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MARKETS DAILY: Russian Drugs and The Most Illegal ICO Ever?

Adam B. Levine, Bradley Keoun and Lawrence Lewitinn
Coindesk

With bitcoin recovering after four straight days of decline we’re talking about what may be the most illegal ICO ever, tokens for Mongolian taxi fares, Bitmain’s Texas hedge and one “suicidal” startups surprising success…

Tune in as CoinDesk podcasts editor Adam B. Levine and senior markets reporter Brad Keoun run down recent action, track interesting longer-term trends, and highlight the best “thinking with tokens” and some of the most important crypto industry developments of the day.

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Related: PODCAST: Introducing ’The Breakdown’ With Nathaniel Whittemore

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Topics for December 12, 2019:

Transcript:

Adam B. Levine: 

Related: MARKETS DAILY: Billion-Dollar Returns Removed From Libra White Paper

On Today’s episode, we’re talking Tokens for Mongolian Taxi Fares, Bitmain’s Texas Hedge, and  one startups existential offer to dissolve itself

Adam B. Levine: It’s December 13th, 2019, and you’re listening to Markets Daily, I’m Adam B. Levine, editor of Podcasts here At Coindesk, along with our senior markets reporter, Brad Keoun, to give you a concise daily briefing on crypto markets and some of the most important news developments in the sector over the past 24 hours. 

Markets Update (Illegal ICO, Mongolian Taxi Token)

Bitcoin up just slightly, after four straight days of declines

Currently around $7200 and CoinDesk’s Omkar Godbole reports that today’s move up has been pretty lackluster, an indication that sentiment is still quite bearish

That said, bitcoin is still more than double where it started the year, and that performance has helped make cryptocurrencies the best-performing asset class of the year, dwarfing gains from U.S. Treasuries, emerging markets, gold, oil and even U.S. stocks, which have been charting new records as U.S. President Donald Trump’s administration reportedly moves toward agreement with China of the trade war between the world’s two largest economies 

Turning to the news, European Central Bank President Christine Lagarde said yesterday that it was her personal conviction that she wants to be QUOTE ahead of the curve END-QUOTE on the issue of stablecoins, amid efforts by Facebook’s Libra and other countries to develop payment tokens backed by government currencies

There is clearly a demand that the ECB needs to respond to, she said.

CoinDesk’s Nathan DiCamillo reports that Kraken, the San Francisco-based crypto exchange, appears to be preparing to open a limited-purpose bank in Wyoming that would let it store customers’ deposits of government-issued currencies like dollars and euros

 The cryptocurrency exchange has opened up a position for an operations director to oversee a Wyoming special-purpose depository institution.

The move could take advantage of Wyoming’s new blockchain-industry friendly laws, which according to state officials could allow companies to operate in New York without having to obtain that state’s notoriously strict BitLicense

CoinDesk’s Anna Baydakova reports that Hydra, Russia’s largest darknet market, is seeking to raise $146 million through a token sale to fund a worldwide expansion

 Now this is essentially like a Craig’s list of things that might be illegal, similar to the Silk Road marketplace in the early days of the crypto industry, with offerings ranging from Colombian cocaine to peruvian cocaine, home-grown marijuana, fake passports, hacking services, prescription pills and synthetic drugs

The Hydra project promises almost complete anonymity, with no adherence to the know-your-customer standards that most banks and exchanges must follow for anti-money-laundering compliance, along with an encrypted messaging system, a crypto exchange and an anonymous browser

Needless to say the whole endeavor would appear to be an illegal ICO under the laws of most nations. The ICO is scheduled to launch next week and could prove a test case of whether the anything-goes spirit of the offering can succeed in an era of increasing regulation and institutionalization in the crypto industry

 And with the crypto market stuck in a funk as we head into the last few weeks of the year, there’s more job cutbacks in the industry following the news yesterday of reductions at the crypto-focused firms Circle and Consensys 

 CoinDesk’s Ian Allison reports that Trustology, a digital-asset custodian, has cut seven staffers, reducing its total headcount to just 11. CEO Alex Batlin says the company needed to restructure and downsize

 Finally, there’s a new use case for blockchain and cryptocurrencies – in the Mongolian taxi industry

 CoinDesk’s Danny Nelson reports that the blockchain Terra will serve as a financial backbone on a Mongolian messaging app, allowing users to make payments over the system

 One taxi driver told Nelson that he’s already been paying for gas with the tokens he’s receiving from riders

SPONSORED BY Consensus2020.com

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In previous years, speakers have included Democratic presidential candidate Andrew Yang, Coinbase CEO & Co-Founder Brian Armstrong, and BitMex CEO Arthur Hayes.

But prices go up this Friday, December 13th, at midnight EST. Save $500 on your pass and register now. Visit Consensus2020.com and hit “Get Tickets.” See you in May!



Adam: And for todays featured story, Bitmain is still the market leader in crypto mining equipment. But its top position is being threatened by some stiff competition. Earlier this week — as reported by CoinDesk’s Wolfie Zhao — Bitmain announced they will offer customers a few incentives to get them to buy new machines. One of those is a bunch of put options.

So what are these put options and what makes them so unusual? We’re talking right now with Lawrence Lewitinn. He’s managing editor of Markets at CoinDesk and he just wrote a story about Bitmain’s options offer. So what makes Bitmain’s offer so interesting? And what’s this about a Texas hedge?

Lawrence Lewitinn: So they’re doing what’s called writing a put. Writing a put is essentially what you would call selling a put, and when you’re selling a put you inherently long the underlying instruments. So, by selling Bitmain is hoping the price of Bitcoin goes up. It’s part of being an options rider, expecting the price of the underlying instrument to rise.

Now the thing about Bitmain, first of all, their revenues come from selling mining equipment and it is very related to the price of bitcoin. That means if the price of bitcoin collapses tomorrow, the demand for their machines falls apart.

On top of that, they have a considerable amount of cryptocurrency in their own portfolio. They had hundreds of millions of dollars worth when they filed an S1, which is kind of a financial statement that they were filing when they were considering going public. They show that they had hundreds and hundreds of millions of dollars worth of cryptocurrencies. By writing a put on top of all of that, they’re doubling down on their long Bitcoin position.

Adam: So what’s a Texas hedge? 

Lawrence: It’s kind of a joke term among options traders. When I was a trader back in the nineties, we used to use that term. What a Texas hedge is, essentially, most people would use options to hedge their position. So, if you’re long bitcoin, you would buy the put to protect your downside. But in case of a Texas hedge, you would sell the put and by Bitcoin, so you’re doubling down on your position. That’s kind of what it looks like Bitmain is doing.

Adam: What are some of the ways that Bitmain could offset their risks. And do we know if they did?

So this is interesting. I went in and looked around various options exchanges to see where the 5000 strike bitcoin puts that will expire in March. Where are they trading? They didn’t seem out of line and didn’t look like a lot of purchases were happening. So if Bitmain really were 100% fully hedged, you would probably see an uptick in the options market with them buying those low strike price puts in the market just to say “Okay, you know, we’ll buy them, we’ll give it to our customers.” They did it early on Monday.

If you look in the market, it’s trading a little shy of 200. So conceivably they would go out and buy it for 200. And you know, they said, oh is worth $255. But we bought it for $200 we’re giving it to you. Didn’t look like they did that. That doesn’t mean they didn’t do it, but nonetheless, there’s no evidence of it in the market. It’s still quite a statement for them to say We’re going to give you all these puts. We’re going to write all these puts and give it to our customers. We’re really going gung-ho for the price of bitcoin to go up. That’s how much faith we have in our equipment and you as a customer and bitcoin in general. But of course, it could also just be being a cowboy, a Texas hedge here, we won’t know for sure, but all remains to be seen. So, this is going to be a very interesting three months, for Bitmain. It won’t be the biggest marketing expense, but if you think about it, if they sold 500,000 units right now over the next few days or few weeks using this incentive program at the present time they would probably have to sell about 3700 bitcoin just to be what they call Delta neutral, which is no exposure in the market. That’s quite a lot of bitcoin, close to $26 million worth. But it looks like that’s not a big chunk out of their Bitcoin holdings. Nonetheless, $26 million is nothing to sneeze at.

Altcoin Spotlight

Adam: And now, for our altcoin spotlight, we’re looking at a new proposal from a startup called DigixDAO (DIDGE-EX-DAO), which appears to put holders of its three-year-old digital tokens ahead of its own survival  

For today’s feature, we’re going to highlight some exclusive reporting by CoinDesk’s Brady Dale on what appears to be a very interesting development with one of the smaller tokens in the crypto space

Brad: The story is about DigixDAO, which is essentially offering to dissolve itself in what appears to be a uniquely selfless gesture to put its stakeholders first

Digix is a project that holds physical gold and represents it with tokens on the ethereum blockchain via its DGX token

But the company also has a separate token DGD, sold in 2016, that entitles holders to what are more akin to ownership rights in the company

Dale reports that Digix has some $56 million of the cryptocurrency ether in its corporate treasury

And that amount is far higher than the current market capitalization of the tokens, currently around $37 million

So the idea is that the whole enterprise could be dissolved, and token holders might see immediate profits rather than waiting for Digix’s gold-back tokens to take off

Now the price of these tokens has surged since the new dissolution proposal was announced in late November

It’s essentially as if a stock corporation had more cash in its bank account than was represented in the share price, and the company simply closed up shop and distributed all the cash to its shareholders

 Indeed, some industry observers told Dale that the crypto industry is ripe for such corporate moves, and even that it might need an activist investor along the lines of the corporate raider Carl Icahn to force some crypto startups to put stakeholders first, even if it means the founders and employees lose their jobs and have to start over

Ryan Zurrer of the Swiss crypto-asset firm Dialectic told Dale that many of the best known ICOs that ran sales prior to the peak of the bull market in 2017 are sitting on vast resources, since those projects were essentially capitalized with crypto tokens like ether whose value has appreciated faster than the underlying company’s development 

 Nic Carter of Castle Island Ventures says he sees the move by Digix as “quite mature”

 In a statement to CoinDesk, Digix(DIDGE-EX) noted that it had encouraged stakeholders not to wind down DigixDAO(DIDGE-EX-DAO), but that it would abide by their decision and would abstain from voting its own holdings of the DGD tokens 

 Digix Chief Operating Officer Shaun Djie said in the statement, that QUOTE it is important for the success of the industry that these communities continue to be heard. END-QUOTE

The episode demonstrates that despite some mainstream perceptions of the crypto industry as being full of opportunists and fraudsters, some operators are putting corporate governance first – not to mention their own stakeholders

And that’s something that, based on Carl Icahn’s fertile career as a corporate raider and an active investor, isn’t always a priority for executives and founders in traditional stock markets 

Brad: BACK TO YOU ADAM

Adam: Join us again on Monday,  for the next Daily Markets from Coindesk.  We appreciate you listening, and would love to hear what you think.  Send an email to podcasts@coindesk.com

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