Steve Massocca’s Crypto Currency Report 12/8/17

Crypto Currency Report Header

There have been so many stories recently regarding Bitcoin, alternative coins, new coin offerings and block chain technology that I thought it a good idea to report on it. Some view it as the greatest invention since the internet; others view it as modern day tulip bulbs. The purpose of this report is not to take sides but simply provide provocative reports on the topic. 

Here are stories reporting either growing pains or the tragic news depending on your point of view..

 

Fed Governor Quarles warns digital currencies could pose financial stability issues

  • Quarles notes in his speech at the 2017 Financial Stability and Fintech Conference in Washington that:
    • “While these digital currencies may not pose major concerns at their current levels of use, more serious financial stability issues may result if they achieve wide-scale usage.”

Crypto Fraud

Analysts have little faith in “petro” cryptocurrency plans: Reuters reports that investors and technical experts have been voicing doubts about Venezuelan plans to launch its own oil-backed cryptocurrency, noting that these rely on clear rules and equal treatment of all involved, while the country has been widely seen as flouting basic property rights and mismanaging its existing bolivar currency.

  • Bitcoin Regulation
    • Hackers Steal $70 Million in Bitcoin (WSJ)
      • Almost $70M worth of bitcoin was stolen from cryptocurrency-mining service NiceHash following a security breach causing the company to stop operations for at least 24hrs.
    • Fed Official Steps Up Concern Over Bitcoin (WSJ)
      • Fed official Randal Quarles says digital currencies like bitcoin might not be secure enough for widespread public use.
    • Bitcoin Mania In Context: Cryptocurrency Is Still a Tiny Asset (Bloomberg)
      • Bitcoin is equivalent to less than 2% of any major class and 400 stocks have bigger gains this year
    • Is It Time to Regulate Bitcoin? (WSJ)
    • Opinion: The chance of a bitcoin crash is greater than 80% (MarketWatch)

Goldman Sachs smells profits by helping clients with Bitcoin but doesn’t want to commit its own capital…

Goldman eschews bitcoin but wants to help clients crypto-trade

NEW YORK (Reuters) – Goldman Sachs Group Inc (GS.N) is trying to figure out how to cater to investors who want to trade bitcoin even though the digital currency remains too volatile for the Wall Street bank to trade itself, according to comments by a representative and its chief executive officer on Thursday.

At an event, CEO Lloyd Blankfein said there was no imminent need for Goldman Sachs to develop a strategy around bitcoin, which rose to an all-time high of $11,395 on Wednesday only to lose one-fifth of its value on Thursday.

Something that moves up and down 20 percent in a day doesn’t feel like a currency, doesn’t feel like a store of value,” Blankfein said at an event hosted by Bloomberg to promote Goldman’s 10,000 Small Businesses endeavor.

The bank will trade in bitcoin if it becomes more established, trades in a less volatile manner and has more liquidity, he said.

Even so, Goldman has been looking at ways to facilitate bitcoin trades for customers. It is still doing so, spokeswoman Tiffany Galvin told Reuters in a statement.

FILE PHOTO – A bitcoin (virtual currency) coin placed on Dollar banknotes is seen in this illustration picture, November 6, 2017. REUTERS/Dado Ruvic/Illustration

“In response to client interest in digital currencies, we are exploring how best to serve them in the space,” she said.

Established in 2009 as a digital currency not backed or regulated by governments, bitcoin was mainly supported by technology enthusiasts at first. Its reputation was marred by hacks that lost investors billions of dollars, and by those who allegedly used the currency to mask illicit dealings.

But as its price has soared, traditional investors have entered the market, and major exchanges plan to introduce bitcoin futures contracts. The technology that underpins bitcoin trading, called blockchain, has also become popular among large financial institutions that see it as a mechanism to more cheaply and efficiently handle other transactions.

Prominent Wall Street executives and U.S. officials have been split on whether digital currencies themselves are worth spending time and money on.

JPMorgan Chase & Co (JPM.N) CEO Jamie Dimon called bitcoin a “fraud” at a conference in early September, while Morgan Stanley (MS.N) CEO James Gorman characterized it as “more than just a fad” at an event a few weeks later.

Meanwhile, Citigroup Inc (C.N) CEO Michael Corbat predicted governments will issue digital currencies of their own, something a U.S. Federal Reserve official said the central bank is considering at an event on Wednesday. The following day, another Fed official called bitcoin a threat to the financial system.

Ethereum is in second place but trying to catch up…

 

Scalability is the red-headed stepchild of innovation. In theory, most disruptive technology should scale easily thanks to global high speed Internet, smart phones and cloud computing. The reality is sometimes far more difficult than that promise.

Here are some notable examples of scalability problems, pulled from just today’s news:

#1 Ethereum (the second largest crypto currency by market cap) has its first killer app, a game to create and breed cartoon cats. Called CryptoKitties, users pay to design their own animals and then sell or “Breed” them in exchange for crypto currency. The top three sales as of today were all for the equivalent of more than $50,000. No, we aren’t kidding.

The problem: the game is so popular that it is beginning to clog the entire Ethereum network. No, we aren’t kidding.

Now, as one Tech startup CEO told us today, “Every breakthrough technology starts with a stupid game.” He’s right. But Pong never crashed on me, no matter how much I played.

The big question: if Ethereum gets clunky when people collect virtual cats, what happens when a large global business decides to adopt it?

More details from Cointelegraph: https://cointelegraph.com/news/cryptokitties-becomes-largest-ethereum-based-decentralized-application

And a description of how to play: https://techcrunch.com/2017/12/03/people-have-spent-over-1m-buying-virtual-cats-on-the-ethereum-blockchain/

 

Other exchanges and brokers don’t want to be left behind and are starting to increase the reach of Bitcoin…

Bitcoin futures trading is coming to a regulated trading market near you.

The largest exchange operator, CME Group, announced last week that it has received regulatory approval to launch Bitcoin futures contracts beginning December 18, the first regulated futures trading platform for the cryptocurrency. CBOE Holdings, one of the Big 4 US exchanges in its own right, followed suit and is to offer futures trading starting December 10. The Wall Street Journal has reported that Nasdaq plans to launch its own Bitcoin futures offering in the first half of 2018.

We expect the discount brokers including E*TRADE, TD Ameritrade, and Ally Financial to offer Bitcoin futures trading through CME and other exchanges at some point after the launches. E*TRADE, TD Ameritrade and Ally Financial management suggested they would consider offering bitcoin futures contracts once they become available on the exchanges, but more recently E*TRADE has said it will take a wait-and-see approach and watch how the futures trade. SCHW also is taking a careful approach until it has more information and a better grasp of potential risks. Exchange-traded futures contracts with central clearing, net cash settlement, and regulatory oversight may give discount brokers enough comfort to offer Bitcoin futures trading despite volatility and the wide spectrum of views around the cryptocurrency. Futures trading will enable investors to take short positions in Bitcoin for the first time.

We view Bitcoin futures trading as a potential 1) commission revenue opportunity, 2) client acquisition tool, and 3) brand value enhancement.

It could help expand the discount brokers’ customer base via market share gains and new trading customers, with potential cross-selling opportunities from new customers. Discount brokers currently spend ~$240 on average to acquire a new client (LTM client acquisition costs were ~$190, ~$330, and ~$200, at AMTD, ETFC, and SCHW, respectively). If discount brokers allow trading in Bitcoin futures or cryptocurrencies broadly, we see potential for an acceleration in new customers. AMTD, ETFC, and SCHW generated net new account growth of 6.7%, 4.3%, and 5.1% over the last 12 months. We estimate every 1 percentage point increase in net new account growth is worth 5c/sh, or 2.2%, at AMTD; 5c /2.1% at ETFC; and 4c/2.0% at SCHW. Our account growth calculations may prove conservative, but cross-sell could be more limited if these new accounts are less interested in traditional stock and options trading and banking/investment products.

Future of Cryptocurrency

    • A little-known digital currency surges 90% after teaming up with firms like Microsoft (CNBC)
      • IOTA has become the fourth largest cryptocurrency by market cap
    • Enter the ‘petro’: Venezuela to launch oil-backed cryptocurrency (Reuters)
      • President Maduro announced the launch of the “petro” cryptocurrency, backed by oil reserves was created to circumvent recently enacted U.S sanctions
    • Federal Reserve May Introduce A Cryptocurrency In The Future (Investopedia)
      • NY Fed President William Dudley and other central banks around the world are considering offering digital currencies at some point in the future

More will be reported as everything evolves.

Steve Massocca |
Wedbush Securities | 2 Embarcadero Center, 6th Floor | San Francisco | CA | 94111
Steve.Massocca@wedbush.com | www.wedbush.com | Member: NYSE / FINRA / SIPC

Wedbush

This information contained in this presentation is not to be construed as an offer to sell or a solicitation or an offer to buy commodity futures or options. The factual information herein has been obtained from sources believed to be reliable and is not guaranteed as to the accuracy. Futures trading involves the substantial risk of loss and is not suitable for all investors.