– Research from Fidelity Investments
“Institutions are more aware of these [crypto market] developments now than they were six or twelve months ago. The people we talk with are actively scanning and observing what’s going on, and considering how this technology would impact their business, and — ultimately — financial markets.”
Bitcoin has officially bottomed out, and the bull case is currently being made as it has historically performed with incredible strength following washouts like 2018 typically sending prices to new all-time highs. While the past is neither an indicator of future performance or returns, Bitcoin and crypto assets as a whole have seen a powerful move upwards in the past couple of months. The asset class also is experiencing a lot of interest from many reputable individuals and traditional financial institutions that are starting to realize and understand their value, which was not the case during the last run up in prices that put them practically on everyone’s radar. People are increasingly coming around to the idea of buying into Gold 2.0, bitcoins are its digital manifestation as an asset with a store-of-value that is independent of any nation or government. It is fully possible that it’s poised to become a newly adopted reserve currency that’s held in significant quantities by governments and institutions as part of their foreign exchange reserves.
In general, the short-term performance of Bitcoin and the crypto asset market has been bolstered by worries of the U.S.-China trade war, interest rate and inflation tensions, the riskiest credit market in history, as well as other uncertainties globally that are presenting them as an anti-fragile, uncorrelated safe haven asset class. Prices broadly may have gotten some help too with Blockchain Week in New York City this month as many of the best and brightest in the sector were hosted at conferences, meetups, and summits discussing the technology and their roadmaps for the future. It still seems sort of odd that out of all the possible places that New York would be the gathering place of so many interested parties and investors despite the state’s regulators harsh enforcement history in this sector. If there was to be a logical choice for the Crypto Capital of the World, it would be Chicago. It’s a great option as a city with a deep pool of talent, rich commodity and trading history, as well as its physical location in the Midwest of the United States with an abundance of culture and diversity at the heart of both the East and West coasts (Wall Street and Silicon Valley) in one central spot.
The long-term outlook on Bitcoin and the crypto asset market is solid too with plenty of opportunity for continued growth and expansion into a broader, more mature asset class that can be taken serious and regulated appropriately as such. One of the primary concerns in the previous year that was raised from large capital allocators hesitant to enter the arena was custody, and there’s never been better infrastructure and solutions than ever before available to individuals as well as institutions. Next, payments with Bitcoin and crypto assets were deemed as suspect by many serious investors on the fence about them after hitting all-time highs and just this month the rollout of SPEND™ proving their write-offs on the technology’s potential wrong again. The only places that have been left out of the crypto love are asset management and banking, and it’s conceivable that the tech and its advancements will become very vogue and sought after over next the couple years as customers and clients want to get in on the action and cost savings. For these reasons and more to be explained, Bitcoin (in particular, with its block reward halving in less than a year) and the crypto asset market as a whole are primed to garner increased demand and reach new heights along the way.
Bitcoin virtually represents digital gold as a store of value, and it presents an amazing value opportunity considering the market value of $150 Billion for bitcoin relative to the market for gold at $8 Trillion. If the market capitalization’s were to find parity at $8 Trillion dollars, the value of a bitcoin would be roughly worth $450,000 using current prices. It doesn’t seem all that unrealistic either if you take into account bitcoin’s performance over the past decade, and the fact that it offers superior aspects like portability, a controlled supply (it’s been proven mathematically there will never be more than 21 million bitcoin in existence), and inflation predictability. To illustrate that last point, there will be 656,250 bitcoins mined as well as added onto the blockchain next year in 2020 and 328,125 bitcoins will be mined as well as added to the ultimate total supply in 2021, and Bitcoin will continue on a predetermined inflation schedule (you couldn’t possibly predict gold’s inflation with such accuracy). Bitcoin will be the superior store of value relative to gold for that reason as well as its ease of transport and protections against censorship and seizure. Plus, despite Luddites arguing that the yellow metal offers higher durability during an event that may shut down the Internet the fact is that bitcoin satellites exist (meaning Internet isn’t necessary to use Bitcoin’s network and the public-ledger or blockchain stays up-to-date for everyone around the globe regardless of a connection).
The crypto asset market is having a great month! Bitcoin’s strong performance has been leading it upwards starting May around $5,300 and almost hitting $9,000 before fading back to around $8,700 at the time of this writing. Month-to-date that puts Bitcoin’s return on investment over 60 percent, not to mention, it’s up over 130 percent year-to-date. The uptrend that I spoke of last month is still very much intact, and I’m very confident in the bull case for bitcoin in both the short and long-term time frames. Three basic scenarios that can imaginably play out over the next month in order of likelihood would be: (A) The rally continues to play itself out with institutional and retail FOMO sends Bitcoin over $10,000 before mid-June; (B) Prices capitulate back to a support between $8400 and $7700 before moving higher and pushing across $9,000 to test $10,000 in late June; (C) The worst-case scenario breaking the trend with a drop in prices that sink well below $7000. The logarithmic chart used to generate these predictions can be seen below with the same presets as last month for the bollinger bands and linear regression (R-squared = 0.93102207). The bull case for bitcoin’s long-term value proposition is rooted in its fundamentals, institutional interest, and increasing demand ahead of the block reward halving next year.
Notable Bits of News:
AT&T is the First Mobile Carrier to Accept Payment in Cryptocurrency – (AT&T) The world’s largest provider of mobile telephone services, and the largest provider of fixed telephone services in the Unites States will now accept crypto assets through a payment process for cryptocurrency, BitPay. It sparks the question if this will be a major tipping point that pushes other corporations into FOMO adoption of crypto. The company has limited the acceptance to bill payments only and has not specified whether customers will be able to purchase smartphones and other accessories online or in AT&T’s brick and mortar stores.
Bitcoin Price Up Nearly 50% Since US Congressman Urged To ‘Ban Bitcoin’ – (Bitcoinist) This also comes with news of famed Nobel Prize winning economist, Joseph Stiglitz, saying in an interview that he “thinks we should shut down the cryptocurrencies.” It’s unclear if Congress is the subject who he’s referring to as “we,” but like Stiglitz in an infamous speech given on May 9th Brad Sherman called for a ban on the purchase and mining of bitcoin by US citizens. The market showed that their calls held little water because the truth is they may be impossible to stop or shutdown, and the price action continued to be bullish despite the negative statements.
Bitcoin is a Demographic Mega-Trend: Data Analysis – (Blockchain Capital Blog) In a blog post published by Spencer Bogart, Partner at venture capital firm Blockchain Capital, according to a new survey conducted by Harris Poll, 11% of Americans own bitcoin marking a major awareness increase since 2017. They used a statistically significant sample of the American population (conducted between April 23, 2019 and April 25, 2019), and the findings showed that they had gained more knowledge about bitcoin in terms of awareness, familiarity, perception, conviction, propensity to purchase, and ownership. Compared to another survey they conducted in October 2017, the results outline that bitcoin is a “mega-trend” that is being led by the younger generation in the 18-34 year age range. Interestingly, the older demographics showed they had heard of bitcoin but failed to match the other aspects where the younger age groups excelled.
Robinhood’s Free Crypto Trades Powered by Chicago’s Jump Trading – (Bloomberg) One Chicago trading firm that’s made headlines as an early mover in the space and known for having a profitable shop, Jump Trading, LLC, is helping Robinhood Market Inc.’s trading application for crypto. Robinhood saw its customer base double after adding crypto asset trading last year. It’s a promising sign of faith from respected, traditional financial players especially given that the offering is still not provided in every state because it is so new.
HODL Bitcoin Proves Itself (Unlike Altcoins): This Man Had Lost Almost 50 BTC From Investing in 50 Different Altcoins In 2017 – (CryptoPotato) If only he took the practical advice of just HODL-ing bitcoin and using DCA (“dollar-cost averaging“) strategies, but this one investor highlighted his views that newer coins only have one good cycle where investor’s timing is critical for a successful exit. For this individual, specifically, altcoin diversification from his original bitcoin holdings was not a prudent strategy for which he paid for dearly even though he believed they had “great” technology. The truth is many of them have seen very low volumes, have been delisted from major crypto asset exchanges, or barely shown any signs of life if any at all.
Bitcoin ETFs: Wait May Continue Even Longer – (ETF Trends) In a document that was released on the morning of May 20th, 2019, the SEC expressed its decision to exercise its right to delay (yet again) its decision by another 90 days. This sets the deadline back to August 19th, despite recent research suggesting that an ETF in the U.S. would be the preferred vehicle for 58% of American investors to access the world’s largest cryptocurrency. It is certainly obvious that the SEC is in no hurry to make any decisions too quickly, and they are doing their best job possible to understand the market and gather as much knowledge and information available to them.
New Research: Institutional Investments Likely to Increase over Next 5 Years – (Fidelity Digital Assets Blog) In a blog post before a report earlier this month by Bloomberg announcing Fidelity’s intentions to trade crypto for institutional clients “within a few weeks,” it made noteworthy news because it meant they would go beyond their custody business that’s live and enter the market of crypto trading businesses for institutions (though they emphasized they would be essentially serving as an agent). Seven out of ten respondents found some aspect of digital assets attractive and there was such positive feedback from institutional investors, the company said they are seeing interest from crypto funds and other early movers as well as family offices, endowments, pensions, and foundations. That’s almost as powerful as their survey conducted by Greenwich Associates between November 26, 2018 and February 8, 2019 correspondingly saying that 22% of institutional investors have some exposure to digital assets and almost half surveyed (47%) viewed digital assets as “having a place in their portfolios.”
Grayscale to Investors: Drop Gold – (Greyscale Investments Blog) In their new campaign promoting the emergence of Bitcoin and crypto assets as a viable digital asset class that will serve as the future of money, a strong call to action tells investors they should reassess their gold holdings in their portfolio and reallocate that capital by investing in Bitcoin to reap the benefits of a diversified investment strategy. It, at the very least, provided some comedy and debate around the “Bitcoin vs. Gold” contest. The campaign is more than a commercial and hashtag because they are also educating people and potential investors about their flagship product, Greyscale Bitcoin Trust, at DropGold.com.
Spring has sprung! Accordingly, bitcoin and crypto assets jumped on the bandwagon as their prices surged across the board over the past month as investors took notice too and also observed the return of FOMO. It’s left many questioning whether or not the bottom is in for bitcoin. The price per coin in US dollars has soared over a thousand dollars since the last blog post when bitcoin was roughly $3,850 and is trading for around $5,200 at the time of this writing. It also sparked enthusiasm for another iteration of “alt-season,” when crypto asset prices increase broadly following Bitcoin’s price momentum and spikes in public interest. The financial news covering crypto prior to the run up in prices was raising doubts about inaccurate data reported on exchange trading volumes and now is expressing its concerns with “Flash Boys”-like trading bots deploying algorithmic and quantitative high-frequency trading strategies on crypto exchanges. April 2nd was the single largest intraday price swing from roughly $4,175 to $5,050 (about 20%) per coin since December 2017, which as we all know was when bitcoin reached its all-time high. The timing of it led many to speculate if it was an April Fool’s hoax, short squeezes and liquidations, or a lone buyer with $100M and orders spread across various exchanges.
Bitcoin and crypto asset prices have mostly traded down since about August 2018 when FUD was rampant still with talk of protocol wars as well as questions surrounding the regulatory environment concerning initial coin offerings (ICOs) from the Securities and Exchange Commission. Since that time, progress has been made but the only thing missing has been some encouraging regulatory news or a distinct catalyst like an ETF approval. The SEC has postponed their decision to mid-May as to if the Bitwise Bitcoin ETF (that tracks their Bitwise Bitcoin Total Return Index drawing prices from trusted exchanges) application fits their criteria and is ready for investors. Valerie Szczepanik, Senior Advisor for Digital Assets at the SEC, at the SXSW conference last month indicated that even some stablecoins may be viewed as security tokens in their eyes recommending that companies contact the commission regarding possible problems and to ask for permission. She also explained that no matter the name of the stablecoin or token at the end of the day what really matters is what’s “behind the label.” While this includes algorithmic and digital-asset backed products, it highlights the need for a deeper examination and some basis to decide which stablecoins and digital assets can be perceived as securities with legitimate issues under the current laws as well as a withstanding investment framework (perhaps multiple).
The institutional outlook has brightened as skeptics are becoming more accustomed to the price swings. Enthusiasm for bitcoin has not disappeared even despite the Chicago Board Options Exchange (CBOE) delisting their bitcoin futures product, which in comparison to the Chicago Mercantile Exchange (CME) had far less daily historical trading volume and was subject to more manipulation since it was only derived from one exchange providing its information. CME’s bitcoin futures product was superior and benefited from having more clients available to it being a bigger exchange as well as from using an index that is comprised of multiple exchanges providing its information. It is another sign of maturation too because there seems to be a real demand for products that are physically-backed to give the buyers the option to “hodl” the asset or sell at a later time of their choosing at a “real” price. To this point, Intercontinental Exchange’s (ICE) yet-to-be-launched futures trading platform with physically-backed products for institutions, Bakkt, raised $182.5M last year and following its recent Series A funding round saw a post-money valuation approximating $740M. Reaching unicorn status can be a sentiment indicator for these products, and Bakkt’s latest valuation could allow it to exceed $1B at its next capital raise without sacrificing any considerable equity.
The decentralized finance ecosystem just got a little more interesting last week with news of Harvard University’s endowment venturing into crypto and purchasing crypto assets, directly. This comes after other notable news of Yale’s endowment making a similar investment last year and pension plans investing into a venture-capital fund for the blockchain and digital asset industry earlier this year. According to Bloomberg, citing a recent SEC filing, Harvard Management Co. joined two other investors in backing Blockstack Inc. by purchasing 95.8M Blockstack Tokens, valued at $11.5M. Blockstack’s offering is said to support its decentralized computing network, which utilizes the token. The New York City-based company has built a “parallel internet” where those who access and build on the platform maintain autonomy over all of their own data on blockchain applications. It’s also expected to be the first industry firm to have a token sale approved by the SEC’s “regulation A+ framework.” While the investment was not Bitcoin or other crypto assets themselves, it is especially exciting to see that the endowment is happy holding their own tokens.
The crypto asset universe has us all waiting for the technology to materialize and scale to the point where it serves as the foundation of the next generation’s mainstream consumer applications such as e-commerce, gaming, social media, and more. While that will take an ample amount of time to happen, decentralized finance or “DeFi” is a sector where scalability is not such a priority and a place that blockchain, bitcoin, and crypto assets are already showing their promise. It encompasses all the ICO activity that has largely been built on top of Ethereum and the ERC-20 token as well. Coinbase’s CEO, Brian Armstrong, issued The State of Crypto with a statement that the company tweeted saying, “Crypto may have started with speculation, but that’s not where its headed. Decentralized lending, interest, derivatives, prediction markets – there’s so much happening to be excited about.” It is thrilling to think of applications and platforms where there isn’t any intermediaries, clearinghouses, or “trusted” third-parties, and DeFi won’t be the only sector where blockchain technology and crypto assets shine because people will soon realize the use-cases beyond just money and banking for applications to be built for the mainstream consumers using them. There is a growing consensus of people who are coming around to the idea of trusting algorithms over humans when it comes to making accurate, disciplined, and speedy monetary policy decisions.
Bitcoin and other crypto asset penetration around the world is likely to be over 10% now, but the amount of people really using it and spending it probably is much slimmer. The value and investment returns though have increased quite significantly over the years, yet commercial adoption remains low despite there being a successful global payment network that’s immutable and irreversible as well as was fast, frictionless, and free to accept without fees. This gives them their money in hours not days through strong security measures and without middlemen, delivering consumers as well as merchants true ownership and control over the multiple currencies and assets they opt to accept and/or hold. Hypothetically speaking, if accessibility and adoption spreads to the point for bitcoin as well as other crypto assets that the global penetration rate rises into the double-digits, where do you think prices would be compared to now? I can see a future where bitcoin and crypto assets are so ubiquitous they’re integral not only to online shopping and transactions, but they extend themselves so far to become common in stores as well as during dining experiences, entertainment, sporting events, and more globally. It’s hard to imagine where they may go from here and what that might look like exactly, but institutional and commercial adoption can certainly help them get there and reach new heights along the way!
Taking this all into consideration, there is a myriad of reasons why Bitcoin is poised to carry on its fresh bullishness. Above all, the economic landscape appears to be uncertain about its future facing slowing GDP numbers that are posing the growing threat of a recession around the corner while the Federal Reserve is also tightening monetary policy that will thoroughly cap growth. Bitcoin and crypto assets, as alternatives to other current investment opportunities, display uncorrelated and asymmetric return profiles and are emerging as the supreme hedge against market shortfalls and contractions as well as devaluation of global currencies. Looking at the hourly chart for the BTC/USD pair on Coinbase (see below), it looks positioned for Bitcoin to continue its strong uptrend through the end of the month into May. Best case scenario would be seeing it reach $6,000 before then, and worst case scenario would be prices skidding well below $5,000 to break the trend and fall around $4,600. As fears of a slow down and recession looms in the minds of investors, I’m confident in the bull case for Bitcoin and the greater crypto asset market to continue and prolong its current bull market.
Notable Bits of News:
Cryptocurrencies are ‘clearly shaking the system,’ IMF’s Lagarde says – (CNBC) The Managing Director of the International Monetary Fund, Christine Lagarde, urged that the emerging crypto industry should be monitored and regulated in hopes of limiting the disruption caused to global stability. Speaking in her interview with CNBC (below), Lagarde regarding the disruptiveness of the technology expressed her view that it is already changing the way companies do business. Notably, she was quoted saying that she thinks “distributed ledger technology, whether you call it crypto, assets, currencies, or whatever…” is so powerful that too much innovation could apparently “shake the system so much that we would lose the stability.”
A Unique Look Under the Hood of One of the World’s Most Comprehensive Crypto Insurance Programs – (Coinbase Blog) Coinbase, the major San Francisco-based exchange, has held an insurance policy placed by Lloyd’s registered broker Aon and sourced from a global group of US and UK insurance companies (including certain Lloyd’s of London syndicates) covering its hot wallet crypto holdings since mid-November 2013. In particular, the policy was to protect against what the exchange identifies as being the highest-risk consumer loss scenario in the crypto industry – theft by hacking. The details have been disclosed according to Coinbase’s Chief Information Security Officer (CISO) Phillip Martin who outlined the two chief insurance classes involved in crypto insurance (Crime and Specie marketplaces) noting, “Importantly, that means that a Specie policy would not be responsive to a loss of funds that occurred due to an on-blockchain failure (e.g. a vulnerable smart contract multi-sig implementation).” He provides insight and an analogy to explain the distinction between the two classes, proposing that while Crime policies insure “value in transit,” Specie policies cover “value at rest.”
Numerai Token Sale Raises $11 Million From VC Firms Paradigm, Placeholder – (Coindesk) Mentioned in last month’s post with incredible timing, Numerai, made headlines with prominent crypto VC firms purchasing the NMR token directly to invest in the Erasure protocol rather than its parent startup. The opportunity was attractive to the VCs who liked Numerai for its existing track record, strong team, and community of 44,000 registered users with weekly data science competitions on its current platform. Erasure, the decentralized offspring of Numerai’s existing marketplace, is said to launch later this year according to the founder, Richard Craib. Erasure.xxx will offer users the ability to see how much was staked, paid, greifed, and more allowing them to track how much hedge funds spend buying predictions on its marketplace including Numerai’s own fund itself to draw more users to Erasure, Numerai, and the NMR token.
Chicago Mayor Says Crypto Adoption Could Be Inevitable – (Forbes) Chicago’s mayor, Rahm Emanuel, at a meeting discussing the city’s FinTech movement explained his position on the community saying, “I think we have something really unique and special here in Chicago.” Emanuel mentioned he thinks an alternative currency dealing with the debt markets is going to happen at some point in the future too. The purpose of the meeting was to talk about how to base Chicago as a top hub, or in more straightforward language as “The Crypto Trading Capital of the World.” He certainly thinks the city has the makings and necessities for crypto innovation success. Emanuel also went on the record to add that he believes the trends show that the movement has an affirmative future, especially in Chicago with its rich trading history. The city also made crypto headlines recently on CryptoPotato with the announcement from the popular crypto asset exchange BitMEX partnering up with Chicago-based Trading Technologies (TT).
Square is Staffing Up For a New Cryptocurrency Unit – (Fortune) Jack Dorsey, CEO of Square and Twitter, as one of bitcoin’s most distinguished advocates tweeted “I love this technology and community. I’ve found it to be deeply principled, purpose-driven, edgy, and…really weird. Just like the early Internet! I’m excited to get to learn more directly.” This came after another tweet announcing that the firm was hiring to create a team of 3-4 crypto engineers and 1 designer to work full-time on open-source contributions to the bitcoin and crypto asset ecosystem for Square Crypto. The motto of Square’s first open source initiative is “Vires in numeris.” (Latin meaning, “Strength in numbers.”) Appropriately, it will be independent of their business objectives and will focus on “what’s best for the crypto community and individual economic empowerment,” with all resulting work being open and free.
Kraken is Delisting BSV – (Kraken Blog) An official announcement from another U.S.-based crypto asset exchange, Kraken, posted on its blog saying alongside upstanding members of the community and in consultation with their users their decision to delist Bitcoin SV and included the opinion poll results taken from Twitter. The news comes after months of community criticisms and scrutiny over the supporters and team behind Bitcoin SV, specifically taking offense to fraudulent claims and threats to various members of the crypto community with lawsuits for speaking out about their doubts regarding the true identity of Satoshi Nakamoto. Kraken joined other exchanges and wallet operators in ceasing support like ShapeShift, Binance, SatoWallet, and Blockchain. Jesse Powell, Kraken’s CEO, also hinted in another interview that the exchange will probably start listing two coins a month beginning next month in May.
Goldman’s Trading Floor Is Going Open-Source—Kind of – (Wall Street Journal) The Wall Street firm plans to release some of the code that its traders and engineers use to price securities and analyze and manage risk. Just from what has been said in other news and reading by reputation, Goldman does not seem like the type that would shed its trademark secrecy and it could not care less about the loyalty of code-driven traders. This news comes as there has been an open-source push across the entire financial industry, thanks to bitcoin and blockchain, but personally it just seems to be geared for their own in-house technology resources to boost efficiency, enhance speed, and otherwise cut cost while charging clients more fees. Going open-source eliminates the need for as many analysts and back office employees, plus given the rise of automation and artificial intelligence it will help simplify the work for remaining employees as well as allow them to perform other functions outside of their traditional scopes.
Crypto assets fall under the “alternative investment” bucket along with hedge funds, private equity, real estate, as well as funds of funds, and compared to those other alternative options they present a massive market opportunity. The average person is still figuring out what blockchain means exactly, and they will realize where trust is muted that reputation is amplified through verification. People are beginning to understand that enterprise blockchains may have some difficulty and pose concerns because if they are not decentralized sufficiently they could be purported as securities and without any cryptographic native asset, coin, or token tied to its blockchain then its essentially just another database managed by a central body that requires trust and may be manipulated just like the current legacy financial system. Bitcoin, the King of Cryptoland, is known for being “digital gold” and has a few major hurdles before it can stand the test of becoming the next global reserve currency. Ethereum has some new competition in the decentralized finance game, but it enjoys having a good jumpstart on them as well as a strong community established around itself. The crypto market is still down considerably from its all-time highs, but there’s a crypto renaissance coming and it revolves around money and value. Central banks, institutions, and investors alike who are exploring the space will realize sooner or later that all blockchains lead to Bitcoin. When they do, it’s going to spark a buying bonanza that sends prices, “to the Moon!”
The main ingredient to crypto is not trust, it’s transparency by means of verification. The ability for two untrusting parties transacting with one another is incredibly powerful and makes an economy evermore efficient. The real beauty of these crypto assets and protocols are the cost-savings, remedies for fraud and its prevention, and the lack of manual reconciliation using blockchain technology compared to the aging infrastructure riddled with back-office inefficiencies and third-party intermediaries. Bitcoin alone with its technological forthcomingness may do more to help alleviate the damaging effects to society and human welfare that many of the institutions and their management cause from their negligence or lack of integrity. Prominent figures like Warren Buffett who has said Bitcoin is “delusional” and “attracts charlatans,” ironically defends the legacy financial system that people are losing their trust in as one of his largest investments is Wells Fargo who’s been fined over 90 times since 2000 for fraud as well as other abuses to the tune of some $15 billion (practically as much as Bitcoin and Ethereum’s current market capitalizations combined). Perhaps, what he meant to say was that it attracts mistaken culprits. It is odd that crypto assets have been popularized and associated with bad actors and criminals, yet unlike their fiat cash counterparts they are more resilient against manipulation, semi-anonymous, and easily traceable. The funny part of Bitcoin’s history is its involvement in the infamous Silk Road scandal linking it with that “shady” connotation; however, the truth is thanks to its blockchain that not only was the criminal mastermind who was the target of the investigation caught but it also exposed there were other perpetrators that ultimately were unveiled as a corrupt DEA agent and Secret Service agent both involved in the case. It says a lot about the reputation of Bitcoin representing transparency that you can trust, through verification!
Bitcoin, specifically, is trending up over the past month despite falling back from $4200 in late February to $3800 at the time of this writing as it looks to test breaking through the $4,000 level soon hopefully reviving a widely held bullish outlook. According to Peter Brandt, author of Diary of a Professional Commodity Trader, the value of one bitcoin would be worth $67,193 if the composite value of the network (fully mined at 21 million coins) equaled the value of the 33 thousand tonnes of gold held by the world’s central banks. The price trend growth of bitcoin using a logarithmic model has been an accurate value predictor, and bitcoin would appear to still be on track should the price of finish this year around $67,000. To reach those heights, the current prices would require a parabolic move that historically has been followed by a major correction that sets a “higher low” for yet another move up in the future. Bitcoin reaching that high is far more likely to me than it would be for it to fall to $0 because that would require even the most diehard supporters to lose confidence. Jamie Dimon, the head of JP Morgan who in September 2017 called Bitcoin a “fraud” and said it “won’t end well,” to his delight sent prices tumbling to $3,800 ten days after his statements only to see it later reach nearly $20,000 in December of that year. Taking this information with a grain of salt while bitcoin still in somewhat of a short-term correction and down 80% from its high, the long-term horizon is looking bright as its focus is on scaling prior to taking on major hurdles of firstly seeing its value reach parity with central bank gold reserves and secondly becoming as valuable as the United States monetary base in terms of the entire global monetary supply. In order to accomplish both of these leaps, it will likely need to be systematically adopted as the next global reserve currency.
“Web3” is the next generation of the internet that encompasses the original ideas of decentralization, openness, and permission-less collaboration. Ethereum, the “digital oil” of Web3, powers the decentralized applications (“dApps”) that are ambitiously taking it upon themselves to try and revolutionize money and finance like Compound, Dharma, Maker, GUSD, and USDC. These dApps use ether as the fuel that gets burned to power the Ethereum Virtual Machine (“EVM”) allowing executable code to operate smart contracts programmed to perform specific functions under certain conditions (hence “programmable money”). Ethereum serves as the base layer or “Layer 1” part of the stack that makes up a dApp, which PlaceholderVC has outlined in order from back-end to front-end as: (1) Layer 1, (2) Interoperability, (3) Middleware Protocols, (4) User Interface. Ethereum has a good jumpstart as the substrate of Web3 applications despite having some competition such as Cardano, Dfinity, and Polkadot that all have yet to launch but offer faster transaction speeds. Cosmos, another project challenging Ethereum’s shortcomings and marketshare dubbed as the “Internet of Blockchains,” launched this week and is seeking to create a network of distributed ledgers (blockchains). The launch of its main network (“mainnet”) intends to serve as the go-to for interoperability to make sharing information, assets, and money easier than ever before across blockchains and crypto networks. It also serves as major step in the crypto asset ecosystem though some concerns remain around its potential centralization.
The crypto market is in a dip, but there is a new dawn coming as advances in bitcoin and other blockchain technologies are enabling a transparent provider of trust people can verify around the globe in a peer-to-peer economy. Public and private blockchain implementations differ deeply in the way that it determines whether they are decentralized or centralized as well as if they are permission-less or permissioned, respectively. This technology is allowing many different solutions to applied and tested to the current banking system that is being disrupted by crypto assets. While they try multiple implementations of blockchain technology, it’s only common-sense that banks will realize adopting crypto assets and integrating them into the fractional reserve system will be optimal in contrast to being replaced by them. In the coming years, blockchain technology and crypto assets will historically change the way parties participate in capital and financial markets as well as the way securities are registered and managed because they revolutionized property ownership securely and with scarcity, digitally. Bitcoin and Ethereum are all about fostering confidence and reputation for their network security and reliability, many ICO’s and utility tokens needed to use dApps are fascinating quasi-securities that are legally challenging without any clear regulations yet that are mostly speculative of the network’s long-term value, and security tokens are looking to be the next big hype fest in the next crypto market boom cycle. Through democratization and decentralization, the value capture of Web3 is looking to be the most prolific at the base protocol layer (e.g. BTC/ETH) as opposed to the application layer at the top of the stack (e.g. Coinbase/Radar) that is powered by utility tokens or middleware protocols (e.g. 0x or ZRX token) and interoperability projects as well as niche use-cases which deliver solutions to issues arising from Layer 1. As far as that thinking goes following the fat protocol thesis: the lower it is in the Web3 stack, the better it is generally to invest in.
The future looks brighter than ever and the best investors will take a portfolio approach to bet on crypto assets. Although they will predominantly be weighted in bitcoin with some ether too, they will also take some moonshot bets to possibly profit handsomely off of as well as to further disperse risk out from their main investment holdings. I believe there are strong candidates for those smaller bets and will be lesser known projects like Numerai, which has an ERC-20 utility token (NMR) that powers a decentralized marketplace for predictions known as Erasure. It originally began as a hedge fund for data scientists who wanted to compete to model the stock market, and it would send them encrypted market data that they would use for their model submissions that would potentially be applied to a “meta-model.” The meta-model by Numerai combines the best models to trade on and pays the data scientists who’s models successfully perform well. Fred Ehrsam, the co-founder of Coinbase and Paradigm and previously a trader at Goldman Sachs, in his latest Medium post shares his interest in decentralized data marketplaces as well as combining meta-modeling and machine learning with blockchain incentives to create strong machine intelligences to generalize solutions to problems and power a wide array and variety of applications. Today, artificial intelligence and blockchain technologies are more complimentary than they are competitive in their nature because they can be used together cleverly in solutions where personal data security is of great importance. Fred has historically been a good gauge as to “where the puck is heading” in crypto and is backing Erasure’s new protocol accompanied by Union Square Ventures and Olaf Carlson-Wee (Polychain Capital, Founder). Full disclosure: I am not currently holding any NMR at this time, nor do I have a relationship with Erasure or Numerai.
Total market opportunity is huge for Bitcoin, Ethereum, and a select group of the Web3 stack. According to the World Economic Forum, “By 2027, 10% of global GDP is likely to be stored on blockchain platforms.” Blockchain has been flipping traditional models because retail investors in the crypto assets, protocols, and networks have been active and vocal about these products since day one, whereas traditionally money would have been raised privately and the product/service launched or would be announced to the public afterwards. The attractiveness right now of decoupling money from government control and influence is high because it affords people greater freedom, liberty, and privacy in an increasingly digital world. Money itself has become a monopoly that has been balkanized and separated by jurisdiction as well as digital since the financial systems around it fled from standards such as gold and silver that once backed it. Many bright minds think it is reasonable for there to be a separation of state and money so there is freedom of choice over money and value. This is spurring governments and central banks to learn how these technologies, networks, and assets work because soon they will be wrapping holdings on their balance sheets using some blockchain platform or else they might will lose out themselves. Andreas Antonopoulos said it best, “Bitcoin is not something that you build companies on top of. Bitcoin is something you build economies on top of.” Until it is realized they have already lost the race and that investing in blockchain without buying bitcoin is futile, we can all enjoy the show waiting for these large governing bodies and banks around the world to fully embrace that fact. Get your popcorn ready and prepare for takeoff, we’re going back to the Moon to Mars and beyond!
“We set sail on this new sea because there is new knowledge to be gained, and new rights to be won, and they must be won and used for the progress of all people. For space science, like nuclear science and all technology, has no conscience of its own. Whether it will become a force for good or ill depends on man, and only if the United States occupies a position of pre-eminence can we help decide whether this new ocean will be a sea of peace or a new terrifying theater of war. I do not say that we should or will go unprotected against the hostile misuse of space any more than we go unprotected against the hostile use of land or sea, but I do say that space can be explored and mastered without feeding the fires of war, without repeating the mistakes that man has made in extending his writ around this globe of ours. . . . We choose to go to the moon. We choose to go to the moon in this decade and do the other things, not because they are easy, but because they are hard, because that goal will serve to organize and measure the best of our energies and skills, because that challenge is one that we are willing to accept, one we are unwilling to postpone, and one which we intend to win, and the others, too. . . . Well, space is there, and we’re going to climb it, and the moon and the planets are there, and new hopes for knowledge and peace are there. And, therefore, as we set sail we ask God’s blessing on the most hazardous and dangerous and greatest adventure on which man has ever embarked. Thank you.” — John F. Kennedy
Happy Pi Day!
Notable Bits of News:
Crypto Assets Venture into the Unknown – (Cambridge Associates) This report highlights their assumptions and expectations intended for their own investors regarding crypto asset exposure, proposing that there is booming investment activity and institutional investors have little to no capital invested it and if they are it is about “20-30 basis points.” Notably the Boston-based pension and endowment consulting firm said in a written investment note to clients that it believes “it is worthwhile for investors to begin exploring the cryptoasset area today, with an eye toward the long term.”
Coinbase Custody + Agency OTC: Instant Liquidity on Offline Funds – (Coinbase Blog) This blog post announces Coinbase Custody’s latest developments allow for seamless trading for offline funds or “cold storage” using an Agency-only OTC desk to provide anonymous access to trusted and vetted counterparties. These state-of-the-art services give clients a simple solution that affords them both security and liquidity.
IBM Quietly Enters Crypto Custody Market with Tech-Designed for Banks – (Coindesk) Looking to serve banks, brokers, custodians, exchanges, funds, family offices, and high net worth investors wanting to do self-custody, IBM is launching a beta version of a custody solution for digital assets with Shuttle Holdings (a New York Investment firm). The companies will not be storing crypto assets or tokens themselves, but offering tools to do so for others to use built on IBM’s private cloud and encryption technologies.
Chicago Chases Pot o’ Crypto – (Crain’s Chicago Business) ErisX, a crypto exchange based in Chicago, is competing in a market valued to be over $3 trillion against another local firm Seed CX as well as Bakkt that is Altanta-based, has physically-backed products, and supported by the International Continental Exchange infrastructure. With Chicago’s reputable futures and options exchanges and federally regulated market infrastructure, it’s historically been open to fintech and churned out top trading expertise and talent while it has slowly become a hub for crypto too.
Gold-Backed Cryptocurrency Is Almost Here – (Fortune) Paxos, a New York-based firm offering a dollar-backed product called Paxos Standard as well as Bitcoin trading services, launched its stablecoin “PAX” six months ago by tying cash reserves to a blockchain. They are sharing news of plans sometime this year to introduce investors to digital tokens backed by gold and stocks in the form of cryptocurrency, enabling trading in same way they might with Bitcoin.
Can Cryptocurrencies Enhance Portfolio Performance? – (Lund University Libraries) This interesting thesis paper revolves around an examination of the 17 largest crypto assets selected based on their market capitalization. The results of the study showed that not only bitcoin alone but a larger diversified portfolio of crypto assets presented a significantly improved Sharpe-ratio when compared to a portfolio holding strictly traditional assets.
SEC Affirms Stance that Ethereum (ETH) Is Not a Security, Could XRP Be Next? – (NewsBTC) Jay Clayton as the Chairman of the Securities and Exchange Commission (SEC) reaffirmed the agency’s stance that ether and crypto assets similar to it are not a security, and being exempt from that classification gives it a far more favorable regulatory treatment. This raises questions over what they consider truly to be crypto asset and what they deem to be a security as many investors wonder about XRP (the cryptocurrency created and issued by the Fintech company Ripple).
College Kids Are Using Campus Electricity to Mine Crypto – (PC Mag) Cisco security researchers have shown that the second largest sector, approximately 22% of the total mining of crypto assets, comes from college campuses. The findings suggest that students are likely using the benefit of free electricity from their dorms to operate mining rigs.
Blockchain technology has presented a new frontier for investing whether its crypto assets, decentralized applications, or protocols running on top of this revolutionary technology, it embodies the Silicon Valley boom of the late 20th century in terms of infrastructure and potential as well as the Wild West with characters famous for being gunslingers and outlaws. It is an investment emerging as the 21st century alternative to the traditional assets and markets of our outdated legacy financial system that is practically ancient in terms of technology. These subjects and topics are particularly cumbersome and easily discounted for their complexity, not to mention, the past year’s price consolidation. People serious about their wealth and who are the very best at managing their finances and at investing see crypto assets and blockchain technology together as an outstanding opportunity to place an asymmetrical bet in order to make outstanding returns on their principal if done so wisely. It is essentially wealth insurance should a macro level event like a currency or debt crisis ever happen too. The stage is being set for these new avenues to connect to the older financial infrastructure and legacy systems to onboard more customers and bring the masses a better form of money with security and scarcity in mind and become a part of a trustless and decentralized global network designed for a more digital world.
More people and money will certainly come once the prices begin going up again, which in the current market dynamics in consideration favors buyers and the long-term holders of these assets still. There’s a great maxim in technology investing that goes, “You don’t want to be the first one in on a trend, and you don’t want to be the last one on it either.” The interested parties are beginning to realize that sooner or later that they will likely make an investment or contribute large amounts of capital into these blockchain technologies through dApps and exchanges or invest directly into specific crypto assets, protocols, projects, or funds. Accordingly, smart money, large asset managers, and professional capital allocators are beginning to dip a toe in the pool to get acquainted with the environment. The main catalyst event they want to beat that many in the crypto community regard as a key driver to price growth and acceleration is the Bitcoin block mining reward halving (where the reward drops from 12.5 to 6.25 coins) on May 24th, 2020. Add an ETF approval into the mix and odds are high that a sustained price rally reminiscent of years past takes place.
The current problem that has been plaguing crypto is the pricing. The focus on the prices day-to-day and hour-to-hour are a waste of time and energy, and instead could be spent more productively on getting more active users on the decentralized applications. This could allow more people to interact with the infrastructure and to familiarize themselves with the actual assets, applications, protocols, and networks. It also could allow them to give developers valuable feedback on how to improve the technology or the user experiences and interfaces. While a large portion of institutional money is still on the sidelines, innovations and advancements in custody, on-and-off ramps for fiat, launch of Bakkt, Kraken derivatives and futures trading, and other progress is allowing more tools and options to be available to these investors so when their time comes they can jump in the pool informed and however suits them best.
The next phase in these markets is clear, institutional capital is coming in for the idiosyncratic opportunity to add exposure to uncorrelated assets that offer superior security, scarcity, and risk-return profiles relative to the existing holdings in their portfolios. A California-based asset manager made headlines this month for cleverly figuring out a way to work bitcoin into an exchange-traded fund prospectus, which the CEO said was the best way to get a crypto fund approved by the Securities and Exchange Commission. It is not a “full blown crypto ETF” because it limited exposure to 15%, but it offered solid evidence that demand exists for products that gives investors access to these crypto assets, protocols, and networks despite their limited histories or volatility. Unfortunately, the SEC has already asked for the withdrawal of the application by Reality Shares ETF Trust, though Bitwise still has an application under review. The Commodity Futures Trading Commission Chairman, J. Christopher Giancarlo, announced this month too that a bitcoin ETF will be approved eventually and that the CFTC’s priorities include practices around the crypto industry as it aims to improve their relationship with the markets it regulates to promote “a culture of compliance.”
Last year, I thought security token offerings (“STOs”) would be a trend that persisted into this year and into the future. It appears they are one of the hot topics in crypto despite a lack of real demand since the fall in prices and rise in scrutiny over initial coin offerings (“ICOs”). For individuals who are interested and certifiably accredited investors, STOs fundamentally differ from their ICOs predecessors in that the tokens are tethered to assets like real estate, debt, and company interests or shares. This also makes them less subject to price volatility naturally, but they would also be subject to securities laws that would limit their issuance since not all investors are accredited. Bloomberg published an article detailing them this month as they have also come under question as to whether or not the Securities Exchange Act could require their issuers to register as public reporting companies.
Hester M. Pierce, one of the five commissioners of the US Securities and Exchange Commission, talking about crypto-token sales was quoted saying:
“We rightfully fault investors for jumping blindly at anything labeled crypto, but at times we seem to be equally impulsive in running away from anything labeled crypto. We owe it to investors to be careful, but we also owe it to them not to define their investment universe with our preferences.”
Given at a speech, Pierce was warning the SEC again about the risk of misapplying securities laws to digital assets, coins, or tokens and the potential harm to innovation that it may cause as a result. She also said that Congress could resolve the issue by creating legislation that simply would install a new framework for some crypto assets. It still may take further maturation of these assets, blockchains, and networks, but at least there are credible people that are providing oversight and who want to take charge leading them in the right direction with sensible and positive regulation. The lack of regulatory clarity has been one reason that more established and conventional investors have yet to invest, or at the very least integrate these products and solutions into their own businesses.
Institutional investment pace for digital assets is accelerating, according to Greyscale’s 2018 Q4 report, and it’s still only the beginning! Historically, prices have propelled upwards usually as a result of people’s fear of missing out or “FOMO” that typically follows highly positive and very publicized news. One main ingredient that is still missing for crypto is the “killer” product or application that sees an influx of adopters who send prices soaring again from network effects and potential for monetization value. The promise of the Lightning Network’s developments on Bitcoin could easily make it the killer app of crypto and Web3. There’s more opportunities available now to investors than ever, especially for the more sophisticated individuals and institutions, and the crypto landscape is looking ripe for investment as conditions in the greater capital markets are changing rapidly with consideration to global stress and political factors. Interest will build, pun intended, as developers continue to make Bitcoin and other similar crypto networks faster, more efficient, and transactionally more powerful. This technology is very similar to the early Internet in the dotcom boom and is still so new that applications and browsers are being developed today.
Overall, there has been a good amount of news that shows how positive the crypto market outlook is for the years to come. The themes I will reiterate and think of as being prevalent this year and in the future will be faster and more efficient payments, interoperability between blockchains, new trading venues, security token offerings, and stablecoins. It will be an important year as I believe it will be the setup before the two main catalysts that will come next year, those being the block reward halving and an eventual ETF approval from the Securities and Exchange Commission. I’ve shared my view that an ETF approval is not that important this year, but it should be clarified that it just ranks lower on my priorities of importance under
institutional products by Nasdaq, Fidelity, and TD Ameritrade, further institutionalization, expansion of futures and derivatives markets, improvements to liquidity infrastructure, privacy implementations, positive crypto regulation, Lightning Network growth, and price appreciation.
This is not to say that fear, uncertainty, and doubt (“FUD”) isn’t prevalent still in crypto, but to that point the best investments and opportunities are made when that element exists. Terry Duffy, CEO of CME Group which is a leading derivative market, expressed his views in an interview with Bloomberg that until governments start to accept crypto assets the challenge of getting comercial banks involved remains. He commented that the success of any currency is that it’s associated with the government and needs its involvement, and amazingly the next day two sovereign nations settled a transaction in Bitcoin. From looking at how successful just bitcoin has performed since its inception, it benefits and thrives still today by not being associated with any one government. Governments like banks, courts, and stock markets have been known to shutdown (sometimes from inefficiencies), but Bitcoin never shuts down and it never will. Buying into the FUD and going long bitcoin and crypto now seems reminiscent of Warren Buffet’s old saying, “Be fearful when others are greedy and greedy when others are fearful.”
Notable bits of news this month:
Some Wells Fargo Customers Are Still Having Issues Nearly a Week After a Nationwide Outage – (Bankrate) Unlike blockchain networks and crypto assets where you can be your own bank practically, banking networks are prone to shutdown and keep people from their own money.
Jack Dorsey: Lightning Coming to Square Cash App Is ‘When’, Not “If” – (Bitcoinist) Lightning Network is the powerful decentralized system that allows for sends transactions over a network of micropayment channels whereby the transfer of assets occur off-blockchain.
First US Public Pension Funds Take The Plunge on Crypto Investing – (Bloomberg) It’s happening! The beginning of institutional capital and large funds entering the crypto space and starting to gain exposure to these assets, applications, protocols, and networks.
Most Cryptocurrencies Will Die a Painful Death – (Bloomberg) Barry Ritholtz, founder of Ritholtz Wealth Management and previous chief executive and director of equity research at FusionIQ, hosted Matt Hougan who is the Bitwise global head of research. He warned, “95 percent of these will die a painful and deserved death.” Though, the survivors potentially could pose interesting investments.
Luxembourg Passes Bill to Give Blockchain Securities Legal Status – (CoinDesk) This bill adds the registration and distribution of securities using blockchain and amends a previous bill that passed in 2013, originally making it possible to legally issue “dematerialized securities,” which essentially made the technology legally identical to traditional payments.
Winklevoss Exchange Gemini Shuts Down Accounts Over Stablecoin Redemptions – (CoinDesk) Interesting headline especially last month’s commentary on stablecoins, in partciular, censorship concerns. It raises questions around the decentralization and actual use-case for them with companies like Facebook rumored to be exploring this option.
New Cryptocurrency Custodial Services Could Attract Institutional Investors – (Investing) Overview of the custody advancements that could attract institutional investors by improving the environment for security and safe-handling of cryptographic bearer instruments.
JP Morgan Creates Digital Coin for Payments – (JP Morgan) That’s right… The bank who’s chief executive officer was critical of Bitcoin, going so far as calling it a “fraud”, announced that it will offer an internal stablecoin called JPM Coin for select customers based on blockchain payment systems.
It is a new year and there is much to accomplish in the crypto space! Optimism is running high too. Despite the drawdown in prices over the past 12 months, everyone seems to believe this is the year that the large amounts of institutional money flow into the blockchain and crypto space. While for some people the big money cannot come soon enough, it has been notoriously established that many of the large capital allocators like banks, endowments, family offices, financial advisers, pensions, and other institutions are taking their time regarding crypto assets waiting for more regulatory clarity and/or to prudently allocate funds to these new strategies, initiatives, and investments. These investors are overwhelmingly positive on the blockchain space want to gain access to crypto at these prices but are limited from their varying specialties, backgrounds, and levels of knowledge regarding crypto. For many it is only the beginning of their educational crypto voyage, although there is also a couple subset groups that either do not have mandates against crypto specifically and are evaluating crypto managers like other alternative fund managers or that are knowledgeable and considering an immediate allocation. They have many different options to choose from such as investing directly into blockchain assets and protocols, futures and derivatives, pooled investment vehicles and trusts, or through an exchange traded fund (ETF) granted one is approved after going through the right channels and proper authorities. I personally think that an ETF can acquiesce and help make Bitcoin more ubiquitous than it is currently, but it will take a laborious effort to make it more transparent to the SEC ensuring that specific criteria are met in order to help drive their decision. In my opinion, having an ETF will not be all that important or helpful for its growth or development besides just letting mostly retail traders and some institutional investors put some skin in the game without actually owning any real crypto. This year has two filings set for regulatory review (Solid X/Van Eck & Bitwise) that are already facing obstacles from delayed decisions and the current government shutdown furloughing many government staffers at the SEC. Bitcoin’s blockchain and network are politically neutral and borderless and have been running continuously for over a decade and earned its reputation for being the best investable instrument for secure, low-cost transactions that also offers incredibly more throughput for the amount of value it can handle relative to modern payment processors despite its limitations on the number of transactions it can process per second.
The crypto market has a lot of projects and products, but many of them lacked two way price discovery until last year. Much of the downward pressure was added by the ability to go short with the emergence of new exchanges, markets, and products. It changed the tune of the market like a piano player being allowed to play with both hands instead of just one. It is evident that the bottom is in for bitcoin around $3200 and its recent resistance upwards suggests it will retest that level. It is possible it goes lower, but there is ample information and data available about bitcoin aside from the current prices being where they were in September 2017 to show it has an immense amount of upside for its superior qualities to holding either fiat currency or gold as well as other alternative investments. Speaking of which the amount of money invested in bitcoin and crypto assets as a total is dwarfed currently in comparison to hedge funds, private equity, real estate, commodities, and fiat currencies. In the next decade though, Bitcoin and the crypto market will find itself being equally if not more valuable than all of them. It is a gateway for people to other decentralized markets, protocols, assets, and applications like it that people find as completely novel or as appealing, cost-efficient alternatives to analog or centralized counterparts that may also appreciate and gain mainstream prominence in their own right. Once people realize how much value is possible and the money that is coming in, they will spark the next leg up and revive the poised bull market in crypto assets. The only target I have and will make publicly is for bitcoin’s price since its is what the market and I follow most closely and because it also has the longest track record. My price call is for it to be valued, conservatively, between $60,000 – $100,000 by the end of 2020 for my investment time horizon. It is presenting around a 15X to over 25X multiple opportunity from these current prices and that is why I choose to be long bitcoin.
In an effort to publish more often and help demystify the space to present more meaningful content that helps transparency as well as decision-making, I am publishing the first edition of Crypto Facts & Fantasies.
|1. From 12/31/2016 – 12/31/2018, Bitcoin’s market capitalization grew by 323% and its price saw an appreciation of 288% according to CoinMarketCap data||1. Bitcoin is dead|
|2. The Total Market Capitalizations on CoinMarketCap according to their data shows the market as a whole is up about 770% from about 2 years ago, 1,970% from 3 years ago, and 3,260% from 4 years ago||2. The crypto asset market is in a “winter”|
|3. Money around the world is already digital from the fractional reserve banking system, flee from the Gold Standard, and rise of applications for fiat peer-to-peer payments (physical paper notes are only about 8% of the total money supply), and it is slowly shifting into the form of crypto assets with decentralized blockchains||3. The money of the future will be digital|
|4. Stablecoins are either 1:1 or algorithmically collateralized to be pegged to the US dollar’s value, even though they realistically should be pegged to the Consumer Price Index (CPI) that measures the average change over time of the prices paid by urban consumers for a market basket of consumer goods and services. Many are also subject to centralization, censorship, or privacy concerns that defeat many precepts of crypto assets||4. Stablecoins offering active investment qualities or any potential investor returns|
|5. The best performing crypto asset investments and strategies will be diversified, though their largest position will likely still be in bitcoin which will remain as the dominant Store-of-Value (SoV) as well as Medium-of-Exchange (MoE) with the continuing maturation of the Lightning Network (a network of trustless micropayment channels working to solve scalability)||5. Being 100% invested in any one coin or token doesn’t make you a fanatic without protection for ignorance|
|6. You don’t really own your crypto assets unless you hold your own private keys, otherwise they are practically just IOUs from a business that may not be secure or trustworthy, insured, or that complies with your jurisdictional laws||6. Exchanges are secure places to hold crypto assets as trusted intermediaries (i.e. financially responsible)|
|7. Crypto asset investment firms like Grayscale revealed that the majority of capital inflow (56% of all new investments) during the first half of 2018 was institutional capital, and the Intercontinental Exchange (ICE, the NYSE parent company) is offering contracts for trades which will result in physically delivered Bitcoin in the regulated Bakkt Warehouse (regulated by the CFTC)||7. Institutions and legacy financial corporations will not get involved in the next generation of money and lose out on potential revenue streams|
|8. While many of the markets that provide data to CoinMarketCap may show drops in trading volume, OTC volumes that are not frequently reported on like Gemini’s desk saw over 50% year-over-year growth and many more are cropping up around the world to serve major investor interest looking for high and low-touch trading services||8. Trading volumes have dropped and institutions are concerned about possibly “catching a falling knife”|
|9. Government censorship isn’t feasible with Bitcoin and many crypto assets as well as decentralized applications because they are not routed through the legacy banking system, traditional financial networks, or 3rd parties||9. Central banks do not explore the creation of a peer-to-peer currency or token that they are able to control the ledger to ultimately|
|10. The federal government in the US has been shutdown now for three weeks over funding a 5 billion dollar dispute, while in the meantime it spends that much virtually in a less than half a day||10. The Bitcoin network experiences a shutdown after the built-in proof-of-work consensus mechanisms fail to come into an agreement|
I’m excited to see how these facts and fantasies materialize, or don’t, eventually and how they impact my own theories, methodology, and strategy. The main focus should be aimed at standardizing, scaling, and maturing the overall crypto ecosystem. Crypto as a whole still has a long way to go and every day it gains regulatory clarity, greater OTC and futures trading volumes, new traditional as well as innovative exchanges and trading venues, and more people interested in it brings it closer to becoming fully adopted. The capital markets are shifting and investor demographics are changing too while in the meantime the search for yield is intensifying. Crypto assets fundamentally provide a unique combination of low correlations and high potential returns in comparison to traditional asset classes making them uniquely attractive as a diversifying asset class for long-term investors that have potential to make a large impact on their overall portfolios. Even the smallest of allocations to gain some exposure at 0.25% up to even 10% of an investment portfolio, crypto assets’ powerful performance and historical risk-adjusted returns have shown that they are to be taken seriously as an up-and-coming asset class and infrastructure. As an investment, crypto assets offer investors exposure outside of the traditional financial system as an alternative that may actually turn out to be more dangerous NOT to have in your portfolio. If you are in the U.S. geographic area, please let me know if you would like to consult my opinion on a specific investment or portfolio, know more about my proprietary ratings system (patent pending), or are interested in the systemic bliss™ crypto index. Additionally, if you’re in Chicago feel free to connect with me and drop me a message if you’d like to meet for some coffee and chat about crypto.
Hope you’re having a happy new year!
To the moon,
Disclaimer: information contained herein is provided without considering your personal circumstances, therefore should not be construed as financial advice, investment recommendation or an offer of, or solicitation for, any transactions in crypto assets.
10 years ago today, Hal Finney tweeted “Running bitcoin” and stated publicly he was instrumental in Bitcoin. He was known to have worked for PGP Corporation as the second developer hired after Phil Zimmermann and more famously is validated as the first bitcoin recipient. Satoshi Nakamoto (the anonymous founder/s of Bitcoin) sent the initial transaction to Hal Finney, and the longtime cryptographer and cypherpunk decided to share it with the world! He enthusiastically worked and contributed to the project that was the Bitcoin network despite his own health troubles. ALS completely paralized Hal and he passed away August 24, 2014. Hal is a legend and we would like to remember and honor him for his work and dedication to Bitcoin and crypto in general.
(Click here to donate to ALS Association National Office and help in the fight to cure Lou Gehrig’s Disease)
George Washington back in 1776 used encryption, and it was revolutionary. Now, it is a standard issue tool to combat cyber attacks and for compliance. It has been claimed by many voices within the crypto and digital asset community that, “It is still early days!” While these could not be truer words, the window of opportunity for that phrase’s use is closing. The rate at which it closes is uncertain. For now though, there are plenty of reasons that Bitcoin despite being a decade old resembles the Internet much in its nascence. The World Wide Web was birthed out the protocol wars over the Internet that played out in the mid-1980’s followed by the browser wars in the 1990’s. The feverish progress of that time also shifted the PC Era into Web 1.0 where the focus was primarily on gaining users “on the net” and connecting them to information and documents via hypertext links. Bitcoin is experiencing a similar progression as many altcoins have surfaced over the years to challenge it as the leading crypto asset. As long as bitcoin remains “The King” atop of the crypto market capitalization ranks, it will likely be triumphant and be chosen as the standard or money protocol of the emerging Internet of Value. It needs to be leader in order for crypto’s success because people need to trust that it will be there tomorrow as well as into the foreseeable future. Essentially, the past few years in the crypto asset market has been the face off between various blockchain standards and protocols. If things continue in this direction, let’s just say that Bitcoin will have its own Web 1.0 moment in Web 3.0 with a consolidation of standard networks and protocols that power the applications of Web 4.0. All it takes for widespread mainstream use is further development of the ecosystem for users to simply interact with the decentralized payment network. Allowing them to connect value over the Internet via wallets and private keys, enabling users to transact securely and trace value over a public ledger powered by the blockchain technology as easily as it is to use email today. It took 18 years to shake out the ideas and protocols that are underlying and solidify the Internet we all use now. I believe what we are currently witnessing with Bitcoin closely mirrors the rise of the Internet, specifically the World Wide Web.
In the 1990’s, nobody knew what Web 1.0 was and the term was not applied only until it bit the dust. Web 1.0 is practically synonymous with the World Wide Web as it meant connecting to the network via modems that forbid landline usage elsewhere in a household because it used dial-up to link users to static websites and loads of information. The problem at this stage was the lack of interactive content due to the infrastructure not quite being ready for it. As connectivity and speeds over the Internet rose with emergence and rising popularity of wireless fidelity (WiFi), it created the foundation that was the basis of the massive rise of Web 2.0. As users gained access to the network, it paved the way for interactive content and applications to be built on top of the network. Global sharing of information surged with the explosion of social media through Google, Myspace, Flikr, Facebook, YouTube, LinkedIn and more like-minded communities where anyone could realistically Read-Write-Publish. It thrived as users were generating content and utilizing new platforms to voice their views, opinions, research, and more. The latest iteration of the Internet, Web 3.0, is the antithesis of Web 2.0 and seeks to balance out the power structures of the Internet. The main reason it differs from 2.0 is because it’s decentralized. It comes as a solution to the network becoming monopolized and privatized by companies like Amazon, Facebook, Google, Netflix, Uber, and AirBnB. Instead, its focus is primarily on democratizing the network to share value across multiple profit centers over open source and cryptographically secured networks accessible to anyone. Besides concentrating power and data in the hands of huge Internet behemoths with questionable motives, privacy will be returned to the rightful owners through a more fair and transparent architecture. Decentralization was the idea behind much of Web 2.0, but the tools and technologies were not available for it to materialize yet. Web 3.0 offers dramatically improved uninterrupted service, permission-less networks, interoperability, reduction in hacks and data breaches, and greater ownership of data due to the lack of a central point of control.
This next generation of the Internet encompasses the otherwise missing piece of the above jigsaw puzzle (originally authored by Pantera Capital), which shows Bitcoin filling the void as it has spawned an Internet of Value around itself of other protocols that can potentially become parts of the standard on their own. Some suggestions have already been made for smart contracts, storage and access, asset exchange, settlements, and document notarization. It should be kept in mind that this has not gone unnoticed by major technology companies like Microsoft and Oracle who originally wanted a private internet and their own version with protocol standards, respectively. Sergey Brin, co-founder of Google, even noted this summer that zk-SNARKs (zero-knowledge proofs for private transactions) are so new that it is almost incomprehensible that Zcash had successfully deployed them in a real-life application so fast. The project’s founder even expressed how most people do not understand that they compressed the normal timeline by several years. It was driven by strong crypto economics. The market literally helped fund the creation of another revolutionary technology. For purchasing, using, and holding their assets, users as early owners of their portion of the network gained value as they saw the addition of new users make it more valuable. Bitcoin and its original blockchain are secured by the largest computer network in the world today, with more processing power than all supercomputers combined. By now it is clear with hindsight, standards and protocols are inevitable. Day-by-day we are inching closer for Bitcoin (or possibly another blockchain network) becoming embraced by governments, or be implemented commercially on a global scale using some form of blockchain to replace the SWIFT network, or serve as the back-end infrastructure for banking network settlements. A big headline a couple of days ago was the announcement of a Singapore government owned venture firm called Vertex Ventures investing in Binance, the crypto asset exchange platform, to launch a crypto-to-fiat exchange by the end of 2018. The goal of their investment is to build-out gateways, tools that make it easier for people to participate in the crypto economy and ecosystem. It bodes well for the emerging asset class and hopefully sets a positive precedent that is assumed by many others to follow. Traditional finance is catching up with trends albeit at a pace that is cautious as to not seem to act irresponsibly, especially given light to the past behaviors that have gotten them in hot water in the public’s perception.
Since the Web 1.0 era of the Internet, the open outcry on trading floors around the world slowly became quieter and quieter until they fundamentally became extinct with some rare exceptions due to the business becoming digital with electronic trading. It has taken its time for our traditional markets to shift from analog to digital too. Even today, bonds are still traded over the phone or for the more sophisticated trader by Bloomberg chat or a similar medium. As a millennial that loves a good mobile application with solid services and exceptional user experience, it seems like only a matter of time before all of these markets are easily maneuvered through a neat app or platform that connects and synthesizes them in one place where users can navigate them all easily by the push of the button. Now it appears that many individuals are getting out of public markets either out of fear or as a protest to the outdated and fragmented legacy financial system. Many people between the ages of 18 and 35 years old use applications for simple payments and hold not an insignificant amount of crypto and digital assets. Money itself has largely become digital around the world (92% of the supply is not in paper notes) and will only continue to do so if the course we are on persists. The idea of digital bonds, equities, funds, trusts, and shares in other private companies and startups is already being spurred by technology companies like Carta and AngelList. The movers and shakers in the Web 3.0 movement will be the ones more interested in leading the charge to “digitize the world” rather than the silliness of creating a token and blockchain for everything simply to “tokenize the world.” This is playing itself out now in the crypto market as the cream will eventually rise to the top in the next 3 to 5 years at least. If the world is digitized, there will be an immensely rich amount of data to drive risk management, decision-making, machine learning, and artificial intelligence. Currently, the crypto market is saturated with many projects and use cases for tokens and blockchains that are not viable or suitable for institutional investment. Sparking the interest of regulators like the SEC and CFTC, who are looking to crackdown on the bad actors, shady practices, and ponzi-scheme projects in the market to uphold proper protections for retail and institutional investors alike. This is good for the growth and maturation of the emerging asset class according to many insiders within the space.
“Smart money,” as it is called among in some circles of investors, is known usually to get in on investments before the institutional and mainstream herds enter the trade. As a result, they benefit greatly usually from having the intelligence to see the opportunity and to notice the inefficiencies of the other two groups aside from taking the initial risk. In recent news the University of North Carolina, Dartmouth College, Harvard, MIT, Stanford, and Yale endowments have all announced they have placed significant amounts of money on the asset class by making investments directly or into at least one cryptocurrency fund. This exceptional report indicates the growing acceptance among serious institutional investors with a reputation for outsized returns, especially in alternative investments. It is a sign that the asset class is not going anywhere and that it might be a good idea to go long. From an investing standpoint, the levels at which many of these assets are trading at are almost too complex to rationalize from a retail perspective making price calls basically all personal opinions in the current market structure. The best explanation of the price of bitcoin is that it’s a proxy for one portion of the network’s value and/or how desirable it might be relative to some future value or date. An investment in bitcoin if you are long-only, keeps it simple enough that it boils down into a binary bet of whether or not it will succeed in growing to become massively adopted and put into mainstream use. As an alternative to fiat currency, bitcoin has a known supply without borders or a central group controlling it. Whereas the US Dollar is also clearly a digital currency with an unlimited and unknown supply, border restrictions, and controlled by a central banking cabal. Bitcoin’s inflation schedule is set for the next 100 years and known to all parties. The US Dollar’s inflation schedule is antiquated, political, and uncertain even 1 year out making it opaque. Let alone, the reality that the FOMC (Federal Open Market Committee) is allowed to manipulate the schedule monthly. Donning both the best technology and best security, it seems only logical that it is the best investment due to the fact governments cannot regulate or kill it. The US Dollar is the first digital currency the world interacted with, and Bitcoin is just an improved version built for a digital world. The value of Bitcoin like land fluctuates in the short term, and over long periods of time due to scarcity rises in value. Just like the old investing chestnut says, “Buy land — they’re not making any more!” The same principles apply to Bitcoin virtually as they’re not minting more than 21 million bitcoins.
If Bitcoin is growing in the same fashion as the penetration of the Internet as compared from 1994 to 2016, it still has a long way to go. Referring to the chart above, given that Coinbase had 13.3 million accounts in November 2017 and as an exchange roughly made up only 5% of the bitcoin trade as a percentage, implying that there are a total of 266 million crypto exchange accounts and after assuming that there are 6 accounts per household; it can be estimated that the total penetration of bitcoin and/or other crypto assets as a percentage of internet households is 1.29% and 0.60% as a percentage of the total world population using the latest figures from 2016. Now in 2018, Bitcoin and/or other crypto asset adoption in the United States could possibly stand as high as 8-9%! By examining the growth trends in the Internet Penetration Comparison chart above, the trend of the network sizes with respect to time takes after the netoid function as defined by Robert Metcalfe (co-inventor of Ethernet, founder of 3Com, and formulator of Metcalfe’s Law) in 2013. Principally, its slope (the adoption rate) is proportional to the product of the fraction of the population already adopted multiplied by the fraction awaiting adoption. It peaks when adoption is 50 percent (global population). Both lines of the chart resemble the same S-curve shape as the sigmoid. Metcalfe used Facebook’s data from 2003 to 2013 to show a good fit for the netoid function, and then Xing-Zhou Zhang, Jing-Jie Lui, and Zhi-Wei Xu used the actual data of Tencent (China’s largest social network company) and Facebook to fit the netoid function. Their work displayed the growth trends of Monthly Active Users (MAUs) of Facebook and Tencent over the past decade can be modeled by the netoid functions seen below.
Metcalfe’s law states that the value of a telecommunications network is proportional to the square of the connected users of the system. It postulates that the utility of a network is derived from the number of connections between nodes. Therefore, a large network with many connections and users is more useful than a small network. This law carried over to applications with the of globalization of the Internet, and its original intent was to describe the Ethernet purchases and connections. This law provides a basis for the theory of network effects. Take for example, telephones, they are highly useful and valuable to people as long as there is more than one. A single telephone would be worthless technology if there were only one in existence since it has no utility. Thus, if there is more than one telephone it can connect to then the value of that network of telephones rises as it becomes more useful by allowing more people to connect to one another. Bitcoin is like the telephone providing a utility and as technology lends itself to a winner-take-all competition against other crypto assets seeking network dominance. The blockchain and crypto asset wars have begun and are engaging in intense competition for market share. The winner will be whoever gains a compelling lead and sees their supremacy snowball as network effects allow it to consolidate their hold over the market. Bitcoin is in the obvious lead as the front-runner for a crypto asset monopoly with an impressive ten year history as well as being the largest, most valuable and secure crypto asset network.
Facebook in its early days experienced network effects as they gained new colleges and universities. As a result, its valuation grew almost exponentially. Similarly to Bitcoin and new crypto assets being listed on new exchanges, they also typically see rises in their values from the addition of new potential users. It begs the question, will Bitcoin and other crypto assets over the long-term have network effects that follow suit? If it does, the highs that were posted back in December 2017 are likely not even half as much as of the value we could potentially see it hit in the years to come. The peak of the crypto market cap was $800 billion last year, a far cry from the dot-com bubble peak of $3 trillion. Putting us not too far out from the hockey stick shaped part of curve. The true madness of crowds has yet to take place, in my opinion, and it will not happen until Bitcoin and crypto assets are even more globally ubiquitous. For now, I think we need to believe it will only succeed because the performance as an investment over the past ten years has been so strong. If Bitcoin and crypto assets are not considered by investment professionals, it should be a violation of their fiduciary duty. They need to understand the concept that as investors in these crypto networks they are able to invest directly into the protocol or infrastructure layer underlying new and future applications of Web 3.0. These crypto assets are the base for these decentralized applications (“dApps“), which are being built on top of their blockchains. The crypto market’s constant run-time and other investment-worthy qualities, not to mention, the growing user bases have proven they are not only possible but inevitable as the future of digital money on the Internet. The rise of Bitcoin and the digital revolution it is inspiring makes it a noteworthy candidate for alternative asset investing after exhibiting cues and characteristics of the early Internet, social media networks, and its maturation as an asset class with increasing liquidity, accessibility, and qualified custodian options. The best use cases for payments are the ones best for sending both $5 or $5 million simply and securely without breakage. Remarkably, last week someone processed $194 million on the Bitcoin network moving funds for less than a $0.10 fee! By design Bitcoin is deflationary, contrary to the non-commodity money experiment that has been running for about 50 years now and having no real value behind the greenback except belief has not gone great. Take back control and trade your belief for code, it’s more transparent. If notable investors and wealthy individuals keep pouring in and back the right horse, they will own a piece of the next Internet or Facebook, except it will be even more valuable!
Mark Twain famously said, “History doesn’t repeat itself, but it does rhyme.”
IMAGE: CNBC (George Washington)