BTC — Not calling a bottom after a VERY ugly 1Q18 — incrementally more negative on price performance near term and don’t expect BTC to hold $6K however the data flow has turned more balanced/positive for the first time in 2018

· 1Q18 crypto performance was horrific — we saw very ugly dataflow weighing on prices across the whole space

· Good news is that the data flow seems to have turned more positive- especially on the global regulatory front

· Bad news is we still have some overhangs from SEC enforcement actions, USD Tether/Bitfinex, and the Tokyo Whale Kobayashi

· From here we expect BTC to retest and break $6K level over next few weeks and enter $3–6K trading band which we think could be the bottom

SEC ongoing enforcement actions are an overhang that will weigh on prices for the next year plus. In early March it was reported that the SEC subpoenaed 80 crypto related firms including ICOs and hedge funds. These are subpoenas which means they are active investigations which can take a year or longer to resolve. The SEC even halted a fraudulent ICO called AriseBank in late January after they had raised $600M. Cleaning up the fraud that is prevalent in crypto today is a plus for the space our concern is that even if only a small portion of subpoenas results in enforcement actions rolled out over time this will lead to negative news flow that will continue to weigh on the space.

Late March G20 meeting was largely constructive on crypto with BOJ Governor Kuroda saying, “cryptocurrencies can be a plus for the financial system.” There was a call for suggestions from member countries for crypto regulation to be discussed at the next meeting in September 2018. We are seeing constructive change and commentary where some Western countries are welcoming ICOs (Switzerland, Singapore) and crypto mining. The tiny country of Switzerland is the envy of everyone with 14% share of ICO issuance in 2017.

However Google, Twitter and Mailchimp all joined Facebook in the month of March banning most crypto/ICO advertising. Google was first announcing in mid-March they would ban ICO advertising and Twitter and MailChimp quickly followed suit. Bitcoin lost over 30% of it’s value during the month of March.

Tokyo Whale Koybayashi will continue to be a mild overhang. Many pundits have been saying he can’t sell any more BTC until the Sept 2018 bankruptcy court update session. We don’t believe this is the case however we also think the likelihood of Koybayashi selling a material amount of the 166K remaining Bitcoins is low. He just doesn’t need much fiat to pay Gox creditors in the near term. In addition, he posted in an update on the Mt Gox site that he did not sell the 30–40K Bitcoin on the open market and he doesn’t believe that his sales had a huge impact on the price which is reassuring going forward. I do believe that when we observe his coins transferred out of his addresses on the Blockchain it will ignite some weakness/selling.

The controversial stable coin USD Tether is still an overhang that needs to be resolved. For those not familiar Tether is a firm that issues a cryptocurrency called USD Tether that is pegged 1:1 to the US dollar. The Tether whitepaper states that one USD deposited to Tether results in the issuance of one Tether. The reason for Tether’s existence is that many crypto exchanges, like Poloniex, aren’t registered as a Money Service Business (MSB). MSB registration is required to exchange cash into cryptocurrency and back. Money is transferred into these exchanges via a cryptocurrency like Bitcoin or Ethereum and can then be parked in USD Tether between trades or when buying a currency without a pair — for example moving funds from Ripple to Stellar. If Tether is exposed as a fraud it would be very ugly (Mt Gox ugly) as their bank accounts would likely be frozen for years tying up over a billion dollars. This would have a huge negative impact on liquidity of these non MSB exchanges. Fortunately, there is another stable coin out there called TrueUSD that addresses Tether’s shortcomings however it has not gained traction yet.

Based on the lack of transparency we believe something is amiss at Tether/Bitfinex. Tether has come under widespread criticism for issuing more Tethers than USD reserves they hold and using these Tethers to bid up BTC price in December 2017. Over $600M Tether’s were issued in December 2017 and January 2018 and it did not help that Tether’s auditor Friedman LLP quit in late January. Tether has been less than transparent about the dissolution of the relationship. We are able to view the Blockchain and see how many Tether’s have been issued or revoked however we are not able to confirm that the 1:1 ratio of USD reserves is being held at a financial institution. There is no audit or announcement of a new auditor combined with their lack of transparency leads us to believe that something is amiss.

We don’t think $6K BTC support will hold and at this point our best guess here is that a $3–6K trading range will be the floor. The longer it takes to get into this new $3–6K range the higher our confidence level will be that we’ve put in a bottom. It’s impossible to find a hard support level for an asset without cash flows or other intrinsic value. And there is so much technical damage to the chart that we need time to work through the sellers and consolidate. Recall the Nasdaq tech bubble of 2000 took almost 3 years to find a bottom and it’s been only ~3 months since BTC peaked. And, we still have pundits calling the bottom at every single support level. When these pundits stop supporting BTC at every level that will be one buy signal.