TowerWatch #5: The Coming Shift


Welcome to the fifth edition of TowerWatch, a weekly newsletter from BlockTower that focuses on cutting through the noise in the cryptomarkets.

We have one purpose: be useful.



One: The End of an Era

On August 15th 1971, the United States terminated the convertibility of the US Dollar to Gold, unilaterally ending the Bretton Woods system that had been in place since the end of World War II. Since then, most central banks around the world have been issuing money tied to nothing but trust — based on the faith that the government will be able to effectively maintain the value of the currency.

The elimination of the gold standard brought with it worries of inflation. Sure enough the 1970’s experienced high inflation (the energy crisis played a large part in this as well). By 1979 many were convinced that inflation was a problem here to stay. Then, something curious happened. In the 1980’s, inflation started going down — and to this day it hasn’t stopped. For the last 40 years we’ve experienced a structural and continuous fall in inflation.

Chart: BlockTower, data from the treasury.gov

The rise of China, globalization and the advance of technology have all contributed in an out-sized manner to this structural fall in inflation. All three of these themes have contributed to a strong depression of labor costs, which has been one of the drivers of dampened inflation. Globalization allowed the abundant human capital in China to provide for the rest of the world, which has been a major factor in reduced labor costs. In the 1980’s, China was just getting integrated with the global economy. Now it is a driving part of the world economy, and much of China’s workforce has already been absorbed through globalization.

 Over the last 30 years,  technology has allowed for massive improvements in:

  • Labor efficiency (accountants vs accounting software)

  • Logistics (cheaper to ship items) 

  • Price discovery (Easier for consumers to shop for the lowest price)

  • Labor availability (Labor on demand -- think Uber / pay per use) 

Going into 2020 we have two of the three major factors coming under fire. China has likely reached peak integration, and globalization is under heavy scrutiny. Combined these point to an inflection point for inflation — the easy ride of cheap money and low inflation might be over.

If this theory holds true, then central banks start to face issues. They can no longer be so loose and free with monetary policy, as there are no outside forces to drive down inflation. Printing money will soon come with more consequences. The population will need to place greater trust in the system if they continue to see their savings whittled away. Unfortunately, the Western world (especially in the U.S) is losing faith in institutions.

Chart: Pew Research

Over the last decade, we’ve seen increasing awareness of structural issues (such as government debt) — which could further dampen public trust in conventional economic systems. As public trust is key to a functioning fiat currency, this could end up leading individuals to explore alternative assets.

We’re already seeing this from the younger generation in the United States. A recent Charles Schwalb report on the investment habits of their consumers showed that Millennials are especially susceptible to this line of thinking. More Millenials own Bitcoin through their brokerage accounts than Disney, Microsoft or Netflix — a significant deviation from older generations.

Why this matters: The next decade is shaping up to be very different. Based on fundamental forces, we believe that there will be radically more change over the next ten years than there was over the previous ten. In previous TowerWatch editions, we’ve talked a lot about where Bitcoin fits into the overall economy, and what people might find Bitcoin useful for. Most of the discussions generally center around Bitcoin as a hedge to unknown governmental failure and uncertainty about continued success of the current economic experiment we’re running (fiat money).

Based on the current state of things, it sure looks like there is a lot of uncertainty ahead.

Go deeper: A lot of the thought behind this piece was inspired by Imagine 2030, a fantastic research report on the future put out by Deutsche Bank last week. Read it here.


Two: The American Rigs

For most of Bitcoin’s history, the computational power for mining Bitcoin has in large part come from Chinese mining farms due to electricity costs. In 2018, a Princeton paper came out with an estimate that 74% of all hashrate is controlled by Chinese managed mining pools — making China the undisputed leader of mining.

Recently, that’s been changing. There have been three major developments in the last few months illustrative of the shifting landscape:

  • Whinstone US Inc and Northern Bitcoin AG merged in November and began the process of opening a 100-acre bitcoin mining farm in the U.S. state of Texas.

  • Bitmain launched a 50MW (megawatt) cryptocurrency mining farm in Rockdale, Texas.

  • Layer1 raised $50m from a variety of investors including DCG and Peter Thiel to start a Texas based mining farm.

And just yesterday, per Bloomberg:

A Denver-based company that installs data centers at shale drilling sites to take advantage of excess natural gas supplies says it now has eight operations across the U.S. and plans another 30 in the first half of next year.

The centers are being touted as a way to solve the growing problem of gas flaring, where energy companies burn off excess gas. Flaring has risen to a record in Texas this year amid a lack of pipeline capacity.

Closely held Crusoe Energy Systems Inc. is harnessing some of the surplus gas at source to turn it into electricity, powering the data centers that in turn generate revenue by mining Bitcoin. The company will install 70 units next year, each with a capacity of about 1 megawatt, which would keep about 10 million cubic feet a day of gas from being flared, Chief Executive Officer Chase Lochmiller said in an interview.

Well, that one is pretty cool. Historically the issue with Bitcoin mining in Texas has been the heat, but with recent increases in cooling technology the incredibly cheap electricity prices have made West Texas a hotspot for mining companies.

A lot of this can be attributed to the fact that the United States is slowly becoming less dependent on foreign energy. As of two weeks ago, the United States is now actually a net exporter of oil! A big change from a decade ago, when everyone was worrying about the fact we might be running out out oil…

Thought bubble: This is good for Bitcoin! Having Bitcoin mining confined predominantly to one area of the world is not a good thing. The geographic distribution of hashrate is helpful for reducing collusion, regulatory risk and potential black swan events.


Three: A (Scarce) Badge of Honor

Prior to Bitcoin’s combination of blockchain architecture and proof-of-work, it was functionally impossible to have digital scarcity at scale. Things on the internet existed to be copied — CTRL-C / CTRL-V, and suddenly you had the same, identical thing twice. Bitcoin however, has to be provably scarce to be effective. Who is going to use money that can be easily created out of thin air? So with the invention of Bitcoin, digital scarcity was introduced to the world. You could now prove that one item online was separate and distinct from another.

The invention of Bitcoin solved the issue, and the introduction of Ethereum helped create a scalable way to mint and distribute provably unique digital items. Now this concept of unique digital items has taken a life of its own, and there is an entire class of items called non-fungible tokens (NFTs).

NFTs have recently been grabbing headlines. A few weeks ago, a platform for the trading and discovery of NFTs (Nifty Gateway) got acquired by the Winklevoss twins. Just last week, Microsoft Azure announced a partnership with Enjin Coin to create provably unique badges of honor for Azure power users (Predictably, Enjin shot up 40% on the news…).

There have been a lot of use cases outlined for NFTs, with individuals claiming that everything from art to gaming will be revolutionized in the coming years. most applications of NFTs are simple to grok. If you’re a gamer, you could buy provably unique in-game items to show off your friends. If you’re into art, a dealer could issue tokens to certify the authenticity of certain piece, proving you’re the owner once acquired. If you’re a collector, you may want to prove that your beanie baby is the original beanie baby (or not because you spent way too much money on it in 2003!).

Why this matters: We’re seeing general mainstream adoption of NFTs in a way that most other applications of blockchain technology are not enjoying. This hammers home the point that digital scarcity is one of the major applications of blockchain technology — and the two ways it’s being expressed is though NFTs and Bitcoin (money).


General News:

Regulatory News:

Technical News:


Market Outlook:

Bitcoin: We are currently sitting in between the 6900 - 7750 range, after trading as low as 6500 in November. The midpoint of this range is 7325. We are consistently trading above the midpoint which is generally a bullish sign, and are seeing some relatively strong price action recently, with many of the minor price falls being bought up slowly and deliberately.

Funding rates had been negative throughout the end of November, with many people fading any sign of a rally. Over the last week, this has reduced significantly and funding is coming back to its equilibrium state (neither long or shorts are overzealous here). 

We are still seeing fairly low volumes, and very low volatility. The futures curve has dampened a bit too, with the BitMEX MAR-2020 only trading at ~6.18% annualized. Despite the lull in action, Bitcoin looks strong to us here. 

Overall Market: With the drop-off in Bitcoin volatility alt-coins have been given room to breathe. We’re seeing a rotation to “high quality” and relatively “undervalued” alt-coins. Staking coins continue to steal the limelight, with assets like XTZ trading up ~25% on the week. 

There are two main narratives to pay attention to right now. The first is the continued growth of staking coins, and the second is the revamping of token economics in smaller projects. Many projects are now starting to realize that increasing yield and introducing velocity sinks into their models can lead to outsized returns. For example, Kyber.Network (KNC) is up ~80% in the 2 weeks after its founder mentioned offhand that they were looking into re-doing the token economics, and Harmony (ONE) traded up ~30% following a blog post about updated economics. Algorand also recently traded up ~50% after a protocol update went through to reduce inflation rates. 

As not many people are paying attention to altcoins right now, one may be able to capture value by paying close attention to community discussion and protocol updates. 


What We’re Reading:

Stop Blaming Miners for Falling BTC Prices

In the last TowerWatch edition, we explored what might be causing the recent fall in Bitcoin prices. One of the major theses was that miners were depressing the Bitcoin price, but we came to the conclusion this might be an overstated affect.

Well, lucky for us, Felipe Pereira of Paradigma Capital put out a great piece breaking down why miners were most likely not causing Bitcoin prices to fall.

Tl;dr — Miner flows to exchanges are not highly correlated with price drop-offs



Privacy Policy

This letter is the property of BlockTower Capital Advisors LP (“BlockTower”) and is circulated for informational and educational purposes only and shall not be copied or reproduced.  The views and opinions expressed herein are those of the author and do not necessarily reflect the views of BlockTower, its affiliates or its employees. This letter aims to summarize certain developments, articles, and/or media mentions with respect to bitcoin and other cryptocurrencies or related topics that the author believes may be of interest. The views expressed in this letter are based on information which is believed to be reliable and has been obtained from sources believed to be reliable, but no representation or warranty is made, expressed or implied, with respect to the fairness, correctness, accuracy, reasonableness, or completeness of the information and opinions. The information contained in this letter is current as of the date indicated at the front of the letter. Neither BlockTower nor the author undertake any responsibility to update the information contained herein.
This letter is not intended to provide, and should not be relied on for, accounting, legal, or tax advice, or investment recommendations. There is no consideration given to the specific investment needs, objectives or tolerances of any of the recipients. Recipients should consult their own advisors, including tax advisors, before making any investment decision. This letter is not an offer to sell or a solicitation of an offer to purchase any security and any such offer or solicitation can only be made pursuant to an offering memorandum and otherwise in accordance with applicable securities laws.
This information is not intended to, and does not relate specifically to any investment strategy or product that BlockTower offers.  However, BlockTower, its affiliates and/or its employees may have a significant financial interest in one or more of the positions, securities, digital-assets, derivatives, projects and/or ventures discussed in this communication, or may in the future undertake such a financial interest without further notice. Additionally, BlockTower and its principals and affiliates may have financial interests in or relationships with some of the entities, service providers and/or publications discussed or otherwise referenced herein. Those responsible for preparing this letter receive compensation based on various factors, including, among other things, the quality of their work and firm revenues.
Every investment involves risk and in volatile or uncertain market conditions, significant variations in the value or return on that investment may occur, including the risk of a complete loss of an investor’s entire investment. Analyses and opinions contained herein may be based on assumptions that if altered can change the analyses or opinions expressed. Nothing contained herein shall constitute any representation or warranty as to future performance of any digital asset, financial instrument, credit, currency rate, or other market or economic measure.  Due to various risks and uncertainties, actual events and results may differ materially from those reflected or contemplated in such statements.  The graphs, charts and other visual aids contained herein are provided for informational purposes only. None of these graphs, charts or visual aids can and of themselves be used to make investment decisions. No representation is made that these will assist any person in making investment decisions and no graph, chart or other visual aid can capture all factors and variables required in making such decisions. By accepting this information the recipient agrees and acknowledges that no duty is owed to the recipient by BlockTower or any of its affiliates.  The recipient expressly waives any claims arising out of the delivery of the information or the recipients use thereof or reliance thereon. 
Certain links, including links to other websites which may not be maintained or controlled by BlockTower or its affiliates, are provided in this letter. These links are provided as a convenience and do not imply BlockTower’s endorsement, sponsorship, affiliation with or approval of any third-party websites or their content.
BlockTower and its affiliates are not registered or licensed in any capacity with the U.S. Securities and Exchange Commission, U.S. Commodity Futures Trading Commission or any other regulatory body in the United States or globally. Nor is any investment vehicle described herein so registered or licensed. Various investor protections under the laws and regulations administered by the SEC, CFTC or other regulators may not be available.

TowerWatch #4: The Grind Down


Welcome to the fourth edition of TowerWatch, a weekly newsletter from BlockTower that focuses on cutting through the noise in the cryptomarkets.

We have one purpose: be useful.



One: Who’s Driving?

With the markets in trading down consistently over the last month (down ~22% from 9100 to 7100), it becomes tempting to search for a specific narrative. There have been rumors of Bitcoin miner capitulation, discussions about PlusToken liquidating assets, and an ongoing stream of negative regulatory announcements from the Chinese Govt. on cryptocurrencies. Generally headlines have been quite negative, and this has likely compounded the sell-off. Much of the news has come out of Asia, which has led individuals to believe that the recent sell-off is Eastern selling into Western bullishness. 

When you dive into the data this becomes a little bit more close. The table below divides up total returns per month by time zone. A cursory glance will tell you that Asia flipped bullish in April at the start of the rally and also flipped bear in Jul -- right at the top. Much of 2019 has been an Asia-driven market, and the distance between East/West actually seems to be strengthening (see Nov/Oct Asia AM vs NYC AM). 

What’s interesting is that when you look at volumes, they are actually lower during Asian hours (note that these are spot volumes only, though).

This seems to jive with the theory that recently Asian traders have been really bearish, and are driving down prices. Recently, even Western “smart money” positioned short (chart courtesy of The Block).

Additionally, the breakdown of the rally in June coincides with the shuttering of PlusToken, a Ponzi scheme that accumulated ~200,000 BTC. According to individual researchers on-chain analytics, there seems to have been a distribution of 150,000 BTC over the last 5 months after the scam collapsed in June.

Then there is the mining theory. It goes like this:

  • Miners have been selling into the market in an outsized manner to the downturn, because they want to flush out additional hash power that is coming online.

  • Miners may be selling out their inventory for cash flow reasons. Difficulty squeezed out margins, so some miners are offloading BTC from their balance sheets.

The problems:

  • As it turns out there are a variety of new mining farms coming online in areas with lower electricity costs than current Chinese farms. It is a surefire assumption that Chinese miners are aware of the large US farms fundraising and in construction in at least the same level of detail as us, likely far greater.  

  • Looking at miner flows to exchanges, it seems as though flows picked up through the summer, and have actually slowed down since Sept.

Final thoughts: It seems as though the most important market right now is the eastern market. Paying attention to traders in the east and what they think about the current market is key, as is tracking the large suppliers of BTC (miners/PlusToken). Of course, the real key is figuring out when to bet against the trend…


Two: Central Bank Digital Currencies (CBDC)

2019 seems to be the year of central bank digital currencies. From China to the EU, we’ve seen a spate of countries look into issuing a CBDC as a way to march fiat currencies into the future, and assert more control over monetary policy.

There has been quite a bit of back and forth of the topic, with some bankers being vehemently opposed to the idea, and others embracing the concept. On the pro side, Mark Carney (Governor of the BoE), advocated for the issuance of CBDC’s to reduce reliance on the U.S dollar. On the other hand, many have pointed out that introducing a CBDC could reduce deposits at banks, reducing overall money supply and harming economic growth.

Well, this week the Fed Chairman got in on the action. In a letter to Congress, Jerome Powell outlined where the Fed currently stands on the issues. The bottom line? The U.S is looking into it — but doesn’t foresee any implementation soon due to a few basic reasons:

  1. Payment infrastructure is already robust in the United States so there is little reason to implement a CBDC. From a BIS survey earlier this year, it seems the main reason for introducing a CBDC is payment efficiency — something which Powell points out as unnecessary.

  2. The Fed does not want to take away liquidity from the banking system, claiming that there is no good model for understanding what happens when the Fed itself becomes a consumer bank (which is fair!)

Why this matters: There are three types of digital currencies now:

  1. Permissionless Currencies (Bitcoin)

  2. Corporate Currencies (Libra)

  3. State Currencies (CBDC)

The deep dive into digital currencies that central banks are taking is in no small part due to the threat of corporate currencies such as Libra presenting a threat to the management of monetary policy. If individuals in states begin using alternative currencies, then the role of central banks is great diminished. If it turns out that corporate currencies or permissionless currencies are actually easier to use, then central banks could find themselves unable to meaningful enforce economic policy.


Three: Growing Infrastructure

The building goes on! This past week has been busy for Fidelity Digital Assets. They not only secured the elusive Bitlicense from New York State, allowing them to offer their institutional-grade custody and execution services to New York residents, but are also close to onboarding their first exchange for execution are partnering with Galaxy Digital to provide custody for Galaxy’s new Bitcoin fund. Fidelity Digital Assets itself was established after 4.5 years of Fidelity testing the waters for institutional interest in digital assets. With $2.8 trillion in AUM, Fidelity is one of the largest companies involved in the digital asset space.

Despite falling prices in the second half of 2019, we’ve seen increased investment into the digital asset world from traditional organizations. Bakkt (an Intercontinental Exchange company) has announced a variety of different products, ranging from apps to options. The CME is introducing an options product, launching on January 13th. In September, SoFi built a way for its users to buy cryptocurrency directly from their mobile app and website. In August, Rakuten released a wallet that facilitated cryptocurrency purchases. All in all, 2019 has seen significant improvement to both retail and institutional on-ramps to the cryptocurrency world.

Why this matters: With increased access points, comes increased potential adoption. Humans tend to choose the path of least resistance. The more difficult it is to acquire cryptocurrency, the less likely individuals are to buy all else held equal.

This makes on-ramps into the cryptocurrency world key for widespread adoption. In a previous issue of TowerWatch, we discussed the outsized impact that Square has on the retail market due to name brand, large reach, ease of use and aggressive promotion of Bitcoin. The same holds true in the institutional world. For most traditional players to feel comfortable in the digital asset space, there needs to be products that act somewhat similarly to the traditional world


General News:

Regulatory News:

Technical News:

Capital Markets:


Market Outlook:

General Outlook: Despite equities and the broader financial markets rallying, Bitcoin has been stuck in a rut. We broke through the previous support level of 6800 at Asia market open today, Funding is staying consistently negative, and we did not see too many long liquidations on the way down from 7300 —> 6700 indicating that the market is quite scared overall.

We’re now trading back above 7000, with funding rates going deeply negative on the way up (traders shorting into the rally). 

Despite significant dollar moves, both realized volatility and implied volatility have remained low. This is because Bitcoin has stepped down consistently rather than crashing.

The key for trading this market right now is to remain patient, keep dry power and be hesitant in positioning. This is a market that could sharply reverse, or trade down significantly. Playing ranges seems to be unwise here.

Key Levels:

  • Resistance: 7260

  • Support: 6600, 6200

Overall Market: Supply constrained altcoins such as XTZ and SNX have outperformed in this market, but overall everything else in the market is trading down along with BTC.


What We’re Reading:

A brief on Consensus Mechanisms

One of the most important breakthroughs of Bitcoin was using Proof-of-Work in conjunction with a blockchain to prevent double spending. Since then many different types of consensus mechanisms have popped up trying to either improve on security, efficiency or both. To understand the future of the cryptocurrency world, it’s important to have a solid grasp on the variety of consensus mechanisms out there. With this in mind, let’s walk through a great primer put together by Jordan Clifford from Scalar Capital.

Jordan breaks down consensus mechanisms into two types:

  1. Mining algorithms

  2. Non-mining algorithms.

Mining Algorithms:

  1. Proof of work.

PoW creates consensus in rounds known as blocks. Consensus participants are called miners or block producers. To create a new block requires solving a mathematical puzzle that is difficult to solve but easy to verify. This puzzle acts as an ongoing lottery for the right to append to the ledger. Proof of Work awards each valid block that is included a block reward, and for the first time, consensus is paid for.

Pros: Very simple and secure. Novel approach to Sybil resistance allowing open participation

Cons: So far economies of scale have resulted in centralization. Consumes large quantities of physical resources.

Notable Examples: Bitcoin, Ethereum (current), Litecoin, Monero, ZCash

  1. Proof of Stake:

Building on the concept of proof of work, Proof of Stake aims to be faster, more environmentally friendly, and more amenable to sharding — the division of labor within subgroups of a network. For the privilege of producing a block, rather than solve a mathematical puzzle, block producers vote with their stake on the blocks they produce. In PoS, it is possible to create a schedule in advance resulting in quite fast block generation times.

Pros: Offers finality enabling sharding possibilities. Can offer fast block times.

Cons: More complex than PoW. Nothing at stake is a theoretical problem.

Notable Examples: Ethereum (future), Decred (hybrid PoW/PoS), Dfinity

  1. Delegated Proof of Stake (dPoS)

Delegated Proof of Stake is a specialized form of PoS. The difference is that the majority of owners in dPoS are expected to delegate their responsibility. By limiting the number of participants, latency becomes less of a problem and consensus speeds up. If the delegates are severely limited in number, premium hardware system requirements may be expected. A limited number of block producers with top notch equipment would allow a network to run at higher throughput.

Pros: Faster consensus since latency is less of an issue; more throughput

Cons: Less decentralized

Notable Examples: EOS, BitShares, Tron

  1. Proof of Space Time (PoST)

A clever alternative to PoW, is PoST. In PoW, miners expend energy trying to solve a hard mathematical puzzle. PoST awards block rewards to consensus participants at a rate proportional to the storage they have allocated for participation.

One of the most promising advantages of PoST is the possibility that it will remain more decentralized. A problem with PoW algorithms is that they require cutting edge specialized hardware to participate profitably. Application Specific Integrated Circuits (ASICs) are mandatory to mine Bitcoin.

Pros: Potentially ASIC resistant. More environmentally friendly than PoW

Cons: Unproven and complex. ASICs or HD farms could diminish benefit

Notable Examples: Chia, SpaceMesh

Non-mining consensus mechanisms:

  1. Practical Byzantine Fault Tolerance (pBFT)

When parties are familiar with each other and cooperative, it can make sense to abandon PoW or PoS models, and use traditional consensus algorithms. One such algorithm is an off-shoot of the original BFT family of algorithms known as pBFT. pBFT was proposed in 1999 by two MIT researchers. It requires a lot of communication overhead between participants, so it is only practical for small groups.

Pros: Reliable consensus amongst known parties

Cons: Only supports small number of participants; not a trustless system due to users having to trust validators

Notable Examples: Hyperledger, Ripple, Stellar

  1. Directed Acyclic Graphs (DAGs)

Requiring all participants to come to consensus within a certain period of time limits the throughput of a system. One novel approach is to not require a global consensus on regular intervals. Rather than batch transactions into blocks that are agreed on in a global manner, transactions are individually added to the history.

As transactions are added, they reference prior transactions, and that gives some confidence that the prior transactions are accepted. If enough transactions are chained together on top of a given transaction, it’s increasingly probable that the network will accept the original transaction.

Pros: Fast “confirmations” and high throughput

Cons: Unproven in practice. Suspect immutability.

Notable Examples: Iota, Byteball, Nano

Some food for thought: everything but Proof of Work is “unproven in practice”. Even proof of work has it’s major flaws such as centralization of mining power and energy usage. In the coming years, there will be many breakthroughs when it comes to efficient consensus mechanisms, and I believe that the cryptocurrency landscape will radically change as a result. Make it a point to document all new consensus algorithms and follow the projects that are attempting new, novel approaches. One of them may end up a winner….



Privacy Policy

This letter is the property of BlockTower Capital Advisors LP (“BlockTower”) and is circulated for informational and educational purposes only and shall not be copied or reproduced.  The views and opinions expressed herein are those of the author and do not necessarily reflect the views of BlockTower, its affiliates or its employees. This letter aims to summarize certain developments, articles, and/or media mentions with respect to bitcoin and other cryptocurrencies or related topics that the author believes may be of interest. The views expressed in this letter are based on information which is believed to be reliable and has been obtained from sources believed to be reliable, but no representation or warranty is made, expressed or implied, with respect to the fairness, correctness, accuracy, reasonableness, or completeness of the information and opinions. The information contained in this letter is current as of the date indicated at the front of the letter. Neither BlockTower nor the author undertake any responsibility to update the information contained herein.
This letter is not intended to provide, and should not be relied on for, accounting, legal, or tax advice, or investment recommendations. There is no consideration given to the specific investment needs, objectives or tolerances of any of the recipients. Recipients should consult their own advisors, including tax advisors, before making any investment decision. This letter is not an offer to sell or a solicitation of an offer to purchase any security and any such offer or solicitation can only be made pursuant to an offering memorandum and otherwise in accordance with applicable securities laws.
This information is not intended to, and does not relate specifically to any investment strategy or product that BlockTower offers.  However, BlockTower, its affiliates and/or its employees may have a significant financial interest in one or more of the positions, securities, digital-assets, derivatives, projects and/or ventures discussed in this communication, or may in the future undertake such a financial interest without further notice. Additionally, BlockTower and its principals and affiliates may have financial interests in or relationships with some of the entities, service providers and/or publications discussed or otherwise referenced herein. Those responsible for preparing this letter receive compensation based on various factors, including, among other things, the quality of their work and firm revenues.
Every investment involves risk and in volatile or uncertain market conditions, significant variations in the value or return on that investment may occur, including the risk of a complete loss of an investor’s entire investment. Analyses and opinions contained herein may be based on assumptions that if altered can change the analyses or opinions expressed. Nothing contained herein shall constitute any representation or warranty as to future performance of any digital asset, financial instrument, credit, currency rate, or other market or economic measure.  Due to various risks and uncertainties, actual events and results may differ materially from those reflected or contemplated in such statements.  The graphs, charts and other visual aids contained herein are provided for informational purposes only. None of these graphs, charts or visual aids can and of themselves be used to make investment decisions. No representation is made that these will assist any person in making investment decisions and no graph, chart or other visual aid can capture all factors and variables required in making such decisions. By accepting this information the recipient agrees and acknowledges that no duty is owed to the recipient by BlockTower or any of its affiliates.  The recipient expressly waives any claims arising out of the delivery of the information or the recipients use thereof or reliance thereon. 
Certain links, including links to other websites which may not be maintained or controlled by BlockTower or its affiliates, are provided in this letter. These links are provided as a convenience and do not imply BlockTower’s endorsement, sponsorship, affiliation with or approval of any third-party websites or their content.
BlockTower and its affiliates are not registered or licensed in any capacity with the U.S. Securities and Exchange Commission, U.S. Commodity Futures Trading Commission or any other regulatory body in the United States or globally. Nor is any investment vehicle described herein so registered or licensed. Various investor protections under the laws and regulations administered by the SEC, CFTC or other regulators may not be available.

TowerWatch #3: The Silent Market


Welcome to the third edition of TowerWatch, a weekly newsletter from BlockTower that focuses on cutting through the noise in the cryptomarkets.

We have one purpose: be useful.



One: The Macro View

Many traditional fund managers that enter the Bitcoin world tend to view Bitcoin as a gold analog, for better or worse. The bitcoin vs gold analogy is somewhat useful as a tangible, surface level equivalent to aid understanding, but generally fails to present the whole picture.

While a main driver of value for gold is its use as an inflationary hedge, Bitcoins value has mostly been derived from speculation for the majority of its history. Interspersed throughout speculation have been brief periods where Bitcoin has reacted to isolated macro shocks, such as the 2013 Cyprus Bailout or the devaluation of the Yuan earlier this year. At a high level, Bitcoin is still a speculative instrument, but within its price action Bitcoin contains the potential for a fantastic macro hedge (in no small part because it's generally uncorrelated to equities, bonds and commodities).

From a broader macroeconomic perspective we can look at the growth of Bitcoin as being driven by combination of three things.

First, Bitcoin growth is a response an increasing Federal Reserve balance sheet. There is actually a synergistic flow between the two. Bitcoin was created by Satoshi Nakamoto as an apolitical, decentralized currency meant to be a hedge against mismanagement of central banks. A large part Bitcoin intrinsic value comes from its censorship resistance and resilience in the face of individual governmental failure. The unprecedented use of QE gave credence to this narrative, and helped justify Bitcoins success in the eyes of supporters.

Chart: BlockTower, data from CryptoCompare and Federal Reserve

In addition to narrative fodder QE introduced a technical reason for a price rise — the printing of “cheap” money. Cutting rates, and refusing to meaningfully unwind the balance seet has pushed investors up the risk curve over the last decade. The “risk-off” environment we’ve enjoyed for some time now has prompted some investors to bet on one of highest risk (but also highest reward) assets in search of returns.

Third, some amount of growth can be attributed to true demand emanating from macro shocks. As an apolitical and uncensorable asset, there is some demand for Bitcoin from those who live under regimes where their own particular currency or banks are untrustworthy. For people living in Cyprus in 2013, or Argentina in 2019, Bitcoin becomes a useful asset to hold. While it’s not clear whether individuals in these countries are piling in large amounts of money directly into Bitcoin as a consequence of currency depreciation (likely only a few are) — it doesn’t matter too much. What matters is that at the margin, individuals become more aware of the fallibility of their own systems during times of stress, and more knowledgeable about Bitcoin as a potential hedge.

  • For example, when the USDCNY peg broke in August, Bitcoin rallied. Whether this was entirely due to Chinese individuals entering is unknown, but the narrative of Bitcoin being a safe haven strengthened regardless.

Let’s entertain the question of how Bitcoin performs in a recession. There are quite a few proponents of Bitcoin who believe that it will outperform in a recession. Many others believe that a recession would be a death knell. To us, the clearest answer to this question is it depends. As a mostly risk-on asset it’s unlikely that Bitcoin does well if a full-on 2008 style recession happens in the next few years. Far too many people would flee to safe haven assets, which does not currently include Bitcoin.

The ideal scenario for Bitcoin is what seems to be happening currently. Idiosyncratic economic downturns and currency depreciation (Argentina, Turkey, Chile), while the broader world keeps on chugging. These individual downturns make the world more aware of potential failure, and as a result is likely to push individuals to explore potential hedges. As long as the broader markets remain strong, individuals will also be comfortable holding assets higher on the risk curve (Bitcoin). As time goes on, and money flows in, Bitcoins volatility goes down, and the narrative reinforces itself. In the end, it’s a matter of timing.


Two: What is Ethereum, Legally?

Ethereum is an odd case. Is it a security? Is it not a security? One of the reasons we can even entertain the possibility of Ethereum not being security is because the network is already launched and running. At the time of the ICO, Ethereum was likely a security because it was pre-launch and therefore almost by definition centralized and dependent on the work of a central group.

Back in 2014 however, no regulators were really paying much attention to the cryptocurrency world which let Ethereum fly under the radar. Cut to the present however, and you’ll find that similar but newer ICO’s are much less fortunate — the SEC is paying close attention.

Anyways. On October 10th, the Ethereum community got a welcome surprise from the Heath Tarbert (Chairman of the CFTC).

From Yahoo Finance:

“We've been very clear on bitcoin: bitcoin is a commodity. We haven't said anything about ether—until now,” Tarbert said on stage at Yahoo Finance’s All Markets Summit in New York City on Thursday. “It is my view as chairman of the CFTC that ether is a commodity.

Huzzah! The CFTC had never before directly addressed whether Ethereum was a commodity. While a director of the SEC (Bill Hinman) indirectly said Ethereum might be a commodity, it was not confirmed by any other regulator until that statement. The designation of commodity opens up a quicker path to Ethereum futures, and broader adoption for the cryptocurrency. All is good.

Wait a second:

Heath Tarbert, chairman of the U.S. Commodity Futures Trading Commission, sounded out a warning yesterday [Nov 12th] over the potential for staked tokens (i.e. the coins that support proof-of-stake blockchain networks) to be classified as securities.

“We are thinking carefully about it,” he said during a conversation at Coindesk’s Invest conference in New York City in response to a question about Ethereum 2.0, the blockchain’s next evolution which intends to use proof of stake (PoS) as a consensus mechanism.

Now this all just seems like a headache. If a cryptocurrency can move fluidly between being centralized and decentralized — then the SEC will constantly need to pay attention.

That’s exactly what the SEC believes though!

A digital asset may be offered and sold initially as a security because it meets the definition of an investment contract, but that designation may change over time if the digital asset later is offered and sold in such a way that it will no longer meet that definition.

I agree with Director Hinman's explanation of how a digital asset transaction may no longer represent an investment contract if, for example, purchasers would no longer reasonably expect a person or group to carry out the essential managerial or entrepreneurial efforts.

  • Jay Clayton

It seems the SEC will need to have hard rules on what makes something decentralized vs centralized (which is not an easy task). How do you define a decentralized system? How often do you need to evaluate a system to ensure it’s decentralized? What happens to operators if something goes from being a security to not being a security and vice-versa? All of these questions need to be answered somehow.

Why this matters: Much of this particular issue may stem from the depth of understanding about underlying consensus protocols (i.e is PoS that much more centralized than PoW?). It also seems symptomatic of general overthinking from regulators, and underscores the importance of regulator education. If cryptocurrency is to go mainstream, there needs to be further concerted effort by the community to help educate regulators on the system.


Three: OpFi, DeFi, DAI and SAI

Open finance, decentralized finance, whatever you want to call it — it’s growing! Tomorrow, MakerDAO will open up transitions to multi-collateral DAI, and the great migration will begin.

  • This in many ways is the first major stress test of decentralized finance as it requires large coordination between exchanges, devs, and market participants in order to come out the other side successful.

  • Exchanges such as Coinbase and Kraken have announced support for multi-collateral DAI, illustrating broad community support (still no BSV on Coinbase / Kraken…)

Here we’ll be watching closely to see how the transition plays out, as we believe that the success or failure of multi-collateral DAI has major implications for the future of decentralized finance. One of the major worries about DeFi is the lack of portability. What happens when there are major changes to a protocol? When you’re dealing with peoples money, everything has to go perfectly, otherwise you can irreparably damage reputation and trust.

Why this matters: Historically confined to the Ethernet community, we’re seeing more widespread discussion about open finance. Over the next year, there are quite a few new protocols launching that may look for DeFi as a potential source of usage.

It’s not too far-fetched to imagine that we will see many different competitors to the current Ethereum DeFi stack on different protocols, with small tweaks to the system based on observed inefficiencies. Dfinity, Cosmos and Harmony all have incentive to help port over DeFi if they think it will allow them grow a userbase. There is already a MakerDAO competitor in existence (Kava) that is based on Cosmos, and we suspect there is more to come.


General News:

Capital Markets:


Market Outlook:

General Outlook: The Market is Silent

Bitcoin is continuing the grind lower with implied and realized volatility continuing to fall. While the options term structure is still very steep, we’re seeing weekly vols at levels not seen since April (mid 40’s).

Bitcoin price grinded lower since our last letter, settling in a tight range between 8350 and 8650. Despite ranging with low volatility, we’ve seen a few significant attempted range breaks that have failed quickly, indicating significant indecision from both buyers and sellers.

Funding rates and futures curves have flattened as well, but open interest remains elevated ($840m) compared to Sept and Oct lows. It seems as though both longs and shorts are positioned relatively well and there is no large imbalance between longs and shorts, which is what often causes sharp movements in either direction. Volume has also reached multi-month lows, setting the stage for a large movement.

Key Levels:

  • Resistance: 8640, 8800

  • Support: 8350, 8200

Overall Market: Ethereum too has seen a significant drop off in volatility, but also is seeing widening spreads on options indicating market markets are reluctant to play aggressively in this low-vol market. Bitcoin dominance has stayed relatively flat, but select altcoins continue to outperform on shorter time frames. In some ways, this market is similar to the February - April market where Bitcoin volatility trended down, giving altcoins room to breathe. The fact that alt coins are still moving upwards in this market lends credence to the idea that some part of Bitcoin under performance is due to altcoin rotation.


What We’re Reading:

This week, we’re taking a look at the cryptocurrency derivatives market. Over the last year, the derivatives market has exploded with a variety of new upstart exchanges and products hitting the market. Looking at just BitMEX vs spot volume, one can see that derivatives are in the drivers seat of this market.

Chart: BlockTower, data from CryptoCompare

Emmanuel Goh, of Skew, wrote a great article on the state of crypto derivatives, and we’d like to share an excerpt from that article:

Victims of their own success, derivatives venues were hit in 2019 with a first-world problem.

As trading occurs on margin, derivatives exchanges have been careful to design a spot price index derived from the price of what were, initially, much larger physical exchanges. The index is used to settle the contracts at expiry, and decide when to initiate margin calls. It was a smart way of preventing manipulation of the then not-so-liquid crypto derivatives contracts.

However, as the derivatives market has grown exponentially, we have now entered a period where the underlying physical exchanges are much smaller than the derivatives exchanges – only 10% of total volumes in aggregate. It has become tempting to try to manipulate the less liquid underlying exchanges to yield some profits trading the derivatives.

This was most visible earlier this year in May when a relatively small-size order on physical exchange Bitstamp triggered a wave of liquidations at BitMEX and took the entire market down.

Exchanges seem to have been increasingly aware of the problem and have been attempting to strengthen their indices – sometimes with unfortunate consequences, as with a recent miscalculation at Deribit costing the exchange $1.3 million.

With the CBOE officially out, expect the competition between CME and ICE to be heating up in 2020 as the two exchanges roll out their options offering.

It would be particularly encouraging to see corporate hedging flows taking off, led by mining companies and supported by physically delivered and options contracts. The Mexican government is said to have spent $1 billion on put options this year to hedge its 2020 oil production. Still some way to go for crypto derivatives.

Cryptocurrency derivatives have undoubtedly become bigger than the spot market — but what are the implications of this?

  • Markets becoming more dependent on Bitcoin. Individuals tend to aggregate around liquidity. Seeing at Bitcoin derivatives are now by far the most liquid instruments, they will continue to attract demand. Despite having periods of altcoin mania in the past, it’s possible that the derivatives market will drain those altcoin speculators and refocus them on Bitcoin derivatives. More generally this is a bearish thesis for altcoins, as individuals who would previously speculate on altcoins move over to leverage BTC products.

  • More sophistication in the Bitcoin markets. Wit derivatives comes sophisticated players who see the potential inefficiencies in the market. One would actually expect long term volatility to dampen (although short term may be exacerbated by increased leverage).

  • The rise of structured products. With derivatives will come products. Covered call portfolio, accumulators and more. Derivatives offer specialized ways to invest in the Bitcoin market, and offer investors ways to invest that were previously unavailable. This should open up the market to both the skittish and the bold.

All in all, suffice to say we’re quite excited for the next chapter.



Privacy Policy

This letter is the property of BlockTower Capital Advisors LP (“BlockTower”) and is circulated for informational and educational purposes only and shall not be copied or reproduced.  The views and opinions expressed herein are those of the author and do not necessarily reflect the views of BlockTower, its affiliates or its employees. This letter aims to summarize certain developments, articles, and/or media mentions with respect to bitcoin and other cryptocurrencies or related topics that the author believes may be of interest. The views expressed in this letter are based on information which is believed to be reliable and has been obtained from sources believed to be reliable, but no representation or warranty is made, expressed or implied, with respect to the fairness, correctness, accuracy, reasonableness, or completeness of the information and opinions. The information contained in this letter is current as of the date indicated at the front of the letter. Neither BlockTower nor the author undertake any responsibility to update the information contained herein.
This letter is not intended to provide, and should not be relied on for, accounting, legal, or tax advice, or investment recommendations. There is no consideration given to the specific investment needs, objectives or tolerances of any of the recipients. Recipients should consult their own advisors, including tax advisors, before making any investment decision. This letter is not an offer to sell or a solicitation of an offer to purchase any security and any such offer or solicitation can only be made pursuant to an offering memorandum and otherwise in accordance with applicable securities laws.
This information is not intended to, and does not relate specifically to any investment strategy or product that BlockTower offers.  However, BlockTower, its affiliates and/or its employees may have a significant financial interest in one or more of the positions, securities, digital-assets, derivatives, projects and/or ventures discussed in this communication, or may in the future undertake such a financial interest without further notice. Additionally, BlockTower and its principals and affiliates may have financial interests in or relationships with some of the entities, service providers and/or publications discussed or otherwise referenced herein. Those responsible for preparing this letter receive compensation based on various factors, including, among other things, the quality of their work and firm revenues.
Every investment involves risk and in volatile or uncertain market conditions, significant variations in the value or return on that investment may occur, including the risk of a complete loss of an investor’s entire investment. Analyses and opinions contained herein may be based on assumptions that if altered can change the analyses or opinions expressed. Nothing contained herein shall constitute any representation or warranty as to future performance of any digital asset, financial instrument, credit, currency rate, or other market or economic measure.  Due to various risks and uncertainties, actual events and results may differ materially from those reflected or contemplated in such statements.  The graphs, charts and other visual aids contained herein are provided for informational purposes only. None of these graphs, charts or visual aids can and of themselves be used to make investment decisions. No representation is made that these will assist any person in making investment decisions and no graph, chart or other visual aid can capture all factors and variables required in making such decisions. By accepting this information the recipient agrees and acknowledges that no duty is owed to the recipient by BlockTower or any of its affiliates.  The recipient expressly waives any claims arising out of the delivery of the information or the recipients use thereof or reliance thereon. 
Certain links, including links to other websites which may not be maintained or controlled by BlockTower or its affiliates, are provided in this letter. These links are provided as a convenience and do not imply BlockTower’s endorsement, sponsorship, affiliation with or approval of any third-party websites or their content.
BlockTower and its affiliates are not registered or licensed in any capacity with the U.S. Securities and Exchange Commission, U.S. Commodity Futures Trading Commission or any other regulatory body in the United States or globally. Nor is any investment vehicle described herein so registered or licensed. Various investor protections under the laws and regulations administered by the SEC, CFTC or other regulators may not be available.

TowerWatch #2: A Quietly Moving Market


A weekly newsletter from BlockTower cutting through the noise in crypto markets and investing.

We have one purpose: be useful.



One: Supply & Demand

Let’s talk about prices. What goes into them? When you fill your car with gas, and you pay an outrageous $4/gal (I’m scarred from LA prices...) — where did that price come from? 

Well, it was probably derived from drilling costs, equipment costs, shipping costs, storage costs, labor costs, the rent of the gas station itself, etc. That’s the complicated version. The simple version: it was derived from the supply of gas vs the demand for gas. In fact, pretty much all prices in this world can quantified using two metrics — supply and demand.

Some assets are supply driven, some are demand driven. Often assets shift from being supply driven to being demand driven based on market regime, and understanding what the main driver is can be useful.

Which brings us to Bitcoin. Bitcoin has one of the more unique supply/demand relationships, because of its predictable and regularly scheduled supply shocks. The Bitcoin inflation rate sees periods of gradual descent, followed by a single day of radical decline when block rewards get halved. Thanks to this easy-to-model supply schedule, you can estimate fairly accurately the amount of Bitcoin that will exist at any point in the future, which means that you can also estimate the amount of new demand flow into the Bitcoin ecosystem that’s needed to support the price. For example, we can ask whether the market will be able to absorb 333,000 Bitcoin over the next 185 days before the halving (1800 BTC/day * 185). If the answer is no, the market should grind lower.

This discussion is particularly focused on the supply generated by new issuance. There can be a more complex discussion about freed supply from sellers, for another time. For example the movement of Satoshis coins would be a large supply shock not discussed.

As the issuance of the new Bitcoin is known quantity, the more important part of the equation the demand side. Generally with commodities, you should assess shocks to both sides of the equation. When trading corn, you should know potential catalysts for supply changes as well as catalysts for demand. With Bitcoin, you can focus exclusively on the demand shocks, such as an ETF approval, or new online portal for Bitcoin purchases. Debating a supply shock such as the halving is probably better framed by discussing whether demand will increase based on the narrative that a reduction of supply is bullish (rather than the reduction in supply inherently being bullish).

Anyways, last week we got an interesting look at one source of Bitcoin demand from Square through their Q3 investor letter.

Inferred statistics from the letter:

  • $148m worth of Bitcoin was sold through Square in Q3

  • Average Bitcoin price in Q3 was $10,392 so an estimated ~14,241 Bitcoin were purchased through Square

  • 174,038 Bitcoin were produced during Q3, meaning Square absorbed ~8.2% of all issued Bitcoin in Q3 was bought by Square users.

Why this matters: Square’s retail customers now account for a significant amount of Bitcoin demand, proving out the importance of having simple gateways into crypto for new users. One of the most powerful ways to get buy in is through companies like Square getting involved and tapping into their existing user bases. We’ve seen a decent amount of this already over the last year, with portals such as SoFi and Bakkt launching. Infrastructure being built out to facilitate demand is a shock of its own kind — and although it seems to be slow, it should not be discounted.


Two: Staking is Having a Moment

Earlier this week, Coinbase rolled out support for staking on the Tezos network. Over the next 24 hours, XTZ/USD proceeded to trade up more than 40%, a clear sign that the market was quite excited about this new development. So what’s going on here?

The introduction of staking on a retail platform could dramatically increase staking participation. The Coinbase announcement seems at-the-margin bullish for staking coins. Currently it’s actually quite difficult for a non-tech savvy individual to go through the steps of staking, limiting the potential user base.

  • If Coinbase continues to add staking functionality for it’s retail platform, it’s not too much of a leap to say those coins may get decent flow. Who doesn’t like passive income, after all. So it makes sense for staking coins to experience a bump, as retail is more likely to opt for an asset that delivers consistent income vs one that doesn’t.

Staking coins outperformed on the announcement.

  • Cosmos (ATOM/USD) has traded up 12% since the news broke that Coinbase was supporting Tezos staking.

  • Decred (DCR/USD) has also added ~10% on the news.

There’s a potential narrative forming here. We’re also seeing PoS progress from Ethereum. So all in, staking projects look like they’re establishing decent momentum.

Side note: The Coinbase announcement is emblematic of a larger trend in the cryptocurrency market, namely the consolidation of services. Large companies such as Binance and Coinbase are now focused on delivered a breadth of services to their customers, so that everything cryptocurrency related can be done from the comfort of a singular website. Over the coming months, it wouldn’t be too surprising to see much larger staking asset coverage from Coinbase, as they try to capture the whole market.

From Coinbase:

With today’s launch, Coinbase is offering an easy, secure way for anyone to actively participate in the Tezos network. While it’s possible to stake Tezos on your own or via a delegated staking service, it can be confusing, complicated, and even risky with regard to the security of your staked Tezos. We’re changing that with staking rewards on Coinbase.

With Coinbase staking rewards:

  • You can begin earning rewards on your crypto. The current estimated annual return for Tezos staking on Coinbase is ~5%. You’ll see your pending rewards increase in real-time in the app, and once your initial holding period completes (35–40 days), you’ll receive rewards in your account every 3 days.

  • You will always maintain control. Your Tezos always stays in your wallet; you just earn rewards while keeping your crypto safely on Coinbase. You can opt out any time you want.


Three: Hong Kong Regulator Clarifies Exchange Rules

In a step forward for digital asset trading, the Hong Kong Securities and Futures Commission (SFC) announced a new licensing mechanism for digital asset trading platforms.

From the announcement:

  1. The SFC met with virtual asset trading platform operators to discuss their businesses and explain the SFC’s regulatory expectations. Having examined in depth the technical, operational and other aspects of virtual asset trading, the SFC has concluded that some types of centralised platforms trading security and non-security tokens would be suitable to be regulated under the framework set out in this position paper.

  2. The SFC has therefore adopted a set of robust regulatory standards for virtual asset trading platforms which are comparable to those applicable to licensed securities brokers and automated trading venues. These standards seek to address key regulatory concerns related to the safe custody of assets, know-your-client requirements, antimoney laundering and counter-financing of terrorism, market manipulation, accounting and auditing, risk management, conflicts of interest and the acceptance of virtual assets for trading. The SFC will only grant a licence to those platforms which are capable of meeting the expected standards.

As per Reuters:

The new rules, under which exchanges can apply to be regulated from Wednesday, draw on the standards the SFC expects for conventional securities brokers.

They stipulate that an exchange that wants to be licensed must provide services to professional investors only, have an insurance policy to protect clients in case assets are lost or stolen, and use an external market surveillance mechanism.

Cryptocurrency exchanges do not need an SFC license to operate provided they do not trade any products defined as a security. Bitcoin for example is not a security, Alder said.

Main point: Note that the SFC hasn’t ruled much on the status of individual tokens, so it’s unclear how much of an effect it will have on exchanges that purely trade cryptocurrencies.

  • According to the document, cryptocurrency exchanges do not need an SFC license to operate provided they do not trade any products defined as a security. Bitcoin for example is not a security as defined by the SFC, so this seems like an announcement that could precede the rise of regulated security token exchanges, rather than cryptocurrency specific exchanges.


General News:

Capital Markets:

Technical News:


Market Outlook:

General Outlook: The market is quietly moving…

We finally broke out of the 9000 - 9400 range this week, trading down as low at 8700 on Nov 8th. After trading down those $500, funding rates went flat indicating that few longs were being taking out despite being at a significant support level (see above chart).

Our time outside of the range was relatively short, and we quickly rebounded to 9200 in a quick short squeeze before settling at 9050 at the time of writing.

Implied volatility and realized volatility are continuing to cruise down, both touching lows not seen since April 2019. We’re in a quite uncertain period for Bitcoin price, but now that we’ve sweeped more longs out by taking liquidity through 8700, I’m more bullish than I was in the last edition of TowerWatch.

Key Levels:

  • Resistance: 9400, 9700

  • Support: 9100, 8900, 8600

Overall Market: As Bitcoin has slowed down, we’ve seen specific altcoins outperform as correlations continue to break down. Staking coins such as Tezos, Decred, and Cosmos have seen growth, and individual coins such as Ethereum, Litcoin and VeChain have seen out performance over Bitcoin as well.

  • Stellar was a standout too, lifting almost 20% after the foundation announced they would be burning 50% of circulating supply.

  • Theoretically, burning half the supply should lead to a 100% increase in price. It’s clear that markets aren’t perfectly efficient, but a 20% rise is on the low end of returns. According to Messari data, they only burned 35% of Year 2050 supply, which may explain some of the markets hesitancy (but not all of it). If Stellar had continued to outperform, it may have caused a cascade effect where other tokens with large, concentrated treasuries would also burn.

  • The relative under performance of Stellar makes this less likely, but token burns still remain a useful lever for many cryptocurrency projects.  

More generally, the last two weeks have seen a consistent decline in BTC.D, falling down from a local top at 70.84%, to 68.74% at the time of writing. In a weird twist, BTC.D actually went up after the fall from 9200 —> 8700, which was an indication of market strength. If altcoins fail to follow Bitcoin down then one may be able to assume the market is stronger than it appears from pure Bitcoin price action.

One interesting asset to pay attention to is MakerDAO, given that a major protocol upgrade (Multi Collateral Dai) is coming on November 18th. Basic Attention Token will also be part of the protocol upgrade, and the Ethereum community seems generally excited about the announcement.


What We’re Reading:

What is Bitcoin, really?

One of the most enduring questions in the crypto world concerns the role of Bitcoin in the world. Since its creation in 2008, people have argued over what exactly bitcoin is. Is it for cheap payments? Is it a store of value? Is it for privacy? It’s good to consistently remind ourselves of the historical narratives, and the current ones.

Over time, our definitions of what Bitcoin should be used for have changed. I’ve included an excerpt from Nic Carter’s well written article, where he goes over what the 7 main definitions of Bitcoin are, and how they have changed over time.

  1. E-cash proof of concept: the first major narrative, this was the general view of Bitcoin in its earliest days. Back then, cypherpunks and cryptographers were still appraising the nascent project and determining whether it worked, if at all. Since all prior e-cash schemes had failed, it took a while for people to be convinced of its technical and economic viability and move on to more expansive conceptions of the protocol.

  2. Cheap p2p payments network: an extremely popular and pervasive narrative. Some believe this is what Satoshi had in mind — a straightforward currency for peer to peer internet transactions. A decentralized Paypal or Venmo, if you will. Since microtransactions are a key component of internet commerce, proponents of this view generally believe that low fees and convenience are an essential characteristic of such a currency.

  3. Censorship-resistant digital gold: the counterpoint to the p2p payments narrative, this is the view that Bitcoin primarily represents an untamperable, uninflatable, largely unseizable, intergenerational wealth store which cannot be interfered with by banks or the State. Proponents of this view de-emphasize Bitcoin’s use for everyday transactions, arguing that security, predictability, and conservatism in development are more important. We’re callously lumping in sound money believers into this camp.

  4. Private and anonymous darknet currency: the view that Bitcoin is useful for anonymous online transactions, in particular to facilitate black market online commerce. This is not necessarily mutually exclusive with the e-gold position, as many proponents of the digital gold view believe that fungibility and privacy are important attributes. This was a popular narrative before the chain analysis companies had success de-anonymizing Bitcoin users.

  5. Reserve currency for the cryptocurrency industry: this is the view that Bitcoin serves an essential purpose as the native currency for the cryptocurrency/cryptoasset industry more generally. This is a view espoused by traders for whom BTC is the numeraire — the currency in which the prices of other assets are quoted. Additionally, traders, businesses, and distributed networks that hold reserves in BTC de-facto endorse this view.

  6. Programmable shared database: this is a slightly more niche view, and generally involves the understanding that Bitcoin can embed arbitrary data, not just currency transactions. Individuals holding this view tend to see Bitcoin as a programmable, expressive protocol, which can facilitate broader use-cases. In 2015–16, it was popular to express the notion that Bitcoin would eventually absorb a diverse set of functionalities through sidechains. Projects like Namecoin, Blockstack, DeOS, Rootstock, and some of the timestamping services rely on this view of the protocol.

  7. Uncorrelated financial asset: this is a view of Bitcoin that treats it strictly like a financial asset and finds its most important feature to be its return distribution. In particular, its tendency to have a low or nonexistent correlation to all manner of indexes, currencies, or commodities makes it an attractive portfolio diversifier. Proponents of the view are generally not too concerned about owning spot Bitcoin; they are interested in exposure to the asset. Put another way, they want to buy Bitcoin-flavored risk, not necessarily Bitcoin itself. As Bitcoin has become more financialized, this conception has gained steam.



Privacy Policy

This letter is the property of BlockTower Capital Advisors LP (“BlockTower”) and is circulated for informational and educational purposes only and shall not be copied or reproduced.  The views and opinions expressed herein are those of the author and do not necessarily reflect the views of BlockTower, its affiliates or its employees. This letter aims to summarize certain developments, articles, and/or media mentions with respect to bitcoin and other cryptocurrencies or related topics that the author believes may be of interest. The views expressed in this letter are based on information which is believed to be reliable and has been obtained from sources believed to be reliable, but no representation or warranty is made, expressed or implied, with respect to the fairness, correctness, accuracy, reasonableness, or completeness of the information and opinions. The information contained in this letter is current as of the date indicated at the front of the letter. Neither BlockTower nor the author undertake any responsibility to update the information contained herein.
This letter is not intended to provide, and should not be relied on for, accounting, legal, or tax advice, or investment recommendations. There is no consideration given to the specific investment needs, objectives or tolerances of any of the recipients. Recipients should consult their own advisors, including tax advisors, before making any investment decision. This letter is not an offer to sell or a solicitation of an offer to purchase any security and any such offer or solicitation can only be made pursuant to an offering memorandum and otherwise in accordance with applicable securities laws.
This information is not intended to, and does not relate specifically to any investment strategy or product that BlockTower offers.  However, BlockTower, its affiliates and/or its employees may have a significant financial interest in one or more of the positions, securities, digital-assets, derivatives, projects and/or ventures discussed in this communication, or may in the future undertake such a financial interest without further notice. Additionally, BlockTower and its principals and affiliates may have financial interests in or relationships with some of the entities, service providers and/or publications discussed or otherwise referenced herein. Those responsible for preparing this letter receive compensation based on various factors, including, among other things, the quality of their work and firm revenues.
Every investment involves risk and in volatile or uncertain market conditions, significant variations in the value or return on that investment may occur, including the risk of a complete loss of an investor’s entire investment. Analyses and opinions contained herein may be based on assumptions that if altered can change the analyses or opinions expressed. Nothing contained herein shall constitute any representation or warranty as to future performance of any digital asset, financial instrument, credit, currency rate, or other market or economic measure.  Due to various risks and uncertainties, actual events and results may differ materially from those reflected or contemplated in such statements.  The graphs, charts and other visual aids contained herein are provided for informational purposes only. None of these graphs, charts or visual aids can and of themselves be used to make investment decisions. No representation is made that these will assist any person in making investment decisions and no graph, chart or other visual aid can capture all factors and variables required in making such decisions. By accepting this information the recipient agrees and acknowledges that no duty is owed to the recipient by BlockTower or any of its affiliates.  The recipient expressly waives any claims arising out of the delivery of the information or the recipients use thereof or reliance thereon. 
Certain links, including links to other websites which may not be maintained or controlled by BlockTower or its affiliates, are provided in this letter. These links are provided as a convenience and do not imply BlockTower’s endorsement, sponsorship, affiliation with or approval of any third-party websites or their content.
BlockTower and its affiliates are not registered or licensed in any capacity with the U.S. Securities and Exchange Commission, U.S. Commodity Futures Trading Commission or any other regulatory body in the United States or globally. Nor is any investment vehicle described herein so registered or licensed. Various investor protections under the laws and regulations administered by the SEC, CFTC or other regulators may not be available.

TowerWatch #1: A Return to Normalcy


Welcome to the first edition of TowerWatch, BlockTower’s weekly newsletter! We’ll be delivering TowerWatch on Sunday nights (US Eastern Time), directly to your inbox.

Our goal is simple: be useful.



One: China Goes in on Blockchain

On October 24th the President of China, Xi Jingping, gave a speech to the Political Bureau of the Central Committee that articulated the need for China to ramp up investment into blockchain technology. While he said nothing explicitly about cryptocurrencies, it was made clear that China will be allocating a significant amount of resources and manpower to advancing their blockchain capabilities over the coming years.

Over the following 24 hours the cryptocurrency markets went wild, with Bitcoin experiencing its third largest daily swing ever, rising 42% from $7,361 to $10,370 in 24 hours. Chinese-focused coins in particular saw gains reminiscent of 2017, with both ONT and NEO posting three day gains of 42% and 65% respectively. Much has been made of this price action, with many rumors flying about a sudden influx of Chinese investment.

On the margin, this is a straightforward, bullish announcement. Estimates of the number of Bitcoin users generally range from 20 to 30 million unique holders. With this announcement the word blockchain will eventually be disseminated to over 1 billion people. There is likely to be some percentage (however small) of people who go from hearing the word blockchain to learning about Bitcoin (the largest current application of blockchain tech), and from there, some percentage who end up buying Bitcoin. There is a similar argument to be made for Libra being a bullish event for Bitcoin. General awareness is the first step towards growth.

There are second and third order effects to a statement like this. This push forward from the Chinese might end up causing the United States to allocate more resources to blockchain technology, and become marginally less resistant to the idea of a digital currency.

  • China has already released plans for a state-sponsored digital currency and the U.S currently doesn’t have a response (save for Libra, which is currently under scrutiny). The dollar is a major source of power for the U.S government making it important for the US to keep the dollar based trade system that most of the world currently operates on. It’s possible that the impending threat from a Chinese digital currency will push United States to be less critical of Libra.

Stay alert: With narrative shifts like this, rumors often begin swirling. For example, there was a widely passed around tweet that claimed to be a picture of an “approved” Chinese cryptocurrency exchange. If this were true, it would have been a very positive signal for the space, but it turned out to be at best overhyped and at worst totally debunked.

  • An overheated market could also lead to crackdown from China. If this news does end up driving Chinese individuals to purchase cryptocurrencies and push up prices, it could lead to more scrutiny from regulators and a higher probability of government action against cryptocurrencies and exchanges.

Last thought: Generally, the cryptocurrency markets tend to seek narratives. The story that the market tells itself becomes an integral part of the price action and can be used by market participants to justify positions. In an asset as momentum driven as Bitcoin, it becomes important to identify these narratives as they take hold. One of the most important things an investor can do is identify and take advantage of narratives in their infancy.

  • When we were trading at $7,400 after falling down from $10,000, many were bearish not only because of the price action but also because no one could see a reason for new buyers to step in at the $7,400 level. If everyone was a bear, why would new money wait to buy in lower? Well, as it turned out, the Chinese announcement offered up significant ammunition to the Bitcoin bulls. Whether or not Chinese retail was buying it, the narrative of the potential involvement of Chinese retail was enough to convince buyers to push the price the higher.


Two: The Rise of Institutional Exchanges

At the beginning, all cryptocurrency exchanges existed in a state of legal limbo due to ambiguous laws surrounding the regulation of cryptoassets. As the market grew over the years, regulators started paying more attention and the laws crystallized and clarified. Exchanges in the U.S must now comply with a variety of newly enforced standards. Many exchanges abroad have now chosen to block U.S customers from their offerings rather than comply. Due to this shifting landscape, a schism has appeared between the U.S regulated and offshore entities — and has presented an opportunity for individuals who have worked in the traditional exchange world, who already know the ins and outs of exchange regulation.

There are a variety of U.S based exchanges competing for the title of the worlds best regulated exchange, including the CME, SeedCX, Bakkt and ErisX. All have approached the market with the premise that adhering to regulation is the underpinning for capturing the long term market. To me, the validity of premise remains unclear.

  • These exchanges certainly have to be playing the long game — seeing as non-U.S entities such as CoinFLEX, Binance and FTX have managed to garner huge volumes and revenues while walling off U.S customers. What’s unclear is whether is will be difficult for those non-U.S entities to enjoy continued success.

The core way for these exchanges to compete right now is through the courting of institutional clients. The CME has done a reasonably good job so far, and has seen their Bitcoin futures market grow significantly Q/Q. SeedCX, ErisX and Bakkt have not yet seen the success of the CME, but in fairness are much younger. Innovation is still happening on the product level. The CME recently revealed their intention to begin Bitcoin options trading, and Bakkt countered a week later with their own announcement of options.

Image Source: CME Group

The important bit: There is a coming rift between regulated, U.S based exchanges and offshore exchanges. Slowly but surely, the U.S market is getting walled off from the rest of the cryptocurrency world. It’s not unlikely that this causes large disjointedness and opportunity over the coming years. The coming launch of the Bakkt mobile app has signaled that these U.S based regulated institutions are willing to innovate, and believe they can still move nimbly to capture significant market share. Whether they can effectively do so is yet to be seen.


Three: The Lending Market Grows

Genesis Capital, one of the largest cryptocurrency lending desks just published an in depth report on the state of their book, and there are some great details and charts.

The most interesting takeaway from the report is that Asian borrowing has picked up significantly.

China has been experiencing currency “flight” for a number of years, and the government has been attempting to restrict Yuan transfers out of the country1.  Although the Chinese government has attempted to restrict transfers of Yuan directly into Bitcoin, there are still many liquid on-ramps for Yuan into the digital currency ecosystem, through pairs such as Yuan/USDT, localbitcoins (a peer to peer bitcoin transaction site) and transacting directly with miners. Once in the digital currency, getting to USD or another stablecoin is straightforward and we believe this flow of funds is one of the larger drivers of cash demand out of Asia.  Additionally, Asia is home to some of the largest bitcoin mining firms in the world. As mining companies become more sophisticated, they can optimize their balance sheets by leveraging BTC holdings for cash financing to pay costs such as electricity.

From a macro perspective, every time a dollar is borrowed against BTC collateral, the cash is largely used in one of two use cases: speculation or working capital. Speculation is the simplest, where the cash is borrowed to purchase more BTC and leverage long. An example of a working capital use case is a miner who is generally BTC-rich while cash-strapped and electing to pay for electricity contracts by leveraging cash financing against his BTC holdings. Ultimately, both use cases are facilitating sell pressure on USD and foreign currencies, increased velocity on USD, and increased liquidity on the bid for BTC.

Why this matters: Understanding geographic flows of capital is key to understanding where buy / sell pressure may come from. Generally, different geographies approach the cryptocurrency markets in different ways, and contextualizing where the large players in the current market structure are coming from can help you paint a better picture of market direction. For example, if a lot of Bitcoin demand is coming from countries with strict capital controls, that may indicate a population with stronger propensity to anchor their holdings than Bitcoin demand coming from countries where the main use case is speculation.


General News:

Capital Markets:

Technical News:


Market Outlook:

Bitcoin has seen a relatively stable week since the gyrating price action of Oct 24th - 26th. We experienced a blow off top at $10,400, traded down $8,900 shortly after, and have been chopping in the 9,000 - 9400 ever since. BTC has experienced a relatively low daily volatility but a higher amount of intra-day volatility, in a slight return to normalcy for the markets ( We can tell you, last week everyone was going crazy trying to figure out what was going on— this week was far more calm).

Source: BlockTower Calculations, CryptoCompare Data

General Outlook: Within the range, we are currently trading below the midpoint indicating a bearish bias. After the blow off top, we’ve saw a stable increase in spot volumes and an initial drop-off in open interest on derivatives exchanges (the latter of which has slowly been climbing back). The initial rally from 7400 —> 10600 seemed to be a spot driven rally based on large volumes (Delphi Report), indicating that actual buying was taken place. From the 10600 price level, the market has walked down the offer to 9150, with failed pushes past 9700, and more recently 9400. Generally, the stepping down of resistance levels after a large blow-off presents medium term bearish outlook, as it provides evidence that there sellers have stepped down their profit taking. It would not surprise us to see a flush down to 8600. (The previous significant resistance — now support). It’s generally unusually for such a large move to be followed by meek, grind lower price action. This seems to indicate a lack of follow through buying, another data point for the bear case.

Key Levels:

  • Resistance: 9400, 9700

  • Support: 9100, 8900, 8600

Overall Market: When evaluating the market, we tend to look for prevailing narratives that may move price. So far, the two potential narratives identified are the “Chinese Narrative” and “DeFi”.

Chinese coins such as NEO, ONT, and TRX have outperformed the rest of the altcoin market, but have now given back a decent amount of their gains. On the DeFi side, Synthetix has performed admirably posting large gains over the last month, but Maker has not — trading mostly sideways. One thing to watch out for is the launch of multi-collateral DAI, which the Maker team is planning on introducing on November 18th.

Correlations have also broken down over the last 30 days, with many coins showing idiosyncratic performance.

Source: BlockTower Calculations, CryptoCompare Data

What We’re Thinking:

Central Banks & Bitcoin

The last few years have seen the rise of negative interest rates, currency wars and trade wars, sparking renewed interest from the general population regarding the role of central banks in the world economy.

We’d like to explore the role of Bitcoin in this discussion by looking (briefly) at the potential economic impact of Bitcoin on the world economy.

Generally, central banks have a turbulent relationship with Bitcoin and digital assets more generally. There has been a significant amount of research output concerning the role of central banks in a world with digitally issued currencies, mainly surrounding the question of whether a central bank should directly issue a digital currency of its own. Research on Bitcoin specifically is more rare. It seems that a simple way to frame the question is, “should there be a free market for currencies?” Economists seem to be equally fascinated and dismissive of a free market currency. It presents a terrifying but intriguing possibility — can a world exist with an unmanaged currency?

The answer to most central banks is a resounding of course not because the idea of a free market currency undermines the entire point of a central bank. Central banks exist to manage state currencies and to ensure that economies run smoothly throughout times of turbulence. If there exists no entity to manage currency supply then the ability to influence economic output doesn’t exist.

This idea that a digital asset cannot usurp the place of a central bank hinges on three things that these banks offer:

  • Protection against the risk of structural deflation

  • The ability to respond flexibly to temporary shocks to money demand and thus smooth the business cycle

  • Capacity to function as a lender of last resort.

Let’s take the third point and run it in a different direction. While central banks may be able to act as a “lender of last resort” in a liquidity crisis, we’d like to talk about the concept of a “currency of last resort”.

A currency of last resort is important for those people trapped in a governmental crisis rather than a liquidity crisis. When you hold your nation’s currency, you are implicitly trusting the government and banking system with full faith to manage the affairs of your country. If they fail to implement effective monetary policy, then you as a citizen and holder of the currency bear a massive cost.

If you believe there is a slight chance that your central bank will not manage the economy effectively, then it’s in your best interest to hold a currency that is not impacted by your state. It’s your hedge. It’s your currency of last resort. If you live in a country with a 1% chance of failure, you should rationally hold some percentage of your savings in assets not tied to that country. The percentage of uncorrelated assets that you hold should scale along with your assessed probability of currency failure.

In the world economic system, it’s important for an asset like this to exist as it will offer the ability to stabilize crises. Central banks do not fail out of nowhere, you can generally see the warning signs. Bitcoin will allow those people living in precarious economic situations to reduce their exposure to their national currency and in the case of total collapse they will not be as negatively impacted, allowing for a faster rebuilding of societal structure.

It doesn’t matter too much if Bitcoin (or another cryptocurrency) replaces central banks. What matters is that the existence of Bitcoin provides a useful currency of last resort for people to store wealth when they believe there could be a potential crisis on the horizon. While there is only scant evidence of Bitcoin acting in this capacity yet, it’s not too far-fetched to believe that a free market, apolitical currency would be a good fit for the role.



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