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Tokenizing the Swiss Franc with Armin Schmid of Swiss Crypto Tokens

Tokenizing the Swiss Franc with Armin Schmid of Swiss Crypto Tokens

“Useful groundwork has already been done in all these areas in Switzerland. But the time for pioneers is over: Switzerland now has to take the next step in the development of DLT, morphing from the much-vaunted ‘Crypto Valley’ into a fully-fledged DLT nation.”

Avenir Suisse, Blockchain after the Hype Report

Key Takeaways

  • Crypto Francs (XCHF) is fully backed by physical bank notes and there is no negative interest rate. Storage costs make 100 % backed circulating bearer instruments not possible unless the issuing company charges subscription and redemption fees as well.
  • Swiss Crypto Tokens has issued more than 10 million XCHF on the Ethereum blockchain using the ERC-20 token smart contract.
  • Swiss Crypto Tokens does not see Swiss National Bank Coin as competition, as the underlying private blockchain and purposes are fundamentally different.

Everyone Can Hold Digital Swiss Francs Now

The most common form of stablecoins are fiat-backed and fiat-pegged stablecoins. For this edition of the Crypto Research Report, we interviewed Armin Schmid from Swiss Crypto Tokens (SCT) AG that issues the Crypto Franc (XCHF) to answer a few unanswered questions from our readers. The tokens themselves represent an underlying transferable bond based on Swiss law.

Source: Bitcoin Suisse
Source: Bitcoin Suisse
Armin Schmid joined Bitcoin Suisse in April 2018 as Head Strategic Projects. In July 2018, he became CEO of the newly founded daughter company Swiss Crypto Tokens AG. Armin previously worked for eBay, PayPal, and SIX Payment Services. He holds a Master in Materials Engineering from ETH Zurich and an MBA from University of St. Gallen.

Each ERC-20 token represents a zero-coupon Crypto Franc bond. Swiss Crypto Tokens is “borrowing” money for one month from investors. In exchange for borrowing the money, Swiss Crypto Tokens issues a stablecoin to them as a type of receipt. If the token is not returned before maturity, the token rolls over to the next bond period free of charge. When the XCHF ERC-20 is sent back to Swiss Crypto Tokens and the customer is fully onboarded with KYC & AML documentation, the Swiss francs are redeemed. Swiss Crypto Tokens burns the XCHF ERC-20 token and does not further trade it.

  • Are all Crypto Franc (XCHF) ERC-20 tokens fully backed with reserves?

Armin: All holdings (currently more than 10 million CHF) are backed 100 % in physical banknotes, that’s right.

  • If you stored this cash in a bank, would you have to pay negative interest rates on this money?

Armin: Most probably yes. Banks usually have a certain threshold, where they don’t charge, but at this level, they would charge negative rates for business customers. This might be different for private customers. But especially with this volume in cash, no investments = full -0.75 % interest would apply.

  • Current setup: XCHF > Swiss Crypto Tokens AG > banknotes in bunker
  • If stored on bank account:  XCHF > Swiss Crypto Tokens AG > bank XYZ

We would announce any changes to the interest rate 3 months in advance. So token holders have the chance to redeem them, so they do not have to pay negative interest. This is just a nice feature that we announce early. The goal is to keep the interest rate at 0 %.

“Volatility has become an obstacle to the wider adoption of cryptocurrencies. In general, an effective currency should at least function as a medium of exchange and a store of value.”  

Armin Schmid, CEO Swiss Crypto Tokens AG
  • Is this why you write “The interest rate for the next 3 months of the bond issuance is set at 0 %.” Why would Swiss Crypto Tokens need to charge a negative interest rate on the bond if the money is stored in a vault outside of the banking system? 

Armin: Storing banknotes is not free: Vault, insurance, cash handling, monthly auditing by Grant Thornton of SCT have running costs. The idea is to make up for losses with issuance & redemption fees.

The bank notes belong to Swiss Crypto Tokens and the XCHF product. XCHF token holders know that we have the assets stored in a bunker and have this audited on a monthly basis by Grant Thornton.

  • If interest rates go up, will SCT pay a positive interest rate or will this be a profit margin for BS in the future? 

Armin: Based on the prospectus, we would not pay positive interest rates. And yes, this would be our margin.

Figure: Swiss Interest Rate Since 2000

Swiss Interest Rate Since 2000

Source: OENB, Incrementum AG

  • Why did you need to make this into a bond? 

Armin: If you’re not a bank and you’d like to accept money from customers, there are only a handful of exemptions based on Swiss law. Bond with prospectus is one of them.[1]

  • Is there a subscription fee?

Armin: Yes.

  • Is there are redemption fee?

Armin: Yes.

  • Is there a transaction fee?

Armin: (No – only GAS Fee from Ethereum Network.)

  • Is there a management fee?
SCT Fee Overview

Armin: No.

  • How many redemptions have you had?

Armin: 2 major redemptions with 5 million CHF volume in total.

  • Is it open to retail investors? What is the minimum investment?

Armin: Any customer segment is welcome. We have lowered the threshold for issuance from Swiss Crypto Tokens to 1,000 CHF. For lower volumes, we recommend using exchanges like Bitfinex, Ethfinex, IDEX or Uniswap, where XCHF can be traded against Bitcoin, Ether, Dai or USD. 

  • The ERC-20 tokens can be traded freely as any Swiss-based bond can be traded peer-to-peer with anyone. The target customers are Swiss investors. If a customer outside Switzerland wants to invest, Swiss Crypto Tokens must look at each case one-by-one and each investor needs to do KYC/AML with Swiss Crypto Tokens in order to invest. Is this correct?

Figure: Number of Stablecoins Launched Per Year

Number of Stablecoins Launched Per Year

Source: Blockdata.tech, Incrementum AG

Armin: Swiss bond = Swiss customers, any other customer is welcome, and we would check individually. We would like keep the website setup simple, not to request from each visitor to identify themselves: Where are you from? What are the legal requirements for country XYZ? Are you a qualified investor? …

“It is very difficult to determine which is a better mechanism to achieve stability but what we do know is this — the race for a truly decentralized, stable and transparent cryptocurrency is alive and well, and this will be a welcome solution to many of the problems inherent in the market currently.”

Armin Schmid, CEO Swiss Crypto Tokens AG
  • Do you have a whitelist of people who can hold the coins?

Armin: No.

  • What happens if someone loses the private key to their tokens?

Armin: No recovery, the token is 100 % linked with customer wallet.

  • Does Swiss Crypto Tokens have a backup of the private keys? 

Armin: No, no backdoors, no freezing of funds.

  • Is the ERC-20 token considered a security in Switzerland?

Armin: Based on Swiss law (FINMA), the underlying bond is clearly seen as an asset token, a security.

  • If the SNB launches a private ledger token that represents Swiss francs, what will this mean for the Swiss Crypto Tokens’ Crypto Franc (XCHF)? 

Armin: Crypto Franc is a token issued on the public blockchain Ethereum. If SNB would launch a CHF stablecoin on a private blockchain, it is not different from a centralized ledger. Only limited participants would be able to use it. E. g., banks. SIX Digital Exchange (SDX) have announced to work with SNB but only for settlement of SDX internal transactions. So, I see it as a completely different product from the current Crypto Franc (XCHF).

[1] https://www.admin.ch/opc/de/classified-compilation/20131795/index.html#a5.

How Crypto Brokers and Funds Source Liquidity

How Crypto Brokers and Funds Source Liquidity

 “If you contact multiple desks to source your trade, you are leaking a lot of information to the market, and desks will often ‘pre-hedge’ ahead of consummating the trade. That is very expensive as it amounts to legal ‘frontrunning’ that will move the price against you.”

David Weisberger, CoinRoutes

Key Takeaways

  • There are two main ways that large-scale investors such as high net worth individuals, crypto brokers, and digital currency funds execute large trades in the cryptocurrency space. Agency models attempt to get the best price via smart-order-routing, but are prone to slippage from the benchmark price, generally charge a commission and usually pass on exchange fees and other transaction costs. In contrast, principal models shift execution risk away from the investor, but need to be financially compensated in order to do so, meaning that transaction costs will be incorporated into a spread between what is obtained in the market and then shown to the client.
  • Crypto hedge funds are outperforming Bitcoin in bear markets. Since BTC normally holds over 50 % of the crypto market capitalization, 66.7 % currently, it is commonly used as a benchmark for market performance. Most of the funds have a high beta with Bitcoin (~0.75 or higher) but have realized fewer losses in 2018 (-46 % average for funds vs. -72 % for BTC).

When an investor wants to buy $100 million worth of Bitcoin, how do they actually do it? What are the steps that they follow and the risks that they need to keep in mind? This article covers what crypto funds are and how they source liquidity, who the players are, including B2C2, Grayscale, Galaxy Digital, FalconX, Tagomi, SFOX, CoinRoutes, Omniex, Caspian, and Koine, what their strategies are, and how much they manage.  

Four Models for Sourcing Liquidity

“Statistical arbitrage has been a widely adopted trading strategy among traditional asset classes for quite some time.”  

Gabriel Wang, Aite

Large investors want to make sure that their own orders do not move the price. This price of Bitcoin fluctuates based on the global market of supply and demand for Bitcoin on exchanges on over-the-counter markets. Imagine an exchange such as Kraken is quoting at a bid-ask spread of $10,000 on the bid side and $10,010 on the ask side. Let’s say that the bid side has a buy wall of $10 billion at various strike prices and the ask side has a sell wall of 1 million Bitcoin at various strike prices. If an investor comes in and wants to buy $1 million worth of Bitcoin, what is the best to execute their trade so that they do not lose out to slippage, the spread, and transaction fees?

There are two main ways that whales, such as high-net-worth individuals, crypto brokers, and crypto funds, execute large trades in the cryptocurrency space. Agency models are risky because the exchanges and brokers can easily front-run investors. In contrast, principal models shift execution risk away from investors and need to be financially compensated to do so. Agency brokers needs to be compensated as well. The difference is that an agency broker will trade with principal-at-risk brokers, and will offer wider (i.e. worse) prices in order to reap their financial reward. So cryptocurrency investors that go directly to principal-at-risk brokers can receive better prices for their cryptocurrency investments, especially if they connect to more than one principal-at-risk broker.

1.) Account with Exchanges and/or OEMS (Order & Execution Management System) platforms

The most common method that retail investors use is the agency model with multiple accounts at several exchanges. This is called an agency model because the investor is the principal and they are relying on an agency to execute their trade for them. For example, when the investor wants to buy, they simply send their money to an exchange and buy at the spot price.

First, the investor will lose money because of slippage, which is the price that the investor saw the ask at and the price that the trade was actually executed at. For example, they might have clicked “buy” when the asking price was $10,010, but in their account,  they notice that the price they actually got was $10,012 because the price changed slightly in between the time he clicked and the time the trade was received and executed. This occurs often with highly volatile assets like Bitcoin and can result in significant losses in the aggregate for high frequency traders.  There are two main causes of slippage:

  • Technical Architecture of the Exchange: The website should optimize the number of page loads per millisecond and have servers that have stable and rapid response to site traffic. This enables transactions to occur at high speeds, which enables traders to mitigate the risk of significant price changes.
  • Liquidity on the Exchange: Low liquidity means that orders will not be filled for a single price. Instead, large orders will be distributed over several smaller orders, with an increased price for each tranche of the order.

In addition to currency risk from slippage, this model also has counterparty risk because they must trust the exchange. As long as their assets are on the exchange, either fiat or crypto, they risk losing their 100 % of their wealth if the exchange goes bankrupt.

In this model, how do investors know which exchange is offering the best price?

“With $130 trillion of assets under management worldwide, institutional investors could have a huge positive impact if they moved even a tiny fraction of those funds into crypto, whose market cap remains under $300 billion.”  

Gerrit van Wingerden, Caspian

There are three main companies in this space that help investors determine which exchange has the best price using routing protocols that consolidate liquidity.

  • CASPIAN. Backed by Novogratz’s Galaxy Digital Capital and offshoot of Tora Trading Services from the traditional equity space, Caspian provides a single user interface software that allows investors to see the order books on 30 spot crypto exchanges and seven crypto derivative exchanges.[1] A large order, called the parent order, is broken down into child orders, or slices of the order, that can be executed within the software at various exchanges in order to try to get the best price. The company raised $16 million in fall of 2018 in a pre-sale of their token called CSP. The coin’s all-time high was on its first day of exchange trading on April 8, 2019 at $0.019 and its all-time low is set newly almost every day with the latest prior to publication of this report being on October 24, 2019 at $0.005. The year-to-date return is -73.68 %.
  • OMNIEX. Founded by ex-State Street senior VP for emerging tech, Hu Liang, Omniex is an order- and execution-management system for trading. Although they are very similar to Caspian, they have one difference – which is, they are crypto native.[2]
  • COINROUTES. Recently invested in by Bitcoin Suisse for an amount of $3 million, CoinRoutes plugs into the APIs of 35 exchanges, aggregates the information, and then allows investors to access these 35 exchanges by simply accessing just one software. CoinRoutes has a patent pending called Smart Order Router that allows clients to retain complete control over their exchange keys and wallets.[3]

Figure 7: Caspian Return on Investment Since Launch

Caspian Return on Investment Since Launch

Source: Coinmarketcap.com, Incrementum AG

The main problem with non-custodial cryptocurrency trade optimization routing software is that investors will have to open up several accounts on several exchanges because routing software do not take custody of the coins. They simply allow traders to trade where the traders have already done KYC/AML and made deposits of collateral. Not only is it a hassle to KYC/AML on 30+ exchanges, but there is the opportunity cost of keeping liquidity on many exchanges. By avoiding custody of assets, this software also avoids having to apply for money services business (MSB) licenses at the federal level and money transmitter licenses (MTLs) at the state level in each state where the software company sells their product.

2.) Agency Model – Account with Broker

The second type of agency model is where investors only open up one account with a broker instead of 30 accounts with various exchanges. Brokers such as Bitcoin Suisse in Switzerland or BitPanda in Austria would typically take custody of the coins and execute the investor’s order by sourcing liquidity from their network of counterparties and their own internal order book. This is considered an agency model because the broker is acting on the behalf of the fund or high-net-worth individual (HNWI).

Do Selfish Brokers Increase the Overall Credit Risk?  
Although reducing the broker’s counterparty risk by paying after receiving sounds appealing, this arrangement actually increases the overall systematic risk of the entire market.  For example, imagine that Tagomi wants to buy $100,000 from Kraken and Tagomi has an agreement with Kraken that Kraken will send the 10 Bitcoin to Tagomi first and then Tagomi will send the money. Now imagine that Tagomi receives the 10 Bitcoin but then goes bankrupt before sending the $100,000. This leaves the exchange empty handed with losses of $100,000 that they may try to socialize over all of their clients’ accounts, leading to a downward pressure on the price of Bitcoin overall.
Now imagine the opposite, Tagomi buys $100,000 worth of Bitcoin from Kraken and Kraken makes Tagomi send the funds upfront by posting collateral. Now, if Tagomi goes bankrupt, the exchange is fine because they have the funds already. The only clients that will suffer are the clients of the broker that went bankrupt. The impact is localized to the investors that took on the risk in the first place in this model. The common model in traditional FX is settling through a central clearing company. An example of such a company is the CLS. Centralizing settlement helps to eliminate a risk called the “Herstatt Risk”, which is named after the Bank Herstatt fiasco. Bank Herstatt failed to deliver their side of the settlement. There is no CLS in crypto, because it would be centralized (by definition) and therefore goes against the ethos of crypto. Therefore, brokers and banks in the cryptoasset industry often use the first model when the credit risk of the exchange is larger than the credit risk of the broker or bank. Credit risk determines who will have to post collateral first. The reason some brokers have this privilege is because their trading volume and credit worthiness makes them an important client for the exchange. Therefore, this option is not available to retail traders. Retail traders must first post collateral on the exchange, and then the exchange will deliver cryptocurrencies. Another option that is quickly becoming a standard is delayed settlement with 1–2 basis points charged per extra day of settlement.

The largest firms in this space are Tagomi and SFOX. SFOX even has Federal Deposit Insurance on fiat deposits with them up to $250K. Since brokers take custody of client funds, they normally need to be licensed. For example, in the US the common licenses required for this activity include MSBs and MTLs.

There are two main ways that brokers and exchanges handle the counterparty risk of cryptocurrency trades:

  • Exchanges send the cryptocurrency to the broker prior to the broker paying the exchange for the cryptocurrency.
  • Brokers post collateral or pay for the cryptocurrency prior to the exchange sending the cryptocurrency.

Brokers can have contractual agreements with exchanges that state that the exchange must send the cryptocurrency first to the broker before the broker sends the fiat to the exchange in order to pay for the cryptocurrency they bought. Essentially, the broker wants to ensure that they have received the cryptocurrency in their wallet before they settle the trade with the exchange by sending the money.

Some firms are trying to become institutional brokers, such BCB Group in the United Kingdom and Falcon X in the US. The idea is to offer the lowest spread possible on trades without slippage. The model heavily relies on the network effect and is a race to connecting the disparate exchanges and agency OTC desks. By selling at cost, these companies hope to build a network that they can later sell peripheral services to, such as derivatives, margin trading, and lending. Currently, many startups are entering into this market.

Entrance from a traditional institutional broker such as State Street Corporation or Northern Trust would bring much needed legitimacy to the entire cryptocurrency market. However, clarity on the insurance of custodied assets would need to come first. Insurance firms such as Lloyds, Aon, and Zurich are dappling in cryptocurrency products; however, the market is immature. For example, BitGo’s $100 million insurance policy with Lloyds only covers cold storage meanwhile, other insurance policies only cover hot storage insurance.

3.) Principal Model – Client-Facing Market Maker

Some market makers face clients directly and use their own principal to take the other side of the client’s trade. However, market makers are in business to make money and may have directional bias (wanting to either go long or short) based on their view of the crypto market.  For example, if an investor is buying Bitcoin and the market maker is also wanting to be long, the sell quote from the market maker will likely not be advantageous for the investor. In this model, quotes shown to the client can be attractive if they line up with the market maker’s positioning, but might not be of great quality otherwise. As long as a client is connected to more than one principal-at-risk broker, the investor can benefit from the inside spread of all their principal-at-risk brokers. Clients will periodically see great prices as / when their brokers are “axed” (meaning they have a position, long or short, and are therefore skewing their prices to flatten). The barriers to entry are quite high for firms looking to become a market maker, because they require large balance sheets that they can use to offer bid-ask spreads on exchanges and to OTC clients.

In this category is B2C2 in the UK. They are a market maker that also has an OTC desk that faces clients. They aggregate the price of a cryptocurrency from many exchanges, and then internally create a price for that cryptocurrency. Once they have their internal price for the cryptocurrency, they create bids and asks around that price on exchanges, and they quote these bids and asks to clients. For example, the current price of Bitcoin on Kraken Pro is $6,120.40 with an ask of 6121.5 and bid of 6,119.10, then this would put the spread at $2.40 or .03% or 3 bips. Since B2C2 is plugged into the APIs of several exchanges, B2C2 may calculate that their internal price is $6,123.5. They will then offer a bid – ask spread around this price on Kraken Pro. If their internal price is wrong, then their principal is at risk of loss.

4.) Principal Model – Trading Desk or Bank

A bank acting as a principal means that they execute a trade with their client directly, taking the execution risk on their books. In turn, they would hope to warehouse or lay off that risk via another trade. This is the same service provided by market makers in model 3, but instead of the service being provided by market makers, the service is provided by banks and trading desks at large prime brokers.

Future Outlook of Principal-Agent Models in Liquidity Sourcing

The way financial intermediaries source cryptocurrency liquidity is rapidly evolving, but the market increasingly resembles the historical development of foreign exchange and equity markets.

“The spot FX trading industry is rapidly heading toward an agency-only trading model, but for the time being principal spot FX trading models are still widely utilized.”  

Solomon Teague, Euromoney

In traditional foreign exchange markets, large trades occur in over-the-counter markets instead of on exchanges. This is because the largest foreign exchange traders on exchanges, such as the world’s largest banks, have access to information regarding the depth of order books, and they can make well-informed trades against small banks, brokers, and trading desks.

Agent models are not a bad option for investors, as long as the aggregate order book that the broker has access to is deep and the bid-ask spread is low. For example, the US equities market averages spreads of 20 basis points. However, cryptocurrency markets have high spreads and order books with fake liquidity created by wash trades in order to manipulate investor perceptions.

Insights from seasoned foreign exchange traders can help startups in the cryptocurrency space professionalize their services and prepare the market for institutionals. We greatly thank Glenn Barber from FalconX, Dan Fruhman from BCB Group, and Simon Heinrich from B2C2 for sharing how crypto brokers source liquidity in this edition of the Crypto Research Report.

Who Needs to Source Liquidity?

Agents that execute trades on the behalf of their clients need to source liquidity, so that is primarily cryptocurrency funds and brokers.

Cryptocurrency Funds

Crypto Funds is a catch-all term to refer to a type of investment fund which pools capital from multiple investors with the goal of investing in a variety of crypto assets. There are several types of legal investment vehicles that fall under this category and several legal investment vehicles that do not follow under this category but are still labeled as cryptofunds by misinformed media outlets.

Crypto Hedge Funds

For regulatory reasons, the main category of cryptocurrency funds are still cryptocurrency hedge funds. The main goal of these funds is to outperform the cryptocurrency market as a whole in the long run. It is worth noting that traditional hedge funds (e. g., ones not invested in crypto) have generally failed to consistently outperform traditional index funds. They are often based in Cayman, British Virgin Islands, or Switzerland.

PricewaterhouseCoopers (PwC) reports[4] that the median fees collected by crypto hedge funds are a 2 % management fee (annually, based on the total investment) and 20 % performance fee (annually based on the profit realized). At the same time, the average with the traditional hedge funds is 1.3 %/15.5 %.[5] Despite the higher average fees and the recent crypto bear market, PwC reports that the crypto hedge funds grew over three times in assets under management (AUM) in 2018. 

PwC further reports that on average crypto hedge funds outperformed Bitcoin in 2018. Since BTC normally holds over 50 % of the crypto market capitalization, 66.7 % currently, it is commonly used as a benchmark for market performance. Most of the funds have a high beta with Bitcoin (~0.75 or higher) but realized fewer losses in 2018 (-46 % avg. for funds vs. -72 % for BTC). The exception seems to be quant funds, which have both a positive return (+8% and a negative beta -2.33); however, this is explained in the report with the fact that the majority of those funds had early investment in initial coin offerings (ICOs) and managed to exit some of those positions in the first half of 2018.

Here are some of the largest players in the cryptocurrency hedge fund arena:

  • Pantera Capital is one of the largest crypto investment firms with investments across five cryptocurrency funds (Venture Fund, Digital Asset Fund, ICO Fund, Bitcoin Fund, Long-Term ICO Fund). Current assets under management (AUM) are around $450 million, due to the recent crypto winter, although they previously had $700 million. The investments range from VC investments in blockchain companies, including some big ones (like Ripple, Zcash, Civic, Harbor, Bitstamp) to investments in ICOs (like Wax, OmiseGo, 0x, Funfair, FileCoin). There is a minimal investment requirement of $100,000. According to NewsBTC, the fund has recorded a 40 % loss since its inception and a 72 % loss year-to-date.[6]
  • CoinCapital is even more restrictive, looking for individuals with a net worth over $2.1 million. Similar to Pantera Capital, this fund invests in a combination of blockchain startups, ICOs, and cryptocurrencies. It holds a portfolio of over 40 cryptocurrencies, including the major ones – Ethereum, Litecoin, Bitcoin, Ripple, and Dash. The fund does not report AUM and fees; however, third-party sources report that they are currently raising $25 million from accredited investors under a 2/20 fee structure.[7]
  • BitcoinsReserve was a specialized crypto hedge fund in the field of arbitrage. Like many cryptocurrency hedge funds, they have already gone out of business. Essentially, they looked for inefficiencies (price discrepancy) on the price of cryptocurrencies across different exchanges and leverages this to realize profit.
  • General Crypto is a smaller crypto hedge fund with $25 million in assets. The firm takes a venture capital approach to investing. Its main focus is coins that offer solutions to real-world problems. For instance, General Crypto is invested in Golem due to its decentralized computing capabilities and Ripple because of its international wire transfer technology. 
  • Bitbull is a cryptocurrency hedge fund that invests in crypto assets and startups. In essence, this is an umbrella fund which offers various options, including BitBull Fund, a crypto fund of funds, and BitBull Opportunistic Fund, which directly invests in crypto assets. The fund of funds operates under a 1/10 structure with $100,000 minimum investment and a 10 % hurdle. The standard fund is a classic 2/20 with $25,000 minimum investment. The strategy employed in the standard fund is described as “Opportunistic; current focus is market-neutral volatility strategy.” Both funds are only open to accredited investors.
  • Brian Kelly Capital Management currently manages over $50 million in assets and provides its investors with a three-pronged approach: buy-and-hold with 50 %, ICOs for 20 %, and actively manage the remaining 30 %. Investments in the BKCM consists primarily of cryptocurrencies like Bitcoin, Ethereum, Litecoin, Ripple, Zcash, and Stellar. Additionally, the fund invests in more risky tokens like Golem, Siacoin, and Augur.[8]
  • Ember Fund can be thought as more of an advisory service rather than a traditional hedge fund. The fund offers portfolio rebalancing and optimization strategies which are not carried out by the fund itself but supplied as tips to its customers. There are both pre-defined portfolios and customer-defined ones. Currently supported currencies are BAT, BCH, BTC, DENT, ENJ, LTC, TUSD, and XRP. A customer can have up to three portfolios. The fund charges a fixed fee of 1.5 % on every trade.
  • Prime Factor Capital was the first crypto hedge fund approved as a full-scope alternative investment fund manager by the Financial Conduct Authority, according to Bloomberg. There is no information publicly available regarding the firm’s investment strategy. The team is comprised of former employees from Blackrock, Legal & General, Goldman Sachs, and Deutsche Bank.

Index Funds

  • Grayscale Bitcoin Trust (GBTC) is a publicly listed company, holding its assets in Bitcoin and thus allowing traditional investors to have exposure to BTC without buying it directly. GBTC is basically “a single-asset index fund” which runs at a premium (around 22.5 %), in addition to annual fees of two percent. The price of Bitcoin is up 123 % year-to-date, and the Grayscale Bitcoin Trust (OTC: GBTC) is up 143.3 %. Currently, Grayscale Bitcoin Trust is up over 2,700 % since its inception in 2015.

Figure: Grayscale Premium Roughly Constant Over Time

Grayscale Premium Roughly Constant Over Time

Source: Grayscale, Incrementum AG

AIF- and UCITS-Regulated Cryptocurrency Funds

  • Postera’s Fund is regulated in Liechtenstein and based in Germany. The fund invests in a wide range of cryptocurrencies and for professional investor’s only.
  • Crypto Finance’s Fund is regulated in Liechtenstein and based in Germany. The strategy is long-short on a single asset, Bitcoin, with a cash buffer. This fund is for professional investors only and is the one of the best performing funds of the year that are based in Liechtenstein.

Products that are not funds but are often called funds are exchange-traded products, such as Amun tracker certificate that is actually a bond and not a fund. Other products that are not legally fund structures include all of the cryptocurrency-based certificates issued by companies, such as Bank Vontobel and GenTwo Digital. Although cryptocurrency certificates have similar fees and trading strategies compared to cryptocurrency funds, the legal distinction mostly refers to whether the assets are held on a balance sheet of a bank and who is liable if the assets get stolen or hacked.

[1] Information retrieved in October 2019, from Caspian’s website.

[2] See “Omniex Adds Additional Top-Tier Institutional Crypto Clients And Launches Executable Streaming Prices To Fuel Growth Of Institutional Crypto Trading,” Omniex, July 16, 2019.

[3] Information retrieved in October 2019, from CoinRoutes’ website.

[4] See 2019 Crypto Fund Hedge Report, PwC & Elwood, 2019.

[5] See “Hedge funds see fee increases in 2018,” Charles McGrath, Pensions&Investments, January 30, 2019.

[6] See “Pantera Capital’s Crypto Fund Reports 40.8% Loss Since Launch,” David Babayan, News BTC, 2018.

[7] Information retrieved in October 2019 from Security Token Network’s website.

[8] See “Top 10 Crypto Hedge Funds: Investment Guide,” Tom Alford, Total Crypto, October 9, 2018.

Bitcoin vs. Gold – a Fictitious Debate

Bitcoin vs. Gold – a Fictitious Debate

Since we have been quite involved with the topics of Gold and Bitcoin for several years, we have already held several discussions on the subject of investing in Gold and Bitcoin. In the form of a (fictitious) debate between a proponent of gold investments (XAU) and a proponent of the cryptocurrency Bitcoin (BTC), we want to dialogue some frequently discussed points such as the similarities, differences and opportunities of these two forms of investment.

BTC: Dear GOLDBUG, I am pleased that we have met here today. I am quite curious if I can convince you that there are some parallels between gold and Bitcoin, and that Bitcoin definitely has a place in the market or will become much more important.

Gold has fascinated humanity for thousands of years
gold statue

Source: Unsplash.com

XAU: Thanks for the invitation! As you know, as a rather conservative investor I am very critical of the crypto world, but I am always open to a good argument.

BTC: This is a good basis on which we can build our conversation. Let us start by discussing the differences and similarities between Bitcoin and gold. What are your thoughts?

XAU: That’s a great idea! While I did notice that there is a huge trend towards digitalization these days, it stops with me when it comes to the investment of value. This is because gold is a precious metal. You can touch it and it has always imposed an almost mystical fascination on people– especially my wife.

BTC: Sure, but there is a fundamental difference. gold is a chemical element, it exists physically, it can be touched as you say, and admittedly it does have rather interesting properties. But Bitcoin on the other hand, is an open protocol that only exists digitally as bits and bytes. Bitcoin is ultimately a groundbreaking innovation and has managed to successfully give digital information scarcity for the first time!

Bitcoin is a relatively new technology. Is it becoming the gold of the digital world?
Digital Gold

Source: Unsplash.com

XAU: What does that mean?

BTC: For example, if you send someone an email, you are not actually transferring your own data. You send a copy of your data. Ultimately the data will be available to both you and the recipient afterwards. Until the invention of Bitcoin and the associated blockchain technology, it was not possible to make digital information definitively transferable, i.e. that it “goes from me to you and is no longer with me afterwards”.

XAU: Okay, I’m following so far. I can even concede that this is indeed a groundbreaking invention. But how do I know this transmission will work safely? Everything on the Internet is hackable!

BTC: The inventor of Bitcoin created a very intelligent reward system for the people involved in securing the network. These so-called “miners” fulfill the task of verifying that each transaction is valid and is only actually executed once. The same Bitcoin can never be spent twice simultaneously. With the computing power provided by the miners, they ultimately make the network secure. In return, for compensation they receive newly mined Bitcoins. The more Miners are involved, the more difficult it becomes for Miners to conspire to validate a fraudulent transaction.

XAU: Okay, I can imagine that Bitcoins can be transmitted relatively safely over the Bitcoin network. I have never transferred a Bitcoin, but surely someone by now would have noticed if a secure transmission was compromised?

“Bitcoin is considered to be hack-proof because the Bitcoin blockchain is constantly being monitored by the entire network. Therefore, attacks on the blockchain itself are highly improbable.”  


BTC: Exactly! Since the network was established, every single transaction has been transferred securely.

XAU: Still, why exactly would Bitcoin prevail? There are supposedly thousands of such cryptocurrencies in existence today! Whereas the element gold only exists once, guaranteed!

BTC: Well, I have to admit, 100% I can’t rule out the possibility that there won’t be another crypto currency at some point.

XAU: You see!

BTC: Regardless of this, since the launch of Bitcoin, the likelihood of another cryptocurrency becoming established as a store of value has already decreased significantly. This is primarily due to the enormous spread of its network and thus the high level of Bitcoin security. The computing power that secures the Bitcoin network is now gigantic. No other cryptocurrency has even come close to achieving similar computing power. This can be observed by looking at Bitcoins hashrate.  

Figure: The Development of Bitcoin’s Hashrate

Bitcoin Hash Rate Coinwarz

Source: Coinwarz.com, EH/s Stands for Exahash per Second.

XAU: Okay, so you’re claiming I can transmit Bitcoins safely and securely on the blockchain because the most processing power is behind the Bitcoin network. But this security method is extremely power consuming! Isn’t that a disaster in these times of global climate change?

“If the Bitcoin system were a country, its electricity consumption would put it in 43rd place in the world – between Switzerland and the Czech Republic, and the trend is growing.”  


BTC: I’m sure we could spend a very long time debating this specific topic, but I think the most important point is that the electricity used to produce Bitcoin is often excess electricity that would otherwise be wasted.

XAU: What do you mean? The power used to operate the Bitcoin network must be taken from someone else!

BTC: It is well known that electricity is very difficult to store and can only be transported over long distances with huge losses in power. To mine Bitcoin economically, it is essential to use the cheapest sources of electricity. These are usually remote hydroelectric power plants, as there is often no way to store the electricity. Therefore, many of the Bitcoin farms are located in Scandinavia and Iceland, for example. In both of these places there is large surplus of electricity and it is cheap to use hydroelectric power. Various electricity suppliers have already recognized this and are using Bitcoin mining in some cases to deal with the surplus of electricity. In places with electricity shortages you couldn’t even consider mining, because the electricity prices are too high making mining not cost effective. Even at an average electricity price point it is still not possible to mine economically!

XAU: Wow, I really didn’t know that. Still, why invest in Bitcoin now? With gold, I know there’s a finite amount on earth. So, gold will always be worth something. But Bitcoin is so speculative. And it pays no interest, either.

Figure: Stocks of Bitcoin and Gold Compared with Future Outlook – An Indicator of Inflation

Bitcoin versus Gold Inflation

 Source: Incrementum AG

BTC: Okay, let’s get this straight. Both gold and Bitcoin are two investments that yield no interest. Both are “unproductive” assets whose value originates in the investment itself. Shares are invested in order to participate in the success of the company. Or, via government bonds, one participates to a certain extent in the development of the entire economy.

XAU: I understand your argument, but I would still not consider gold and Bitcoin to be equivalent. This is because gold is strong and stable. Gold is only available in limited quantities and is therefore valuable. Every year the amount of gold mined grows very steadily by about 1.5 percent. Even after large price increases, mining companies have not been able to expand their production significantly. Central banks, on the other hand, have been siphoning off vast amounts of money since the financial crisis, amounts that I can no longer even imagine because of the many zeros. Surely, they will go bankrupt at some point!

BTC: On that point we are in complete agreement. The number of Bitcoin cannot be increased arbitrarily at will! Gold and Bitcoin could therefore be two ways of protecting against the dangers of the central banking system.

XAU: But with digital currencies, you could also add the numbers zero and one to somewhere in the code and thus create new “currency”.

BTC: [Laughs] I’m so glad you brought that up. You’re kind enough to play into my hands. In fact, Bitcoin will become even “stronger” than gold over time, because the maximum number of Bitcoins available is exactly 21 million. That’s all there is, and that’s all there will ever be, the Bitcoin protocol stipulates this. Every four years the inflation rate of Bitcoin is therefore halved. In May of this year, Bitcoin’s inflation rate will fall roughly to that of gold and in the future Bitcoin will be even “stronger”, even less inflationary than gold. See also the different stock-to-flow ratios in comparison [chart on the next page, Figure 5]. Simply changing a few numbers in the code is absolutely impossible. There would have to be a 95 percent approval of the miners to do this. But Bitcoin thrives on the fact that it is a scarce commodity, so broad approval for such a change is almost impossible.

Figure: Various Stock-to-Flow Ratios in Comparison

Bitcoin and Gold Stock to Flow
Bitcoin and Gold Stock to Flow

Source: Incrementum AG

XAU: But what about the opportunity then to just create a new cryptocurrency? I’ve heard that one could basically just copy Bitcoin, and everyone could create their own version. Isn’t that called hard fork? Wouldn’t that just double the maximum number of Bitcoins in seconds?

What is a Hard Fork?  
Simply put: a fork is the further development of a software. A hard-fork, i.e. a backward-compatible change to the rules on the blockchain, results in a blockchain becoming two blockchains. At the time the hard fork is published, the blockchain users have to decide whether they want to stay with the old blockchain or whether they want to switch to the new one. This decision must be made actively. A hard fork always leads to a split, but the blocks remain the same until the split. A detailed explanation can be found on the Crypto Research Report’s website under the following Link.      

BTC: Technically, while this sounds quite simple in theory, it is extremely unlikely that a copy of Bitcoin would be widely adopted:

First of all, the survival of a new cryptocurrency depends on whether there is any interest in it at all. Why would Bitcoin investors, who probably also trust Bitcoin because the system has limited inflation, want to switch to a new cryptocurrency system? There has to be added value here. If there is not, the hard fork will be very difficult. This has been seen with all Bitcoin hard forks so far. Secondly, the Miners who secure the system would have to go along with it and make their computing power available to the new Bitcoin version in the future. But the Miners don’t do that, because they have a far greater incentive to mine the most valuable asset. Without high computing power this “new version” of Bitcoin would be very insecure and thus is not an attractive investment.

XAU: Okay. You know, I keep hearing that Bitcoin has a scaling problem. If you want to use it as a widespread currency it’s way too expensive, right?  

The “Scalability” Problem of Bitcoin
Bitcoin’s current version allows for a maximum of seven transactions per second. If Bitcoin really wants to be used as a means of payment in the long term, at some point that rate will be too little.  

BTC: You are correct, there is currently a scaling problem that is caused by the size and decentralization of the Bitcoin network. There is a trade-off between the security of the network and the speed of transactions. One perspective is that Bitcoin does not have to become a mass payment medium to be valuable. This is true for gold as well. The smaller the quantity of gold, the higher the transaction costs in terms of the price difference between buying and selling. It is questionable whether one should really invest in gold if one only wants to buy 1 gram of gold. With larger quantities of gold, the transaction costs are hardly significant. From a cost perspective, gold is therefore well suited as a store of value for larger investment amounts. Bitcoin can be viewed in the exact same way. From a cost point of view Bitcoin is store of value for larger amounts, i.e. digital gold, but it admittedly can be a volatile one.

XAU: Interesting. But Bitcoin’s ultimate claim was to be the advanced electronic payment system. Is that now unfulfilled because of this scaling problem?

BTC: Quite correct. The title of the so-called white paper was even “Bitcoin: A Peer-to-Peer Electronic Cash System”. And there are intensive efforts to fulfill this claim. There are various approaches to enabling more transactions per second. Hard forks are just one approach, which we have already seen with Bitcoin Cash, for example. Other possibilities exist in the areas of off-chain transactions, such as the Lightning-Network. There, transactions outside the blockchain are processed quickly and securely. In any case, thousands of programmers worldwide are working on the solution to this issue. There is an incredible amount of human capital behind this, which is also responsible for the fact that the hurdles that have been overcome so far have been handled quite effectively. If the scaling problem is actually still being resolved, it would not only be digital gold, but also a strong digital currency! So, another difference between gold and Bitcoin is that Bitcoin can be used as a means of payment and a store of value at the same time. This is a huge advantage of Bitcoin over gold, because gold is hardly suitable as a means of payment.

XAU: Well, I must strongly object here. In the days of the classic gold standard, gold was indeed used as a means of payment! Today’s central banks tend to overlook the period from 1870-1914, when there was slight deflation and very high growth rates. But I think that is a different debate. In any case, I don’t understand why you, as a Bitcoin fan, keep talking about Bitcoin being a store of value like gold, considering the high level of volatility?

BTC: I think I have already been able to give you some solid arguments, such as limited inflation or the security of the system through the hashrate. I would also like to highlight the fact that Bitcoin is still in its early stages. The market capitalization as of January 9, 2020, at $ 144 billion, is only a fraction of that of gold. The significant price fluctuations are therefore also offset by an exorbitantly high potential profit. In fact, Bitcoin is an extremely asymmetric asset class, as Bitcoin either succeeds in the medium term and asserts itself as a global digital store of value or – for whatever reason – fails and becomes worthless.

Figure: Comparison of Market Capitalization Gold vs. Bitcoin 2013 – 2020

Bitcoin versus Gold Market Capitalization

 Source: Incrementum AG

XAU: Hmmm, I never thought of it that way. Bitcoin has a different payout profile than gold. I mean, gold really can’t drop to zero, or do you disagree with me on this point?

Figure: Number of Months of Different Returns of Bitcoin and Gold

Bitcoin versus Gold Monthly Return Distribution

Source: Incrementum AG

BTC: No, we are in agreement on this! Gold cannot become worthless. But the appreciation potential of gold is of course limited, since gold is known to everyone. Bitcoin is still extremely small and very young. The Internet has only been around for 30 years and Bitcoin for only 10 years. The vision is that Bitcoin will become the universal and digital value standard in an increasingly digitalized world. Very little of this has been taken into account so far. Why shouldn’t the central banks hold digital assets in 10 years? They are already thinking about digital currencies today, why shouldn’t they invest in “digital gold” at that point in time? When Bitcoin becomes established as the strongest digital currency, the central banks will hold Bitcoin as a currency reserve in addition to gold. I don’t think that’s so far-fetched. The world is changing!

XAU: Okay. Assuming you have piqued my interest, what would your investment advice be? I’ll tell you one thing right off the bat. I certainly won’t sell my gold, at least not all of it!

BTC: There are indeed crypto enthusiasts who swear by cryptocurrencies and have invested all their savings. This is of course extremely risky! On top of that, things usually turn out the way they’re supposed to! They buy in euphoria and sell in panic. But it is precisely the asymmetric payout profile that makes a small addition of Bitcoin interesting. And the high volatility can be used to your advantage through rule-based rebalancing!

XAU: Well, it seems that Gold and Bitcoin are more alike than one might think, don’t they? Together the two asset classes form a thoroughly dynamic duo.

In Case You Were Sleeping: Banking on the Blockchain

In Case You Were Sleeping Banking on the Blockchain

“Bitcoin will do to banks what email did to the postal industry.”

Rick Falkvinge

Key Takeaways

  • Coinbase is estimated to control about four percent of all Bitcoins, which would amount to more than 850,000. The asset manager Grayscale, provider of the “Bitcoin Trust,” manages around three billion USD in crypto assets. At BitGo, it’s two billion USD.
  • PayPal has already withdrawn from the Facebook Libra consortium. Visa and Mastercard are also shaking in their boots. Heads of the Bank of England and European Central Bank have expressed grave concerns regarding Libra. The project appears to be at a standstill for the moment.
  • US authorities are investigating a German company that offered an alleged gold-backed cryptocurrency called “KaratGold Coin.” The company had previously sold gold products – and had been the subject of repeated warnings from authorities in Canada, the Netherlands, and Namibia even before entering the crypto space.   
  • Demand for Bitcoin is slumping. The number of addresses from which users send Bitcoin to the major stock exchanges BitFinex and Binance is falling. However, demand for Altcoins has slumped even more. Altcoins never left the 2018 crypto winter.

Libra Meets Resistance Everywhere

“We believe that no private entity can claim monetary power, which is inherent to the sovereignty of Nations.”  

French and German Governments

While Bitcoin is gladly dismissed and smirked at by politicians and central bankers, they immediately took Libra seriously. This is interesting because the founders of Libra were strongly inspired by Bitcoin and Ethereum and have borrowed heavily from these projects.[1]This makes sense, too. Where else should they look for ideas and concepts for a cryptocurrency? Be that as it may, there is obviously great fear on the part of the state when it comes to private competition on the currency market.    

France, the USA, and China are particularly active. All for different reasons. Paris put Libra on the global agenda during its time chairing the G7 group and set up a working group on stablecoins.[2]Central bankers from all over the world openly show their skepticism. Mark Carney, the head of the Bank of England, said that Libra would have to submit to the “highest regulatory standards.” The head of the European Central Bank ECB, Mario Draghi, who has since retired from office, expressed himself in an almost identical manner. The finance ministers of France and the USA also voiced grave concern.   

The state actors have two main problems with Libra: Facebook’s market power and the impending loss of the state monopoly in the money market. Facebook can access a network of more than one billion users on its own. In addition, more than 20 partner companies are involved in the Libra consortium. A huge starting advantage. “I think that’s really what’s gotten the regulators quite in a furor about what’s happening around Libra, as opposed to bitcoin,” said Zennon Kapron, founder and director of consulting firm Kapronasia, to CNBC. Governments could gradually lose power over monetary policy if Libra ever goes live.[3]

“U.S. lawmakers are calling for Facebook to halt Libra development.”  

The Block Crypto

And it’s not just about interest rates and inflation expectations but about tough power politics, says Kapron: “Right now, the U.S. dollar has a lot of power, and the U.S. government has a lot of power because oil is priced in U.S. dollars. And, the U.S. government controls which banks can interact with the U.S. dollar, so using that sphere of influence, they’re able to really control the direction of global economics and the global political situation.” Experienced crypto investors should be perplexed by these words. How come the same state actors haven’t been as nervous about Bitcoin? Was it not Satoshi Nakamoto’s stated intention to undermine the state currency monopoly?    

The answer is yes. But unlike Bitcoin, Libra has an address and backers that you can subpoena in Congress. And that’s exactly what’s happening. American senators of both parties have been extremely harsh on Facebook at public hearings on the subject. The tech giant with the ambitious crypto plans also offers an excellent target for politicians because of its battered image. Facebook is like a “little child playing with fire,” it was said in July. “Do you really believe that people should trust Facebook with their hard-earned money?” asked Sherrod Brown, the democratic senator from Ohio rhetorically. His answer: “I just think that is delusional.”[4]     

Facebook’s Libra manager David Marcus defended himself, assuring that Libra will not compete with government currencies and that the privacy of users will be protected. Senator Brown nevertheless urged Facebook to simply stop the development of Libra. Summarized in one sentence: States don’t like Libra (and Bitcoin) because they endanger the money monopoly.[5]    

There is more resistance. The banks are nervous too. Because – and this applies to Libra and Bitcoin – before cryptocurrencies can change the monetary system, they will endanger the banks’ business model. At a meeting between bank representatives and the US Federal Reserve in September, the banks stated: “Facebook is potentially creating a digital monetary ecosystem outside of sanctioned financial markets — or a ‘shadow banking’ system. As consumers adopt Libra, more deposits could migrate onto the platform, effectively reducing liquidity, and that disintermediation may further expand into loan and investment services.”[6]

“Bitcoin is still too unstable.”  


The bank representatives seem to have overlooked the part of the Libra white paper that describes the process of creating new coins. It is true that Bitcoin is indeed a completely independent monetary system. But not Libra, because its coins are to be covered by a basket of traditional assets. Put simply, the more money goes into the Libra system, the more traditional securities the Libra Foundation has to buy for its reserve. But the main message still stands: Banks don’t like Libra (and Bitcoin) because they endanger their business model.    

The Special Case of China

China goes one step further. The government also sees danger for the control over the Chinese population by the state. Bitcoin has long been targeted by China because the regime has a general fear of capital flight. The fact that the ongoing protests in Hong Kong have again boosted Bitcoins popularity in the former British colony has certainly caused little enthusiasm in Beijing.[7]

But China also has another approach. It is much more open than other countries to the idea of launching its own, state-issued cryptocurrency. Cash is generally frowned upon in this vast empire anyway. Such a state-issued cryptocurrency could further accelerate the path to a cashless society. A pleasant side effect from the point of view of the communist government in Beijing is that such a digital state currency would also facilitate the total control of the population. It could even be integrated into the Orwellian “Social Credit” system of the People’s Republic. In addition, China wants to curb the dominance of the dollar – but not by bringing in a new currency from American “production” like Libra. To sum up: China really doesn’t like Libra (and Bitcoin) because cryptocurrencies provide Chinese citizens with a way out for their capital.[8] 

The resistance against Libra is not without consequence. PayPal has already withdrawn from the Libra consortium. The credit card giants Visa and Mastercard are also becoming increasingly nervous in the face of political pressure. According to the Wall Street Journal, they recently refused to openly express their support for the project – even though they had already promised to invest millions in the Libra reserve.

According to the plan, Libra should start sometime in 2020. But from today’s point of view, at least delays are to be expected – if not a total derailment of the plans.    

King Bitcoin Rules Over Altcoins

For Bitcoin investors, this is all a sideshow, a distraction. But from the fate of Libra some important conclusions can be drawn for the future of the crypto sector. You can’t subpoena the makers of Bitcoin, but you can subpoena those of some other crypto projects. In addition, the Bitcoin price has always responded to major Libra-related news. There is a connection – even if it is perhaps only seen on the market.

“It is clear that Bitcoin isn’t a safe haven asset today.”  


The crypto market cooled off considerably recently. Prices for Bitcoin fell from around $10,000 to just $8,000 at the end of September. The climb that began in April has been slowed down – perhaps even stopped. The number of addresses from which users send Bitcoin to the major stock exchanges Bitfinex and Binance is falling, according to data from London-based analyst TokenAnalyst. This signals “a lack of retail interest in general currently in crypto,” said TokenAnalyst co-founder Sid Shekhar. “If we go by the ‘Bitcoin as safe haven in times of recession’ narrative, the number of new users/buyers should actually be increasing.”[9]

This is a sore subject for the crypto space. This year, Bitcoin has not succeeded in establishing its reputation as a “hard” asset. The story of the alleged “safe haven” may apply to individuals and families in crisis-ridden countries, such as Venezuela or Turkey. And in these countries, you can also see a strong acceptance of Bitcoin. But from a global market perspective, Bitcoin is certainly not on a par with gold today. Perhaps the asset is simply still too young and has to earn this status.    

There is definitely no danger for “King Bitcoin” coming from Altcoins at the moment. Alts experience a continuous bloodbath in 2019. The vast majority have already been unable to benefit from the Bitcoin rise – and now that the king is going downhill, the peasants have to suffer even more. Bitcoin’s market dominance in October was 66 percent – and thus at the level of March 2017. Anyone who looks at the market capitalization of Altcoins in isolation (i. e. without Bitcoin) will notice that the bear market was probably never abandoned here. There is no other way to put it: If this trend continues, a (partial) destruction of the Altcoin sector is to be expected. This would probably be a positive cleansing process for the market, as many scams and fraudulent projects are still running – disguised as Altcoins. But it can’t be good for crypto’s image.    

Figure: Eight Coins Make Up 90% of Cryptocurrency Market

Eight Coins Make Up 90% of Cryptocurrency Market

Source: Coinmarketcap.com, Incrementum AG

Figure: Bitcoin Dominance

Bitcoin Dominance

Source: Coin.dance, Incrementum AG

In any case, further reports on scams and warnings to investors are expected. In recent months, we have seen the implosion of the PlusToken pyramid scheme, which started in Asia (probably China). US authorities are meanwhile investigating a German company that offered an alleged gold-backed crypto currency called “KaratGold Coin.” The company had previously sold gold products – and had been the subject of repeated warnings from authorities in Canada, the Netherlands and Namibia even before entering the crypto space.[10]      

In the USA, three men are on trial who are said to have sold drugs such as MDMA, Ketamine, and Xanax for Bitcoin on the DarkWeb. That alone is certainly not newsworthy. But in the run-up to the trial, the court decided to release only two of the three men on bail. The alleged leader must wait behind bars for his trial. Why? He has considerable Bitcoin assets at his disposal – and that leads to a flight risk, the court says. In this context, the authors at The Block are asking: “When will criminals learn that Bitcoin is an open payment system that can be traced by anyone?” The answer to this question would also be of interest to us.[11]     

What Will BAKKT Bring to the Table?    

“Facebook’s alliance crumbles as the controversial digital currency loses important partners.”  


But it’s not all bad news. The professionalization of the Bitcoin market, which we have documented in detail in previous reports, continues to progress. In addition to players such as Coinbase and Fidelity, Bakkt plays a major role here. Bakkt is the crypto project of Intercontinental Exchange (ICE), the parent company of the New York Stock Exchange (NYSE). Apart from Fidelity’s entry into the crypto sector, there is probably no other project with more significance. The Bitcoin futures promised by Bakkt, which, unlike those of CME, are ‘physically’ settled, were eagerly awaited by the market. But the start at the end of September was disappointing. On the first day, Bakkt traded only 72 Bitcoin via futures. For comparison: On the first day of CME futures at the end of 2017, the figure was 5,298.[12]

Figure: BAKKT vs. CME vs. CBOE (Trading Volume on First Trading Day in Million USD)

BAKKT vs. CME vs. CBOE (Trading Volume on First Trading Day in Million USD)

Source: BAKKT, CBOE, CME, The Block, Incrementum AG

Figure: BAKKT Trading Volume Over One Month (In Million USD)

BAKKT Trading Volume Over One Month (In Million USD)

Source: BAKKT, CBOE, CME, The Block, Incrementum AG

Some observers, including JP Morgan analysts, even blame the weak start of Bakkt on the fall in Bitcoin prices in the preceding weeks. The reason: Miners and other owners of physical Bitcoin may have taken shorts to hedge against falling prices. Seen like this, the launch of Bakkt futures was indeed a self-fulfilling prophecy – but from the point of view of the shorter and not that of the broad market. We know that the expectations of the broad masses are rarely fulfilled in the markets in general and in the crypto markets in particular. The continuing dominance of the “dumb money” of retail investors plays an important role here.[13]     

“It’s too soon to write off Bakkt.”  

Wall Street analyst

We therefore consider it appropriate to think beyond short-term headlines and price movements. Bakkt is by no means just introducing futures or another crypto exchange. Instead, ICE is working on a complete solution for the professionalization of the Bitcoin markets. Put simply: They try to prepare the crypto market in such a way that institutional investors can also get involved. The futures are an important step, as Bitcoin’s pricing still takes place on the spot markets today, which is unusual for other assets or commodities. “What Bakkt fundamentally believes is that price discovery is going to happen in an end-to-end regulated market,” said Bakkt COO Adam White, “Most of that price discovery is happening in the spot market, but it is going to switch to the futures markets.”[14]But there is a second step that is at least as important from Bakkt’s point of view: Custodianship.

The question of professional storage of Bitcoin and other crypto assets on behalf of institutional investors remains unanswered. We have described this problem several times in previous reports. Actors such as BitGo, Coinbase Custody, and Fidelity are working on their own solutions. At Bakkt, the custody question is at the center. The main focus here is on the New York location, the connection to the NYSE and the experience in working with regulators. On Bakkt’s website, they say that they want to set a new standard in the custody of digital assets by using the tools that are also responsible for NYSE cyber security.[15]

If you look at the history of the Intercontinental Exchange and its surprising acquisition of the iconic New York Stock Exchange, you immediately see that an innovative and highly ambitious team is at work here. Bakkt is apparently intended to secure the dominance of the NYSE in traditional markets for the future. “You can’t ignore ICE,” writes Frank Chaparro on “The Block” – and he’s certainly right about that.[16]    

But in one crucial area, Bakkt is far behind other actors. The popularity of futures has increased significantly in recent weeks and the rather embarrassing first day has been forgotten. But companies such as Coinbase and BitGo have long had large amounts of physical Bitcoin in their “safes.” Bakkt’s still lagging behind. Chaparro suspects that Coinbase controls about four percent of all Bitcoins, which would amount to more than 850,000. The asset manager Grayscale, provider of the “Bitcoin Trust,” manages around three billion USD in crypto assets. At BitGo, it’s two billion USD.

No ETF Yet, but the Central Banks Are Printing Again    

With its “Trust,” Grayscale offers one of the few products that enable traditional investors to profit from Bitcoins price movements. Recently there has been a strong increase in interest from institutional investors, Grayscale said recently. For the first time in months, money did also flow into Altcoins again.

What is still not available is a Bitcoin ETF. The reasons for this do not shed a good light on the current crypto markets and also explain why Bakkt is aiming at the establishment of a fully regulated futures market. The ETF is like the Holy Grail for some Bitcoin investors. These exchange-traded funds allow investors to invest in virtually any market. For example, the launch of the largest gold ETF to date in the 2000s is often associated with the rise in the gold price since then. The logic is simple and also applies to Bitcoin: Whoever buys an ETF does not have to worry about the custody and security of his/her assets.

But the US Securities and Exchange Commission (SEC) rejected another ETF application in mid-October, that of Bitwise Asset Management. A month earlier, the SEC had done the same with an ETF application from VanEck. The SEC’s justification is a slap in the face for every Bitcoin fan: The applicants have stated that “95 percent” of the Bitcoin spot market could possibly be fake, according to the SEC: Moreover, it has not been possible for Bitwise to identify the “real” Bitcoin market or to prove that it can be distinguished from fraudulent or manipulative activities, the regulator stated. The application must therefore be rejected, according to the SEC.[17]     

It is therefore in the interest of all professional players in the Bitcoin sector to create a regulated crypto market as quickly as possible. What Bakkt and others are working on seems to be a basic prerequisite for the further development of Bitcoin and Co. Only when there is a transparent and legitimate market, which has also taken over pricing, will the authorities approve a Bitcoin ETF. It could be years before we see something like this. This would also explain why major players in the ETF market, such as Blackrock or Vanguard, have so far shown no interest in the Bitcoin sector. And this despite the fact that there is a permanent race for first place in the ETF market.

Investors who have already invested should also know that an ETF decision by the SEC is headline news but currently has no fundamental significance. The prices of Bitcoin, Ethereum, and other cryptoassets shot up after the negative decision in mid-October.

Easy Money is Good for Bitcoin    

Many analysts and investors are now looking primarily at the development of the global economy and monetary policy to determine where Bitcoin might go next. The recent easing by central banks in Europe and the USA is generally interpreted as positive for Bitcoin prices. “We know that loose monetary policy has always historically helped Bitcoin,” said Joe DiPasquale, head of BitBull Capital, to Coindesk.[18]Analysts of Deutsche Bank also see this trend continuing.[19]    

“There are only 3 million Bitcoin left to be mined.”  

Anthony Pompliano

It seems that Bitcoin returned to its roots in October. The cryptocurrency was introduced more than a decade ago as an alternative to government money when central banks announced the biggest easing in history to date. After a brief period of normalization over the past two years, fears of an economic downturn have led to a new round of easing. This inflation of the economy drives money into various asset classes: Stocks, real estate, gold and even Bitcoin.

It is, if you like, the global version of a trend that can be observed on a small scale in crisis countries. When their own currency weakens, people look for alternatives. Unlike Facebook’s Libra, Bitcoin has long since established itself as such an alternative. And even if the fundamental professionalization of the sector is likely to continue for a long time to come, many investors have long regarded Bitcoin as a serious asset that can flourish and prosper at least in an environment of cheap money – an environment that could be with us for many years to come.

This article has been sponsored by Jelvix, and they recently wrote an article on how to choose what blockchain APIs to pull pricing data from for blockchain projects.

[1] See” Libra White Paper Shows How Facebook Borrowed From Bitcoin and Ethereum,” Brady Dale, CoinDesk, June 18, 2019.

[2] See “Paris will Facebook-Geld stoppen,” Oliver Grimm, Die Presse, September 12, 2019.

[3]  See “Facebook’s dream of a global cryptocurrency raises political stakes — for the regulators themselves,” Elizabeth Schulze & Saheli Roy Choudhury, CNBC, August 25, 2019. 

[4] See “Libra’s Biggest Challenge May Be Facebook’s Tarnished Reputation,” Kurt Wagner, Bloomberg, July 16, 2019.

[5] See “Facebook’s Crypto Plan Called ‘Delusional’ as Senate Digs In,” Robert Schmidt et al. Bloomberg, July 16, 2019.

[6] See “American Banking Giants Sound Off Against Libra as Monetary Threat,” David Pan, CoinDesk, October 3, 2019.

[7] See “Hong Kong protests are accelerating bitcoin adoption,” Adriana hamacher, yahoo!finance, September 2, 2019.

[8] See “China’s Digital Currency Will Be Two-Tiered, Replace Cash: Binance”, William Foxley, CoinDesk, August 2019, 2019.

[9] See “Fewer People Are Sending Bitcoin to Largest Crypto Exchanges,” Olga Kharif, Bloomberg, September 5, 2019.

[10] See “‘Gold-Backed’ Crypto Token’s Promoter Investigated by Florida Regulators”, Leigh Cuen, CoinDesk, October 4, 2019.

[11] See “Defendant’s sizable bitcoin transactions cited in drug defendant’s bail denial order,” Nelson Rosario, theblockcrypto.com, October 6, 2019.

[12] See “Bakkt Exchange’s Bitcoin Futures See Slow Start on First Day of Trading,” Sebastian Sinclair, CoinDesk, September 23, 2019.

[13] See “JP Morgan Chase Pins Bitcoin Price Plunge on Bakkt and BTC Futures,” Daily Hodl Staff, THE DAILY HODL, September 29, 2019.

[14] See “Calling Bakkt a ‘crypto exchange’ misses the mark on what they’re actually doing,” Frank Chaparro, theblockcrypto.com, August 19, 2019.

[15] See “Bakkt.com – About”, Bakkt Staff, October 11, 2019.

[16] See “Calling Bakkt a ‘crypto exchange’ misses the mark on what they’re actually doing,” Frank Chaparro, theblockcrypto.com, August 19, 2019.

[17] See “SEC not convinced a ‘real’ Bitcoin market exists, denies Bitwise Bitcoin ETF,” Rakesh Sharma, Decrypt, October 10, 2019.

[18] See “Bitcoin Jumps to 3-Week High Near $8,600 as Fed Plans New Round of Reserve Increases,” Brad Keoun, CoinDesk, October 9, 2019.

[19] See “Bitcoin could be rising due to central bank easing, Deutsche Bank says | Street Signs Europe”, Jim Reid, CNBC International TV, June 26, 2019.

Introducing the Academic Blockchain Podcast


Listen Now to our exclusive interview with the Director of Economics at the Center for Aerospace and Securities Studies in Pakistan, Dr. Usman Chohan.

The Academic Blockchain Podcast is a weekly podcast where we interview academics regarding papers that they recently wrote on the topic of blockchain and cryptocurrencies.

In this inaugural edition, we discuss why Dr. Chohan believes that cryptocurrencies will be the future, and that stablecoins are just a short-term intermediary step. Dr. Chohan does not believe that stablecoins will be able to maintain their pegs in the long-term because:

  1. Stablecoins that are backed by collateral are not scalable. If a stablecoin like Tether has to store dollar reserves, then eventually Tether would need to own and store trillions of dollars in order to service the world’s demand for a reserve currency.
  2. Speculative attacks on coins that are unbacked can break the peg. This is what we saw when Thai authorities abandoned the US dollar Thai baht peg on July 2, 1997, and when the Bank of England broke their peg to the Deutsche Mark during the European Exchange Rate Mechanism (ERM) in 1992.

We discuss that Pakistan’s currency devalued from 10 rupees to 1 USD dollar in the 1980s to the current exchange rate of 150 to 1. We discuss why pegs fail, and why blockchain probably will not help currencies maintain their pegs.

We also discuss how the Triffin Dilemma is all about the trade-offs between short-term benefits and long-term costs when a country’s currency becomes the global currency. We discuss how the United Kingdom’s pound hegemony and the US dollar’s hegemony have not helped these countries in the long-run.

We also discuss how Saudi Arabia’s exclusive use of the US dollar for oil sales is keeping the entire economy running on dollars, and why any oil producing country that moves away from the dollar is a major target for US warmongering.

In the following weeks, we will be releasing our podcast with ConsenSys discussing their central bank digital currency white paper released during the World Economic Forum’s 2020 conference in Davos, Switzerland. On the lineup also includes an interview with Stanford University Professor Dan Boneh who recently wrote a paper on problems with MakerDao’s Oracle data.

Tomorrow our weekly newsletter comes out. The report compares the Corona virus and the 9/11 Terrorist Attack crisis in 2001. Both are Main Street crises that the Fed is responding to by lowering rates. In the newsletter, we discuss all of the actions that the Fed has done over the past two weeks.

We discuss how the Fed’s three newest collateralized lending programs and the daily $1 trillion dollars in repurchase agreements or “Repos” do not mean that the dollar is being devalued in the long-term. On the other hand, we discuss how buying securities outright is bullish for crypto. Sign up for the newsletter now to make sure you understand what the Fed is doing and whether or not the Fed’s actions will devalue the dollar and send crypto soaring.

Crypto Research Report Newsletter

Incrementum Recommended Books: Crypto Currencies and Blockchain

Incrementum Recommended Books Crypto Currencies and Blockchain
Incrementum's Book Review

Today, thousands of cryptocurrencies exist and even more books on the topic of cryptocurrencies exist. Determining which books are worth the read is almost as difficult as determining which cryptocurrencies to invest in. A book that we recently read called Kryptowährungen und Blockchains was published last year in March 2019 by Dr. Niklas Schmidt. This book has already had to be reprinted several times due to popular demand and the English version, Crypto Currencies and Blockchain is set to be translated and release by the end of this year 2020.

Das Buch Kryptowährungen und Blockchains von Dr. Niklas Schmidt

The book closes the gap by covering detailed insights about cryptocurrencies and blockchains for the German-speaking readership. It is comprised of three main characteristics: First and foremost, it contains about 400 Frequently Asked Questions (FAQs) that provide an easily digestible introduction to the subject without having to read the entire book– although we highly encourage the full read.

Secondly, the book covers a wide spectrum of topics in great detail from technological functionality & characteristics of the blockchain to its economic aspects & implications. Some examples of this include: Bitcoin’s price development, the disruptive effects blockchain has on various industries, and a legal overview covering civil, tax, accounting, corporate, labour, commercial, data protection, supervisory, money laundering and criminal law.

Thirdly, the content is practical in that it contains many real-life examples and anecdotes so the reader can have better context. Some chapters also offer helpful lists of the industry’s current wallets, exchanges, blogs, newsletters, and apps.

Overall, this book we recommend without restriction and a great resource for both beginner readers and those who want to acquire a deeper knowledge of Bitcoin and beyond.

A Physical and Digital copy of Kryptowährungen und Blockchains (German) can be purchased on the publisher Linde Verlag’s Website.

The English version will be released this year (late 2020).

Dr. Niklas Schmidt

The Stock to Flow Model: Mark Valek’s Exclusive Interview with “Plan B”

The Stock to Flow Model Mark Valek’s Exclusive Interview with Plan B

“I read the whitepaper regarding Bitcoin, was hooked and went down the rabbit hole.”

Plan B

Key Takeaways

  • When asked if the Bitcoin Halving is Already Priced In, Plan B Says “No.”
  • Plan B says that Bitcoin has done a 10x increase during the last halvings, and his model forecasts this trend to continue.
  • The largest critique of Plan B’s Stock to Flow Ratio Model is that it does not consider demand. Plan B answers this critique by saying that many famous financial pricing models including Capital Asset  Pricing Model and the Black & Scholes Model do not consider demand.

Plan B is blogging under a pseudonym. Who exactly is behind this baseball cap remains unknown. We also asked him some personal questions in this interview. His Twitter handle is: @100trillionUSD.

Plan B

Plan B, When Will You Show Yourself?

As explained in the previous chapter, we arranged an interview with the father of the “Stock-to-Flow Model”. Plan B says that Bitcoin is here to stay. He also expects the price explosion of Bitcoin to be foreseen by his model. Why he is so sure about this? How does he deal with critics? Will he ever take off his cap and show his face?

Mark: Plan B, almost a year ago the publication of your model really shook up the entire crypto community. How do you deal with all this attention you and your model have received? What have you experienced this past year?

  • Plan B: It has been a very interesting year since the publication of the article March 22nd 2019. The paper was well received and I gained valuable feedback from econometricians and math/stats people all over the world. I love the interaction with the community and the open source vision of sharing knowledge. I really enjoyed doing the podcasts. With 60k followers and a full-time job, I do have to make choices. It is almost impossible to read all the comments, DM’s (Direct Messages), Telegram messages, WhatsApp messages, emails, and I hope everybody understands. I want to keep focused on analysis, investing, and writing more articles.

Mark: Can you tell us, what you do for a living and why do you use a pseudonym?

  • Plan B: I am both an analyst & investor at an investment office of a large institutional investor in the Netherlands. As a team we invest $50+ Billion AUM. My main focus is on mortgages, loans, and structured finance. I do not want my employer to have any negative consequences from my Bitcoin “hobby”. Also, I consider it good operational security to remain anonymous.

Mark: Where did your interest in Bitcoin come from?

  • Plan B: If you have seen the movie The Big Short (2015), that was my life from 2007-2008: CDO’s (Collateralized Debt Obligations), ABS (Asset Backed Securities), and RMBS (Residential Mortgage Backed Securities) etc. The craziness of negative interest rates and QE (Quantitative Easing) forced me to rethink everything I knew about finance. So, I was actively looking for QE hedges in 2013 and found an article about Bitcoin on the website Zerohedge. I read the whitepaper, was hooked and went down the rabbit hole.

Mark: Why did you start to model the value of Bitcoin?

  • Plan B: I started modeling because I wanted to know what drives Bitcoin’s price. I noticed that there was a lot of technical analysis, but not much statistics / econometrics modeling. So, I tried to make a more fundamental model, based on Bitcoin value: it’s scarcity.

Mark: In our “In Gold We Trust Reports” we have been writing about the S2F ratio of Gold and Silver for many years. It’s great, that through your model, this concept of scarcity has been introduced to an even greater community. In terms of terminology, however, we prefer to talk about constancy, rather than scarcity when talking about SF (Stock to Flow). A higher SF ratio indicates a more constant quantity rather than a scarcer quantity of the good (as a higher scarcity indicates that the quantity actually goes down). Even though this is just a minor differentiation in terminology, we think that this could be helpful for a more intuitive understanding of the S2F concept. What are your thoughts in this respect?

  • Plan B: Unforgeable scarcity (Nick Szabo) is a well know concept in the Bitcoin community, so I see SF as a nice quantification of that concept. Frankly I think some people in the “commodity community” don’t have a very good definition of scarcity. For example, I talked to a lot of commodities investors that think platinum is scarcer than gold because there is less platinum in the world than gold. I prefer the definition of scarcity that relates production (flow) to stock. You could also interpret this as inability of producers to influence stock (and thus price): with oil producers have much influence, and with gold less. Maybe your definition of “constancy” is the same? This is something we should discuss further.

“The Drunk & His Dog” Analogy

The drunken sailor goes out with his dog on a leash, wanders around in a random fashion and the dog has to stay with him, but sometimes he is on the right, sometimes on the left, but he cannot go any further as he is on a leash.

You don’t know where the drunken sailor and the dog are going, but you do know they stay together.    

Mark: Could you please explain to us the analogy regarding “the drunk and his dog” again and tell us the meaning for our readership?

  • Plan B: The drunk and his dog story is a popular story to explain cointegration. Correlation is about how two series move together. Cointegration is about two series staying together. So, the drunk walks a random unpredictable path, and his dog too, but the distance between the drunk and the dog is predictable, it is never larger than the leash. So, without knowing where the drunk or dog are going, we can predict they stay together. With stock-to-flow and Bitcoin it is special case of course, because we know where one of the two is going: SF. Cointegration is used to test if correlation is spurious or real: no cointegration = spurious. SF and BTC are cointegrated, so they are likely (no guarantee) not spurious.

Why Current Prices of BTC Do Not Reflect the Predictions of the SF-Model

Mark: Are people too dumb to get it?
Plan B: No, it is enough if some people get it. Like with insider information, if only 10-100 get it, they will move the price. Dumb money is formally “noise” according to the EMH (Efficient Market Hypothesis), it is irrelevant.
Mark: Is it bad model?
Plan B:  I think the cointegration is real, so the model is good. So far, I have not seen anything better.
Mark: Are the ones that “get it” already invested?
Plan B:  Most will be invested, but I think that many who “get it”, also see the big risks such as government bans, a software bug, “the next Bitcoin”, death spiral, etc. These risks prevent them from going all in. Actually, this is true for myself as well: I am invested, but not 100%; if I knew 100% certain Bitcoin would go to $100k USD in 2021, I would go all in and even lend money.
Mark: Are the markets inefficient?
Plan B: No, the markets are efficient. Also, the $150 Billion Bitcoin market is efficient, as I have shown in the FX (Foreign Exchange) example in my article. Easy arbitrage between BTC/USD, BTC/EUR, and BTC/JPY markets is not possible.
Mark: Do people know about the model?
Plan B:  Enough people know about it. I have 60k followers on Twitter and many of them are investment bankers, quants, miners, venture capitalists, hedge-fund CEO’s, and CIO’s, etc. The SF model was featured in MSNBC and in Forbes.    

Mark: Your model has occasionally been criticized – that it only explains the Bitcoin price in reference to Bitcoin supply. If this is even possible, how do you incorporate demand?

  • Plan B:  People that use the demand argument probably don’t have a statistics or investing background. The argument is theoretically right (price is a function of supply and demand) but there are a lot of famous pricing models that do not use demand (or supply) as input and still give good predictions. Some examples of this are the CAPM (Capital Asset Pricing Model) and Black & Scholes model, as both price with only risk / volatility (standard deviation, etc). The demand argument is really based on ignorance.

Mark: Let’s now throw a new thought into the equation: The model tries to explain the price of Bitcoin in USD. We know, that measuring value in fiat money over time is difficult, as fiat currencies are designed to be permanently inflated. In our mind, the model implicitly does not take into account fiat money inflation. If say, – at least for the sake of a thought experiment – the USD would hyperinflate within the next years, we would expect the model to vastly underestimate the USD value of Bitcoins. What are your thoughts regarding the dollar-inflation in regard to SF model?

  • Plan B: It is true that the SF model doesn’t correct for inflation. If we would do that, we probably see not much difference anyway because from 2009-2019 inflation was low. And indeed, in my opinion the SF model predicts USD hyperinflation because Bitcoin USD does this 10x every 4 years. Many people have problems with this thought, but for me it is not an improbable scenario, given negative interest rates and what central banks are doing with QE: they are going full Zimbabwe in my opinion.

Mark: What is the deal with the artist you commissioned? (The artist is going to make an artwork out of the charts).

  • Plan B: The artist Petek was intrigued by the charts and she asked permission to paint it. It will be a unique painting with some special elements that are yet to be revealed. It is exciting to see that a lot of other people are inspired as well and are commissioning a similar SF painting. Her idea is that she will make a series of paintings using different colors and materials based on SF. I think Bitcoin is not only about programming and money but also about a movement and a revolution. Art and science are two sides of the same thing, they belong together.

Mark: What other projects are you currently working on?

  • Plan B: I am cooperating with other Bitcoiners on research and writing more articles. I am working together with some investment funds, also traditional institutes, finding ways to include an exotic investment like Bitcoin in the existing asset mix. Also, I am doing chain-analytics, crunching the 300GB blockchain to find more patterns that can give insights and be used for proprietary trading, that is really uncharted territory.

Mark: (When) can we expect an outing of Plan B?

  • Plan B: I think the chances of me going dark are higher than an outing. I have no desire to become a public figure. Especially when the model works, which I hope and expect of course. People that want to meet me know where to find me, through my network, and everybody can verify it is me by my cryptographic signature (like on the articles).

Let’s Hope Bitcoin Doesn’t Become Any More Decentralized

Let’s Hope Bitcoin Doesn’t Become Any More Decentralized

A common claim among bitcoin enthusiasts is that it is a “decentralized” method of making payments. Here are some notable outlets making this claim:

Investopedia: “Bitcoin offers the promise of lower transaction fees than traditional online payment mechanisms and is operated by a decentralized authority, unlike government-issued currencies.”

Business Insider: “Because bitcoin is decentralized, it’s not directly subject to market forces such as interest rates or currency debasement.”

St. Louis Federal Reserve: “Bitcoin is a decentralized recordkeeping system, with updating of the record of transactions in the blockchain.”

This is in addition to the hundreds of other websites, both professional and amateur, that assert that bitcoin is a decentralized system.

But a new working paper from economists William J. Luther and Sean Stein Smith is casting doubt on this characterization of bitcoin. Luther and Smith offer a new taxonomy of the different methods of processing payments: centralized, decentralized, and distributed. The differences may seem superficial, but the implications can be significant.

Before we begin defining and understanding the different systems, it’s best to review some basic concepts.

First, let us define a medium of exchange as a good which is acquired in order to be exchanged for another good. Second, let us define money as the most commonly accepted medium of exchange. Third, we must distinguish between the production of money and the verification of an exchange: the production of money is creating new monetary units and adding them to the system; the verification of an exchange (a.k.a., clearing or processing) is determining whether sufficient funds exist to fulfill a transaction. We can go further and define trust as the belief that a transaction will be verified before it actually is.

With those preliminaries out of the way, we can now proceed to understand the three different systems of payment.

A centralized payment system has all transactions going through a third party for verification. The “third party”, in practice, may be several distinct parties networked as a series, with one verifying the work of another in sequence. The key feature is, however, that if the third party is unable or unwilling to process a payment, the two parties in a transaction will be out of luck.

Under a centralized system, there is effective a monopoly on verification. No one other than the centralized authority is permitted to produce money or verify transactions. As such, all other users must trust the judgment of the central authority.

A decentralized system is one where there are many independent verification parties. As an extreme example, a system where every transaction has no intermediaries (like a barter system) is a decentralized system. But decentralization exists on a spectrum: a situation where there are dozens of independent firms competing for the privilege of verifying a transaction is also a decentralized system.

This was the case in the era of private coin production. In the days of commodity monies, any private person with access to a mint could create their own money. Producers would compete on the aesthetic and value-to-weight ratios of their coins. The economist George Selgin documented perhaps the golden age of private coinage, England of the 18th century, in his book Good Money:

The commissioning and issuing of commercial coins, which had been the preserve of a few industrial and mining firms, was taken up by all sorts of small businessmen – grocers, drapers, silversmiths, malsters, and pretty much anyone whose dealings generated a need for small coin. Well, not just anyone: even small-scale token issuers were almost always persons of good standing in their communities, whose token issues were generally modest in comparison with their capital and command of credit.

Selgin (2011, p. 123)

Of course, kings and other nobles have been exercising virtual monopolies on money creation for millennia. So, what had happened to cause a break in the centralized system? According to Selgin, the Royal Mint in England stopped producing low-value copper coins as a cost-saving measure, despite the fact that there was great demand for them. Conveniently, there were many copper mines that were willing to sell their raw metal to those private individuals who would go on to mint coins. As metals were the commonly accepted medium of exchange (otherwise known as money), anyone with access to metals who could fashion them into something attractive for consumers could create his own money. And as Selgin (2011) documents, they were indeed attractive:

The other thing most eighteenth-century tokens had in common… was their extraordinary appearance. According to Francis Klingender… the tokens displayed a unique ‘combination of intellectual vigor, social consciousness, and imaginative design’ (Klingender [1943], 46.) [Citation corrected.]

Selgin (2011, p. 133).

Under this system, the functions of producing money and verifying transactions are divorced. The mint buys the raw materials and produces the money. A person then makes a direct exchange with the producer for the money, with no third-party intervening. The person who now owns the money will get use it at a new transaction. The transacting parties themselves verify each transaction, while the producers focus on minting easy-to-verify coins. If the users of the coins lose their trust in a coin, they stop patronizing the producer and he or she goes out of business.

Since every step in this process involved only two transacting parties, these are all decentralized markets.  

Eventually, of course, the central powers took notice of what was happening and took over the money production process again. The initial excuse is to ensure safety of the parties. Then overtime more duties are assumed by the regulator. This is called regulatory creep. In the 1900s, regulatory creep led to the advent of the modern central banking system with the systematized backing of fractional-reserve banking (FRB). Under an FRB regime, while the central bank and government mint create so-called “base money” (cash and ex nihilo virtual deposits into the accounts of chartered banks), it is the private banks that end up generating most of the media of exchange in the economy. Each bank does this by lending out the deposits of their checking account depositors.

Since each bank makes the decision to expand the supply of money via loans of demand deposits, the system functions as a decentralized network of money producers. However, the verification of transactions is still centralized. Thus, the current monetary regime is a blended centralized-decentralized system.

That is, until the existence of bitcoin. Bitcoin is neither a centralized nor a decentralized system. Instead, it is a distributed system.

A distributed monetary system distributes the role of verifying transactions to everyone on the network. This is distinct from a decentralized system, where the power of creating and verifying money is split up among many people. A distributed system has a two-fold approach to verification: first, the entire network shares a ledger that documents every transaction that has ever happened; second, the network has a shared protocol or procedure for verifying an update to the ledger via some kind of consensus rule.

The principles of distributed monetary systems come from the world of distributed computing. The major innovation of bitcoin was that it was the first to recognize how distributing trust among the entire network can be an attractive method of transacting. In effect, bitcoin is a trustless payment network, as buyer and seller no longer have to trust each other or a third party. Instead, only trust in the faithful execution of the automatic protocol is required.

This removal of interpersonal trust is a giant achievement. Trade axiomatically makes us richer. But in order to trade, we must trust the person we are trading with. Historically, trade has been mostly within tribes, among family members or other closely-knit individuals where trust was high. Trust was the only way to exchange.

After intertribal and cross-regional trade was discovered, and exchanging with strangers became a common occurrence, the necessity of money became apparent: it is difficult to know what others want, but everyone will want money. Direct exchange gave way to indirect exchange, albeit decentralized. While money superficially looks like an inefficiency, it facilitated a much smoother market. A decentralized market does not require a fully trusting society, but just enough trust that you find it unlikely to be taken advantage of.

The early markets were decentralized. Buyers and sellers now only needed to trust each other in an exchange. Over time, as tribes settled down to form cities, kingdoms, and empires, centralization of trade in the form of government fiat money, government mints, and so on, became the norm. Trust from the counterparty was replaced with trust in the centralized authority. However, centralized authorities have tendencies to restrict trade on a whim, in the name of security, nationalism, or other infamous ends.

Bitcoin offers a way forward. There is no longer a need to rely on a mercurial central authority to verify transactions and create money, nor do you need high trust. By extending the scope of the market, many more exchanges can happen, creating more opportunities for innovation, cost-reductions, and other benefits of making a connection with other people.

Luther and Smith (2020, pp.14-25) do point out, however, there is more to bitcoin than its distributed payment network. Firstly, it is the governance of the protocol itself. Here, changes to the protocol must be arrived at via popular consensus among the developers and miners. We can describe the decision-making process as broadly decentralized, despite the fact that some mining pools are more influential than others. Secondly, there is also the issue of exchanges and e-wallets. As they are third parties that verify transactions, they are centralizing forces in the bitcoin space. 

The original bitcoin whitepaper does not mention “decentralization” at all. Instead, the system was called a “peer-to-peer distributed time-stamp server.” Why did a distributed system become mislabeled as a decentralized one? Perhaps because many have an intuition that the current regime is highly centralized; and since bitcoin is not centralized, it must be the opposite: decentralized. However, there is a third way of organization: distribution.

A distributed system is not the same thing as a decentralized system. Decentralized systems require high trust between buyer and seller; meanwhile distributed systems require all peers on the network to share and communicate with each other constantly. As such, distributed systems can offer less privacy than a decentralized system, wherein all exchanges are only between buyer and seller. Furthermore, distributing among a large number of participants the responsibility to store every transaction between every participant on the system, may prove to be more costly (in terms of storage costs, energy costs, and time to approve a transaction) than a centralized system where only one entity is responsible.

On the other hand, decentralized systems can be cumbersome, costly, and the degree of trust required to fulfill them can serve as a hinderance to trade. A move towards decentralization would mean more trust is needed to engage in an exchange, in addition to regulatory creep. By reducing the level of trust required to verify a transaction, bitcoin has the potential to open up trade among more strangers who otherwise wouldn’t trust each other. 


Luther, William and Sean Stein Smith (2020) “Is Bitcoin a Decentralized Payment Mechanism?” Social Science Research Network.

Klingender, Francis Donald (1943) “Eighteenth Century Pence and Ha’Pence.” Architectural Review 93: 41-46.

Selgin, George. (2011) Good Money. Independent Institute.

The “Plan B” – Model: The Holy Grail of Bitcoin Valuation?

Bitcoin and Gold Stock to Flow
Bitcoin and Gold Stock to Flow

“The high stock-to-flow ratio, the liquidity of the market, and its unique features as a monetary good set gold apart from all other asset classes and make it an efficient hedge against systemic market risk.”

In Gold We Trust Report 2011, Page 26

Key Takeaways

  • The “Plan B” valuation model for the development of Bitcoin’s price quickly gained worldwide attention. In it, the price of Bitcoin is modelled with the “stock-to-flow ratio”, a proxy for scarcity.
  • Historically, the stock-to-flow ratio was an almost perfect exogenous regressor for the development of the price of Bitcoin (R2 was 95%).
  • According to the model, the price of Bitcoin should rise to USD 55,000 after the next “halving” in May.

What is the Stock-to-Flow Ratio?

Since the article “Modeling Bitcoin’s Value with Scarcity” appeared on the online platform Medium in March 2019, it has already been translated into over 25 languages and will soon spread worldwide. But what exactly is it all about and what conclusions can be drawn from it? In the following article, we’ll explore these and other questions.

The basis for the entire model is the so-called “Stock-to-Flow Ratio”, a concept that interested readers of the Crypto Research Report and its sister report, the “In Gold We Trust Report“, have been familiar with for many years. For those who are not yet familiar with the concept or who would like to refresh their knowledge of it, please refer to the info box on the left.

The author of the article, who blogs under the pseudonym “Plan B”, dared to try to model the price of Bitcoin with the “Stock-to-Flow Ratio” (hereinafter SF). The concept, which was originally applied to gold and other precious metals, hit the Bitcoin scene like a bomb. How did it come about that a concept for commodities could be applied to a cryptocurrency?

The Stock-to-Flow Ratio
The stock-to-flow ratio is a ratio of two figures corresponding to raw materials, which can ultimately be used for price modeling.   The term “stock” refers to how much of a certain raw material is mined or would potentially be in stock if the entire stock was offered. In this concept, “flow” stands for the production quantity within a certain period, usually within one year. If you now compare these two figures, you will see relatively quickly that this can be used as a measure of the constancy of the quantity of raw materials.   An example: While the total amount of gold ever mined is about 190,000 tons (stock), the annual production is about 3,000 tons (flow). If you divide the stock by the flow, you get a stock-to-flow ratio of 63.3, which means that at the current production level, it would take more than 63 years to double the gold stock or rebuild the current stock. So, the larger the number, the more constant is the raw material that is examined. While the “stock” is a given size and grows yearly exactly around the “flow”, the “flow” depends on various factors, such as the rarity, the price and the difficulty of extracting the raw material.    

Bitcoin, Gold and Scarcity

Two main factors contribute to the value of gold–– the most important precious metal for investors:

1. The Relative Rarity

2. The Difficulty of Extraction or The Extraction of the Raw Material.

Similar to gold, Bitcoin is both scarce and expensive to extract. Therefore, an analysis of the price development of Bitcoin with the SF model, which was originally designed for commodities, seems to be reasonable due to its similarity to gold.

Figure: Bitcoin vs. Gold – Stock-to-Flow-Ratio

Bitcoin and Gold Stock to Flow
Bitcoin and Gold Stock to Flow

Source: Medium Original Article, ZPX, Satoshi & Co. Research

The Quantitative Valuation of “Plan B”

A special feature of the Bitcoin protocol is that the code already determines how the Bitcoins offering – and thus the stock to flow ratio – will develop in the future. 

The maximum number of Bitcoins is 21 million (maximum stock). The number of newly generated Bitcoins is also fixed (flow). However, the Bitcoin flow is not constant over time. Every 210,000 blocks the so-called “block-reward” is halved. This is the number of Bitcoins that the successful miner receives for its validation services. Miners currently receive 12.5 Bitcoins per block, but the next “halving” will take place in May of this year. From then on, only 6.25 Bitcoins per block will be “mined”.

By way of comparison, in the case of gold or silver, for example, it cannot be completely ruled out that one day a huge find will be made, and the flow will shoot up, because more can be mined.
The “Halvings” lead to: Inflation of Bitcoin getting smaller and smaller until it reaches zero, and an increasing SF ratio as the flow is halved.
Since Bitcoin is denominated to eight decimal places, the reward per block will arrive at 0 exactly after the 33rd “halving”. Based on a halving every four years, the last Bitcoin will therefore be mined in 2140.

Table: Development of the “Block Rewards”

Period Number of New Bitcoins per Block
Genesis Block – November 2012 50
November 2012 – July 2016 25
July 2016 – May 2020 12,5
May 2020 ~ May 2024 6,25
May 2024 ~ May 2028 3,125

Source: Incrementum AG

Plan B examined a total of 111 data points between December 2009 and February 2019 and determined the respective market capitalization of Bitcoin and the corresponding SF ratio.

Important Links:
Live BTC Stock-to-Flow:  
DIGITALIK: https://digitalik.net/btc
LOOKINTOBITCOIN: https://www.lookintobitcoin.com/charts/stock-to-flow-model/  
The Original Article: https://medium.com/@100trillionUSD/modeling-bitcoins-value-with-scarcity-91fa0fc03e25      
Because the S2F ratio is constantly increasing, time is already included in the model as an exogenous variable.

Then the author pulled the data and one thing was immediately apparent: The higher the SF ratio, the greater the market capitalization. If one regresses the rising stock to flow ratio with the logarithmic price time series of Bitcoin, one finds a surprisingly high explanatory value. The correlation can also be seen with the naked eye.

The natural logarithm was used. This makes it possible to show the correlation of both quantities linearly and thus opens up possibilities for a solid statistical investigation.

Figure : Plan B’s Infamous Graphic

Plan Bs Stock to Flow Bitcoin Model

Source: Plan B, Medium[1]

For the Number Crunchers: If one models the price of BTC directly by SF and converts the resulting formula In (Market Capitalization) = 3.3 * ln(SF) + 14.6 Then you get the law of potency: Market Capitalization = Exp(14.6) * SF3.3

In Plan B’s infamous stock to flow chart, the small dots represent Bitcoin’s historical price data over time. The large grey and yellow dots show the respective market capitalization of silver and gold and their respective stock to flow ratio. The regression suggests what can be seen with the naked eye: a statistically significant relationship between S2F Ratio and the market capitalization of Bitcoin. 

For the Number Crunchers: Test Data of the Regression: R2: 0.95 F-Test: 2.3E-17 P-Value: 2.3E-17

Plan B argues that the correlation is so strong that the dominant driver for the price must be scarcity, or SF ratio. However, the author also acknowledges that other factors such as regulatory measures, hacks, and other news have an impact on the price; therefore, not all the data points are perfectly in line. The fact that the S2F ratio of gold and silver also fits very well into the picture is a further validation of the model.

Since the “halvings” have such a great influence on the SF ratio, Plan B has color-coded the months until the next “halving” in the chart. Dark blue are the halving months and red are the points shortly after the “halving”. The current S2F ratio of ~25 will thus double to ~50 in May 2020, which is already close to the S2F value of gold.  Based on this model, the forecast market value for Bitcoin after halving in May 2020 is $1 trillion, which would correspond to a Bitcoin price of $55,000.

Further Models

 We dug a little deeper and found out that there were already several variants of the model that Plan B calculated:

Points of Criticism with the “Plan B” Model  
The model is based purely on the supply side (maximum number, Bitcoins per block, etc.) and does not take into account the demand for Bitcoins.Regulatory measures, possible hacks, etc., i.e. (largely non-quantifiable) control variables, are not included or built into the model.
•        Historical data is not a source of forecasts.
•       The statistical correlation between the SF ratio and the price of Bitcoin is not a causality, only a correlation.
•       If the model is correct, this should already be reflected in the prices.
•       At some point Bitcoin will become truly deflationary (the loss of BTC per year would exceed the annual mining production), resulting in a negative SF ratio. What happens to the price then cannot be predicted by the model. Lack of stationarity of the data. The high R2- value could be a consequence of the missing stationarity of the data.The empirical work of Plan B is not precisely documented, which makes it difficult to find methodological weaknesses.  

Another interesting model is the so-called “time-based model”, as it explains the increase in the value of Bitcoin over time with a different underlying causality. The model states that Bitcoin increases in value as more and more market participants know about Bitcoin, deal with it and take the step to buy it. The narrative for the increase in value is thus the adoption, but not the scarcity (S2F). The estimates of this model are more conservative, and it is assumed that the price of Bitcoin will not break the $100,000 barrier until 2021-2028.

Table: Bitcoin Price Development Model Overview

Model Original Model (Until Dec 2018)  “Additional Data Model” “Out of Sample” Model  Time-BasedModel
Value After the 2020-Halving 55,000 USD 60,000 to 9,000 USD 100,000 USD Between 2021 & 2028: 100,000 USD
    Special Feature The first rapidly spreading model for price evaluation of Bitcoin with scarcity as proxy. Supplements “The Original” with additional data (older and younger). Uses only data prior to November 2012, so no halving has occurred in the data set yet. The reason for the price growth in this model is the progressive adoption of Bitcoin.

Source: Incrementum AG, Plan B

The Law of Potency

“S2F and price are proportional and react and change proportionally.”  

Plan B, Stephan Livera Podcast November 2019

Definition: “A power law is a relation in which a relative change of one quantity leads to a proportional relative change of the other quantity – independent of the initial quantity of these quantities”.

Exactly such a law of potency emerges when one examines the regression of the “original model”: At each halving, the SF ratio doubles, and market capitalization increases tenfold – this is a constant factor. Plan B therefore suggests:

“The possibility of a power law with a 95% R2 over eight orders of magnitude makes me confident that the main driver of the Bitcoin value is correctly captured by the SF ratio”.


The stock-to-flow model has shaped the crypto year 2019 like no other development. The accuracy with which the model traces price developments of the past is outstanding. It was also possible to observe how the model drove additional researchers and critics to take a closer look at the price development of Bitcoin. In the medium and long term, this invested human capital will contribute to a better understanding of the crypto world and its adoption to a broader population. The partly heavily criticized Model from “Plan B” will have the opportunity to prove itself as a forward-looking achievement starting this May – and it deserves exactly this opportunity. 

[1] https://medium.com/@100trillionUSD/modeling-bitcoins-value-with-scarcity-91fa0fc03e25

[2] See Stephan Livera and Plan B, Nov 4, 2019

Iran, Gold, and a Small Bitcoin Boom

BTC Volumes


Clem Chambers, Forbes

Is Bitcoin currently acquiring a new status as a safe haven asset, as digital gold? There is some evidence for this, the Iran crisis provides interesting clues. The Halving could help too.

Bitcoin and The Iran Conflict

“Luck in the crisis? The Iran-conflict could trigger the next Bull Run (on Bitcoin).”  


Suddenly the price of Bitcoin took a leap. And then another one. The reason for the first leap was the targeted killing of Iranian General Qasem Soleimani on January 3, 2020 by the US. The Bitcoin price then took its second leap due to the Iranian counterattack against Western military bases in Iraq. Twice the world held its breath. Twice Bitcoin shot up together with gold. And twice it all looked like a new safe haven was born. But is Bitcoin really the new digital gold?    

The correlation between the two assets has rarely been as high as it was in early 2020, and some analysts see a clear connection between the shiny precious metal and the digital coin. Others urge patience. One event does not make a safe haven.    

But the growing tension between Washington and Tehran is a Bitcoin story – in more ways than one. It was not the first time that the cryptocurrency has reacted sensitively to a political event – and it will not be the last. Comparison with gold is also understandable: For in the daily practice of Iranians (or Venezuelans before them) the two assets play a very similar role. And Bitcoin has not only just arrived with the current worsening of the situation in Iran. Cryptocurrencies have long been part of everyday life there.

Here is what Brian O’Hagan had to say about his experiences in Iran in 2018:

“People who own savings in rials see their purchasing power diminish every day. They are looking for ways to protect their wealth, and find a refuge for what little cash they have. They are looking for stores of value to survive the economic collapse: dollars (but they can’t find any in Iran) or gold. People in Iran are increasingly turning to cryptocurrencies to protect themselves from an economic collapse and to evade the financial repression. And the government is noticing.”[1]

Figure 1: Inflation Rate Iran

Iran Inflation

Source: Reuters Eikon, tradingeconomics.com, Incrementum AG

“Iran removes four zeros from the national currency.”  


The US sanctions have been making it difficult for Iranian companies and private individuals to trade with foreign countries for years. In addition, there is high inflation in the country, which has a negative impact on the purchasing power of Iranians. Perfect conditions for the adoption of Bitcoin, as we have also seen in Venezuela. Another parallel: thanks to extremely low energy costs, mining in these countries is much cheaper than elsewhere.

As far as the official side is concerned, Iran is very ambivalent. That’s understandable. On the one hand, Bitcoin can help circumvent US sanctions. On the other hand, it also provides the population with a way to get money out of the country. This then leads to excesses such as a significantly inflated Bitcoin price within Iran. In September 2018, there were reports of an Iranian Bitcoin exchange rate of almost 26,000 dollars.[2]

Now Iranian President Hassan Rouhani demands a crypto-currency for the entire Muslim world in order to make itself less dependent on the US dollar.”  


Like China and other US antagonists, the Iranian regime has a great fear of capital flight. The country’s banks have therefore been forbidden to engage in the crypto business. Mining is handled with a more pragmatic approach. The industry is now recognized by the government and it cannot even be ruled out that the regime itself is active in mining to fill its coffers.[3] At the same time, Iran is working on a state cryptocurrency – just like Venezuela and China. More on this later.

And it is not only Tehran that is taking the issue seriously- Washington is too. At the end of 2018, the Iran sanctions were extended for the first time to the Bitcoin wallets of two individuals. Even the “New York Times” has already been to Iran to visit the Bitcoin mines there: “Iran’s economy has been hobbled by banking sanctions that effectively stop foreign companies from doing business in the country. But transactions in Bitcoin, difficult to trace, could allow Iranians to make international payments while bypassing the American restrictions on banks.”[4]

This brings us to the three megatrends we see for 2020:

“Bitcoin is going to be a safe haven.”
  • Bitcoin will be talked of as a safe haven and escape route – and will increasingly be compared to gold.
  • The Halving will bring attention – but not necessarily higher prices.
  • While Facebook’s Libra project is running into more and more problems, some central banks will launch government cryptocurrencies.    

Bitcoin as Safe Haven and Friend of Gold

In the first few days of the year, volumes in Bitcoin markets doubled. In the midst of an ongoing bear market, investors and fans saw a silver lining on the horizon. Around the escalation of tensions between Iran and the USA, Bitcoin was traded as a safe haven asset. The correlation with gold was stronger than it has been for years. The mood on the Bitcoin market has also improved as a result, with sentiment no longer being bad but neutral.[5]

Figure 2: Trading Volume of Bitcoin in the Beginning of 2019 Compared to 2020

BTC Volumes

Source: coinmarketcap.com, Incrementum AG

However, the vast majority of analysts agree that one data point is not enough, that the safe haven story must stand up to further scrutiny – and that the prevailing downward trend has not yet been broken. One analyst doesn’t believe the Iran story at all and speaks of a technical rally.[6]

Be that as it may, the comparisons between Bitcoin and gold will now be heard more often. Bloomberg analysts even see gold as a proxy for the Bitcoin price because the assets are so similar. Both are scarce in quantity and are particularly suitable for value storage. Bitcoin has the advantage of simplified transport and dominates in the digital world. Gold has the advantage of a history going back several thousand years – and dominates in the real world. Find out more about the similarities and differences of Gold and Bitcoin in the article “Bitcoin vs. Gold – a Fictitious Debate” in this episode of the CRR.

At the same time, Bloomberg does not speak highly of Altcoins, whose market share continues to shrink: “The fact that a store-of-value asset with fixed supply and increasing adoption is more likely to appreciate in price will keep Bitcoin supported in 2020. We expect movements in gold to remain a proxy for Bitcoin. The broader crypto market is at risk of more mean reversion of the parabolic 2017 rally and depends on advancing Bitcoin for buoyancy. Our takeaway is straightforward: Bitcoin is winning the adoption race, notably as a store-of-value in an environment that favors independent quasi-currencies.”[7]

Figure 3: Bitcoin Dominance in Comparison to Altcoins

BTC Dominance

Source: coinmarketcap.com, Incrementum AG

Unlike Bitcoin itself, which benefits from its scarcity, Altcoins suffer from a constantly growing oversupply. We have already examined this process in our previous reports and do not see any change in the trend.” Just too many crypto-assets competing for adoption will keep broad market prices biased to the downside, in our view. A future of appreciating prices for cryptocurrencies is unlikely until rapidly increasing supply is curtailed. In 2019, the number of tradable crypto assets listed on Coinmarketcap.com increased by about 3,000 – up to 5,078, the most ever.”[8]

Figure 4: Number of Altcoins Over Time

Number of Coins

Source: coinmarketcap.com, Incrementum AG

In the first week of the year alone, Bitcoin increased its market share by 1.0 percent, while both ETH and XRP fell by 2.6 percent. Interestingly enough, the tense Iranian situation had a positive effect on the anonymous cryptocurrencies Dash and Monero, which increased their market share by 15 percent each. In our eyes, this is proof that the crypto sector also has a meaning in real events and that these coins are not just bought for speculative purposes.[9]

This development, the experience from Iran and the price movements in early 2020 clearly show in the eyes of Bloomberg analysts that Bitcoin is establishing itself on the market as a store of value. Again, the similarity to gold is striking. Unlike many in the crypto-community, analysts do not see gold and Bitcoin as enemies, but as friends: “Gold prices will keep climbing in 2020 and so should Bitcoin, in our view. The digital version of the metal is in the maturing process of consolidating the rapid price appreciation of its youth. Bitcoins’ ever-more inverse relationship with the U.S. dollar indicates the maturation process of the new quasi-currency toward a digital version of gold.”[10]

“The (Peterson) correlation between gold and BTC rose to 0.217, last seen in October 2016.”  

Coin News Telegraph.com

The correlation between Bitcoin and gold had already been on an upward trend since the beginning of 2019 and, according to the analysts of Arcane Research, reached a peak in January 2020, which was last seen in the summer of 2016.[11]

But there is another correlation that should make Bitcoin investors less happy. We’re talking about Tether. In recent months two studies have come to the conclusion that the price of Bitcoin, at least in the past, has been very strongly dependent on the development of the stablecoins money supply.[12]

The accusations of the US researchers John Griffin (University of Texas) and Amin Shams (Ohio State University) are particularly blatant. They have written a paper to prove that only Tether and the stock exchange Bitfinex alone were behind the huge price increase at the end of 2017. They talk of massive manipulation. Griffin told Bloomberg: “Our results suggest instead of thousands of investors moving the price of Bitcoin, it’s just one large one. Years from now, people will be surprised to learn investors handed over billions to people they didn’t know and who faced little oversight.” Tether and Bitfinex categorically deny the allegations.[13]  Now the controversy around Tether is by no means new. We have reported on this on several occasions, and for the sake of completeness, we list the study and the allegations here. Unfortunately, we cannot judge whether there is something behind it or not.   

The Halving as a Big Non-Story?

Another factor that accompanies Bitcoin and will become acute this year is the story of the Halving. Bloomberg has collected quotes by industry leaders on the event, which is expected to take place in May 2020. The conclusion: Some hope for price increases, others consider the halving to be priced in, and yet others see it as the best way to educate people about Bitcoin. We are most likely to be found in this third camp. The fact that we even know that the supply of fresh coins will be cut back this year is a great victory for the transparency of Bitcoin’s monetary policy. It is also the basis of the comparisons to gold that we cited in the previous chapter. Find out more about the Halving in the Article “The Stock to Flow Model Mark Valek held an Exclusive Interview with “Plan B” in this episode.

Taking a look at past halvings, you quickly understand why many enthusiasts are looking forward to 2020: “In a halving, Bitcoin rewards that go to the so-called miners that support the coin’s network drop in half in order to prevent inflation from eroding the purchasing power of the coins. In the previous reductions, the price rose about 8,000% in the year after the 2012 decrease and around 2,000% in the 18 months following the 2016 cut, according to data compiled by Bloomberg.”[14]

What do the pros say?

“Unlike most Bitcoiners, I don’t think the halving is particularly bullish. I am of the view that most people with a Bitcoin position understand that it’s capped in supply, so the issuance change shouldn’t make a difference. Also, the halving is perfectly forecastable, so I have a hard time believing that it constitutes an informational shock. Bitcoin supply has been described and understood from January 2009 and has followed the ordained trajectory ever since.”

Nic Carter, Co-founder of Coin Metrics

“As Bitcoin is often influenced by momentum thinking — and the halving is magnified by a transformation of the economic structure — I’d estimate it will have a positive influence on price.”

Dave Balter, Chief Executive Officer of Flipside Crypto

“Many market participants have been asking the question — is the Bitcoin halving priced in? That’s the wrong way to frame it. A small single digit percentage of the world currently owns Bitcoin. For those that currently own Bitcoin, a large portion of them understand that Bitcoin’s newly issued supply is cut in half every four years. This is likely a significant reason why they own it — because of Bitcoin’s provable scarcity. For the many billions of people around the world that do not own Bitcoin, few understand this provable scarcity characteristic. So for those billions, it cannot be priced in. To the extent those billions of people discover Bitcoin in the future and decide to buy some, there will be less new available supply to satisfy that increased demand to purchase Bitcoin.”

Travis Kling, Founder of Ikigai Asset Management

We find the perspective of Kling particularly interesting. How can one assume an efficient market if the market has so few participants so far? The halving will in any case give the media the opportunity to point out the positive sides of Bitcoin and to explain the functioning of the original cryptocurrency in detail once again. This could further strengthen the Bitcoin-as-Safe-Haven narrative and further weaken the Altcoins.

But it would also be the perfect time for a state actor to enter the field of cryptocurrencies. Even if that has little to do with Bitcoin per se.

Central Banks Are Coming

Anyone who belittles the efforts of central banks in the crypto area could overlook important points. One thing is true, though: Neither China, nor the Eurozone or Sweden are planning any real competition to Bitcoin. The new digital currencies will be just that: currencies – no digital store of value.

“The preparation for the e-Krone (Sweden) is well advanced.”  

Business Insider.de

State cryptocurrencies, which also allow state surveillance, could even drive some users into the arms of Bitcoin, Dash and Monero, which at least partially guarantee anonymity. But: “Politicians are looking to destroy this competitive advantage for non-state digital currencies by making them less secure. Governments are investing heavily in a technology that could one day – in theory – crack the public-key cryptography underpinning Bitcoin: Quantum computing. The Trump administration has committed $1.2 billion to this endeavor. China is active too.”[15]

China even takes a particularly nefarious approach. In November 2019, President Xi even caused a 30 percent increase in Bitcoin prices, because he had spoken positively about the blockchain and expressed the government’s interest in the technology: “The irony is striking, considering Bitcoin’s anarchic origins. But there’s something broader going on here. The future of digital money is being shaped increasingly by national governments. Politicians are under pressure to make electronic payments more efficient, to neutralize the threat of cryptocurrencies to their sovereignty and to crack down on illicit money flows. None of that is good news for the blockchain’s true believers, however much a Beijing stamp of approval boosts the price of a Bitcoin.”[16]

Meanwhile, Chinese media report that the state cryptocurrency is almost ready. What exactly this digital yuan will look like and when it will be launched is still unclear. According to reports, China has been working on the project since 2014. What we do know: The currency is to be put into circulation via the commercial banks in the same way as the paper currency. Users can then open accounts with these banks and use the crypto-yuan. The first pilot projects are to start in Shenzhen and Suzhou.[17]

Switzerland cannot authorise Libra in its present form.”  

Swiss Federal Council Ueli Maurer

It is a certain irony that Mark Zuckerberg, of all people, warned of precisely this development. If the West is not open to new blockchain projects like its Libra-Coin, China will take the lead in this area, Zuckerberg told the US Congress: “China is moving quickly to launch a similar idea in the coming months. We can’t sit here and assume that because America is today the leader that it will always get to be the leader if we don’t innovate.”[18]

Zuckerberg sees Libra as the western counterpart to China’s plans, where cryptocurrency is to be combined with close monitoring of the population. But Libra is severely handicapped in the West. The skepticism is huge in the USA and in Europe. Recently, Switzerland has also bowed to the pressure. Libra will not receive permission to set up the headquarters of its consortium in Switzerland in the foreseeable future, the government said. The status of the project is open, its future remains uncertain.[19]  Recently, some of the most important supporters have backed out: Mastercard, Visa, E-Bay and Stripe.[20]

At the same time, however, according to the Bank of International Settlements, almost three quarters of all international central banks are working on some form of digital currency.[21]  But: Only five projects are in the pilot phase. It is highly unlikely that a digital Euro or digital Pound will be introduced the day after tomorrow. It is true that individual countries in Europe, such as Sweden, have already made great strides on the road to a cashless society – and are therefore very interested in a state cryptographic currency. However, the so-called “E-Krona” is still a long way off it seems.

In the EU, the focus so far has been on the further development of existing systems. However, there is a joint crypto project that the ECB is running with the Bank of Japan: “Project Stella”. As an individual state, France wants to position itself particularly prominently and wants to “test” a digital currency in 2020. But that’s all it will ever be, because France, as a member of the Euro, is not allowed to introduce its own currency.[22]  In a position paper at the end of October, the German Banking Association also spoke out in favor of a European digital currency. But the ECB only wants to make plans for a digital Euro if the private sector does not manage to make international transfers cheaper and faster.[23]

Within the Bank of International Settlements, a Frenchman will be responsible for the digitization of money: Benoît Cœuré, a former member of the ECB’s Executive Board, heads a new department which is charged with developing public alternatives to projects such as Libra. “The first task facing Mr Cœuré, who starts in January and will serve a five-year term, will be to co-operate with the Swiss National Bank to create a central bank digital currency for wholesale use between banks, safeguarded by so-called distributed ledger technology (DLT)”.[24] 


“Facebook has 2.4 billion active users. And it’s planning its own digital currency called Libra. Politicians in Europe – including Germany’s finance minister – fear for their currency power.”  


The efforts of the central banks have made one thing very clear: From an economic perspective, this is not about Bitcoin. It’s about the danger posed by Libra. It is about the possibilities of saving on cash logistics. And it is – unfortunately – about the surveillance of citizens.

Against this background, Bitcoin should actually find fertile soil in which a new bull market can flourish. The story of Bitcoin as a store of value, of “digital gold”, becomes more credible with each crisis. It’s also simpler and better digestible for the masses than the hype about blockchain, from which, apart from Bitcoin itself, not many useful applications have emerged so far.

The combination of these factors should make for a good year for Bitcoin. Even though we do not know when the downward price trend will really end. In the days after the short Iran crisis, when the price of gold was long since on the way down again, the Bitcoin price did actually continue to rise. A sign of life, if you will. From a market that is still in its infancy.

We must not forget that. Just around the last pump to around 8,650 dollars per Bitcoin, public television in Germany even reported with a positive undertone about the introduction of Bitcoin options at the CME stock exchange. “Bitcoin reaches the mainstream,” was the headline. We share this opinion. We have stated the same many times.[25]

[1] https://hackernoon.com/how-donald-trump-is-helping-bitcoin-grow-in-iran-331ee7445bd8     

[2] https://hackernoon.com/why-is-bitcoin-trading-at-a-253-premium-price-in-iran-45f9a2f30017

[3] https://www.aljazeera.com/ajimpact/iran-government-recognises-cryptocurrency-mining-caveat-190804193912792.html

[4] https://www.nytimes.com/2019/01/29/world/middleeast/bitcoin-iran-sanctions.html     

 [5] Arcane Research Weekly Update 2/2020     

[6] https://www.ccn.com/bitcoin-price-bounce-has-nothing-to-do-with-iran-situation/

[7] Bloomberg Crypto Outlook – January 2020 Edition

[8] Bloomberg Crypto Outlook – January 2020 Edition

[9] Arcane Research Weekly Update 2/2020     

[10] Bloomberg Crypto Outlook – January 2020 Edition

[11] Arcane Research Weekly Update 2/2020     

[12] https://www.bloomberg.com/news/articles/2019-10-03/bitcoin-gains-correlate-with-tether-issuance-researcher-says?srnd=technology-vp

[13] https://www.bloomberg.com/news/articles/2019-11-04/lone-bitcoin-whale-likely-fueled-2017-price-surge-study-says

[14] https://www.bloomberg.com/news/articles/2020-01-08/bitcoin-halvening-isn-t-until-may-but-nothing-else-matters-now?srnd=cryptocurrencies

[15] https://www.bloomberg.com/opinion/articles/2019-11-04/bitcoin-s-government-enemies-will-have-their-sweet-revenge

[16] https://www.bloomberg.com/opinion/articles/2019-11-04/bitcoin-s-government-enemies-will-have-their-sweet-revenge

[17] https://www.theblockcrypto.com/linked/52616/chinas-central-bank-says-it-has-completed-top-level-design-of-digital-currency

[18] https://cointelegraph.com/news/libra-could-serve-as-counter-to-chinese-digital-currency-says-zuckerberg

[19] https://www.nzz.ch/schweiz/bundesrat-maurer-libra-hat-derzeit-keine-chance-auf-bewilligung-ld.1530913     

[20] https://www.ft.com/content/a3e952dc-ec5c-11e9-85f4-d00e5018f061     

[21] https://www.ledgerinsights.com/bis-70-percent-central-bank-digital-currency-cbdc/

[22] https://www.derstandard.at/story/2000111883615/frankreich-will-ab-2020-digitalwaehrung-testen     

[23] https://www.bloomberg.com/news/articles/2019-12-04/ecb-says-own-digital-euro-may-be-answer-if-payment-efforts-fail?srnd=premium-europe

[24] https://www.ft.com/content/c7739de6-03e7-11ea-a984-fbbacad9e7dd?sharetype=blocked     

[25] https://www.tagesschau.de/wirtschaft/boerse/bitcoin-153.html