Bitcoin Forecasts Are Still Bollocks

In May 2018, I posted an article critical of Cryptocurrency forecasters, pointing out that most people voicing an optimistic view of future price moves had a conflict of interest. After nearly a year of hitting new lows each week, Bitcoin, and Cryptocurrencies at large, have rallied for a week running. As has been a trend in this industry, the optimists are out in force again.

However, Bitcoin forecasts are still Bollocks. As far as technology and use cases are concerned, the Blockchain sector has gone way beyond Bitcoin, but for some reason, this failed “digital currency” is still, rather absurdly, seen as the bellwether of the sector. The Bitcoin Foundation is yet to do anything substantial to take the token close to being what Satoshi Nakamoto envisioned it to be. Transaction times are still high and network fees are volatile. In fact, other tokens such as Ether, EOS, and Steem now have better fundamentals. Data from www.stateofthedapps.com suggests that EOS has surpassed Ether as a decentralized platform, with EOS dapps having more users than those deployed on Ethereum. Even steem, a cryptocurrency that incentivizes social media addiction seems to be more actively used than Ethereum. Obviously, the popularity of Bitcoin and Ether still stem from all the publicity they gained during the dazzling price rise in late 2017.

Not that there haven’t been any moves on fundamentals. Upbit, a South Korean cryptocurrency exchange has obtained approvals to offer trading services in South Korea and Singapore, and will soon have the infrastructure for traders to capitalize their trading accounts from real-world banks. Similar approvals in Europe are likely in early 2019. In the United states, the Securities and Exchange Commission is warming to the idea of cryptocurrencies, with Commissioner Hester Pierce being quite vocal of her views supporting the asset class. Though these will provide the necessary tailwinds for Cryptocurrencies as speculative assets, they completely exclude the use cases that crypto-entrepreneurs are working on. The marketplace for speculation is expanding rapidly, with a new decentralised exchange opening every week, but liquidity is thin as in most jurisdictions, you can’t fund your trading account from a bank.

So the next time someone buttonholes you to rave about how the crypto market has “bottomed” and is now heading “to the moon”, smile thoughtfully and nod, perhaps make acknowledging grunts to be polite knowing full well that it’s all a load of bollocks.

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Cryptocurrencies: Structural Weaknesses Persist

Cryptocurrencies have been rather placid for the past month or so, with prices on a general downward trend. The usual Crypto-bulls are out talking about buying opportunities, but no one seems to be listening. Google Trends data suggests a waning interest in the asset class in general, with searches for Bitcoin and Ethereum dropping substantially.

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Google Trends – Bitcoin (March 2017-March 2018)

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Google Trends – Ethereum (March 2017 to March 2018)

Of course – a month is a lifetime in the crypto-world, and the Crypto-bulls are seeing the emergence of “value investors” who speak of picking up coins at a discount. Despite the 70 per cent drop in the cardinal cryptocurrencies, it would be foolish to assume that the market has “bottomed out”. Bitcoin in particular, has plunged over 90 per cent in the past, and even on a slow-dump, the market may have a way to drop yet. Furthermore, many of the structural problems in terms of slow network speeds and high settlement times persist. Regulatory issues continue, with the latest blow coming from Social Media platforms having banned advertisements for ICOs.

Scalability is where Cryptocurrencies lag. While Bitcoin and Ethereum were reasonably efficient in the time when there were just a handful of computer geeks sploshing around in their utopian currency, both networks got seriously congested when the plebs piled in. Ethereum fell prey to an absurd calamity when “Cryptokitties” – an online game where users bred virtual kittens – caused the network to slow so much that a simple transfer of Ether took over 24 hours. The massive price fluctuations and slow transaction times put paid to any claims that either was a “currency”.

Still, after the brilliant rise and the crushing plunge, murmurs persist. What could be next?

It seems likely that crypto platforms such as Ethereum and EOS may rise on fundamental factors as acceptance widens. With more apps being built on these platforms and their tokens being used as “fuel”, demand should spur an increase in value. However, unlike Bitcoin supply of both these tokens is open-ended, and the Sanhedrinesque “governing councils” or watchamacallem will be pressed to increase supply to keep the platforms viable for users to the disadvantage of hoarders or speculators.

A black-swan event of course will be an open-source solution to the Scalability problem, which would be a major boost to the ecosystem. An adverse Black Swan event would be an alternative technology such as what Hashgraph claims to be, that could render Blockchain obsolete. As with all Black Swans, none of this seems imminent, as there are no plausible solutions to Scalability at this point, and all Blockchain alternatives have serious weaknesses of their own.

In all, what we have is Limbo. Speculators looking to stay exposed to the asset class will do well to hold liquid tokens such as Bitcoin, Ether, EOS, Monero, Litecoin, and Dash. Longer term Cryptoptimists should focus on Initial Coin Offerings (“ICOs”) backed by strong teams with a viable product.

Bitcoin: Tread Carefully

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Everybody wants Bitcoin Bragging Rights today. It appears that with the Currency passing USD 10,000 and the media being inundated with tales of people who have made fortunes because they bought bitcoins a few years ago, imaginations have been fired up. Be warned – much of the good news today is being put out by people who have a conflict of interest because they themselves own Bitcoin and other cryptocurrencies.

Make no mistake – the risks are very high. Bitcoin in itself suffers from a number of structural problems that do not make it an ideal asset. Though it is the cardinal cryptocurrency today and forms the basis of most trading in the asset class, these problems will hamper the market in the days to come.

First – Settlement times. It’s easy to be optimistic in light of the recent news of CBOE and CME offering Bitcoin Futures – but settlement times running into minutes or hours based on network traffic make this a cumbersome asset for the pricing algorithms that banks and hedge funds use. Unless the Bitcoin Foundation pushes through a MAJOR update to fix this, the currency is unlikely to gain much traction in the highly fluid and algo-driven futures market.

Second – Market cap. Even though much is being said about Bitcoin’s market cap exceeding well-known listed companies (USD 207 billion as of writing), it is still minuscule by standards of a ‘global’ currency. A leveraged options trader with a USD 1 billion book can easily trigger a major swing one way or the other. If banks and hedge funds take up the CBOE/CME gauntlet and allocate risk to this asset class, crypto traders will have to redefine ‘whale’.

So what is one to do?

Forget easy money. Do not tank your retirement fund and invest in bitcoin. If you do not have the stomach to see your portfolio down by 20 per cent when you return from a toilet break, Bitcoin – as it is today is NOT for you.

Once you get through the hype, there are other opportunities in the crypto space that will yield profits over the medium and long term. Initial Coin Offerings (ICOs) are issues of cryptocurrencies by businesses looking to raise funding from the market. Most of these today occur via Ether, and yield tokens compatible with the ERC20 standard. This makes these tokens easier to trade via smart contracts-based exchanges such as EtherDelta and HitBTC.

Another way to profit from the asset class as a whole, is to invest in Crypto-funds. The past few months have seen the launch of a variety of such funds that are both actively managed (TaaS and Smart IFT) and passively managed (Crypto20). For those looking for long-term exposure to the asset class, this is a great way to get some risk on.

For everybody out there who is mesmerised by the price graphs on TV and is looking to dive in, I would remind you of the old Wall Street adage:

“Bulls make money, Bears make money, Hogs get slaughtered.”

Disclosure: I have exposure to Bitcoin, Ether, Smart IFT and Crypto20.

Bitcoin – Interesting Times Ahead

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During a Media Interview On October 31, Chicago Mercantile Exchange (“CME”) Chairman Terry Duffy stated that CME was planning to offer trade in Bitcoin Futures pending regulatory approval. This news sparked a knee-jerk spurt in Bitcoin prices, pushing the cryptocurrency well past the USD 6,000 mark.

While the dust is sure to settle as it often does after such a news-based movement, this event is of tremendous significance for the market in the long term.

For many investors, a key reason to avoid cryptocurrencies was that the market is “not mature”. Indeed, most of the platforms for trading Bitcoin are nowhere near “mainstream” asset trading platforms in terms of stability, compliance, and reliability. This is certain to change soon. With the CME Group getting involved, it is likely that exchanges such as Poloniex, Kraken, and Bitfinex will be targeted for acquisition by financial institutions seeking to add cryptocurrency platforms to their portfolios. Companies like DCorp – an ICO-funded venture capital fund that is building a cryptocurrency derivatives platform; and Open ANX – an aspiring crypto-fiat bridge, are likely to benefit from interfaces with the fiat system. These platforms will mature rapidly, and will race to comply with accepted KYC/AML and Cybersecurity standards.

I expect a substantial impact on Coin Prices.  Cryptocurrencies have thus far been a fertile hunting ground for bold traders – incredible fortunes have been made by people playing volatility – where asset prices swing by 20-30 per cent in response to news. With large players like the CME getting involved, their billion-dollar supercomputers (“algos”) will play against each other to capitalize on even minor moves, making massive swings a thing of the past. Along with the algos, these players also bring liquidity, which will further decrease volatility. The biggest impact is likely to be on Bitcoin, which for most, is the US Dollar of the Cryptocurrency world. Across exchanges, Bitcoin is most common currency that Cryptocurrency pairs are quoted in. Further, by virtue of the finite supply built into its code, Bitcoin prices are likely to rise further as the new players build up positions.

Ether will see a substantial impact too, as the ERC20 standard pioneered by Ethereum improves fungibility between tokens. Furthermore, the vast majority of tokens in circulation today are ERC20 compatible, making Ether a choice holding, and maybe even a ‘Safe Haven’ second to Bitcoin.

Ultimately, as a result of increased touch-points with the fiat currencies, Cryptocurrencies will get closely integrated with the global economy. This will increase the risk of contagion from mainstream economic and political events.

As a secondary consequence, the ICO market will expand rapidly. During 2017, businesses raised more money via ICOs than via Venture Capital. Given progressive legislation in Lichtenstein, Switzerland, and Singapore, Crypto funds, Crypto Banks, and Crypto Investment Banks will become high growth sectors. Interesting times ahead!

ICOs: Venture Capital for Mere Mortals

womanmoney-800pxAn Initial Coin Offering (“ICO”) is a method by which entrepreneurs raise money via cryptocurrencies. In the typical ICO, a company floats a proprietary digital token on a network such as Ethereum and accepts Bitcoin, Ether, or another cryptocurrency in exchange. These new tokens represent either shareholding or participatory privileges in the fledgling business. Ethereum has been a game changer for such enterprises, having served as a platform for most issuances.

These ICOs represent the beginning of a fundamental shift in how high-technology businesses are funded. In the past four decades, angel investors and venture capitalists got behind great ideas and funded them. Private equity funds then took up the gauntlet in second stage funding and ran to the IPOs. By the time these companies listed on stock exchanges and shares made their way into the hands of individual investors, the venture capitalists and the private equity funds had locked in massive returns on capital. Few individual investors could hope to match the kind of profits that early investors generated. Well, one could certainly invest in a Private Equity fund, but in most regulatory jurisdictions, you would need about a million dollars to join.

The game is changing. Today, lay investors with a rudimentary understanding of how Cryptocurrencies work have the opportunity to make early-stage investments with as little as USD 100. The ICO revolution puts early-stage investing and its profit opportunities within the reach of ordinary investors. For instance USD 1,000 invested at Ethereum’s ICO in 2015 would today be worth USD 230,000!

There are risks though. Venture capitalists are high risk takers, and are comfortable with the possibility that their entire investment in a particular company may be lost. Even Private Equity funds, though somewhat more conservative, play similar odds. For an individual investor with a focus on capital preservation, this may be a poor thesis on which to build one’s retirement portfolio, but this does offer a credible and low-cost opportunity to add some high-reward risk to a conservative portfolio.

The fraud risks are immense. Information on internet directories suggests that the time of writing, there are over 100 companies at various stages of the ICO process. Naturally, performing adequate due diligence on these is a huge challenge. The only resources that investors have are the LinkedIn profiles of the principals of these companies and a webpage that contains information about the supposed product. As the frenzy kicks up, it is entirely possible that fraudsters conduct an ICO and divert the proceeds. The decentralized nature of Blockchain enterprises will make such fraud impossible to investigate or prosecute with the current state of Law, as investigative agencies lack jurisdiction across international borders.

Regulatory risks abound too. Though multiple governments are warming to cryptocurrencies, these are largely considered to be a fad among technology enthusiasts. As interfaces with the traditional financial systems increase and cryptocurrencies become more influential in moving markets, the possibility of stronger regulation increases, and “investments” in these tokens may be challenging to liquidate.

The biggest risk though, is that most Blockchain startups are based on arcane concepts that are beyond the understanding of the average person. While these systems and platforms represent engineering genius, as a utility, they are irrelevant to 90 per cent of the world’s population. Furthermore, many of these projects are conceptualized and executed by young and passionate entrepreneurs. While their technical skills and intentions are beyond doubt, it remains to be seen if their business skills are up to the mark in riding the wave of disruption that they are about to unleash. Browsing through these ICO Prospectuses (or white papers as they’re called), it’s obvious that most of them are aimed at solving fundamental problems related to service delivery, financial inclusion, and even healthcare – however, whether these platforms will actually make the change that they envision is up for debate.

Cryptocurrencies, as an asset class, have delivered outstanding returns in what seems to be blowing into a bubble. Thankfully, newer digital assets such as Ether, Gnosis and Aeternity tokens have a functional aspect that will add fundamental value to them as time passes. For instance, Bitcoin has notional value like paper money, and there is a possibility that the currency will collapse once mining it becomes unprofitable. Conversely, Ether is the sole mode of payment of transaction fees for a growing number of applications on Ethereum. As these apps increase in number and grow in user base, the fundamental value of Ether will increase.

In conclusion, if the idea of owning a piece of a high-potential technology business is appealing to you, looking up ICOs may be worth your time.

Start your Cryptocurrency journey by buying Bitcoin via Unocoin

Cryptocurrency Classism is Here

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Cryptocurrency is becoming classist.

This is particularly dismaying, because if anything, cryptocurrency networks have the potential to drive financial inclusion on an unprecedented scale. Ethereum-based ICOs can bring early-stage investing to ordinary individuals, giving them the opportunity to add some risk to their portfolios at a reasonable price. However, cabals of insiders are forming.

In June 2017, cofound.it, billed as a Blockchain venture capital fund, had its ICO. This ICO was purchased entirely by a group of insiders who had the cofound.it “Priority Pass”. To get on this priority list, you need to have a minimum of 5000 CFI tokens in your wallet. This token is currently priced at USD 0.25, meaning that you need a deposit of about USD 1,250 with cofound.it to participate. Cofound.it’s first partner ICO – Santiment – is allotting a portion of its tokens exclusively to CFI Priority Pass holders. Looking at Santiment’s white paper, this is particularly worrying, as Santiment aims to be the leading provider of Cryptocurrency market information. If this “vision” materializes, the Cryptocurrency market will mimic the uneven playing field that the global capital markets have become. It is highly possible that these Santiment “insiders” will have preferential access to both information and platforms and will possibly drive the agenda of what Santiment pushes to the public.

So where are we headed with this? This trend is not going to slow. These cabals of insiders will continue to grow stronger, and will extend their influence in the cryptocurrency sphere. Services like Santiment will have the power to make or break any upcoming ICO. In addition, as algorithmic trading systems become increasingly active on cryptocurrency markets, data cues will drive broad-based market movements. In the worst-case scenario, the entire cryptocurrency industry will become a casino, where optimistic lay investors will hope to make a fortune, while a bunch of insiders will laugh all the way to the bank. In the end, we will be left with the cesspool of collusion, corruption, and deceit that today’s capital markets have become.

The Cryptocurrency Party is Just Beginning

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As of writing, Bitcoin is trading at USD 2,630, having surged from around USD 800 since January 2017. In addition to Bitcoin, other Cryptocurrencies have seen a surge too. Ether, another “digital token” that is intended as a medium for paying transaction fees on the Ethereum computing platform has risen in value from USD 10 to about USD 300 in the same time period. Other Cryptocurrencies such as Ripplecoin, Zcash, and Dash have also seen an explosion in value.

What are people saying?

Public opinion towards Cryptocurrencies has always been divided. However, with the new surge in the market, opinions have become even more polarized. Sceptics hinge on Bitcoin’s first impression as being a black-market currency and call this a bubble, while proponents contend that this is a global currency that is just going mainstream and can indeed go way higher.

So what is actually happening?

A number of market observers are right in noting that Cryptocurrencies are exhibiting bubble-like behavior. For Bitcoin, which isn’t backed by a central bank or doesn’t have a market regulator, this is particularly true, as its value is purely notional. Ether, a digital token that is incorrectly regarded as a Cryptocurrency, has real-world utility, but is still in an early experimental state that does not justify its current market price. In addition, the potential supply of Ether is infinite, unlike the Bitcoin – which has a finite supply hard-coded into its design. Long story short, the critics are right – we ARE in an ebullient Cryptocurrency bubble, and a painful correction is certain – but not imminent.

Why is this happening?

Skepticism notwithstanding, Cryptocurrencies are taking baby steps to going mainstream. In many countries, authorities are actually studying Cryptocurrencies, and exploring ways to regulate them. Even in notoriously conservative regulatory jurisdictions like India, sites like Unocoin are permitting people to buy Bitcoins for cash. Zebpay, another platform, allows you to make small payments using the currency. Each passing day, Bitcoin in particular inches close to mass acceptance and has thousands of new users signing up.

Value as a currency aside, the Blockchain technology that cryptocurrenices are based on has tremendous potential. Ethereum, as a technology platform, has just begun to explore this. A number of Ethereum projects such as the DAO, Akasha, and Gnosis have received an enthusiastic response from the market and have been successful in raising millions of dollars in funding. Today, hundreds of companies, in technology, banking, media, communication, and logistics are looking at ways that Blockchain technology can be leveraged for profit. When these efforts mature, platforms like Ethereum will achieve their true potential, as their Software as a Service (“SaaS”) offering will give users access to obscene computing power at a minuscule cost.

The most prominent factor in this bubble right now, is the Cryptocurrency casino. The utility of the Blockchain and the growing acceptance of Bitcoin do not entirely justify the surge in Cryptocurrency prices. However, millions of people around the world have discovered the speculative opportunities in Cryptocurrencies and have begun to trade them for profit. In fact, all Cryptocurrency trade today may be attributed to speculative trading, as the amount of Cryptocurrency used for actual transactions is microscopic. This is not unprecedented. According to the Bank for International Settlements, global trade in foreign exchange (“FX”) was about USD 5.4 trillion per day in April 2016. Incidentally, the total value of the world’s money – currency and bank deposits – is about USD 81 trillion (Source – CIA World Factbook – 2015). To put this in perspective, money equal to all the notes, coins, and bank deposits in the world changes hands every 15 days on the world’s FX exchanges. This entire market is speculative – run largely by multi-million dollar computers playing against each other. In comparison, the cryptocurrency market, valued at around USD 60 billion, is negligible.

The Cryptocurrency market is gaining in speculative appeal, but this journey is just beginning.

The Japan Factor

Japan is the most mature market for FX speculators in the world. Ordinary Japanese citizens generate a trading volume of hundreds of billions of dollars each week. Starting April 2017, Japanese regulations have made it easier for their citizens to trade Cryptocurrencies, especially Bitcoin, and as the chart below shows, a large part of Cryptocurrency trading today is in Yen. Bitcoin, with its massive swings, is the perfect currency for a bold FX trader. In fact, the mainstreaming of Bitcoin will accelerate now that Governments are taking notice.

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The party is just beginning

The number of people trading Cryptocurrencies is increasing. Global events that harm public faith in institutions are accelerating acceptance by lay people. Major moves in cryptocurrencies can be seen after events such as Brexit; the demonetization of high-denomination notes in India; and anti-speculation measures by Chinese regulators. An increasing number of freelancers are accepting Bitcoin for international payments to avoid expensive bank fees. With each passing day, people are finding new use for Blockchain technology and are solving complex technological problems with platforms such as Ethereum.

The market for speculation is growing rapidly, as a number of highly secure and versatile trading exchanges are offering investors the option of trading Cryptocurrencies against regular currencies. These exchanges form strong and influential interfaces with the mainstream financial system. Indeed, a number of derivatives houses are already writing “exotics” pegged to cryptocurrenices. As such activity grows, Cryptocurrencies will attract more investors and the resultant demand will drive prices higher.

The entire market will see expansion. Unlike conventional currencies, Cryptocurrenices are freely traded against each other. This creates arbitrage opportunities between pairs and exchanges. All major Cryptocurrency exchanges permit algorithmic trading by end users. Large scale exploitation of arbitrage opportunities will cause prices to even out in the long term. The wide swings seen in recent years will become increasingly uncommon, and as platforms like Ethereum increase their operational utility, the trends in individual currencies and tokens will lean towards fundamentals.

There WILL be a crash

From Tulip Mania to the Dotcom bust, rabid speculation has always led to devastating crashes. This is likely to happen even with cryptocurrencies. Thanks to platforms like Ethereum, there is now a low barrier of entry to Cryptocurrencies. Today a lay user with minimal experience with solidity – Ethereum’s programming language – can institute his own currency and even make it freely tradeable with minimal effort. Projects like DAO and Gnosis are large-scale examples of this. Additionally, rapid advances in computing, networking, and storage technology will uncover deficiencies in existing cryptocurrencies, leading people to newer products and causing obsolescence of older ones. Many people who trade wildly will be completely wiped out.

And then a resurgence

However, like the Dotcom bust preceded a fundamentally sound expansion in the Hardware, Internet, and Mobile sectors, the fundamental appeal of Blockchain technology WILL drive resurgence in the industry and bring about mainstream businesses in Blockchain. Indeed – a Blockchain-based ERP system would be impossible to manipulate in order to deceive investors, regulators, or tax collectors. Corporate entities structured in “smart contracts” on platforms such as Ethereum could do away with Audit and Compliance functions entirely – saving massive amounts of money that could be better applied to innovation or worker welfare. Cryptocurrencies and Blockchain are here to stay. Will we one day have a global economy where money and services flow freely across international borders free from protectionist measures and oppressive taxation? Blockchain and Cryptocurrencies can deliver – but today, we can merely dream.