By Gaurav S. Iyer, IFC Published : July 30, 2018
Although cryptocurrency prices were heating up last week (Bitcoin, especially), regulators poured cold water on the rally by rejecting calls for a Bitcoin exchange-traded fund (ETF). This is the second time that the proposal fell on deaf ears. (More on that below.)
Crypto mining ran into similar trouble, as you can see from Advanced Micro Devices, Inc.‘s (NASDAQ:AMD) most recent quarterly earnings. However, it wasn’t all bad news. Investors should, for instance, be cheering the fact that hedge funds are ramping up their involvement in cryptocurrency markets.
Without further ado, here are those stories in greater detail.
ETF Rejection Forestalls Crypto Rally
Earlier in the year, the U.S. Securities and Exchange Commission (SEC) rejected a proposal by the Bats BZX Exchange to form a Bitcoin ETF. It was seen as a bad moment for crypto markets. (Source: “Winklevoss Brothers Bitcoin ETF Rejected By SEC for Second Time,” CoinDesk, July 26, 2018.)
On this occasion, however, the proposal came from the Winklevoss twins, whom you might remember from the famous lawsuit against Facebook, Inc. (NASDAQ:FB) CEO Mark Zuckerberg or their portrayal in the movie The Social Network.
After settling for a large payout in that lawsuit, they became early investors in Bitcoin. Then, having made a killing in the crypto market, the ambitious brothers set out to build financial products for the nascent blockchain industry: namely, a crypto ETF.
However, the SEC denied their application.
There’s a silver lining, though. The SEC emphasized that the decision wasn’t anti-crypto or anti-blockchain, but an unavoidable legal technicality. Here’s their full explanation:
“Although the Commission is disapproving this proposed rule change, the Commission emphasizes that its disapproval does not rest on an evaluation of whether bitcoin, or blockchain technology more generally, has utility or value as an innovation or an investment. Rather, the Commission is disapproving this proposed rule change because, as discussed in detail below, BZX has not met its burden under the Exchange Act and the Commission’s Rules of Practice to demonstrate that its proposal is consistent with the requirements of the Exchange Act Section 6(b)(5), in particular the requirement that its rules be designed to prevent fraudulent and manipulative acts and practices.”
(Source: “SECURITIES AND EXCHANGE COMMISSION
(Release No. 34-83723; File No. SR-BatsBZX-2016-30),” U.S. Securities and Exchange Commission, July 26, 2018.)
So, it’s not that the SEC will never approve crypto ETFs. They are simply waiting for certain regulations—such as surveillance sharing agreements—to be put into place and minimize the potential for fraud and manipulation.
After that, I imagine we’ll see a flood of ETFs.
AMD Sales Suggest Crypto Mining Is Slowing Down
When AMD reported earnings on July 25, it revealed a drop in sales of graphics cards used to mine cryptocurrencies. In the first quarter, those sales had comprised 10% of AMD’s sales—now, it is down to six percent. (Source: “AMD Reports Second Quarter 2018 Financial Results,” Advanced Micro Devices, Inc., July 25, 2018.)
However, the fall was measured against the previous quarter. Segment revenue was actually up 64% compared with the same quarter a year before. Nevertheless, the company acknowledged crypto sales were a freak accident that investors should never have counted on in the first place.
On the blockchain side of the equation, it suggests there is less money to be made on mining than ever before. And while that might sound like a bad thing, I find it quite reassuring.
This is what sanity looks like, folks. This is a return to sustainable growth in the crypto market, one founded on real progress with technology rather than uncontrolled and frenetic speculation.
Hedge Funds Flood into Crypto Markets
There are now 312 institutional funds investing in the cryptocurrency market, according to research firm Autonomous NEXT. Contrast that with two years ago, when there were just 56 different funds in the space. (Source: “$20 Billion in Cumulative ICO Funding, 300+ Funds,” Autonomous NEXT, July 24, 2018.)
Why does this matter?
Well, the cryptocurrency market is famously dominated by retail investors, who, with all due respect, command a tiny portion of all the investment capital in the world. Institutional investors are the Big Money. So, in order for crypto markets to reach their full potential, we need these institutional investors to pour their resources in.
Given this obvious correlation, I wasn’t surprised to see that a data analysis showed that Bitcoin prices are positively correlated to the number of funds. Of course they are.
It should be noted that the top 50 funds dominate 80% of the total available funds. We expect the total pie to grow exponentially from its current level of $10.0 billion, giving rise to a crypto rally that could dwarf everything that’s come before it.
While I would have liked to see the crypto rally extend throughout the week, I think it’s encouraging that bad news didn’t utterly destroy market sentiment.
Yes, prices dropped and moved sideways after the Bitcoin ETF was rejected, but we didn’t see persistent selling. That’s not much of a silver lining, I know, but it’s better than the alternative.