ByteMe: has bitcoin had its chips?

Welcome to ByteMe, GlobalCapital’s new column, providing an informed, critical and irreverent take on the newest and biggest issues in technology — specifically the bits of it involved in moving money around.

  • By Costas Mourselas, Lewis McLellan
  • 03 May 2018
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Cryptocurrencies are here to stay. The asset class, with its alluring volatility and sensational returns, is simply too much fun to resist. The sector is rather more colourful than mainstream finance, so here are some of its ups and downs.

Cryptocurrencies leapt into the public eye in 2017, riding a wave of hype engendered by the sensational growth of its market capitalisation, which hit $832bn in December.

Comparisons to tulips abounded and most pundits, including GlobalCapital, predicted a “healthy correction”. When 2018 arrived, the long-awaited correction crashed bitcoin more than 60% to below $9,000 per coin and wiping almost $600bn off the market cap (although it has since recovered to $446bn).

Speculating on bitcoin’s fundamental value is a mug’s game. The sceptic’s cry for years was “but it’s not based on anything” and, while this is true, it does rather miss the point.

By one measure, bitcoin’s value is as a payments system outside of the control of mainstream financial players. Its early growth was driven by tech types who believed in this potential and despised central banks.

Decentralised value transfer can, in theory, be quicker and cheaper than what banks offer, but bitcoin falls short in a number of ways: it isn’t cheap or quick and it’s mostly used by nerds in Silicon Valley and dealers of drugs and weapons.

Really though, bitcoin’s role these days is as a speculative asset. The ease of setting up a trading account and general low barriers to entry have captured the imagination of a public shut out from early stage start-up investment. Given the performance of tech stocks over the past few years, the opportunity to get in early on “the next big thing in tech” is awfully seductive. As such, its main selling point was its tremendous growth.

But now that growth has stalled and a great deal of the shine has come off. Of course, there are still believers or HODLers (Hold On for Dear Life) and interest persists, but it’s possible that bitcoin’s best days are behind it. While it has the name value for the moment, bitcoin’s tech looks increasingly outdated compared to younger, sexier cryptocurrencies.

But bitcoin has another advantage. It remains the only cryptocurrency for which there is an active futures market (functioning despite the colossal margins required to hedge its notorious volatility). Futures were introduced by well-respected derivatives market providers CME and CBOE in December. Indeed, Goldman Sachs is opening a trading desk for bitcoin derivatives.

However, if firms like TrueEx follow through on their promises of cryptocurrency derivatives unrelated to bitcoin, then bitcoin will have one less unique selling point. The influx of institutional interest could give the market a shot in the arm.

But the industry has its internal flaws to contend with too. Chief among them is the traditional combination of malice and incompetence that plagues most fledgeling industries. Bad security leads to hacks and low barriers to entry lead to opportunistic shysters. Regrettably, these are not confined to the fringes, but baked into the market’s heart.

The organisers of Tether, a key piece of market infrastructure, have been subpoenaed by the CFTC, along with Bitfinex, the largest bitcoin exchange in the world. Doubts over whether Tether, a cryptocurrency pegged to the value of the dollar, is fully collateralised intensified when it fired its auditor late last year. While it has not been accused of any wrongdoing, it has lost the trust of many market participants and is alleged to have been used to artificially inflate bitcoin’s value.

Away from bitcoin, the situation is worse. Initial Coin Offerings, whereby firms raise capital by launching new cryptocurrencies, are rife with fraud. Regulators around the world have begun cracking down on these, issuing cease and desist orders and ordering firms to return cash to purchasers. As a result, the pace of launches has slowed.

But there are many ICOs with sincere goals but such woefully inadequate business models that they are almost worse than the fraudsters. Still, as the market matures, the quality is on the up, even if the quantity has dropped away.

Marketeers should buckle up, because the crypto ride is far from over.

Goldman leaping into crypto

Bitcoin is a fraud that will blow up. At least, that’s what JP Morgan’s Jamie Dimon believed about the digital currency last September. Eight months on, one of JP Morgan’s biggest competitors, Goldman Sachs, is introducing bitcoin futures and non-deliverable forwards for its clients.

Blankfein bitcoin

Most of the big banks have so far sat on the sidelines in introducing cryptocurrency services. One major European bank recently told GlobalCapital that they were in “wait and see” mode. But Goldman’s seal of approval could be enough to tilt the scale and tempt others into the market.

If Goldman really is “long-term greedy”, the move could be interpreted as a display of confidence in bitcoin, startling the cryptocurrency evangelists that see the big banks as the ultimate enemy of decentralised currencies.

Goldman has even hired a new head of digital asset markets, Justin Schmidt, to look into new ways the firm can serve its clients in the growing market. But cryptocurrency fans may be wise to take the announcement with a big pinch of salt.

GlobalCapital understands that Goldman will not be trading the underlying cryptocurrencies for now, and that the bank has serious reservations about the cryptocurrency spot market, which is not properly regulated. This is a familiar story, and one of the key reasons why cryptocurrencies have not properly taken off with institutions and big financial players.

Until the cryptocurrency market cleans up its act, we will continue to see similar caution, with big players like Goldman operating on the fringes, carefully satisfying the whims of a few clients.

Market manipulation

The practice of “pump and dump” has been raised to an art form in crypto-markets. Well-known investors congregate in groups on Telegram’s chat service to coordinate strategies, pool resources and laugh at the sheep — the regular citizens who are suckered into buying the coins they are shilling and end up with burned fingers.

There is even a codified set of instructions known as “the God PDF”, a seven step strategic guide to profiting by the artificial inflation of prices, peppered with Sun Tzu quotes, self-aggrandisement and bad spelling. It’s quite a read if you have the time.

  • By Costas Mourselas, Lewis McLellan
  • 03 May 2018

All International Bonds

Rank Lead Manager Amount $m No of issues Share %
  • Last updated
  • Today
1 Citi 165,175.88 645 7.88%
2 JPMorgan 156,487.83 676 7.46%
3 Bank of America Merrill Lynch 152,294.90 499 7.26%
4 Barclays 132,291.23 454 6.31%
5 HSBC 113,665.79 526 5.42%

Bookrunners of All Syndicated Loans EMEA

Rank Lead Manager Amount $m No of issues Share %
  • Last updated
  • Today
1 JPMorgan 26,573.45 32 9.73%
2 Citi 16,837.08 38 6.17%
3 SG Corporate & Investment Banking 15,661.30 47 5.73%
4 Deutsche Bank 14,193.64 44 5.20%
5 Bank of America Merrill Lynch 13,028.84 31 4.77%

Bookrunners of all EMEA ECM Issuance

Rank Lead Manager Amount $m No of issues Share %
  • Last updated
  • Today
1 Goldman Sachs 6,961.44 31 9.14%
2 JPMorgan 6,815.38 29 8.95%
3 UBS 5,503.59 15 7.22%
4 Citi 5,145.98 30 6.75%
5 Deutsche Bank 4,303.27 25 5.65%