Weekly Crypto – Winter

To everything there is a season, and a time for every purpose under heaven: A time to be born, and a time to die; a time to sow and a time to reap; a time to kill and a time to heal, a time to break down and a time to build… – Ecclesiastes 3:1-3

The last week in crypto currencies reduced the market capitalization by $41.5 billion, with most crypto indices falling 25%. BTC touched $4035 off from the 2018 high of $19,843.11, while ETC fell to $119.402 from $1,420.86. Price action rather than news again dominated the space. Understanding the drivers for the retracement in price will sow the seeds for knowing the opportunity to rally again. The reasons for any price drop in any market are numerous – more sellers than buyers – but here are the standard three:

1) Technical – the break of $6000 and $5800 last week led to a Fibonacci retracement to $4200 in BTC. 

2) News - Bakkt delays launch. Bakkt delayed the launch of their Bitcoin futures trading platform until January 24, 2019. The delay came just 1 day after the price of Bitcoin and the cryptocurrency market as a whole began to plummet. Of course, there is also the ongoing BTC Cash SV vs. ABC hashwar, the ongoing SEC/CFTC investigations, and the exchange issues that populate headlines and add to the gloom.  

3) Leverage – The unwind of ETH ICO money continues to be a significant driver of selling as the platform allowed fractional money growth and that unwinds with the price drop. While these three factors explain much of the reasoning for selling digital assets there are two other stories that matter – the correlation of the crypto market to all other risky assets – whether that is oil which fell significantly or equities where the tech sector again led losses – FAANG is now in a bear market. Both are fundamentally connected to crypto currencies as one captures the cost of energy and the other the growth and value proposition of new technology. The other factor that matters is seasonal – and not just a calendar year view – but a business or bubble cycle outlook. This is where the BTC bubble sits in comparison to other famous financial manias.

The rise and fall of markets is universal. The key for understanding what drove the cycle remains essential for believing in the 5th wave of rebuying for this asset class.There are a number of things supporting the 2019 outlook for crypto – here are the top 3 mentioned in the last week:

1) Security Tokens. These are seen replacing the leverage crisis from the ERC-20s and ICOs of 2018 with a more equity like ownership structure, regulatory clarity and blockchain efficiency. Many see this as the viable alternative to present IPOs and VC funding. Platforms like tZERO, Securitize and Polymath are all building frameworks for tokenizing equity today.

2) Bakkt and more institutional futures. The delays this week hurt the market but its planned start in January 2019 matters as it allows the NYSE to list the contracts and adds to transparency and liquidity in the space. The key difference is this one - The BAKKT contract fundamentally differs from existing institutional focused futures provided by the CME and CBOE platforms, because first, the product is physically settled. Meaning traders receive actual Bitcoin at the end of their contracts following initial payment with dollars. This means new Bitcoin is purchased by BAKKT with each new speculative contract agreement — in contrast with CME and CBOE futures where all bets on price movement have final settlement in US dollars. Second, the contracts won’t support margin or leverage. Again, this is in contrast to the riskier, leveraged BTC future options available on platforms like Bitmex, CME and CBOE.

3) Bitcoin ETF. The holy grail for the market growth in BTC has been the SEC approval for a BTC ETF. For an asset like Bitcoin, the advantage of an ETF is that Bitcoin becomes accessible on major international exchanges — making it easier to integrate with 401ks, pension funds and similar portfolio investment options. Applications currently being processed by Direxion, Proshares, and the apparent favorite for final approval, VanEck-SolidX, have all been declined at some stage and are currently going through an appeal evaluation. 

Bottom Line: Any one of these will help the crypto market find some support, and if all three happen, there will be a return to thinking about the longer-term value proposition of blockchains, tokens and alternative money offered in the crypto space. Also worth noting that they are all interconnected as the SEC ETF approvals may link to the liquidity and transparency of Bakkt and to the need for more regulation on security tokenization projects.  This the is the basis for faith in a crypto Spring event.

What Happened Last Week?

 

• A new Bitcoin Index.  The index, MVIS Bitcoin US OTC Spot Index, will serve as a base for VanEck’s ETF and could be used by institutional investors to get a better sense of what the market looks like.  VanEck’s bitcoin specialist Gabor Gurbacs says OTC data is more reliable than exchange data.  Three major cryptocurrency over-the-counter traders — Genesis Trading, Cumberland, and Circle Trade — announced they would provide data for a new index, dubbed MVIS Bitcoin US OTC Spot Index. The new product, which is run by MVIS, a division of asset manager VanEck, is a standout given it draws data from OTC desks as opposed to exchanges, such as Coinbase and Kraken. “Transparency is coming to the over-the-counter market,” Gabor Gurbacs, head of digital asset strategy at VanEck said in an exclusive interview with The Block. “Before this no one would publish the price and it happened behind the scenes.”

• Crypto miners selling machines by weight not price per unit. Crypto miners are reportedly especially eager to sell the older models, including Antminer S7, Antminer T9, and Avalon A741, as these have reached their “shutdown price.” According to local Chinese outlet Tencent News, the earnings from mining are no longer enough to cover electric power and other associated costs. 8BTC reports, some mining machines are being sold on the second-hand market for merely 5 percent of their original value. A mining machine bought at a price of up to 20,000 yuan ($2,885) a year ago is reportedly currently sold for just 1,000 yuan ($144). The chart above captures the minimum price needed to cover the machinery – albeit from a September cointelegraph article.
• Norway removes Bitcoin electricity use tax break. Currently miners pay about 0.48 Øre – or just 0.0005 USD – per kilowatt hour. This is in line with other high energy consumers of 0.5 megawatts or more. However, after January 1st, they will pay the normal electricity tax rate of 16.58 Øre, or roughly two cents – in tax alone – per kWh. The reaction from pro-business Norwegians was not favorable. This follows a budget agreement deal with the KrF

Question for the Week Ahead: Has the price of BTC dropped to levels where there is value? 

The ability to find longer-term value in BTC and other crypto currencies rests with their use. It also remains connected by design to the supply/demand function – price drops make the margin for mining coins less profitable and so curtail supply making forcing value to catch up to real demand. The role of crypto assets as an alternative to public equities and government bonds also has to be considered particularly in the context of a global macro market shifting to the 2020 US recession view.

• The price drop in BTC has hit the amount of value traded in the BTC network but the rise since 2015 is still up 400%. According to a Chainalysis study cited by Reuters, the value of bitcoins handled by bitcoin payment processors has dropped nearly 80% from $427M in December 2017 to $96M in September 2018. Chainalysis surveyed 17 payment processors, including BitPay. Also, while merchant payments may be down, Bitcoin's scalability solutions are showing positive signs. The Lightning Network, a second layer solution designed to address Bitcoin's scalability problem, reached a new record this week. The network has onboarded over 4,100 nodes with a capacity of nearly $1.9M, according to data from 1ML. (Source: Reuters)

• Mining in crypto assets is clearly dropping, making for future value should demand hold. The ship rights itself argument for price drops and mining scarcity holds. The drop in hashrates is notable but still up from 2017.Markets are repricing demand.

• The volatility drop in crypto holds and its non-correlation to other assets as well. If you want to argue that lower volatility allows for more interest from institutional buyers then even with the last two weeks of noise, crypto markets remain relatively calm and on par with the noise of equities.The more interesting correlation focus is on gold and its alternative status. The role of gold to fiat is different than that of bitcoin but often compared to it – this break is healthy in the longer-term.

Bottom Line:

The fall in price is an opportunity rather than a failure for blockchain, BTC and tokens.The optionality of investing in the space has become more attractive.

Market Recap: Hashwars, Overselling and Regulatory Arbitrage.  All major coins lost ground last week. The BTC and XRP did slightly better than others. BTC remains well over 50% of the entire market volume and capital.

 

Price action in BTC cash was painful again. Some see the hashwars between SV and ABC near the end and find some solace in this. The cost of mining the new coins after the fork is clearly a problem, as this tweet from Alistair Milne highlights.

The market is looking for a technical bounce back with $5800 and $6200 as BTC targets, with $4000 the new line in the sand, with some fearing $1500 to $2500 should that break by year end. This is what one technician noted Friday night.

There is also the strange reaction function last week for some utility tokens. Basic Attention Token (BAT), the native cryptocurrency of Brave Browser, increased from $0.16 to $0.185, by around 16.5%. Since the listing of BAT by Coinbase, the third largest crypto-to-fiat exchange in the world behind Bithumb and Bitfinex, the price of BAT dropped by more than 56%.

However, in comparison to many ERC20 tokens and consideration of the significant price surge BAT experienced in the build-up to the Coinbase listing, BAT has performed relatively well against both Bitcoin and the US dollar. Every digital asset listed by Coinbase, which includes 0x (ZRX) and Brave Attention Token (BAT), meets the criteria of the SEC of a non-security. In May, when Coinbase initially released its plans to integrate Zcash (ZEC), Stellar (XLM), Cardano (ADA), ZRX, and BAT, the company emphasized that it will only pursue its plans if it can be certain that the tokens comply with existing regulations enforced by the SEC.

For all those wondering what is Veros - VEROS is a cryptocurrency that has the nomination and it has 8 digits post decimal point. Henceforth, it is an initial project and it is expected to grow consistently by adding innovative modules, which ultimately defines a Crypto-One-Stop-Solution (COSS).Veros is a zero-fee fundraising platform where the majority of all advertisement revenue funnels directly into fundraisers launched on the platform.