Section 3: Blockchain industry players


Market growth and profitability

Bitcoin hash rates are hitting new all-time-highs. On Ethereum, the cost of operating the network is now estimated to be close to half a billion euros yearly (Figure 6).


Mining is attractive again, overall, but it still depends on cryptocurrency prices. Small PoW coins have not enjoyed a revival as strong as the major ones. As a corollary, these coins are becoming less and less secure and more prone to attack.



With the price of Bitcoin going up, mining profitability has again taken off, and miners are seeking to equip themselves with cutting-edge equipment. The Bitcoin mining difficulty is at all-time highs, with the block halving projected for May-June 2020.

ASIC manufacturers are swiftly re-entering the market, with machines that have unprecedented power (70 terahash/s), and that is more economical (0.01Wh/terahash).

So, all in all, the cryptocurrency mining industry is recovering strongly from the bear market. A significant new player is entering this lucrative market: Samsung.


Business finds markets in all directions: some mining applications have been developed to run on small devices like smartphones to enable individuals to engage in cryptocurrency mining using a small device (e.g., Honeyminer).


The concentration of hash power

Siberia is touted as the new mining Eldorado, a cold climate and cheap energy. But, probably still not sufficient, in itself, to drive the Chinese miners from their dominance!
The ASIC-resistance battle, led by Monero, has had unexpected implications that are worth mentioning. While hardware designers and producers have proven to be very efficient in bringing specialized equipment to the market, the struggle to have the protocol evolves (implying hard forking) to preserve the decentralized character of cryptocurrency mining has had the unexpected consequence of centralizing the power in the hands of the developers that are trusted with this evolution, and with hard forking. This is interesting philosophically: it proves that maintaining decentralization is always a considerable effort in itself, as human nature still causes individuals to work for a bigger slice of the cake for themselves…


Environmental issue – electricity consumption
It is often said that Bitcoin mining has a disastrous environmental impact due to the waste of energy resulting from Proof of Work. When looking at this a little closer, while the amount of raw power consumed for absolutely nothing (other than claiming the network is secure) can be compelling, the situation has to be nuanced (Figure 5).












Electrons do not (yet) have a color when they emerge from the power socket. Nevertheless, it is a fact that many, if not the vast majority of mining farms, are situated close to “renewable” energy facilities, primarily hydro. This is the case in Québec, Sichuan, Switzerland, etc., and in Iceland, geothermal energy also qualifies as “clean” (Figure 7 and 8).

To extend this line of thinking, arguably, at several sites, a significant portion of the power consumed by mining would have been lost. Hence, the real impact of mining on the climate is significantly less, and overall, the effect of PoW is not quite as terrible as it seems. The mining lobby has begun to express these points in an attempt to clean up the image of the industry.









Decentralized exchanges (DEX)

A phenomenon has appeared – or rather, has been exposed – on decentralized exchanges. This has to do with arbitrage bots that exploit inefficiencies in the exchanges to make profits. Basically, by paying high fees for transactions, it is possible to prioritize some executions in a manner that cannot be achieved manually by traders.

A Cornell research paper states that “Like highfrequency traders on Wall Street, these bots exploit inefficiencies in DEXs, paying high transaction fees and optimizing network latency to front-run, i.e., anticipate and exploit ordinary users’ DEX trades.” It further estimates that this is not a minor phenomenon; potentially hundreds of millions, if not billions of euros worth of crypto assets, could be extracted from the market due to this phenomenon.


To an extent, this highlights the power of miners: when they favor transactions with a higher - paying fee, less profitable orders are penalized with delays. Moral: in this new and decentralized financial environment, unexpected dangers need to be taken care of!
Otherwise, one aspect worth mentioning is that the pressure for the control of centralized exchanges, pushed by international financial taskforces, is likely to accelerate efforts by the community to make decentralized exchanges work.
















Off-chain crypto exchange platforms

Objectively, exchanges have become very powerful. With great power comes great responsibility. To illustrate this, a compelling case to analyze is Binance’s move to delist BitcoinSV. Even though this cryptocurrency’s fork was dubious, the decision to delist it came abruptly, and directly from the CEO, Changpeng Zhao, apparently to punish the primary individual behind BitcoinSV who claims to be Satoshi Nakamoto. This is a question of principle: clearly, Binance is a central player in this space, so its actions cannot be ignored. As the most significant player, some could argue it bears some public service duty. The public will oppose arbitrary decisions in this context, and we can expect more of this to happen.

Talking of dominant positions; worldwide, is a central aggregator of price and volume data that many refer to when they want access to crypto information. It is well established and exhaustive and has consequently acquired a central position. Following the fake volume scandal raised by BitWise a few months ago, CoinMarketCap has made an effort to clean up some of the mess. It launched a “Data Accountability and Transparency Alliance” that was immediately joined by the leading exchanges. And to go further, they decided to require exchanges to provide some mandatory data or face being delisted. This should have a clear and direct impact: we shall see if it triggers concrete change!


All of this is a consequence of the massive market that the cryptocurrencies exchanges have become. 

Looking at such an attractive business (Figure 9), many actors are eager to capture a share of the market, and in such an unregulated environment, all methods are employed to attract traders. The present proliferation of exchange platforms is good news, as competition is critical to push for better services, but only time will tell how the industry will ultimately evolve, as many small, crappy exchanges are currently profitable despite offering very low liquidity.


Legacy exchanges

[Nothing new to report in this section this quarter.]


Custodians of crypto assets are still relatively small players. They are by no means unique in the landscape; actors like Bitcoin Suisse, Xapo, and others have been around for a long time. But lately, they have been promoting their service more actively, either in forums or by advertising. The offer of cryptocurrency vaults, in the sense of safeguarding private keys for customers, is, of course, a segment of the value chain that appears to be becoming profitable.


Crypto exchanges are integrating vertically to become crypto asset custodians, which they have always been, in many ways. The decision by the asset manager, Grayscale, to move their billions of euros worth of BTC, XRP, and LTC to CoinBase is an example of this.




[Nothing new to report in this section this quarter.]



ThThe surge in the price of Bitcoin in the first half of 2019 had a positive impact on the value of ICO tokens. Altcoins prices, overall, tripled in market cap, from their low point in early 2019 to the peak in June. But, while infrastructure tokens have kept some of these gains, most, if not all of the tokens issued in 2017 and 2018 for fundraising purposes are, with a few exceptions, back to their lowest levels (as of September 2019), and a number of them are even plumbing new depths. Analyzing the reasons for this is difficult, but we believe that the need for finance to sustain the founders and pay employee wages is likely to result in selling pressure on utility tokens while their models have not yet demonstrated viability.

Examples of such tokens include TenX, Melon, Gnosis, PundiX, LAToken, Power Ledger, SirinLabs, Polymath, Mithril and many others that, despite having a sound team (in principle) and some deployed products and services, are obviously struggling to gain traction and investors’ confidence, all the more so with the “utility token” financing model.


For the people behind these projects who are genuine and still committed to the success of their value propositions, this is, of course, a catastrophe. As cash is needed to continue the development and build the business, for many, survival depends on whether the capital raised by the ICO has been well managed or if it has shrunk dramatically to the point that another round of fundraising is necessary. On the other hand, if the project had foreseen difficult times and kept some tokens aside, another fundraising may be possible, but at the current market for tokens is hardly favorable for that.


As such, the only alternative, for the majority of projects, seems to be the classic VC financing method. It’s a reasonably safe bet that, in this situation, many more projects are likely to die soon, paradoxically, despite any revival in the Bitcoin price.




It is challenging to validate the information from private brokers. For example, the story that hit the headlines that Dadiani Syndicate was approached by a wealthy client willing to buy up to 25% of all existing Bitcoin is probably fake news to create interest. Nevertheless, this tends to indicate that wealthy individuals were buying massive amounts of cryptocurrencies in June, mainly Bitcoin.


Concerning whales, a significant number, if not the majority of them, can be qualified as “new rich” young people, an emerging socio-cultural category that marketers have already been curious about studying, and unsurprisingly, their consumption patterns indicate the acquisition of “bling-bling” goods, expensive cars, and luxury mansions. Vendors of these goods have identified the segment, and are offering cars for sale with payment exclusively in Bitcoin, and apartments in Dubai reserved for buyers who prefer to pay with cryptocurrency.


Casual holders

Individuals holding cryptocurrencies resumed their interest, mainly due to the BTC price surge. However, from our observation, even among the most enthusiast circles, there are still mixed feelings, and while some have once again taken positions, they are not the majority. To that extent, there is still some upside potential.


Overall, individual holders still account for most of the trading volumes. However, their share of it is being reduced by the increase in institutional activity.


It is also worth noting that there is a high probability that casual holders who entered during the first half of 2019 will hold their positions.



[Nothing new to report in this section this quarter.]


Private bankers and classical investment/ hedge funds

Justin Sun, the controversial CEO of TRON, has bid $4 million to be the guest of a Warren Buffet charity lunch. This was quite a media coup, but Sun canceled the lunch due to health reasons. However, there are suggestions that Chinese investigators are preventing him from leaving the country…


Anyway, Warren Buffet does not appear to be ready for conversion: in August, he repeated how much he believed that Bitcoin does not produce anything, which means it’s just a bubble, like tulips in their day. For this reason, he would never hold BTC rather than invest in productive businesses. This summer, critics of cryptos have been pretty active, with media coverage.


Otherwise, the SEC has again delayed the examination of three Bitcoin ETF proposals; decisions are expected in October 2019 – stay tuned.

Dedicated (and new) crypto investment funds


As of mid-2019, an audit of crypto hedge funds shows several holes in their management and reporting, let alone the varying independence of their directors. From this, we can acknowledge that this industry is so young that it needs to consolidate at every level of its business.


A report by PWC giving the results of a study of 150 crypto funds holding a combined billion euros (uncertain of the date) confirms that, despite the bear market in 2017, they were able to increase their assets under management from significant subscriptions by clients. The interesting data from this report also mentions that average assets under management are €20 million, and only 10% manage more than €50 million (among them, Pantera and Polychain). The funds are overwhelmingly based in the Cayman Islands, with the teams typically working from the US. This looks like a traditional finance scheme: nothing has changed in this respect!


The most significant crypto investment funds are Grayscale (€2 billion in assets under management), Polychain Capital (close to €1 billion), and Pantera Capital (€650 million). Grayscale has revealed that 84% of its client base were institutional investors. Other, more ‘classic’ PE/VC funds are investing tens, and sometimes hundreds of millions in the crypto-world through these large “pure” players.


On the contrary, PWC reports that more than 60% of 150 active crypto hedge funds have less than €10 million in assets under management.


Recent issues of Blockchain Quarterly have identified a trend of significant activity, both in proposing dedicated DLT courses and in research programs being financed. Fundamentally, we observe that the movement continued and strengthened during this quarter. Here are the most prominent related headlines:


  • The Wharton School of Pennsylvania has issued some online programs about financial technologies, including a significant focus on digital currencies.

  • The National University of Colombia has joined the global blockchain consortium for science, dubbed Bloxberg, to establish an infrastructure that broadens the scientific landscape of regionally and nationally governed blockchain networks to become the first genuinely globally-maintained decentralized network by scientists for science.

  • One of Ireland’s prestigious higher-learning education institutions, Dublin City University, is fortifying its crypto stance in the financial world with a new online master’s program in blockchain technology, with the help of funding from the Irish government.

  • The University of Nicosia in Cyprus was the first in the world to offer students the option of paying fees with Bitcoin.



One has to wonder if a shortage of technologyeducated workers will be a significant roadblock to unlocking the potential of distributed ledger technologies in the coming years. Not only are there some mechanical delays for populations to gain exposure, get interested, get involved, and adopt the technology, time is also required to build a sufficient pool of competent professionals to make it happen. All of this takes time; it is not just a matter of the technology maturing. To us, these are, in fact, independent concerns. The problem is, these concerns are not easily quantifiable.



















A shortage of DLT-qualified talent is evident everywhere; we can accurately quote shortages reported in Australia, and a 300% + increase in demand for blockchain skills in the US, year-onyear, etc (Figure 12).

To get an order of magnitude, a comprehensive study of blockchain consulting prices shows that a distributed application developer costs €200 per hour in the US, €120 in Western Europe, €70 in Eastern Europe and €35 in India (Figure 10 and 11).


























This quarter, it is quite difficult to project which money is flowing in and out of cryptocurrencies.

  • There is still a net outflow of money from the ICOed start-ups that are now struggling with the collapse in the prices of their tokens, and their need for further financing. Exchanges and miners also routinely add to this selling pressure, particularly for ICOs in the infrastructure token category.

  • Individuals still appear to be quite cautious, even though they explain, at least partly, the spike seen in March-June 2019. In the short term, it is unclear whether they will become more involved, despite the apparent appetite for cryptos that is emerging in developing countries. Ultimately, the buying pressure has to come from people willing to use cryptos as an everyday vehicle of value, and this still appears to be far off, even though there has been progressing.

  • Institutional investors still lack the legal framework and the risk management models to enable them to pour substantial funds into the crypto environment. Despite this, we have observed some movements in this regard. However, fund managers are still not comfortable with cryptos and are averse to taking the responsibility of being criticized if there is a collapse.

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