the withdrawal, and any withdrawal may only be made to a preapproved address.

Insuring one’s cryptocurrency assets is probably a great idea when someone else maintains custody. Daenerys also offers an optional insurance policy where an individual card is insurable up to $5 million. The insurance provider has a Standard & Poor’s A+ rating, is based in London, and is something worth looking into.


Another crypto custody solution investigated was Blockvault, which is powered by Goldmoney Inc. We had the pleasure of speaking with Josh Crumb, co-founder and director of Goldmoney, and Will Felsky, director of operations of Blockvault. Goldmoney is a company that provides a way for institutions to invest in precious metals. The company was also founded in 1999 and is a public company listed on the Toronto Stock Exchange (XAUMF). Their current customers rely on Goldmoney to secure $2 billion worth of assets. Goldmoney is also a debt-free company with more than $100 million at its disposal.

Being that Goldmoney is in the precious metal’s storage business, they have access to precious metal storage facilities around the world. Goldmoney saw an opportunity to provide similar custody solutions for institutional clients in the crypto space. They are leveraging their network of vault providers around the world for Blockvault.

Blockvault offers its clients an offline private key storage of crypto. The private keys are created by Blockvault, although the method of private key generation was not disclosed during the interview. Regardless, client’s cryptoassets may be covered under an insurance policy.

The company’s auditor is KPMG, and they are used to confirm and verify that the assets under its management are in fact in its respective vault. KPMG is also the auditor for Goldmoney where they perform IASC audits for gold bar custody confirmation. The Blockvault insurance they are offering is made up of a collection of many of the major insurance companies. Blockvault also mentioned that their vault providers, auditors, and insurance partners are all publicly traded businesses. They are currently working with vault providers in Canada, United States, United Kingdom, Switzerland, Dubai, Singapore, and Hong Kong.

Blockvault described the high-level process of how their offering works. It begins with know-your-customer (KYC) and anti-money-laundering (AML) checks during the client onboarding process. Once through the onboarding process, the client is provided with a trade receipt of a list of addresses that they are able to deposit their crypto funds to. Blockvault’s target clients are regulated or registered financial institutions, banks, broker-dealers, registered funds, cryptocurrency miners, and other similar businesses that can pass bank level KYC/AML tests. The target customer is more than likely the institution looking to safeguard $50 million or more in crypto, although they would be willing to accept clients starting with $1 million. They recommend that each address store approximately $50,000 worth of crypto, so if depositing $1 million of crypto, those assets would be safeguarded across 20 different crypto addresses that have a corresponding key pair. Every deposit is issued a trade receipt, and the governance model for how to deposit and withdraw is customizable by the client, and that is something that is usually agreed-upon through the contractual relationship with Blockvault. As for the maximum amount of cryptocurrency insurable, they prefer to have those conversations directly with the client. Further, withdrawals and trading of cryptocurrency assets are able to be performed within one business day to an address of the clients choosing.

Assets that Blockvault supports safeguarding in their vaults include Bitcoin, Bitcoin Cash, Ether, XRP, Litecoin, as well as all ERC20 tokens. Coming soon, they will be supporting XLM. Blockvault also mentioned the potential for financial institutions to white label the Blockvault service and offer it to their own clients.

Overall Blockvault seems to be in a great position and has a long history and track record of safeguarding precious metals for its clients. Any company looking into their solution should inquire about the private key generation and storage methods employed and should also ask about their insurance policy.

Swiss Crypto Vault AG

Swiss Crypto Vault AG (SCV) is branded as a hyper-secure crypto storage solution for institutional investors and high-net-worth individuals (HNWI) and is a joint venture between Bitcoin Suisse AG and Swiss Gold Safe AG. For this interview, we had the pleasure of speaking with Philipp Vonmoos, CEO of SCV.

If you are from the cryptocurrency space, you may have heard of Bitcoin Suisse, who is known for its cryptocurrency-related financial services and storage solutions for institutional and private clients. Established in 2013, Bitcoin Suisse has helped facilitate and raise nearly ₣1 billion for initial coin offerings (ICOs) or token generation events (TGEs) for some of the most well-known cryptocurrency projects. If you are from the precious metals space, you may have heard of Swiss Gold Safe AG, which is known for its precious metals and valuables storage services. Established in 2006, Swiss Gold Safe has helped secure precious metals and valuables for institutions and HNWI. SCV was formed under the laws of Switzerland in 2017 and is based in Zug. The partnership between the two organizations to form SCV was to combine their knowledge of cryptocurrency handling and physical security and storage.

SCV’s solution provides clients with a deposit address that is associated with a private key that was generated on an HSM so the private key never leaves the device. The client is able to deposit their cryptocurrency assets as needed into the deposit address. The private keys are redundantly distributed, after being encrypted, ensuring that if one facility were to suffer a catastrophic event there is a backup to your private keys. The governance model is highly customizable by the client, allowing for multi-signature transactions and role designations of requester, controller, and approver. 

The requester, using the web portal, is able to initiate withdrawals. One or more controllers are able to cancel a withdrawal request and two or more approvers are able to approve a withdrawal request. An optional time delay may also be defined, and withdrawals are only allowed to be delivered to preapproved addresses. Another configuration the client is able to make is the selection of a handling partner. 

To prevent Swiss Crypto Vault from having complete authority over the withdrawal process in case their personnel or computer systems were to ever become compromised, a handling partner is a company different from Swiss Crypto Vault, that provides the client with the additional benefit that the authorization of 2 separate organizations with different business operations, personnel, and computer infrastructure are required to authorize the client’s withdrawal request. Requiring 2 organizations to authorize a withdrawal request is in addition to the clients own configurable withdrawal approval process. Currently, the only handling partner is Bitcoin Suisse, with the promise that other handling partners will be available for clients to utilize in the future. This architecture is similar to a multi-signature transaction, in that more than one party is required to authorize a withdrawal. In other words, both Swiss Crypto Vault and the chosen handling partner (currently only Bitcoin Suisse) must both agree to authorize a withdrawal request otherwise a withdrawal request will be denied. This is a worthwhile safety feature which reduces the odds of both organizations being compromised when a client makes a withdrawal request.

PriceWaterhouseCoopers reviewed the storage solution, oversaw the private key generation, and will also compare the amount of stored crypto assets to the balances registered on the associated blockchain. Zuhlke Engineering reviewed the private key generation code. They don’t yet offer insurance, but this is something that they said they are looking into. As for their clients, they are currently serving those from Europe, USA, Asia, and the Middle East. As for the typical client deposit amount, SCV makes sense for those starting around ₣500,000, up to triple digit millions. A SCV client does not require any physical hardware installed on their end, although they may co-sign a transaction with the private key of their own Trezor or Ledger hardware wallet under their control. They may also leverage multi-factor authentication for accessing the web portal. Many types of cryptocurrencies are supported as of today, such as Bitcoin, Bitcoin Cash, Bitcoin Gold, Ether, Litecoin, and all ERC20 and ERC223 tokens. Others will be added on an ongoing basis.

Swiss Crypto Vault appears to be a highly redundant, highly secure, well thought-out implementation and process that is also easy to use and configure by the client. SCV is backed by a track record of experience and expertise in both cryptocurrency and precious metals. The solution is suitable for both institutions and HNWIs, and definitely a crypto custody solution worth investigating.

HSMs Matter and Outlook

In this article, we covered a few options for crypto custody solutions. Two solutions ensure that a private key never leaves an HSM, two others generate the private key in temporary storage where it remains for a brief moment. 

The final solution desired to maintain confidentiality and secrecy of their private key generation process.

For those where the private key is not generated on a HSM, an insurance policy could make up for any potential vulnerabilities assuming the policy covers theft and is bullet-proof. As for technological innovation, speed, ease of use, customization of governance, physical security, and digital security, the most well-rounded solutions appear to be Swiss Crypto Vault AG and Crypto Storage AG. Of those two, Swiss Crypto Vault AG has the longest track record and most experience. Crypto Storage AG appears to be the most innovative solution. If your organization requires insured options, Daenerys & Co. and Blockvault may be right for your organization. Both are capable and in positions for the physical storage of large sums of cryptocurrency. These evaluations are not meant to be recommendations of one company over the other, as they each have their own use case. We should stress the importance of doing your own due diligence when investigating the solution that is right for your organization.

If you have any questions or comments, are looking for a solution for your organization, or if you have your own solution that you are interested in sharing, please head over to this website for participating in a brief survey and be entered for a chance to win a Ledger Nano S sent directly from the manufacturer. Joseph can also be reached at joseph (at) cryptocustodysolutions.io.

[1] See “Storage,” Crypto Finance, 2018.

[2] See “Crypto Currency Physical Storage,” Gregor Gregersen and Clint Mark Gono, Little Bit, September 21, 2018.

Disclaimer: Coinfinity and Silver Bullion are associated with In Gold We Trust and the Crypto Research Report. None of the information you read in this article should be taken as investment advice, nor do the writers of the Crypto Research Report endorse any project that may be mentioned or linked to in this article. Please do your own due diligence before taking any action related to content within this article.

Quarterly Review Q4 2018: Crypto Winter Edition

Crypto Winter Edition

“The idea of having an alternative to traditional fiat money is attractive, especially today, when major currencies’ savings value is in jeopardy and the trust they require to work is declining. Central banks are no longer focused on their duty to protect money’s value and have instead bowed to the pressure spendthrift governments have put on them to finance oversized public debts.”

Princess Gisela von und zu Liechtenstein

Key Takeaways

  • Gross profit margins on mining Bitcoin and Ethereum have fallen to 30% and 15% respectively. Never the less Bitcoin will not enter a “death spiral” as some critics have proposed. Enough miners are incentivized to stay in the market as the difficulty falls.
  • The rumor that Goldman Sachs’ crypto trading desk was cancelled is “fake news.” Not only is Goldman launching a trading desk, they are also working on a digital asset custody solution.
  • Due to the recent high volatility in the crypto markets demand for stable coins has increased. Various interesting projects are being worked on right now.

Crypto-winter is in full swing. In the background, the major players are working on the infrastructure while the authorities are clearing up the debris of the ICO hype.

About ten years after the publication of the famous white paper by Satoshi Nakamoto, almost everything has been said about Bitcoin’s anniversary. Therefore, our greetings do not go to the mysterious inventor or inventors of the cryptocurrency, but to Alicia Florrick. The likeable (and fictional) lawyer from the CBS hit series “The Good Wife” had already dealt with a Bitcoin case in 2012. It was probably the very first Bitcoin reference in a mainstream television show. The scriptwriters deserve praise. Not only because they made Bitcoin an issue when the cryptocurrency was worth just three dollars apiece. But also, because they could explain this new innovation within a few minutes. The viewers were not only entertained, but also well informed when Alicia’s teenage children taught her about Bitcoin step by step. Something that others have often failed to replicate when it comes to Bitcoin.

When the Simpsons mentioned Bitcoin a year later, it was – of course – in the way of a joke (S25E07). The protagonist in this case was Krusty the Clown. Lisa Simpson asked Krusty if he was broke, and he answered: “Yeah, all it takes is some bad luck at the ponies, worse luck in the bitcoin market, and heavy investment in a high-end bookmark company.” This rather depressive perspective fits in well with Bitcoin’s past anniversary year.

As far as prices were concerned, 2018 was virtually the opposite of 2017. After the euphoria came disillusionment. After the boom came the bust. $20,000 was followed by $10,000. Then the $6,000 mark was held for a long time. Until the end of November. Then it went rapidly down – triggered by a dispute in the Bitcoin Cash Community. Bitcoin slipped into the $3,000 area. The media published obituaries. Like so many times before. Explanations of what Bitcoin actually is are no longer necessary. Bitcoin has actually arrived in the mainstream. It was a long way. The colleagues from “Breaker Magazine” have compiled a whole list of Bitcoin references in pop culture from the past ten years. They ask, “What does Bitcoin in the mainstream actually mean?” Is it about the price? Is it about using the cryptocurrency in the coffee house? Or is it about fame? We also ask ourselves these questions.[1]

The Crash and the Consequences

Since Bitcoin was first mentioned in “The Good Wife”, the price has risen by more than 10,000 percent. The first ten years of the cryptocurrency are actually an incredible success story.

But all this does not seem to interest anyone after the depressing year 2018. Bitcoin had to celebrate his birthday with a tear in his eye. Recently, there has even been debate about a death spiral. Some argue that miners will simply stop their activities if the price falls below the cost of production.

“Once Bitcoin’s price falls below its cost of mining, the incentive to mine will deteriorate, thrusting bitcoin into a death spiral. That is, without the mining activities supporting the ledger that maintains the records of who owns what — bitcoin is, after all, a set of encrypted numbers that cannot establish the ownership of anything — bitcoin will become worthless.”[2]

Atulya Sarin

This view of things is not new. The same debate has been going on since 2011. Today, the industry is much bigger, but the answer to the scaremongering remains the same. As then, the prophets of Bitcoin’s death overlook the nuances in the game theory behind the cryptocurrency. Satoshi Nakamoto prepared the network very well for a rapid drop in prices. After 2016 blocks, the difficulty is adjusted. If the price drops and the number of miners shrinks, the software is designed to make mining easier for the remaining miners. The argument of the death spiral is based on the assumption that the price could fall so quickly that the system does not adjust difficulty in time – and the miners give up. But there are solutions for this problem. Andreas Antonopoulos explains:

“If the miners wait until the difficulty retargets and the difficulty becomes less, then each miner who waits makes more profit because in the new scheme they have a greater percentage of the mining power than they did before.”[3]

In addition, one must consider: Mining costs are not the same everywhere, each miner has his or her own calculations. Some might even be able to temporarily mine at a loss. And if all else fails, there is still the option of a hard fork, which would allow the immediate adjustment of the difficulty. That would be the last resort.[4]

Of course, this does not mean that all miners did survive the fall in prices unscathed. The situation is quite dramatic. Bitcoin miners are used to huge gross profit margins of up to 50 percent. Since the fall in prices, the situation has become tougher, as BitMEX has calculated. Currently, profit margins are only 30 percent for Bitcoin and 15 percent for Ethereum. There are also a number of mining companies that have misjudged the situation and already went bankrupt. The cleansing of the market during the price decline does not only apply to crypto projects, but also to the mining sector.[5] The CIO of BlockTower Capital, Ari Paul, explained on Episode 95 of Laura Shin’s Unchained podcast that mining as an industry is not profitable because miners compete with each other in a zero-sum game.[6]

And when it comes to Bitcoin as a currency, things look even grimmer. Around Bitcoin’s 10th birthday in October, plenty of experts lampooned Bitcoin’s irrelevance as a means of payment.

“In 2018, cryptocurrencies in general have sharply limited relevance, if any, to the way that money is moved around the world. Bitcoin is an undoubtedly valuable commodity and is by far the highest-profile and most important of the cryptocurrencies, but it is not actually a currency in any real sense. It is used for some payments, mostly peer-to-peer, between parties for whom the anonymity of Bitcoin is important, or between the remaining true believers in the global potential of the system.”[7]

Samuel Murrant, GlobalData’s payment analyst

But that’s a very one-dimensional view of Bitcoin – and Murrant knows it too. He follows up: “Bitcoin is far more like gold than it is like money – it is a store of value, considered precious due to its rarity, and traded among investors to profit from changes in its perceived value over time.”

Bitcoin has therefore created its own asset class: crypto. The fact that a bubble burst at the beginning of the year cannot be denied. Air is still escaping. In our very first report in December 2017, we warned of the ICO boom and its consequences. In the March issue of this year we wrote an article entitled “Is there a crypto winter threatening us?” Currently, the northern hemisphere is not only in a meteorological winter, but globally we are seeing the second deepest crypto-winter after the bear market of 2014 and 2015. This adjustment may have run its course, although that’s too early to call. .

From an economic point of view, this is positive: after a bubble, only a crash can lay the foundation for new, sustainable growth. Unfortunately, however, crypto, which Morgan Stanley now also sees as an “institutional asset class”, is so young that we have little experience of how long such an adjustment could take.[8] We can only wait and see how the big players position themselves for the next phase. And, as we have been documenting regularly for more than a year, there is a hell of a lot going on.

The second sector, where Bitcoin and blockchain have undoubtedly innovated, is payment traffic and the area of currencies in general. Not necessarily because Bitcoin has asserted itself as a means of payment. We know that didn’t happen. The real breakthrough is mainstream acceptance of digital currencies per se and “private” digital currencies in general. So much is happening here that even the central banks can no longer just idly watch. In a digital world, cryptocurrencies, and privately issued stablecoins in particular, offer an alternative to the Euro, Dollar or Pound.

Bitcoin has also significantly influenced a third sector: cybercrime. Unfortunately, Bitcoin’s second appearance on “The Good Wife” in 2013 was already about a ransomware extortion. The good news: Supervisory authorities are cracking down on fraud in crypto. From our point of view, this is very positive for the sector. 2018 may have been depressing in terms of prices, but this leads to an automatic market cleansing, and it gives the cops time to hunt scammers. The SEC even punished celebrities for advertising scamcoins for the first time. More about that later.

Asset Class and Adoption

As Michael Novogratz, one of the best-known crypto investors, puts it: “One thing you learn in this process is that everything takes a little longer than you hoped it would.” We won’t see the $10,000 mark again this year, the Bitcoin bull recently said. His company, Galaxy Digital Holdings, has already posted more than $150 million in losses this year. But Novogratz, one of Wall Street’s best-known Bitcoin supporters, won’t give up.[9] On the contrary: Novogratz, himself a former Goldman Sachs partner, recently invested in BitGo Holdings – together with the investment bank. Goldman and Galaxy Digital Ventures hope that the start-up will provide a solution to the still unsolved problem of custodianship of cryptoassets. US regulators require money managers to store assets in so-called “qualified custodians”. The traditional players in this sector have so far stayed away from the crypto market for fear of hackers and the legal uncertainty that still prevails.[10]

” If you were investing in any other asset class, you’re probably not worried about the asset just disappearing – but this one, people still have that fear,” said Mike Belshe, BitGo’s co-founder and CEO in an interview with Bloomberg. His company has now collected around $70 million through fundraising. The Palo Alto-based company was founded in 2013 and offers digital wallets that require multiple signatures for transactions. Offline safes for Bitcoin and other currencies are also available. The company currently manages 75 different cryptoassets and a total volume of around $2 billion dollars. But the entry of Novogratz and Goldman could take BitGo to a whole new level.

Goldman is certainly one of the most courageous banks on Wall Street when it comes to Bitcoin. “We believe that a custody offering is a logical precursor to digital asset market making,” said Goldman spokesman Michael DuVally. Reports that Goldman has cancelled its plans for its own crypto trading desk in view of the price drop have led the bank to deny this as “fake news”. Allegedly Goldman is also working on their own solution for Bitcoin custodianship. One thing is certain: as long as these questions have not been clarified, the crypto market will remain closed both to the “normal” retail investor and to almost all institutional investors. In this issue we dedicate an entire chapter to safe custody solutions that already exist or are going live soon.

Another important player who wants to compete against Goldman in this area is Fidelity Investments. The company, which manages $7.2 trillion in customer funds in its traditional business, established its own crypto subsidiary in October. Under the name Fidelity Digital Asset Services, customers will be able to trade Bitcoin on various stock exchanges at the best prices. Cold storage, i.e. safe storage without an internet connection, could be part of the package right from the start.[11]

“If you look at the existing market infrastructure, it’s heavily skewed toward the needs of retail investors and early adopters of the space. The time is quite good for this announcement. We’ve seen a real acceleration of demand over the last couple months.”

Tom Jessop of Fidelity

Fidelity has been experimenting with Bitcoin since 2014, and they have even mined hundreds of Bitcoins. In the Fidelity canteen you can now pay with Bitcoin. “The question is, how do we stay ahead of the competition? How do we innovate and bring new products onto the platform,” asks Jessop.

It is by no means the case that all institutional investors are merely sitting on the sidelines and waiting. In fact, institutional investors may have replaced high net worth individuals as the largest buyers of cryptocurrencies. These trades usually take place directly between investors and large miners or people with large Bitcoin fortunes. According to current estimates, this over-the-counter (OTC) market sees a daily volume of $250 million to $30 billion dollars.[12] For comparison: According to “coinmarketcap.com”, cryptoassets worth around $15 billion are traded daily on the exchanges. Some of the stock exchanges listed there are however not considered to be very reputable and their figures should be viewed with skepticism. At the University of Liechtenstein, a comprehensive analysis is currently being carried out on this subject, which deals with the actual market depth of the asset class. The results of the study will certainly be a topic in one of our next issues.

There is no doubt that the OTC market has also suffered from the price decline. Nevertheless, growth can be observed here, says Jeremy Allair, CEO of Circle Internet Financial in Boston: “We’ve seen triple-digit growth enrolling in our OTC business. That’s a big growth area.” This growth is likely to continue as long as institutional investors enter the market. Because they often need more coins than are offered on the exchanges. Or they are afraid of moving the price too far by buying or selling big amounts. That’s why they look for trading partners.

None of this is hidden from the big Wall Street banks. We’ve heard about Goldman and Fidelity. But it looks like Fear of Loss (FOL) is quickly transitioning to Fear of Missing Out (FOMO). Morgan Stanley, Citigroup and Bank of America Merrill Lynch are also reportedly working on their own Bitcoin products to meet customer demand.[13] Russia’s Gazprombank is also venturing into the market via a subsidiary in Switzerland.[14]

And then there are the big US universities that manage their income and donations in endowments. 96 percent of university money managers still say they don’t want to touch the crypto market. But some of the big names like Harvard, Stanford and MIT are already in business.[15] The same goes for Yale. The elite school recently invested in the Paradigm Fund, which was launched by former employees of Coinbase, Sequoia Capital and the Pantera Capital crypto fund. A total of around $400 million is invested in this fund. However, it is not known how much of this comes from Yale’s $30-billion-dollar purse. But the step is significant, because Yale’s money is managed by David Swensen. Swensen is considered a pioneer among institutional investors and has managed some of the best performing college endowments over the past decades. He focuses on long time horizons and often on markets with low liquidity assets. Many other universities try to imitate him. Under Swensen, Yale has seen a return of almost 12 percent annually – over the past 20 years. In total, more than $500 billion dollars are invested in the funds of US colleges.[16]

Two important players have recently underlined their interest in the crypto market but have adjusted their schedule to the new pricing conditions. Bakkt, the crypto platform of Intercontinental Exchange (ICE), has postponed the launch of its own Bitcoin futures until the end of January. “As is often true with product launches, there are new processes, risks and mitigates to test and re-test, and in the case of crypto, a new asset class to which these resources are being applied”, said Bakkt CEO Kelly Loeffler. The partnerships between ICE, mother of the New York Stock Exchange, and Starbucks as well as Microsoft are still up to date – but there are no new details.[17] Nasdaq also intends to stick to its plan to enter the market with futures contracts. Starting date is the first quarter of 2019, but talks are still underway with the US regulatory authority CFTC. Nothing is set in stone.[18]

M&As and Europe

Another way to enter crypto is to become active in business yourself or to buy up other companies. We have already mentioned several times that the market crash of the past months can be good for Bitcoin – because dubious projects become unprofitable as a result and perhaps even disappear. At the same time, the sector is being consolidated and the financially strong companies are going on a shopping spree. By October, the number of mergers and acquisitions (M&As) in the crypto sector had already risen by more than 200 percent – compared to the previous year. At least 30 deals are still open.[19]

The crypto industry is global and so far, appropriately, without a real financial center. One of the biggest and most interesting deals, therefore, did not take place in the USA, but in Europe. The Belgian investment company NXMH has just bought the Bitstamp stock exchange – and paid cash for it. The purchase price was not stated. Two years ago, Bitstamp, the largest cryptocurrency exchange in the European Union, was valued at around $60 million. It can be assumed that the valuation for the sale was significantly higher after the 2017 boom. Bitstamp has more than three million registered users and a daily trading volume of $100 million dollars. For the two founders, Nejc Kodrič and Damian Merlak, the deal was definitely successful. They founded Bitstamp in Slovenia in August 2011 – in a garage. Their starting capital: A server, a few laptops and a thousand euros in cash. Today, Bitstamp is registered in Luxembourg. It is supposed to stay that way after the deal.[20]

Two more anecdotes from Europe, this time from the German-speaking area, which is very close to us. We know from past reports that Switzerland is actively trying to attract Blockchain and Bitcoin companies. As we reported in detail in our October issue, the government of Liechtenstein is planning its own law, which is already being praised by many as exemplary. But even the giant Germany is by no means inactive. The hipster capital Berlin has a lively crypto scene. Now there is an advance from the party of chancellor Angela Merkel. The CDU wants to make Germany the number one ICO country and a “blockchain financial centre”.[21]

Austria has another way of doing things. In Austria, ICOs are supposed to be carried out with legal certainty soon. A working group is to present results by the end of the year – then there will be a new law. But a lot is already happening on a small scale. The Graz-based company Coinfinity and the privately-owned Austrian state printing company have developed a solution for physical, offline storage of Bitcoin private keys. This is called “Chainlock” – and is the solution to the custodian problem, so to speak, but more for private individuals than for institutional investors.[22]

And the Viennese law firm Stadler & Völkel has succeeded in getting a capital market prospectus for a Security Token Offering (STO) approved by the supervisory authority for the first time. An STO can be understood as a further development of the ICO. Like share owners, holders of security tokens also have securitized rights and are not solely dependent on the price development of a purchased token – as was the case with ICOs. In return, the security tokens are subject to the same rules as other securities. For this reason, Austria requires approval from the Financial Market Authority (FMA) before such a token can be sold. The security token of Hydrominer, whose prospectus has just been approved, is expected to be available to investors in February 2019.[23]

Central Banks and Stablecoins

After just learning a new abbreviation (STO) we now present another one: CBDC. Central Bank Digital Currency. The subject is getting hotter every day. Although to this day it’s not even clear what we’re actually talking about. The media likes to pretend that the central banks experimenting with digital money are developing their own “cryptocurrencies” like Bitcoin. But it’s not that simple. For them, the blockchain is a vehicle to create a digital equivalent for cash. Nouriel Roubini, the notorious Bitcoin hater, is firmly convinced that the CBDC of the future will kill Bitcoin. Because no one would accept anarchy-money if they could have state money, he reasons. However, Roubini overlooks the fact that Bitcoin has something that digital central bank currencies can never have: its deflationary character as discussed in depth in the interview with Saifedean Ammous contained in this edition of the report.[24]

It is extremely unlikely for a central bank to ever issue a currency that tends to appreciate. In the event of over-indebtedness, the expansion of the money supply is often used as a form of concealed state financing. What can no longer be completely ruled out today is the “denationalization of money” as demanded and predicted by Friedrich August Hayek. He envisioned that commercial banks will come into the market as money producers. That is still possible. As far as private money is concerned, we are at the very beginning, but the most important steps have been taken.

Christine Lagarde, the influential head of the International Monetary Fund (IMF), has become aware of the issue. Central banks around the world need to be more open to new technologies, she said recently in Singapore. “I think we should consider issuing a digital currency. There must be a role for the state to provide the digital economy with money.”[25] She speaks of a “counterweight” for private currencies and thus shows that even the high priests of money now consider the existence of Bitcoin to be a given. Lagarde, like Hayek, also wants to involve the banks. But them printing their own money is not part of the plan. Lagarde sees CBDC primarily as a substitute for cash: “A digital currency could bring advantages as a last resort for payments. And it could drive competition forward because it offers an efficient alternative at a low price – just like its grandfather, the old, reliable paper money.” But the complete anonymity of cash would then be gone.

Instead, Madame Lagarde proposes to record transactions and pass on the details to the state only in case of suspicion. A delicate idea – but not completely crazy, at least in constitutional countries where there is a separation between the state and the central bank. However, Lagarde’s own experts from the IMF are quite skeptical about the subject. A recent IMF paper on the subject states:

“All in all, it is still too early to assess the benefits of CBDC. Central banks should take into account the specific circumstances in their respective countries, pay cautious attention to risks and the benefits of other solutions. It needs further analysis and studies of technical feasibility and costs.”

It should be noted at this point that central banks are notoriously slow when it comes to technical innovations. The plans for CBDC are by no means mature. One thing is certain: we are not talking about digital money as we already know it. An account balance is ultimately a claim to the bank. CBDCs must be currencies with no counterparty risk – as with Bitcoin or gold. Even if the true motivation of central banks and the IMF is the preservation of the money monopoly, the efforts to obtain their own digital money ultimately indirectly legitimize private alternatives such as Bitcoin conceptually.

It should come as no surprise to anyone that Sweden is the country where plans for a CBDC are the most advanced. Sweden is regarded as the test tube of a cashless society and is now reaching the limits of what is feasible. There have long been protests by citizens against the abolition of cash, which has been pushed mainly by banks. This is one of the reasons why the central bank launched the E-Krona project and is currently investigating the various technical possibilities for introducing an electronic Krona. The Riksbank, the Swedish central bank, has now called on the government to create the necessary legal framework for a possible introduction of an E-Krona. “If the marginalisation of cash continues, a digital krona, an e‐krona, could ensure that the general public still has access to a state-guaranteed means of payment”, the Riksbank said.[26]

2019 will see the rise and expansion of private stablecoins. Joining Tether is also the Gemini Dollar, TrueUSD and Paxos. And of course, USDCoin, which is backed by no one other than Circle, in which Goldman Sachs is also invested. USDCoin is now even used and offered by the Bitcoin giant Coinbase.[27][28] Currently there are more than 50 such stablecoins. Some of them are not even tied to an existing national currency – but most of them are. During falling Bitcoin prices, investors can save their digital money in a USD stablecoin and wait until the market calms down. Of course, the controversies surrounding the original stablecoin Tether are not over. Even the US authorities are now investigating accusations that the backers of Tether and the Bitfinex stock exchange manipulated the Bitcoin price.[29]

ICO-Bust and Outlook

The SEC has dozens of investigations into crypto matters under way.[32] Two providers of ICOs (Airfox and Paragon Coin) had to pay fines of $250,000 each and compensate investors. They conducted their ICOs after the SEC issued an explicit warning last summer that ICOs were illegal sales of securities.[33] The penalties imposed by the SEC on two celebrities who had advertised dubious crypto currencies are likely to be much more effective. The boxer Floyd Mayweather and the hip-hop star DJ Khaled accepted fines of $300,000 and $100,000 dollars, respectively, as part of a settlement. The celebrities also had to relinquish the proceeds from their promotional activities – amounting to a further $300,000 and $50,000 respectively. According to the SEC, they had advertised ICOs on social media without disclosing that they were being paid. Both celebrities had advertised Centra, a project that has been in the SEC’s sights for quite some time. “Investors should be sceptical about investment advice posted on social media platforms and not make decisions based on recommendations from celebrities”, warned Steven Peikin of the SEC. “Social media influencers are often paid promoters.”[34]

While we consider it positive that the authorities have intervened here, it must be said that it is a drop in the ocean. Investors should be extremely careful with any form of information they obtain from the crypto-media and crypto-influencer environment. Three independent studies have shown that the media, so-called rating agencies, and individuals on social media and on YouTube are highly corrupt. The “Breaker” magazine wrote to 22 different crypto media companies from a fake address of an alleged Russian PR man. The result: more than half of the websites would have taken money for articles without marking them as “ads” or “sponsored”. Some were even willing to simply adopt ready-made PR texts and pass them off as their own. The smallest websites took less than $300. The largest more than $3000. In any case, this study explains why there are so many miserably written texts on the Internet about relatively obscure coins. Advertising is subtle. Among the websites that take money for reports are some of the best-known names in the cryptosector. But to be fair: Around 10 of the websites contacted immediately rejected the offer.[35]

But news sites are just the tip of the iceberg. The covert advertising campaigns are often managed by so-called ICO agencies, which have price lists for various channels at hand. These agencies do not only take care of the marketing of a coin on the relevant websites, but also provide comments and traffic in the Telegram groups and other social networks. Many people who discuss cryptocoins or ICOs on YouTube are also paid for their service. Research by Breaker, Techcrunch and Reuters paints a picture of a deeply corrupt industry at the heart of which is the hunt for money by ICOs.[36][37]

If the drop in prices and the SEC’s crackdown leads to this swamp being drained, then this should be welcomed. This is part of the development of the sector towards more professionalism. As far as mainstream acceptance is concerned, we no longer need to worry. Years after Bitcoin’s first appearance on “The Good Wife”, a feature film with Kurt Russel is soon to come. The title is simply “Crypto”.[38] And shortly before this report went to press, this news came in: Electronics giant Samsung is supposedly working on a cryptowallet for their smartphones. If there is any truth to this, it would be another big step into the mainstream. And a confirmation of the old thesis: While prices are falling, true innovations are taking place.[39]

[1] https://breakermag.com/a-comprehensive-list-of-crypto-references-in-pop-culture/

[2] https://www.marketwatch.com/story/bitcoin-is-close-to-becoming-worthless-2018-12-03

[3] https://www.marketwatch.com/story/why-bitcoin-by-design-wont-become-worthless-according-to-this-crypto-heavyweight-2018-12-05?mod=newsviewer_click

[4] https://www.theblockcrypto.com/2018/12/04/the-bitcoin-mining-death-spiral-debate-explained/

[5] https://blog.bitmex.com/the-price-crash-the-impact-on-miners/

[6] http://unchained.forbes.libsynpro.com/ari-paul-on-why-bitcoin-is-a-good-value-buy-today-ep95

[7] https://www.globaldata.com/ten-years-bitcoin-now-no-relevance-payments-says-globaldata/

[8] https://www.coindesk.com/morgan-stanley-says-crypto-is-a-new-institutional-asset-class/

[9] https://www.bloomberg.com/news/articles/2018-10-15/novogratz-says-bitcoin-rally-likely-to-take-place-next-year

[10] https://www.bloomberg.com/news/articles/2018-10-18/goldman-wades-deeper-in-crypto-betting-on-bitgo-with-novogratz

[11] http://fortune.com/2018/10/15/fidelity-launches-company-help-hedge-funds-big-investors-trade-crypto/

[12] https://www.bloomberg.com/news/articles/2018-10-01/institutional-investors-are-using-back-door-for-crypto-purchases

[13] https://bitcoinexchangeguide.com/breaking-bank-of-americas-merrill-lynch-to-launch-bitcoin-trading-product-to-rival-goldman-sachs-and-morgan-stanley/

[14] https://gazprombank.ch/news/gazprombank-switzerland-ltd-prepare

[15] https://www.theinformation.com/articles/harvard-stanford-mit-endowments-invest-in-crypto-funds

[16] https://www.bloomberg.com/news/articles/2018-10-05/yale-is-said-to-invest-in-crypto-fund-that-raised-400-million

[17] https://www.theblockcrypto.com/2018/11/20/bakkt-has-pushed-back-its-bitcoin-futures-launch-to-2019-but-phase-two-is-still-on-track/

[18] https://www.bloomberg.com/news/articles/2018-11-27/nasdaq-is-said-to-pursue-bitcoin-futures-despite-plunging-prices

[19] https://www.cnbc.com/2018/10/18/crypto-deal-makers-see-opportunity-in-bitcoins-price-slump.html

[20] https://www.businessinsider.com/r-european-investment-firm-buys-digital-exchange-bitstamp-in-all-cash-deal-2018-10?IR=T

[21] https://www.faz.net/aktuell/finanzen/digital-bezahlen/cdu-vorschlag-deutschland-soll-mekka-fuer-kryptogeld-werden-15887209.html?printPagedArticle=-%20sync:%C3%9F%C3%87%C3%88%C3%A2%C3%88%C3%A2

[22] https://www.trendingtopics.at/card-wallet-coinfinity-und-staatsdruckerei-bringen-neue-speicherloesung-fuer-bitcoin/

[23] https://diepresse.com/home/wirtschaft/recht/5541879/Depot-in-der-Hosentasche_FMA-approved-BlockchainEmission

[24] https://www.project-syndicate.org/commentary/central-banks-take-over-digital-payments-no-cryptocurrencies-by-nouriel-roubini-2018-11

[25] http://www.faz.net/aktuell/wirtschaft/diginomics/iwf-chefin-fordert-digitale-waehrungen-15889788.html

[26]  http://fortune.com/2018/10/26/sweden-riksbank-e-krona/

[27] https://diepresse.com/home/wirtschaft/kolumnen/wertsachen/5391098/Der-Kampf-gegen-das-Bargeld-ist-klaeglich-gescheitert

[28] https://www.ccn.com/2-million-lightning-network-hits-major-milestone-despite-bitcoin-price-decline/

[29] https://www.bloomberg.com/news/articles/2018-10-29/stable-coin-backed-by-circle-coinbase-draws-most-early-demand

[30] https://www.bloomberg.com/news/articles/2018-10-23/crypto-exchange-coinbase-to-list-stable-coin-backed-by-circle?srnd=cryptocurrencies

[31] https://www.bloomberg.com/news/articles/2018-11-20/bitcoin-rigging-criminal-probe-is-said-to-focus-on-tie-to-tether

[32] http://fortune.com/2018/11/02/sec-ico-report-cryptocurrency-scams/

[33] http://fortune.com/2018/11/16/sec-airfox/

[34] https://diepresse.com/home/wirtschaft/5538851/KryptogeldWerbung_High penalties for Boxer Mayweather and DJ Khaled

[35] https://breakermag.com/we-asked-crypto-news-outlets-if-theyd-take-money-to-cover-a-project-more-than-half-said-yes/

[36] https://www.reuters.com/article/us-crypto-currencies-promoters-specialre/special-report-little-known-to-many-investors-cryptocurrency-reviews-are-for-sale-idUSKCN1NW17S

[37] https://techcrunch.com/2018/09/18/inside-the-pay-for-post-ico-industry/

[38] https://www.imdb.com/title/tt8563452/

[39] https://www.sammobile.com/2018/12/11/exclusive-samsung-bitcoin-app-cold-wallet-cryptocurrencies/