Dispatch #28 – 2021
September 3rd, 2021
Hope everyone is enjoying the last few weeks of summer. The weather on the East Coast is particularly nice this weekend, even if some areas are recovering from Ida’s aftermath.
The lead story is the Ethereum blockchain split a week ago, but it’s been lightly discussed because it didn’t become a serious event. Even though a software bug-induced chain split is a very serious event, today’s media only seems interested in sensational events. Fortunately, the best case outcome materialized and Ether is up 20% since the event on August 27th. This is a good example to highlight the notably higher technology risks of digital assets, and the relative technology risks between protocol. Yes, adoption-led upside is positive, but this comes with the potential for permanent loss from technology failure. As a fiduciary wealth manager, the Dispatch is highly sensitive to technology risk embedded in digital assets, and that’s a key asset allocation consideration.
This week’s discussion subjects follow:
- Ethereum blockchain splits briefly due to software bug
- Tether offers more reserve details
- Meme stock crowd moves to NFTs
- Bitcoin becomes legal tender in El Salvador on September 7th
- Berkley Prof says fire suppression of the past mostly to blame for current fires
- COIN SCHOOL – Life cycle of an NFT: CyptoPunk 4847
Ethereum blockchain split briefly, due to software bug
The Ethereum blockchain briefly had two versions of the chain running on Friday 27th August. Chain splits – two versions of the blockchain exist for a period – arise in the normal functioning of blockchains. However, it’s unusual to have one that’s caused by a software bug that was exploited by an outside actor.
Initial media focus, but no follow up
A slew of reports on the chain split was published that Friday. These short articles from Bitcoin.com, Coindesk & Decyrpt provide a flavor of the coverage on the day of the event. Luckily, a software update to fix the issues was pushed out and the longer of the two chains became the single chain again. This Futuresmag article provides the most detailed analysis. However, because it was the weekend and the outcome was favorable, there has been no follow-up coverage of this serious situation. A week later, as I type these words, the price of Ether is 20% higher. We are in a bullish market and there’s no stopping to worry about risks!
However, the event was serious enough Defi venue Yearn Finance’s founder to tweet this warning.
Source: Twitter
The lack of follow-up by crypto media is a disservice to the community. However, this is sadly the norm in our current media landscape.
Ethereum chain split highlights technology risk of Digital Assets
To the Dispatch, this event highlights the vastly greater technology risk that is embedded in digital assets. Your USDs don’t have direct technology risk, although there’s technology risk in the bank that stores your dollars in its accounting ledger. It’s also a fact that more frequent software upgrades will increase the chances of bad software code. This technology risk embedded with digital assets is a key factor in our asset allocation decisions. We would leave the higher upside of the latest and greatest new blockchain for the higher probability returns of the established networks with larger teams and deliberate upgrades, all else equal. Plus, we use position size to mitigate the higher risk/ higher reward potential of newer blockchains and projects.
Tether improves reserve disclosure further
In early August Tether released an attestation report dated June 30th that provided the ratings details of the commercial paper and CDs backing the stablecoin. This takes disclosure beyond just the breakdown of assets they had previously provided.
49% of Tether’s reserve invested in commercial paper and CDs
Source: Tether
Tether’s Commercial Paper and CDs had an average S&P short-term rating of A-2
Source: Tether
This is a higher level of disclosure than most peers provide. USDC, the #2 stablecoin in circulation does not provide a credit rating breakdown of assets backing USDC. However, the one major difference is that Tether has relatively unknown Moore Cayman signing off on the attestation whereas USDC has New York based Grant Thornton sign off. Tether has promised to release a full reserve audit before calendar year-end 2021, which will be a relief to the crypto community given the USDT’s ecosystem importance. This Coindesk article provides more details of the most recent release.
Meme stock crowd shifts to NFTs
This Bloomberg story lays out the speculation that’s taking place in NFTs (non-fungible tokens), which are often jpegs of images. The alleged value comes from blockchain-confirmed originality of the NFT, even if the digital item is easily copied. As people spend more time online (in a digital world), NFTs provide status because you cannot show off your Rolex or Ferrari! Crypto Punks, Bored Ape Yacht Club & Pudgy Penguins are some of the more sought after NFTs today.
Pictures (ok NFTs) of CryptoPunks, Bored Apes and Pudgy Penguins are below, if you don’t have the time to click through the links above.
Value of NFTs traded surged in August
The chart of NFT value traded below shows the jump in August 2021 driven by activity on Openseas, the dominate trading venue. This is a market that didn’t exist 18 months ago and much of this activity is built on Ethereum. See Crypto School at the bottom for an observation of how paper value of a specific CryptoPunk has exploded in the past 3 months.
Source: The Block
If you’d like to get in on the action, you’re in luck! Sotheby’s is auctioning 101 Bored Apes, valued at an estimated US$12-18m. The current bid is $4.8m, with five days left in the auction. Welcome to Jay Powell’s world of easy money!
To allow the party to continue, several venues are now offering fractionalized NFTs. With cheapest Punks selling for north of $100K, this should allow the NFT whales to suck in retail to convert paper profits into real cashflow. Be wary out there, before you go jpeg hunting. NFTs will revolutionize economics for creative artists over the longer term, but that current jpeg mania should be questioned.
Bitcoin becomes legal tender in El Salvador on September 7th – Most citizens don’t want it
A poll conducted by The Central American University in El Salvador shows that 2 out of 3 polled don’t agree with the government decision on bitcoin. The same poll shows that 9 out of 10 polled don’t understand bitcoin. This Reuters article has the details. The poll results should not be a surprise as digital assets are new and a step change in monetary technology. Nor should it be a surprise that a leader of a developing country is pushing a technology onto the people that they don’t understand and don’t want. In any event, this will be a fascinating experiment to watch as this emerging economy tries to leapfrog electronic money (credit cards, etc) and move directly to decentralized private money.
Did recent fire suppression measures contribute to current infernos in the West?
The Dispatch is NO expert on forestry or fire, but found the research by Berkeley environment science professors, highlighted in this article, fascinating. The academics concluded that forest fires lead to healthier ecosystems after analyzing Yosemite National Park’s Illilouette Creek Basin, one of the few areas where fires have not been supressed for decades. They even go as far as saying that climate change may only be contributing to 20-25% of the current fire surge in the West.
CRYPTO SCHOOL – Life of a single CryptoPunk NFT
Life of CryptoPunk 4847
This Larva Labs, creator of CryptoPunks, page shows the journey of a single NFT.
CryptoPunk 4847 was minted (essentially given away for free) in 2017. Punk 4847 did nothing, price wise, from June 2017 to May 2020, when it finally traded for 1.44 ETH, which was a $296 value at that point. It’s not unusual that there was zero activity between 2017 minting and 2020 because NFTs weren’t a thing until the middle of 2020.
Source: Larva Labs
Since then, as the table below shows, there’s been a burst of activity, with Punk 4847 last trading in July 2021 for 59 ETH or $149,363. It is now offered for sale at $776K.
Source: Larva Labs
Punk 4847’s offered price surge
Since that last trade on July 31st, the offered price has risen 200% in ETH terms or 285% in dollar terms ($/ETH appreciation). Here’s the rub, for all we know, the same person could have self-traded from different Ether wallets to market up the NFT’s value in July 2021. When art goes virtual and trades 24/7, it’s easy to markup value. It’s much tougher in the physical world because of infrequent auctions and the commissions auction firms take.
On-chain data analyzed by Glassnode weekly suggests that much of the rising ETH activity in the NFT sector is the same ETH changing hands.
Source: Glassnode Weekly #35
Finally, the seller “daddykal..” has 8 punks for sale currently for a cool…wait for this…US$14.5m. I’d say this is a professional NFTer. The seller has already spent $12.7m selling Punks, so this is someone that has over 3K ETH, even if they were self-dealing.
Source: Larva Labs
Stay safe, enjoy the last days of North Hemisphere summer and do reach out if you have any questions or comments about the material in this Dispatch.
Asi
Important Disclosures
| This is not an offer or solicitation for the purchase or sale of any security or asset. While the information presented herein is believed to be reliable, no representation or warranty is made concerning its accuracy. The views expressed are those of RockDen Advisors LLC and are subject to change at any time based on market and other conditions. Past performance may not be indicative of future results. |