Tag: ethereum

In November Bitcoin Lost 36% of its Value, but It Is Here to Stay

The bloodbath on the crypto market that we all witnessed last week swept away several hundred dozens of dollars of capitalization. The market sell-off and “hot news”, including the articles about Chinese crypto miners that are selling mining equipment ‘by kilo’, brought to life all kinds of speculations. Last week we wrote about the possible reasons for the crypto capitulation. Now let’s talk about what to expect next. Take a deep breath and relax, this is a long story. I do not know how much Bitcoin will cost by the end of this year or by the end of June, 2019. But some people seem to know: they expect the price to be anywhere from $2500 to $25,000. You can read their predictions here, here and here.  I am not so brave to make my own forecasts, but I would like to remind you several well-known stories. The first is about the tulip mania in the Netherlands when fortunes were lost after the bubble burst. Still, the Netherlands remains the biggest market of tulip distribution.  The second story is about the first banknotes that were issued in Stockholm also in the 17th century. The idea belonged to Johan Palmstruch, founder of Stockholms Banco. Unfortunately, the printed banknotes were not secured, and Stockholms Banco issued too many. Palmstruch was sent to prison, but soon was reprieved as the acknowledgment of the significance of his invention. The other two cases are more recent: the bubbles on the dotcom and mortgage markets. In all the four cases the bubbles burst, people and corporations lost money, but after some time a new market emerged which is still flourishing. I would dare to propose that the developments on the crypto market will be similar. There will be several months (let’s hope that not years) of crypto winter, and then a new reality will emerge. There might be some bad news on the ICO market in this new reality. “The ICO market is dead — over,” says Barry Silbert, the founder of crypto investment fund Digital Currency Group. But Bitcoin and cryptocurrency market are here to stay despite the bear market: “We’re 5, 6, 7, times through this now. The first couple of times you see your balance sheet drop by 80 percent, it’s kind of rough on the stomach. By the third or fourth time, you get used to it. Now we view this as a fantastic opportunity.” “Somehow bitcoin has lived in a swamp and survived,” Jeff Sprecher, chairman of the NYSE and CEO of its parent company, Intercontinental Exchange. “The unequivocal answer is yes [crypto will survive].” Institutional investors are knocking on the door While crypto investors are nursing their wounds, a lot of interesting things are happening below the surface. According to Silbert, institutional investors have not slowed down, and “behind the scenes companies are being built that will provide infrastructure for them. Massive on-boarding might happen as early as in 2019, he says. One of the game-changing developments was in October 2018 when Harvard, Dartmouth, MIT, Yale, and Stanford announced that their university endowments had started investing in cryptocurrencies.  And the University of Basel made the creator of ethereum, Vitalik Buterin, an honorary doctor. Here are some examples of infrastructure that will soon be in use: In January 2019 Bakkt, the cryptocurrency trading exchange owned NYSE’s parent company, opens a futures market that delivers physical Bitcoin to its investors. Its biggest rival, NASDAQ, will do the same in Q1 2019. One of the biggest US crypto exchanges, Coinbase, has launched over-the-counter (OTC) trading for institutional customers. “We launched our OTC business as a complement to our exchange business because we found a lot of institutions were using OTC as an on-ramp for crypto trading,” - Christine Sandler, head of sales at Coinbase, said. Fidelity Investments, one of the biggest asset managers in the world, is expanding its institutional crypto asset platform to include trading services for the top five to seven cryptocurrencies by market capitalization.  Fidelity has 13,000 institutional clients, and they are interested in bitcoin and ether because they make up a large part of the current market cap, explained Fidelity Digital Assets CEO Tom Jessop. Goldman Sachs, the biggest investment bank, has been clearing Bitcoin futures contract for its clients since June, said its CEO David Solomon. However, Goldman Sachs is not able to hold cryptocurrencies for its clients, because it needs regulatory approval to do this. Bitcoin technology blockchain is also making gradual advance to the new sectors. The South Korea is completing its voting system on distributed ledger technology.  And the United Arab Emirates want to conduct half of its government’s transactions on a blockchain platform by 2021. And just one more figure to conclude. In November, when the trading volume was high, Bitcoin made over $8 billion a day, which is comparable of $12 billion per day for Mastercard, the second largest credit card network in the world.

Articles/December 4, 2018

Crypto Capitulation – Why are Prices Falling?

A number of narratives have emerged to explain the recent violent downwards movements in prices across the cryptoasset market. Today we'll examine a few of them. First up: Prices are declining because ICO projects are being panicked into selling all of their ETH reserves. Let's explore this one in more detail.   ICO projects raised funds in Ether. Those who conducted their ICOs early in the run saw the value of their treasuries climb throughout the bull market. ICOs still need to pay the bills in fiat, so at some point they need to sell large portions of their ETH reserves. But crypto's market volatility put ICO projects in a difficult spot: Should we sell our ETH on completion of our ICO? Or should we hold onto some of our treasuries in order to sell at the highest possible price? Twitter is full of anecdotal evidence that this is true for some projects, such as this from Ran NeuNer, a crypto fund manager: “Spent the morning with an ICO (not to be named) they raised $30m usd with a solid roadmap, they raised when ETH was $1200. They panicked and sold their remaining ETH last night – they have $4m left.” However, closer inspection of the evidence suggests that this isn't the case at all. Larry Cermack, Head Analyst at @TheBlock_, explains why: "Despite the decline in ETH price, the selloff hasn’t been as drastic as many analysts anticipated. In the past two months, treasuries of projects that held ICOs liquidated (or moved) 172,00 ETH, or ~4.6% of total holdings...Out of the 57 companies I tracked, 50% didn't move any ETH...one can assume that most projects have significant enough cash reserves that they haven't had to sell cryptocurrency reserves yet" So, it's unlikely that this is creating the current downwards move. However, some thinkers believe that ICO projects will eventually capitulate - selling their ETH reserves - and that this will create downward pressure on price in the future. Meltem Demirors, of @coinshares, MIT and Oxford University, explores why: "(In view of the state of the current crypto market) what’s an issuer likely to do? Sell the assets they can and hoard cash like it’s going out of style. What’s an investor likely to do? Sell the assets they can, take the hit, and free up mental and emotional energy to focus on generating a return for their investors. Add these two up, and we get capitulation — the action of surrendering or ceasing to resist an opponent or demand." So, this could happen yet. But it probably hasn't so far. The second narrative we'll examine, and a more likely candidate, is the recent Bitcoin Cash hard fork. Bitcoin Cash is the result of a scaling dispute within the Bitcoin community that led to a hard fork of the main Bitcoin blockchain in August 2017. The most notable change that BCH implemented was an increase in the block size limit, aimed towards improving transaction capacity that proponents said more closely aligned Bitcoin with its original vision. Just over one year later, the Bitcoin Cash community is now splitting into two camps again. First there's Bitcoin Cash ABC, which is the original Bitcoin Cash client that split away from Bitcoin. BCH ABC main proponents include bitcoin.com's Roger Ver and Bitmain's Jihan Wu.  Second there's Bitcoin Cash SV (Satoshi's Vision), led by Dr Craig Wright - the controversial Australian computer scientist who claimed (likely falsely) to be Satoshi Nakamoto and was later called a fraud by Vitalik Buterin. Wright wants to restore Bitcoin to its original protocol, increasing its block size limit and even perhaps bringing "lost" coins back into circulation. The Bitcoin Cash hard fork matters because it's creating a hash war. While most service providers, social media and crypto exchanges favour BCH ABC, Bitcoin SV is supported by all of the biggest Bitcoin Cash mining pools. Hashpower, conferred by miners, is an important indicator of security - and therefore legitimacy - in the cryptocurrency space. Craig Wright has explicitly stated that the BCH SC community will use any hash power under their control to 51% attack the BCH ABC chain "If we see an exchange sell (BCH), we will reject the transaction. Miners vote with hash. We will run ABC and we will make sure no trade ever happens, so there won't be anything. You want to know what (BCH) is? It's a corpse." This has led to an expensive hash war in which each chain is trying to outspend the other in terms of hashpower until one of them runs out of money. This has led some to speculate that some large players are selling their BTC reserves in order to fund their mining activities, creating downward pressure on prices that has resulted in the most recent downturn. For others the effect of the BCH hard fork on market prices is a less direct one, and has more to do with the resulting uncertainty at a time when there's already pressure on ICOs from SEC enforcement. For those less invested in crypto, now simply doesn't feel like a good time to deploy one's capital within the space. So, ICOs selling their ETH reserves probably isn't causing the recent price drops but the Bitcoin Cash hard fork may well be.  The third narrative we'll examine relates to the wider macro-economic picture. When one takes a step back from crypto to look at the broader picture, it becomes clearer that the current bear market may have little to do with crypto at all. The US and China are entering a lose-lose trade war, tech stocks are down 20-40% from their all time highs and many analysts are warning of impending debt crises.  From the depths of the financial crisis in 2008 to late-summer of 2018 represented the longest bull run in the stock market ever seen. Events within the crypto community can move the needle and determine exact timing of price moves, however, the broader macroeconomic context has a far larger effect. Returning to Meltem Demirors for a moment for an explanation of the wider investment context: "We are starting to see the fraying around the edges of the global investment community. Blackrock, the world’s largest asset manager with $6.4 trillion in AUM, just experienced its first quarter of net outflows in three years." With that being the case, it's likely that the bear market continues for some time. Things could get worse before they get better. Investors must stay focused on the long term vision for the space, and stay tuned with Cryptonomos to keep on top of the latest developments!

Articles/November 22, 2018

Ethereum 2.0 – Millions of Transactions Per Second?

Vitalik Buterin, founder of Ethereum, used his recent keynote speech at Devcon 4 to provide a warts-and-all account of the development of the Ethereum network since the publication of its Whitepaper in 2014. Buterin's presentation also looked forward, exploring the specifications and implications of the different projects which encompass Ethereum 2.0 - a milestone which is 'really no longer so far away': "Ethereum 2.0 combines a lot of different features that we have been talking about, researching and actively building for several years. They are finally about to come together in one cohesive whole" Those 'different features' include the much-anticipated Casper - the switch from Proof of Work to Proof of Stake, and Sharding - requiring nodes to validate only pieces of the database rather than the whole. Each of these developments is aimed, at least in part, towards achieving greater scalability. The question of scalability is pertinent for investors, as the extent to which Ethereum can scale will have a profound effect on how many decentralized applications (DApps) will be built upon it. This is likely to influence the value of ether - the native token of the Ethereum network. Analysts have for years debated whether Ethereum is capable of achieving the scalability, in terms of transactions per second, that will be needed to run many different types of DApps. In a recent OmiseGo AMA, Buterin suggested that through a combination of Layer 1 and Layer 2 solutions, Ethereum could potentially reach millions of transactions per second: "Sharding is a Layer 1 scalability solution...that makes the blockchain itself have higher scalability. Plasma is a Layer 2 solution. Layer 1 and Layer 2 are complimentary because the scalability gains from Layer 1 and Layer 2 improvements do ultimately multiply up with each other... ...So if you get a 100x from Sharding and a 100x from Plasma, those two give you a 10,000x scalability gain, which basically means blockchains will be powerful enough to handle most applications most people are trying to do with them” Transaction speed has presented a serious bottleneck to scale for blockchains generally, but Ethereum's historical emphasis on security has seen it facing greater concerns than its competitors.  Specifically, the issues that Ethereum has faced have led to an emergent narrative that Ethereum's share of the DApp market will only extend to those that need the greatest level of censorship resistance. This has benefitted competitors such as EOS who instead employ a lesser, 'secure-enough', attitude to censorship resistance in favour of building greater scalability and transaction speed into their model. EOS' 2017 ICO raised $4 billion. The developments which Buterin describes, if all goes to plan, would see them far outstrip the transaction throughput of Visa - 24,000 per second - which is often seen as the benchmark for blockchain scalability. Buterin pushes back on the significance of this milestone however, instead looking forward to the world of the internet-of-things, the needs of which will be on the order of 100,000s per second. What does this mean for investors? The question for investors is two-fold. First: "Which smart contract platform is likely to capture the most use cases and users?" Second: "Will the value that this smart contract platform creates be captured by its token?" There's no simple answer here, and the best thinkers in the space are divided. Multicoin Capital have provided the best exploration of these questions that I know of in two blog posts.  The first, The Smart Contract Network Effect Fallacy, advocates for the idea that smart contract platforms will not benefit from network effects in the same way that platform businesses, such as Facebook or Uber, do. This is because users won’t have to know or care about which blockchain they’re interacting with, and most DApps will be interoperable across chains. This would mean that the native token of smart contract platforms is unlikely to capture much value, regardless of the scale that the network achieves - a bearish stand on ether. The second, Paths to Tens of Trillions, pits founders Kyle Samani and Tushar Jain against each other in a debate which explores what kind of cryptocurrency or token is most likely to become sound money.  In advocating for the utility hypothesis, Tushar Jain believes that the most useful cryptotoken is likely to become the most valuable. This isn't a direct advocation of a smart contract platform's native token, as the argument could extend to a DEx or governance token as well.  However, in a Web 3.0 enabled world, it's hard to envision what kind of token could become more useful than one that enables the smart contract platform itself - a bullish position on ether. So, it's not clear what Ethereum 2.0 means for ether as a potential investment. However, successful blockchain scalability improvements would have wider ramifications than those for ether. The Bigger Picture Ethereum stands at the forefront of what blockchain technology can do. The viability of many potential use cases of blockchain technology will be demonstrated by Ethereum and the specific features, protocols and applications it can support. A scalable Ethereum network would facilitate the operation of thousands of DApps, and succeed in moving more and more financial and online services over to the blockchain. Ethereum 2.0 is therefore an important step along the way toward a decentralized future. One emergent narrative right now is that of Bitcoin maximalism - the belief that Bitcoin, a censorship-resistant store of value outside the reach of nation-states and Central Banks, is the only use-case that blockchain technology will ultimately serve. One central tenet of this thesis is that blockchains are slow and cumbersome, and therefore unsuited to any other application. An improvement to the number of transactions per second that Ethereum can facilitate would therefore provide a powerful refutation of Bitcoin maximalism, and a bullish signal for the viability of a much larger blockchain technology market. Blockchain enthusiasts and crypto investors should therefore be keeping a close eye on the success of Ethereum 2.0.  One reason is that the timing and magnitude of future market bull runs will likely be influenced by it. Another is that it will provide a clue as to 'how deep the rabbit-hole goes', and how much of our future online and financial lives will be decentralized, supported by the blockchain. So, watch this space and stay tuned with Cryptonomos for further exploration of the world of blockchain and crypto.

Articles/November 20, 2018