"He that lieth down with dogs shall rise up with fleas" -  Benjamin Franklin's Poor Richard's Almanack.

The FUG continues for Bitcoin as the long winter gets longer in 2019. The technical failure of the rally over $4200 and the revisiting of $3600 looks ominous to chartists. The futures of digital rests on the quality of its community and the confidence that they generate in developing new technology to solve old problems in the economy. The gloom in BTC and the rest of the crypto markets starts with the frustration of bad press and continues with the lack of technological acceptance. The glitterati of Davos agree.  Jeff Schumacher, founder of BCG Digital Ventures, said during a panel in Davos: "I do believe [bitcoin] will go to zero. I think it's a great technology but I don't believe it's a currency. It's not based on anything."  

The BIS released a new paper that argues Satoshi’s process has two key competing problems – high transaction costs to ensure payment and a system that can’t generate transaction fees high enough to guarantee such payments. The BIS argues that proof-of-work can only work if mining income is high enough and that users are free-riding on the security provided by the transactions fees of others in the chain – limiting “mining” income.They conclude -   So-called second-layer solutions such as the LighteningNetwork  can improve the economics of payment security (in addition  to  mitigating  scaling limits). However, they are no magic bullets, as they face their own scaling issues.

The tragedy of the commons problem in digital currencies maybe more complicated than just the mining issues. Digital trust via a process requires some validity from its use in the real economy. One of the biggest issues facing crypto in 2019 comes from regulation and the expectation that more rules will come down to limit its acceptance in places like the US and China. BTC volumes transacted doubled in 2018 on the darknet to $2m average a day according to Chainanalysis.  This even as the overall value fell to $600mn in 2018 from $700mn in 2017. The dip was attributable to the closure of major markets AlphaBay and Hansa in mid-2017 which hampered flows until the start of last year when transaction volumes started to steadily grow again, Kim Grauer, senior economist at Chainalysis, said in an interview. “The reason for that drop is more law enforcement activity,” Grauer said. “It would be misleading to think that this year it (the volume) will go down.”

The larger US economy and its role in supporting crypto currency use and growth has its own set of problems. The zero limit for US growth is in play for 1Q.  The White House economist warns that 1Q GDP maybe near zero because of the present partial government shutdown. In the same breath, Hassett thinks the odds for a 2020 recession are near zero.  Not everyone is so sanguine, as the impacts of the shutdown are far-reaching and difficult to entirely account for their effect on the US and global economy.  The direct effects, such as delayed loans for small businesses or missed rent payments by government employees, are limited in scope, but the effects on business confidence and consumer outlooks eating away at capital investments maybe larger. The knock-on to the digital asset space maybe linked to the slowdown in ETF approvals and clearer regulations regarding exchanges and security tokens. 

What Happened in the last Week:

• More Layoffs:  Nebulas blockchain project lays off 60% of its team. Following layoffs at Consensys, Houbi, Bitmain and ShapeShift, another blockchain project is cutting its team significantly. Nebulas, a blockchain project describing itself as "autonomous metanet," has reduced the size of its team by 60%, reducing headcount from 80 to 30 people, CoinDesk reports. The company has gone through a series of cutbacks which started last summer and impacted mostly the team based in Beijing, said Becky Lu, a spokesperson for Nebulas. The company chose to shut down less important projects at least until the market recovers, thus focusing solely on their core goals.
• Public Listing for Bithumb via reverse merger. The path to the first publicly U.S. listed crypto exchange took a step forward with the announcement of a letter of intent (LOI) to merge Korean cryptocurrency exchange Bithumb with OTC listed holding company Blockchain Industries (BCII), according to a direct filing issued by Blockchain Industries.
• Technology two-way street - LSE sells trade technology to Hong Kong’s AAX. While LSE has previously sold the system to traditional stock exchanges in Hong Kong and Singapore, it is the first time it went to a crypto exchange. Similarly, other crypto exchanges have already bought tech from traditional ones, since technology brought from regulated markets “is safer for investors,” said Peter Lin, chief executive at Atom. However, many blockchain businesses opt for building their own technology to counter hacking and money losses. This also provides traditional stock exchanges with opportunities to adapt the tech made by blockchain businesses, FT writes.
• ETF delays with Government Shutdown.  On CNBC’s ETF Edge, VanEck CEO Jan van Eck stated that the shutdown of the U.S. government forced the institution to pull out its proposal. The lack of personnel at the commission prevented the continuation of discussions on various aspects of the Bitcoin ETF filing. “We were engaged in discussions with the SEC about the bitcoin-related issues, custody, market manipulation, prices, and that had to stop. And so, instead of trying to slip through or something, we just had the application pulled and we will re-file when the SEC gets going again,” van Eck said.

Question for the Week Ahead: Is the 2019 Crypto focus China, Europe or the US?  The hope for a fast rise in BTC gets dashed with the 5-week government shutdown (which appears to find a ending as we write). The delay to ETFs means trouble for the US focus in the space as it means less institutional money flow.  For Europe, the rise of Malta and its new set of friendly rules has been driving some of the momentum in crypto but some of that seems at the expense of Asia and the US.  Much of the focus in the EU space is in exchanges and the AML/KYC rules that impede the US.  The start-up space for new blockchain business remains the halcyon goal of all nations and China still plays a role here.  The announcement today of China perpetual bond issuance by the Bank of China and the approval by the PBOC to swap those into government bills and accept them for collateral is a game changer to asset markets everywhere. China is turning back on the credit spigot - with more than a fire-hose.  The effect on alternative money should be obvious - and if this doesn't help the space then watch out. QE and BTC are interrelated and co-dependent like Cain and Abel.  The ability to believe in the future for BTC in China will be based on how the innovation push and QE liquidity gets put into play in the next few months. 

The first way to answer the question about BTC and trading is to look at 2018 and how Fiat currency played a role - here KRW and JPY are more important together than the USD alone.  CNY if it was allowed would be clearly significant as well.  However, the role of stablecoins highlights the issues for on and off ramps in the space and this maybe where Europe plays a key role in 2019.

The role of QE and BTC remains in play as asset class returns in 2018 were negative (except for cash).  The US QE mattered less to asset markets than the ECB did perhaps because of the state of the EU banks or the global knock-on effects of the ECB joining the BOE, SNB, BOJ and others.  The role of QE in China will be interesting to watch as it plays against the ending of QE in Europe. 

Market Recap: The bear market in BTC and other crypto currencies continues.  Notable in the last week was the recovery in Monero and other alternative cash coins.  There is a rising fear of chaos in Venezuela, Zimbabwe and other the Congo - leading to some EM related demand. The rise in gold this week links back to some of this story as well and that correlation remains in play.  

However, the BTC market isn't seeing much love. The technical pressures continue and the big picture charts open a risk for lower still. 

The short term charts are showing a stall - where $3250 breakdowns should mean $3000 and lower tests in a hurry against $4000 breakouts bringing a larger $4350 and $5000 risk. The asymmetry of the chart and the tightening of ranges (lower volatility) continues to point lower interest and higher risks for further breakdowns in prices. 

Good luck!