NCFA Fintech Confidential December 2020 (Issue 3)

globe. Today, stablecoins are among the
fastest-growing crypto products, with USDC
doubling its volume in August 2020 alone.
Stablecoins provide faster access around
the cryptosphere, making arbitrage more
efficient. This reduces price differences in the
leading cryptocurrencies around the world. On
Ethereum, the platform is increasingly shaped
by the various smart contract-based protocols.
The explosion of stablecoins has increased
traffic and fees on the platform. And the rapid
expansion of DeFi and yield farming has also
added significant demand shaping pricing.
6,000 projects provide demand for ETH and
BTC
The explosion of DeFi is also part of the
pricing environment. Over 6,000 token and
altcoin projects typically trade pairs using
BTC or ETH. This creates a demand-pull for
ETH and BTC from centralized exchanges to
DeFi. In DeFi, ETH and BTC are used to buy
altcoins that are staked and lent to earn yields
from automated market makers. Now there’s
several billion roaming around this space. All
this staking and lending makes DeFi a growing
part of the crypto price discovery mechanism.
DeFi provides a contrast to the more mature
price discovery in Bitcoin. Various projects in
the DeFi space like the infamous Yam goes
to $150 one day and zero the next. Or the
notorious SushiSwap saga where the integrity
of the anonymous founder shaped pricing.
constant but dwindling supply. A change in the
mining rewards like the 2020 halvening helps
to shape activity around the protocol. But it is
the ongoing securing of the network without
human intervention that adds confidence in
the system. Confidence is an important factor
in price discovery.
The growing dynamism of crypto price
discovery
Prices aren’t simply supply and demand
based. They are dynamic feedback loops
involving an array of financial products and
signals.
Traditional markets have numerous elements
that contribute to price transparency. These
include interest rates, government debt, riskfree
rates, equities, derivatives, and swaps.
Cryptocurrency is quickly developing a similar
structure. Every new crypto product and
service becomes part of the growing nervous
system for pricing.
Accurate real-time pricing internationally
gives clear signals of the value of crypto
assets. Pricing helps with risk transfer from
users to speculators. It helps with insurance
pricing and a more accurate determination
of yields. This, in turn, helps people make
better, more accurate purchasing decisions.
A mature pricing mechanism brings crypto
that much closer to becoming mainstream
finance.
IN FOCUS
The influence of BTC fund flows
Funds are another source of price signaling.
Fund flows indicate the expectation of some
participants in the space. Greyscale’s fund
family is an example of a fund providing
price signaling. Demand for these funds, or
movement out of them, can influence the
demand and supply of the coins they trade.
Other funds, like hedge funds, help to add
another pricing dimension. There are the
originals like Galaxy Digital, Pantera, and Travis
Kling’s Ikigai. These are joined by many other
investment and trading funds contributing to
crypto price discovery.
Crypto miners are the original contributors to
the price discovery process. Mining rewards
and the minting of new coins provide a
Tristram Waye
For Bitvo Exchange
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