“An investment in knowledge always pays the best interest.” Benjamin Franklin
At Bitstocks we believe that education equates to understanding and it is this understanding that allows for confidence when times are tough. In terms of growing mainstream crypto adoption, our best chance of winning the confidence of the wider community is through education. For this reason, one of Bitstocks’ major focus areas is creating content that makes it easy to understand what’s going on in the crypto industry.
Our webinars are one of the ways in which we reach out to clients and interested parties, and this blog post is a transcription of Bitstocks’ latest webinar, presented by Cryptocurrency Portfolio Manager, James Coughlan. If you’d like to keep track of our future webinars, event presentations and online content, make sure you sign up for email notifications and follow us on social media.
In 2018 the cryptocurrency industry was riddled with bugbears challenging confidence in the sector. With market prices dropping from dizzy heights to stomach-churning lows, allegations of price manipulation, regulatory uncertainty, scaling issues, the troublesome development of the ICO trend, and the reliability of exchanges coming under question all combined into a tsunami of doubt. Let’s talk about what went down and how it came to be.
Let's start with rumours of price manipulation. While these began already in 2017, the stories continued well into 2018. A major banking institution’s CEO publicly declared Bitcoin a bubble, comparing it to the infamous Tulip Crisis. As prices plummeted in response to the comment, the same institutions allegedly made the largest buys of that day. Is this a coincidence? I don't personally think so.
(After previous negative comments about cryptocurrency from the CEO of banking giant JPMorgan Chase, the bank recently announced that they’re planning to launch their own digital asset, JPM Coin)
The CME Group added another troubling element to the market as they introduced Bitcoin Futures. While it’s not to say that the Chicago Mercantile Exchange (CME) Group are responsible for market manipulation themselves, futures markets as a category have a history of manipulation which put many people on the edge of their seats around the Futures Expiration Calendar.
In 2018, various jurisdictions across the globe fervently started looking into the ways that they could regulate crypto. In some areas, crypto regulations were even put to the test looking to seize new opportunities. Some chose to hold back to watch and learn from others’ regulatory experiments. We saw crypto bans on trading and mining.
We also saw the SEC (Security Exchange Commission) turn its attention to crypto regulations and trying to make up their minds about the coins they deemed securities. The CFTC (Commodities and Futures Trading Commission) weren’t far behind with throwing their hat in the ring by looking into ICOs as well as regulating crypto on-and-off ramps (the channels through which people get involved with cryptocurrencies and how they sell out of them).
Bitstocks’ crypto market advisory and crypto OTC trading services are examples of such on-and-off ramps, although we act in a pre-compliant form to mitigate the imposition of regulatory hurdles at a later stage. In essence, it means that we operate as if regulation is already in place by following the current standard for financial regulations, which includes AML and KYC verification, and stringent due diligence on any proposed investments.
In 2018 there was a lot of talk of blockchain’s potential to challenge the traditional financial system. To qualify as competitor, one of the first things cryptos would have to achieve is to provide the same quantity of transactions per second as institutions such as PayPal, MasterCard and Visa.
Back in reality, Bitcoin (BTC) had been struggling with scaling issues since December 2017, making no secret of the fact that the BTC network could only manage around two to four transactions a second. If the BTC network wanted to compete on a merchant level with the likes of MasterCard and Visa they needed to be able to process thousands of transactions a second. While we saw promising steps being taken, infighting between developers about the best way to achieve a higher volume of transactions held up the process. Some wanted to see side-chains implemented, while others wanted to increase the block size. While there were different scaling options on the table, each had their pros and cons.
ICOs (Initial Coin Offerings) could well be seen as The Crypto Trend of 2017, and yet it continued into 2018 where we saw a tremendous amount of funding rounds around puzzling projects. Without any clear and tested regulation in place, no protection was offered to those that were getting involved. Funds were raised off the back of five to ten-page whitepapers with little more than an idea behind it. In some cases, ICO projects amounted to clear scams, while other projects simply lacked the team and resources to execute a project that was proposed in good faith. With no accountability in the sector, most projects ended with poor delivery and investor suffering.
As far as crypto exchanges go, many were operating illegally throughout the 2017 and 2018 period. We saw some huge exchanges getting hacked and if they did repay creditors, not really giving any explanations as to how they were hacked or how they were going to mitigate the risks in future. We also saw very questionable things happening around these payouts. All of this irresponsible behaviour and lack of transparency resulted in increased crypto scepticism from outsiders.
While the negative headwinds of 2017- 2018 temporarily slowed down the pace of development in the sector, the clean up we’ve seen in all areas of concern indicates recovery and a potentially promising period ahead.
Price manipulation has become a lesser risk as regulations have narrowed down the opportunities for fraudulent and misleading marketing campaigns and public statements. The SEC (Securities and Exchange Commission) issued a statement warning celebrities that they may be violating the law if they make paid endorsements of cryptocurrencies without disclosing the remuneration received.
Scaling issues are being solved as we're seeing great solutions being put on trial across the board. When it comes to proven solutions, the BitcoinSV (BSV) blockchain holds the current record for a block size of 103MB, is now targeting the 512 MB mark (3,000 transactions per second), while following a roadmap of development that will eventually allow unlimited block size.
We’ve seen the bear market wipe ICO’s and non-delivering projects off the market. At the same time, we’ve seen the blockchain’s potential for digitising assets being tapped, for instance, by helping companies to deliver securities to the market through security token offerings (STO’s).
With regulators focusing more of their time and energy on cryptocurrency, exchanges too have been put under pressure to cleaned up or get out. In Japan, financial regulators have moved to implement a licensing scheme over the past year. In the wake of several exchanges’ security failures that led to the loss of customers funds, businesses had to pull up their socks to be granted a license to operate. In South Korea, the nation’s Internet and Security Agency (KISA) are now requiring exchanges to apply for an information security management system (ISMS) license. Similar regulations have been implemented in the EU, USA and are on the way for the UK.
In 2018 we saw USD 3.8 billion invested into crypto startups — an increase of 280 per cent from 2017. We also saw a record $559 million worth of cryptocurrency-related mergers and acquisitions deals taking place in the United States in 2018. The previous record was set in 2010, when $353 million in deals were recorded.
Even though the price action has been brutal, investment is still coming thick and fast into the crypto space, no longer through coin issuance but through VC investment in startup companies. The reason that prominent VC companies have targeted the crypto industry for investment is because of the promise and potential they see in the space. Such investment gives the crypto space an excellent opportunity for development in 2019.
The nation of Japan has been leading the industry with 3.5 million active crypto traders with annual transactions in excess of USD 97 billion. It is truly encouraging to see 14 per cent of the young male workforce has invested in cryptocurrencies. Japan has the reputation of being one of the most compliant and regulatory oriented countries, with cryptocurrencies enjoying the status of a legally accepted means of payment
As home to the famous Crypto Valley, Switzerland has drawn crypto projects from far and wide. Xapo announced it would relocate key business operations from Hong Kong citing Switzerland’s long tradition of protecting both personal and financial privacy and opaque regulations. This opacity - a balance between transparency and privacy, is what cryptocurrency is all about. The Swiss government classifies cryptocurrencies as virtual currencies or more specifically as the digital representation of a value which can be traded on the internet, but it is not yet accepted as legal tender anywhere. The status of cryptocurrencies in Switzerland currently falls under properties.
In Germany cryptocurrencies are not yet considered legal tender, but they have been recognised as private money by the German finance minister since 2013. Ever since cryptocurrencies have been subject to capital gains tax except for assets that have been held for more than one year which become tax-exempt (please do your own due diligence as I am not a tax expert.) In a November poll conducted by the German Consumer Centres of Hesse and Saxony, only more than a quarter of Germans aged 18 to 29 have indicated an interest in buying digital assets. The status of cryptocurrencies in Germany currently sits under private money.
Famously called the Blockchain Island, several cryptocurrency exchanges (including OKEx and Binance) have set up their operations Malta due to its development of a crypto friendly space. The country’s Prime Minister claimed that the state became the first world jurisdiction to provide legal certainty to the crypto space as they currently hold the status of digital Medium of Exchange, Unit of Account, and a Store of Value.
What do I mean by the statement that cryptocurrency is here to stay but not all of them? Let’s start with the real world issues being solved by blockchain projects that we’ve seen. I’d like to see more of this, for example, I’d love to see the NHS take on blockchain technology to give us a transparent view of access to our private records. I would also like to see the operation of government and MPs being put onto the blockchain, so when they are spending, we can see exactly where they're spending and what they're spending on. We're also seeing banks and corporations setting up blockchain infrastructure, and we're seeing the improvement and expansion of merchant solutions. At the same time, many cryptos fail to solve any practical issues or offer any real utility.
We’ve also come to the point where regulation is entering the space. We can see the SEC gearing up to identify coins they deem as securities, and they’re likely to start with ICOs that raised vast amounts of funds to make an example of these companies. That way it'll echo through to the entire sector to encourage self-regulation. I believe we'll see a lot of cryptocurrencies wiped out over the next three to five years due to their lack of compliance which will likely force them off of exchanges too.
It sure will be very interesting to see how these events play out in 2019. When we look at the way cryptocurrencies performed over 2018 into 2019, we’re not likely to see capital flooding into the market straight away. Nonetheless, if the current trend of infrastructure development and improvement of merchants solutions continue, it's likely we'll see a gradual recovery of crypto sentiment and prices trends.