H1 2019 Crypto Report Final - CoinShares · 2019-07-25 · H1 2019 CRYPTO REPORT / / INDUSTRY...

CoinShares Research

H1 2019:CRYPTO REPORTBehind the hype, speculation, and public imagination that has gripped this emerging asset class there are fundamentals: Indicators which offer essential insights to the market dynamics, investment patterns and overall development of these exciting new technologies.

At CoinShares Research, we strive to distill this information for our readers; to separate the signal from the noise, and to provide the sort of clear, intelligible, and relevant insights that are required to keep pace with one of the fastest moving industries of our time.

The Crypto Report aims to educate, inform and stimulate the creation of new ideas in our readers, as we cover four of the largest, most rapid-growing and technologically interesting cryptoassets in the industry.

None of the commentary or analysis contained herein is meant to constitute financial advice. This document is meant to be used as a foundational guide to cryptoassets and their potential. All analysis is meant to provide emerging trends and observations that may offer value in developing your own investment thesis, though past performance is not indicative of future performance. Please consider all risks carefully prior to making any investment, especially in an evolving asset class like cryptoassets.

Research

Industry Summary 3

Market Overview

Institutional Developments

Industry Developments

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Asset Summaries 4

Bitcoin

Litecoin

Ethereum

Ripple/XRP

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Numbers Dashboards 6

Figure Explainer

Bitcoin

Litecoin

Ethereum

Ripple/XRP

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Important Disclaimer 11

CoinShares Research 2 15 July 2019 | Copyright © 2019 CoinShares

TABLE OF CONTENTS

H1 2019 CRYPTO REPORT

CoinShares Research

[email protected]

Christopher Bendiksen (Lead Analyst [AC]): - Samuel Gibbons

Attachments:

1. Delphi Digital. [Online] December 2018. https://www.delphidigital.io/bitcoin.

2. Bitinfocharts. [Online] July 2019. https://bitinfocharts.com/comparison/google_trends-btc.html.

3. —. [Online] July 2019. https://bitinfocharts.com/comparison/tweets-btc.html.

4. Fidelity Digital Assets. [Online] July 2019. https://www.fidelitydigitalassets.com.

5. Bakkt. [Online] July 2019. https://www.bakkt.com/. 6. Libra. [Online] July 2019. https://libra.org/en-US/. 7. Waters, Maxine, et al. [Online] July 2019. https://

financialservices.house.gov/uploadedfiles/07.02.2019_-_fb_ltr.pdf.

8. Wuille, Peter. [Online] May 2019. https://github.com/sipa/bips/blob/bip-schnorr/bip-taproot.mediawiki.

9. Wirdum, Aaron van. [Online] January 2019. https://bitcoinmagazine.com/articles/taproot-coming-what-it-and-how-it-will-benefit-bitcoin.

10. Bitcoinvisuals. [Online] July 2019. https://bitcoinvisuals.com/lightning.

11. Chong, Nick. [Online] March 2019. https://www.newsbtc.com/2019/03/20/wheres-ethereum-2-0-at-vitalik-buterin-gives-a-much-needed-update/.

12. Litecoin Foundation. [Online] June 2019. https://litecoin-foundation.org/the-litecoin-foundation-teams-up-with-bibox-and-ternio-on-special-edition-litecoin-blockcard/.

13. Ripple. [Online] July 2019. https://ripple.com/insights/. 14. Paris Fintech Forum. [Online] January 2019. https://

www.youtube.com/watch?v=FZbLKph3-uo.

mailto:[email protected]

https://ripple.com/insights/

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H1 2019 CRYPTO REPORT / / INDUSTRY SUMMARY

It is hard to imagine a tougher start to the year than the one we faced this January. Crypto markets wallowed deep in the doldrums as the November 2018 sell-off reverberated through the broader market, causing panic among newcomers and calls for deeper bottoms, even by seasoned crypto veterans.

Numerous pundits speculated this was not only the beginning of a prolonged bear market, but that crypto market cycles were also elongating, and this downturn would be the longest and most brutal one to date.

They were all wrong, and their error perfectly illustrates the immaturity of our collective knowledge in this space. It also serves as a reminder that making predictions based on price data is a difficult endeavour fraught with risk.

However, not everyone was caught in the doom and gloom. Among the research highlights to come out of this panic phase, Delphi Digital released an impressive (and bullish) analysis of Bitcoin [1] that used empirical data from the UTXO set to correctly call bottom in Q1 2019 based on historical patterns of accumulation and distribution among Bitcoin hodlers.

In summary, their data showed that Bitcoin buyers from the previous bull cycle were not moving their coins (implicitly, onto exchanges to sell), but instead holding onto them despite the brutal price environment.

This type of analysis is unique to cryptocurrencies, specifically those using a UTXO model to keep track of balances, and at CoinShares Research we continue to follow the development of these new methodologies with great interest.

Amongst our report portfolio, Litecoin first led the recovery charge in mid-Q1. Spurred by the prospect of a coin reward halving in August 2019, Litecoin broke its downward price trend in early February and ended H1 up a whopping 281%.

As Delphi predicted, Q1 had barely ended before the Bitcoin market sprung into aggressive recovery mode. Altcoins also experienced a collective bump, though at much more modest levels.

The market has mercilessly denied calls for a customary ‘alt season’ while Bitcoin’s price rally has stolen all of the attention, at least so far this year. Despite many altcoins being significantly up from their respective bottoms, crypto opportunity cost is measured in Bitcoin, and nearly all altcoins have lost substantially to Bitcoin so far in 2019.

There has been no shortage of speculation regarding the reasons for Bitcoin’s aggressive recovery. As usual there is no way of knowing with 100% confidence what is truly driving the rally, but there are a few interesting data points that might explain some of this movement.

Four factors that were present during the 2017 bull run have been conspicuously absent during the current rally: widespread media attention; spikes in “bitcoin” searches on Google [2]; spikes in tweets about Bitcoin [3]; and the aforementioned corresponding rally in altcoins.

This suggests that retail interest in Bitcoin is relatively tepid compared to 2017, and implies that the H1 rally was largely driven by the long-awaited entrance of institutional money. Some anecdotal evidence from the CoinShares sales division further supports this hypothesis.

In terms of legitimising the industry, institutions have again led the way. To name just a few: Fidelity announced their intention to launch institutional grade Bitcoin custodial services [4] and also admitted that they've experimented with Bitcoin mining since 2015; Intercontinental Exchange, Microsoft, Starbucks and Boston Consulting Group are partnering to launch Bakkt [5], a cryptocurrency platform enabling, among other products, physically settled Bitcoin futures.

Facebook has also entered the cryptocurrency space, announcing their intention to launch Libra, a fiat-backed ‘stablecoin’ that is fully integrated into popular Facebook apps like Messenger, WhatsApp and Instagram [6]. The Libra consortium reads like a ‘who’s who’ of Silicon Valley tech companies, and includes payments giants PayPal, Visa and MasterCard.

While Libra is centralised, permissioned, trust-based, not censorship resistant, not scarce, and arguably not even a cryptocurrency at all (though this term is poorly defined…) it does offer potential benefits to the world’s unbanked that currently don’t have access to services we take for granted in the West, such as online shopping.

The drawbacks of centralised digital currencies have also been made immediately clear to observers as the Libra has already been met with staunch resistance among global lawmakers—members of the American Congress going so far as to call for an immediate moratorium on Libra development via official letter to Facebook’s corporate offices in California [7].

INDUSTRY SUMMARY

Research

CoinShares Research 15 July 2019 | Copyright © 2019 CoinShares

https://www.delphidigital.io

https://www.delphidigital.io/bitcoin

https://bitinfocharts.com/comparison/google_trends-btc.html

https://bitinfocharts.com/comparison/google_trends-btc.html

https://bitinfocharts.com/comparison/tweets-btc.html

https://www.fidelitydigitalassets.com

mailto:https://www.bakkt.com/

https://libra.org/en-US/

https://financialservices.house.gov/uploadedfiles/07.02.2019_-_fb_ltr.pdf

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What is beyond doubt, however, is that Libra’s launch marks a watershed moment in the history of cryptocurrencies. The adoption of cryptocurrency as a legitimate technology by such a large number of household corporate names immediately counteracts years of negative and uninformed press around cryptocurrencies. It further lowers the threshold to participate in this space for countless ordinary people.

In summary, H1 2019 should be considered a wholly positive period in the development of this nascent industry. The continuing professionalisation of the protocol,

services, and corresponding technologies has been impressive and most assets have reacted by recovering substantially from last year’s brutal bear market.

Nothing is certain in this space and things often feel like they move at a breakneck pace, but we are beyond excited about the rate at which this industry is developing and look forward to seeing what the next half year ahead brings.

ASSET SUMMARIESBitcoin

Hefty price action aside, development on the Bitcoin software stack continues at full steam. On the base layer, arguably the biggest proposed improvement is Peter Wuille’s Taproot proposal [8]. Specifically, the BIP introduces a new SegWit version 1 output type based on Taproot, Schnorr signatures and Merkle branches.

This is a foundational upgrade that builds on SegWit. Out of its constituent parts, Taproot enables new privacy features, which are of increasing importance to maintain Bitcoin's fungibility in the face of invasive chain analysis tools and attempted government ‘blacklisting’.

Schnorr signatures are intended as a full replacement of the current ECDSA signature scheme. Among a range of new benefits, Schnorr enables various scalability improvements, particularly in the realm of multi-signature transactions.

Lastly, the inclusion of Merkelised Abstract Syntax Trees (MAST) in the proposal enables increased smart contract functionality on the Bitcoin base layer. For readers who want to learn more about the Taproot BIP, we recommend Aaron van Wirdum’s article in Bitcoin Magazine [9].

While the proposal is still in very early stages of review and Wuille has expressed his desire for a slow-moving, comprehensive community feedback process before discussing any specific implementation methodologies, it’s known that the BIP can be implemented as a soft-fork.

Development on Bitcoin’s second layer is also progressing at a rapid pace. All three main implementations of the Lightning spec—lnd, Eclair and C-lightning—have made significant improvements to their projects over the course XXXX

of H1 2019, and Matt Corallo’s Rust-Lightning is also moving forward at speed.

Statistics on the Lightning network show continued growth in H1 2019 with the number of channels up from 16,217 to 31,273 (93%); the number of nodes up from 2,322 to 4,495 (94%); and the total capacity of the network up from 526 BTC to 942 BTC (79%) [10].

The first half of 2019—particularly Q2—brought bitcoin mining broadly back into a highly profitable state. After the severe price drop in late 2018, the mining network saw its first sustained reduction in difficulty since the advent of industrial mining as high cost miners were booted off the network.

In line with the aggressive price rebound, profitable miners are yet again expanding their operations and the Bitcoin hashrate reached new all-time highs towards the end of Q2—a very positive sign.

Litecoin

H1 2019 marked another six-month period in which Litecoin development seemed more focused on partnerships than protocol work. The Litecoin GitHub repository continues to stand out as a relative ghost town among cryptocurrency developer communities, with excitement and engagement around the protocol appearing lukewarm at best.

Since the beginning of the year, the Litecoin GitHub repo has clocked only 13 commits—an incredibly weak number and less than 1/3 of the average weekly commit rate in the Bitcoin repo.

INDUSTRY SUMMARY

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H1 2019 CRYPTO REPORT / / INDUSTRY SUMMARY

https://github.com/sipa/bips/blob/bip-schnorr/bip-taproot.mediawiki

https://bitcoinmagazine.com/articles/taproot-coming-what-it-and-how-it-will-benefit-bitcoin

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ASSET SUMMARIESMost exciting Litecoin news these days revolves around partnerships. For instance, in June the Litecoin Foundation announced that it teamed up with Bibox and Ternio to create a special edition physical cryptocurrency debit card. This card will allow users to spend Litecoin both online and offline “anywhere in the world where major credit cards are accepted” [12].

Yet there are other positive signs surrounding Litecoin. Apart from its 281% price rally this year—the strongest of the four underlying assets discussed in this report—Litecoin’s on-chain usage has also increased from about 20,000 daily transactions at the start of the year, to about 30,000 in late June. While this is certainly a positive development, daily transactions are still a fraction of their peak from late 2017/early 2018 when Litecoin regularly handled more than 100,000 on-chain transactions per day.

More positive signs can be found in the Litecoin mining network. Having survived the late 2018 price drops only after sustained drops in hashrate, the network has recovered vigorously since, setting new all-time highs for hashrate already in early Q2 2019.

Litecoin is rapidly approaching its second mining reward halving which will reduce the block reward from its current value of 25 LTC to 12.5 LTC. While this could present short-term challenges to high-cost Litecoin miners, its inflation rate will be reduced by half, which could have a positive effect on price as miners have fewer coins to sell, lowering persistent supply pressure.

Ethereum

Protocol development in Ethereum continues, although with rapidly changing goals and roadmaps. While there remains significant internal disagreement on both means and ends among developers, it appears that Ethereum developers now intend to completely scrap the current protocol—deemed Ethereum 1.0—and opt for a full redesign—deemed Ethereum 2.0 or Serenity [11].

The redesign has a four-phase roadmap—the current of which being phase “pre-zero”—intended to include all the ‘usual suspects’ for upgrading Ethereum, including Proof-of-Stake, sharding, plasma, and zk-snarks.

It’s not entirely clear what the timeline for this complete redesign is supposed to be, but we’re watching announcements closely for new updates.

In terms of price recovery, Ether has been more cautious in its 2019 rebound (103%) than Bitcoin (188%) and Litecoin (281%), but much more vigorous than XRP (6%).

Compounded by its larger comparative drop from all-time high prices (94% vs 84% for bitcoin), its current standing appears comparatively weak in historic context.

As a dual consequence of its tepid price action and last year’s decision by Ethereum developers to lower the block reward by 33% from 3 ETH to 2 ETH as a part of the Constantinople hard-fork this past February, the Ethereum hashrate saw another six months of decline.

This marks the second consecutive six-month period of hashrate decline for Ethereum—certainly a worrying sign, especially when contrasted with the Bitcoin network which continued to increases its hashrate throughout the bear market and despite its significant price woes.

XRP / Ripple

When discussing the development of XRP/Ripple we again stress the importance of keeping their separate yet intertwined lives in mind when assessing both positive and negative news.

Ripple’s product suite consists of RippleNet, xCurrent, xRapid and xVia—all of which are undergoing rapid development by large, well-funded, centrally directed software teams and being aggressively marketed by Ripple’s deep pockets.

Out of the three, xCurrent is at various stages of roll out by some leading banks; however, it does not require the use of XRP and supports fiat currencies. The xRapid solution does use XRP, but it is unclear how much adoption it is currently experiencing.

The largest XRP holding, which is vastly larger than the next closest holding, is still centrally controlled by Ripple, and they continue to sell as much XRP as their self-imposed escrow contracts allow them to dump into the market each month [13].

Among the four coins in our report portfolio, XRP was the worst performer of H1 2019 by far. A mere 6% price growth is extremely weak compared to the rest of the crypto market, particularly when you consider bitcoin's performance as the market benchmark.

There have been positive mentions of XRP by global policy makers—such as the head of the International Monetary Fund, Christine Lagarde—although it is not entirely clear if these positive views apply to XRP the digital asset, or if they are simply made in reference to the company Ripple, their RippleNet product suite, or all of the above [14].

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H1 2019 CRYPTO REPORT / / ASSET SUMMARIES

https://litecoin-foundation.org/the-litecoin-foundation-teams-up-with-bibox-and-ternio-on-special-edition-litecoin-blockcard/

https://litecoin-foundation.org/the-litecoin-foundation-teams-up-with-bibox-and-ternio-on-special-edition-litecoin-blockcard/

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Figure 1 is a simple price chart with a trade volume overlay. Price and volume are indicators of investor confidence and market liquidity, respectively. This chart type is referred to as a candlestick chart due to the characteristic shape of the figure segments. The body of the candlesticks represent the price movement between open and close and the “wicks” represent the intraperiod highs and lows. Market prices are read on the Left Hand Axis. Single candles can represent any period length, in this report however, they represent one week. Because cryptomarkets never close, the open and close times are set to midnight UTC. The lower bar represents total market trade volumes and reads on the Right Hand Axis.

Figure 2 shows annual returns running from the first reliable price signal of an asset until publishing date. This aims to give readers an idea of the long-term performance of the asset.

In Figure 3 we look at the top five geographical markets by US$ denominated trade volume*. This chart can give insight to the relative popularity of certain crypto-assets in different regions across the globe. It can also be interpreted as an indicator of exposure to legal, regulatory or other government-imposed risks in jurisdictions with high volumes.

Figure 4 shows monthly cumulative trade volumes* broken down by the largest fiat trading pairs. While there are additional fiat currencies trading in the market, the vast majority of trading is done via the top seven (including Tether) fiats, with all remaining pairs only representing a small fraction of total global trade volumes. Here, readers can observe periodic changes in overall trade volumes as well as which fiat pairs dominate trade in the crypto-markets. Overall trade volumes are indicative of market liquidity.

Figure 6 shows average daily annualised volatility per year, running from the first reliable price signal of an asset until publishing date. Observing volatility over time can help readers get a sense of changes in the risk-profile of their crypto-assets.

Figure 8 shows various multi-year, monthly average Sharpe Ratios, a r i s k - w e i g h t e d measure of returns. The higher the score the better investors are compensated for the level of risk added by the asset.

Figure 9 shows the n e t w o r k p o w e r growth measured by change in hash rate. As a simplified rule of thumb, networks with higher hash- rates are costlier to attack at the con-sensus level.

In Figure 7 we look at the correlation of crypto-assets against a basket of commonly investable assets using Pearsons Correlation Coefficient. Basic portfolio theory teaches that portfolios containing a diverse and uncorrected basket of assets are less vulnerable to volatility. A score of 1 indicates that two assets move completely in unison, a score of 0 indicates that they move entirely independently of each other and a score of -1 means they move completely opposite.

Figure 5 shows percentages of total monthly trade volumes* by exchange jurisdiction. Similarly to Figure three, this chart aims to lend insight into the relative geographical location of asset trading as well as an indicator of trade exposure to legal, regulatory or other government-imposed risks in jurisdictions.

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H1 2019 CRYPTO REPORT / / FIGURE EXPLAINERS

*Our volumes are collected from a spot-only whitelisted set of exchanges. Exchanges are whitelisted if CoinShares Research deem it reasonably likely that their reported volumes reflect only real trades.

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H1 2019 CRYPTO REPORT / / BITCOIN

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6-Month Bitcoin Price Chart

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Bitcoin S&P 500 Nasdaq Gold Brent

Bitcoin 0.040 0.046 0.040 0.018

S&P 500 0.040 0.944 -0.041 0.138

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Gold 0.040 -0.041 -0.036 0.035

Brent 0.018 0.138 0.085 0.035

H2 18 Monthly ($) Volume By Fiat Pair*

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Litecoin S&P 500 Nasdaq Gold Brent

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6-Month Ether Price Chart




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6-Month XRP Price Chart

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H1 2019 CRYPTO REPORT / / XRP


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Please note that this document is provided on the basis that the recipient accepts the following conditions relating to provision of the same (including on behalf of their respective organisation). Should the following conditions not be acceptable, please destroy this document without retaining any copies.

This document does not contain, or purport to be, financial promotion(s) of any kind. This document does not contain reference to any of the investment products or services offered by members of the CoinShares Group.

Digital assets and related technologies can be extremely complicated. Crypto-currencies can be extremely volatile and subject to rapid fluctuations in price, positively or negatively. Crypto-currencies are loosely regulated and there is no central marketplace for currency exchange. Supply is determined by a computer code, not by a central bank, and prices can be extremely volatile. The digital sector has spawned concepts and nomenclature much of which is novel and can be difficult for even technically savvy individuals to thoroughly comprehend. The sector also evolves rapidly.

With increasing media attention on digital assets and related technologies, many of the concepts associated therewith (and the terms used to encapsulate them) are more likely to be encountered outside of the digital space. Although a term may become relatively well-known and in a relatively short timeframe, there is a danger that misunderstandings and misconceptions can take root relating to precisely what the concept behind the given term is.

The purpose of this document is to provide objective, educational and interesting commentary and analysis in connection with the cryptocurrency market. This document is not directed at any particular person or group of persons. This material is solely for informational purposes and shall not constitute an offer to sell or the solicitation to buy securities. Although produced with reasonable care and skill, no representation should be taken as having been given that this document is an exhaustive analysis of all of the considerations which its subject-matter may give rise to. This document fairly represents the opinions and sentiments of CoinShares (UK) Limited (“CSUKL”), which is the issuer of this document, as at the date of its issuance but it should be noted that such opinions and sentiments may be revised from time to time, for example in light of experience and further developments, and this document may not necessarily be updated to reflect the same.

The information presented in this document has been developed internally and/or obtained from sources believed to be reliable; however, the CoinShares Group (which includes CSUKL) does not guarantee the accuracy, adequacy or completeness of such information. Predictions, opinions and other information contained in this document are subject to change continually and without notice of any kind and may no longer be true after the date indicated. Any forward-looking statements speak only as of the date they are made, and the CoinShares Group assumes no duty to, and does not undertake, to update forward-looking statements. Forward-looking statements are subject to numerous assumptions, risks and uncertainties, which change over time.

Nothing within this document constitutes (or should be construed as being) investment, legal, tax or other advice. This document should not be used as the basis for any investment decision(s) which a reader thereof may be considering. Any potential investor in digital assets, even if experienced and affluent, is strongly recommended to seek independent financial advice upon the merits of the same in the context of their own unique circumstances.

CSUKL is an Authorised Representative of Sapia Partners LLP, which is authorised and regulated by the Financial Conduct Authority (FRN: 550103). The address of CSUKL is Octagon Point, 5 Cheapside, St. Paul’s, London, EC2V 6AA.

The CoinShares Astronaut is a trademark and service mark of CoinShares (Holdings) Limited.

This document is subject to copyright with all rights reserved. Use and reproduction of this document or any parts thereof may be done without permission, however, the following citation should accompany any reference to or other use of the information contained in this document: CoinShares Research H1 2019 Crypto Report.

IMPORTANT DISCLAIMER

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Research H1 2019 CRYPTO REPORT


H1 2019 Crypto Report Final - CoinShares · 2019-07-25 · H1 2019 CRYPTO REPORT / / INDUSTRY...

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