Digital Asset Weekly, Sep 21 2018

This communication has been prepared as market commentary only and is not intended as investment advice

Commentary.

Digital Assets ended the week modestly higher - gaining +0.9% - as another week of BTC price consolidation was offset by strength in 2nd tier digital assets. XRP led gains amongst major coins/tokens, surging > +30% this week. ETH bucked a week of skinny trading with volume +12% WoW for the 3rd consecutive week of volume gains. Amongst the top 200 coins/tokens, breadth was narrowly skewed to the positive with 52% of major coins/tokens ending the week higher

Headlines were largely exchange dominated. The top story of the week was a critical report on the exchange space by the New York Attorney General and subsequent rebuttals from and . New York has long been a challenging regulatory regime for digital asset projects; while the story generated a lot of conversation it seemed to have little impact on this week’s trading and was largely negated by a number of positive headlines in the space, including: expansion plans and reports of US$350M of profits in 1H1, more new hires at Coinbase, and ongoing maturation at Poloniex.

Negative headlines were led by a small hack at NewDex and a larger (US$60M) hack at Zaif (a Japanese exchange).

Continue to expect an uptick in BTC volatility in coming weeks given very slim volume, shorts plateauing, 4Q seasonality and ahead of a number of events (Mt Goxx creditor meeting on Sep 26, VanEck ETF decision on Sep 30th and Bakkt’s physical BTC futures expected by Nov 5th). Likewise, we remain cautiously constructive on ETH given improving volumes and signs of price stabilization.

Thoughts.

* NY AG report highlights the need for a global exchange SRO - The New York Attorney General’s report on crypto exchanges really highlights the need for a global self regulatory organization – this is probably the only way for standards to be set and enforced in an industry that operates across regulatory jurisdictions - Given the prevalence (and to some degree necessity) of ‘wash trading’ and market making, there should clearly be a greater degree of transparency and I think this likely has to come from industry leaders - The NY AG’s approach is onerous, misinformed and significantly lagging market realities

* Binance growth strategy highlight coming round of exchange consolidation - Binance’s focus on evolving fiat-crypto capabilities and expansion plans foreshadow a round of exchange consolidation - This is inline with comments from our recent interactions with a number of large Korean exchanges - Crypto-crypto exchanges are expected to be absorbed into Fiat-crypto exchanges - Regulation in reputable jurisdictions will earn exchanges a premium vs peers domiciled in Malta type locations - The eventual entry of institutional money into the ecosystem will also lkely turn exchange rankings on their head - A lot of the current crypto-crypto exchanges that are currently industry leaders could get completely runover

News.

* Poloniex delists 8 more assets - BTCD, BTM, EMC2, GRC, NEOS, POT, VRC, and XBC to be removed on Sep 25th - Follows removal of FLO, FLDC, XVC, BCY, NXC, RADS, BLK, PINK and RIC on Aug 2nd - Inline that Goldman Sachs backed Poloniex is trying to clean up the exchange to only list assets palatable to regulators

* NY AG’s report: Many exchanges are open to manipulation, put investors at risk - Mentions Kraken, Binance and Gate.IO which service NY residents, but don’t hold a NY bit license - The 32 page reports is the result of months of investigation initiated by former AG Eric Schneiderman (Schneiderman was forced to step down after being accused of physical abuse by 4 separate women)

* BCH rift deepens, Craig Wright faction said to control 57% of BCH hashpower - BCH rift pits several large personalities and former BCH supporters against each other - Current situation has /JIhan Wu and Ruger Ver on one side vs Calvin Ayre and Craig Wright on the other

* Kraken joins Coinbase in rebuking ‘Malicious’ implications in New York - The report seems to be especially of San Francisco based Kraken which left NY in 2016 to avoid what it deemed to be the unfair and counterproductive bit license regime - Much of the criticism seems to stem from Kraken’s refusal to participate in the NY AG’s voluntary information request (given they are not based in the AG’s regulatory jurisdiction) - Coinbase was singled out for allegedly accounting for 20% of it’s own on exchange volume - Coinbase criticized this as misleading and highlighted that while it provides liquidity to traders it doesn’t operate a proprietary trading business

* Australian financial regulator issues warning on misleading ICOs - The Australian Securities and Investments Commission (ASIC), has issued a warning on “misleading” Initial Coin Offerings (ICOs) and crypto-asset funds targeted at retail investors - The warning comes almost a full year after the 4Q17 ICO boom and at a time when ICO project raises are at multi quarter lows – really highlights the struggle regulators face in keeping current with industry developments

* US lawmakers strongly urge IRS to update crypto tax guidance - The lack of tax guidance in the US has made compliance both confusing and complicated - At the moment virtually everything done with crypto is potentially a taxable event for American users, including: Forks, moving coins between wallets or exchanges and buying coffee - Lawmakers argue that the lack of sufficient guidance "severely hinders" taxpayers' ability to comply with tax obligations

* Bitmain IPO reportedly in jeopardy as 2Q earnings loom - Article cites reports from an insider that Bitmain is being sued by investors for material omission

* Bitfury launches next generation mining technology - New flagship Bitfury Clarke SHA256 mining chip is the company’s 5th generation of mining chips

* 6,000 BTC stolen from Japanese exchange - Total value of the hack from BTC, BCH and Monacoin totaled ~ US$60M - $20M from company accounts and $40M from user accounts - (another Japanese exchange) was hacked for US$534M NEM in Jan 2018

* Coinbase denies allegations of internal trading - Allegations from the NY AG that Coinbase is engaged in proprietary trading feel a bit heavy handed given that Coinbase is one of the few companies in the space financially able and willing to comply with the bit license regime

* Coinbase welcomes new executives from Fannie Mae and LInkedin - Michael Li, a former LinkedIn head of analytics and data science, will join as VP of Data - Brian Brooks, former executive at Fannie Mae, will join as Coinbase’s chief legal officer

* Binance wants to open crypto exchange on five continents - Plans to open 10 fiat-to-crypto exchanges across five continents - Plan to continue engaging with smaller countries and talks Binace profit figures - Booked profits of US$200M in 1Q18 and US$150M in 2Q18

* Decentralized exchange hacked by creation of 1 billion counterfeit EOS tokens - Hack looks to have been limited to US$58,000 - There have been reportedly been no signs of account freezes yet and no comments regarding reimbursement

* Russian crypto regulation to label as 'digital financial assets' - Legislation was introduced in May and is expected to be released in the coming months

* Remember Paragon Coin? US$70M ICO now has a < US$3M market cap - Coin was marketed with slick videos and support from rapper ‘The Game’ - Article claims a lack of activity by the projects developers - A familiar story to many ICO investors

* Bank of America remitance fees 6000 times higher than BTC network - US$90k transfer said to cost US$95K with BoA, but just US$0.45 with BTC - These fees would be substantially higher (and even impossible to execute) in non US jurisdictions or in high notionals

Charts.

Chart 1. Weekly Price, Volume Change – Top 25 Coins and Tokens - XRP led price and volume gains on reports of broader corporate acceptance - Most major coins/tokens clustered on the left hand side of the chart – signaling weaker trading across the space

Price vs Volume

35% XRP 30%

25%

20% XTZ

15%

10% ADA 5% BTG Weekly Change Price Weekly BTCTRX XLMLSK BNB ETH USDTEOS XMRLTC0% -60% -40% -20% DASH 0% 20% 40% 60% BCN ETC XEM NEO ZEC VET OMG -5% MIOTA BCH -10%

DOGE -15% Weekly Volume Change

Chart 2. Weekly Price Move - Price gains led by 2nd tier coins – ETH and XRP - Volatility elsewhere mostly very muted

Weekly Price % Market Cap vs 7 Day Price Performance

35% 32% $10B - $500M - $250M - >$50B $50B $5B - $10B $1B - $5B $1B $500M 30% 20% 24% 25%

20% 15%

15% 10% 10% 7% 17% 5% 3% 2% 2% 5% 0% 0% 0% 0% 0% -5% -1%-2%-2% -1% 0% -4%-4% -1% -7% -10% -7%-7% -5%

-10%

Chart 3. Monthly Volume. Current vs best month ever - BTC average volumes on pace to dive deeper in September - ETH volumes look to be regaining their legs

Monthly T/Over as % of Best Month Ever 100%

90%

80%

70%

60%

50% EOS 41% 40% ETH 33% BTC 31% 30% ETC 32% 20% BCH 17% 10% LTC 17% XRP 8% 0% Jun-17 Jul-17 Aug-17 Sep-17 Oct-17 Nov-17 Dec-17 Jan-18 Feb-18 Mar-18 Apr-18 May-18 Jun-18 Jul-18 Aug-18 Sep-18 BTC ETH EOS XRP BCH LTC ETC

Chart 4. Volume Averages - BTC monthly average falls to US$4.1B while ETH picks up to US$1.8B

Monthly Average Daily Turnover - Tier 1 Monthly Average Daily Turnover - Tier 2

$7,000 $1,800

$6,000 $1,600 Millions

$4,149 Millions $1,400 $5,000 $679 $1,200 $4,000 $1,000 $1,754 $3,000 $800 $371 $600 $2,000 $273 $282 $400 $186 $1,000 $200 $0 $0 BTC ETH EOS XRP BCH LTC ETC

Mar-18 Apr-18 May-18 Jun-18 Mar-18 Apr-18 May-18 Jun-18 Jul-18 Aug-18 Sep-18 Jul-18 Aug-18 Sep-18

Chart 5. Average Daily Turnover, Past 15 Weeks - Volumes this week down slightly across the most actively traded coins - As a group, volume was down ~7% this week - BTC, BCH and EOS were each down ~ -12 – 14% - ETH was the stand out gainer, with average volume for the week +12%