Bitcoin Fundamentals – Briefing January 2019
In this month’s briefing on cryptocurrencies, we will look at the changes impacting Bitcoin, especially in the short-term.
Let’s start with an overview of the crypto world in 2019, continuing the discussion that we began in December’s briefing. As we pointed out in our previous article, 2018 was a furious and cruel year for Bitcoin and cryptocurrencies in general. Despite the fluctuations, downward pressures, and negative events, we saw very positive indicators coming into focus toward the end of the year, giving great hope to Bitcoin fans and enthusiasts.
The positive outlook consists of two major factors: First, tighter government regulation over the crypto markets, not only in the US but also in other countries; second, multiple indications that interest from institutional investors and big banks is ripening, although it has not yet matured. Bitcoin experts, traders, and the market in general are waiting for this turning point when, at last, a big bank, exchange, or hedge fund starts working with BTC.
These two factors were our focus in December’s briefing. Let’s see what, if anything, has changed in the market one month later.
A close look at recent news shows a market driven by hacking attacks, thefts, mining problems, and so on. We’ve been hearing a great deal about such negative events in the last 3-4 months. When these issues first hit the news, they impacted the crypto world in a big way, making investors very nervous. Gradually, the degree of impact has become weaker. Now, it seems that such events go almost unnoticed, despite that they have increased in number. Therefore, I would say that the market has built-up some “immunity.”
The decrease in market sensitivity confirms something important that we are witnessing: restructuring. The crypto world is undergoing a transformation in its structure, shape, and rules. Global changes rarely take place without causing turmoil in the markets. This is what we are seeing now, so the downward trend is not over yet. At the same time, there has been little of no talk about a possible demise of cryptocurrencies. This is significant because it indicates that crypto has a future and, with the restructuring coming to its final stages, there will be even more reasons supporting a positive dynamic in the market.
Common sense also leads me to conclude that the consideration of Bitcoin by big financial institutions and banks is not random or ephemeral. As the saying goes, “Where there is smoke, there is fire.” I believe that, although work is underway to usher these financial entities into the crypto market, it is being kept under wraps. The time has not come to make announcements to the public.
This was the direction of my investigation for January, and here is what I discovered.
On the positive side, there is definite growing interest among big international companies – this assessment is supported by statements made by many respectable analysts. In general, expectations that institutional investors will enter the crypto market are high, despite temporary postponements and setbacks.
I. Governments and international companies on the crypto markets
Henri Arslanian, fintech and crypto leader for Asia at PricewaterhouseCoopers, spoke about the “exciting things expected for the crypto ecosystem” in 2019. “In 2018, we saw a lot of the big players entering the space. In 2019, I expect even more players to enter into the sector as well, especially in different ways. Some of them may decide to launch their solutions, others may look to partner with crypto firms, and others might look to invest in crypto companies.” In general, his sentiment was one of optimism.
CCN News included transcripts of Arslanian’s interview to Bloomberg TV citing the importance of institutional entry into the crypto space. Arslanian said that this would provide the kind of expertise and institutional backing that the sector needs. Also, concerning the perceived notion that that bear market affected the plans of various institutional players from entering the crypto landscape, Arslanian attributed the delay to the lack of regulatory clarity in many countries. As in with the previous case, the fintech expert is hopeful that things will improve in 2019. “I think a lot of things are changing on a global level. For example, take a look at regulatory clarity in 2018, a number of jurisdictions provided more regulatory clarity than we had before… I expect more of this to happen in 2019, and that will give even more comfort to institutional investors and players as well.”
Meanwhile, Changpeng Zhao, CEO of crypto exchange platform Binance, said essentially the same things to Bloomberg and revealed that his company is maintaining a bullish start to the year. In his words, “2018 has been a tough year in terms of pricing for the cryptocurrency. And we see a lot of projects not making it this year, so it’s a correction year. But the technology will stay, and we want to kick off 2019 with a bang… So I think the people in the industry are still very confident about the future. There are no worries about that.”
Japan’s Mizuho Financial Group plans to introduce a proprietary digital currency, which can be used for shopping and remittance at no cost. Under the plan, retail shops using the currency will be charged fees significantly lower than those for credit card services. The banking group aims to promote cashless payments by bringing about 60 regional banks on board. To make use of the currency, users will download a dedicated app on their smartphones. Payments will be made using QR codes. The value of the digital currency will be fixed at 1 yen (1 cent) per unit, and will not fluctuate on the market, as virtual currencies such as Bitcoin do.
Holding cryptocurrencies like Bitcoin is currently banned in India, but that could change, since a second interdisciplinary committee is in favour of legalizing it, albeit with harsh riders.
“We have already had two meetings. There is a consensus that cryptocurrency cannot be dismissed as completely illegal. It needs to be legalized with strong riders. Deliberations are on. We will have more clarity soon,” a senior official who attended the panel’s meetings said. The committee is likely to submit its report to the finance ministry by next February.
“The law on digital currencies and digital tokens will come into effect on Tuesday, and any person operating unauthorized Initial Coin Offerings (ICOs) or digital asset exchanges faces a 10-year jail and RM10 million fine,” Malaysian Finance Minister Lim Guan Eng said after the Capital Markets and Services (Prescription of Securities) (Digital Currency and Digital Token) Order 2019 (the “Prescription Order”).
In accordance with the legal framework, which will be in place by the end of the first quarter of 2019, digital currencies and digital tokens or assets are prescribed as securities and will be regulated by the Securities Commission (SC). “The Ministry of Finance views digital assets, as well as its underlying blockchain technologies, as having the potential to bring about innovation in both old and new industries. In particular, we believe digital assets have a role to play as an alternative fundraising avenue for entrepreneurs and new businesses, and an alternative asset class for investors,” Guan Eng said.
As mentioned in December’s briefing, the second game-changer in the crypto space is regulation. In the US, SEC enforcement is increasing against digital token trading platforms and intermediaries, as is that of comparable agencies in other countries.
In November 2018, the SEC imposed a fine of US$388,000 on Zachary Coburn, founder of EtherDelta, for operating an unregistered national securities exchange.
Similarly, in June 2018, both the SEC and the CFTC pressed charges against 1Broker, a Marshall Islands-registered a company, for allegedly violating federal securities laws by soliciting US investors to buy and sell securities-based swaps funded with Bitcoin, without registering itself as a securities-based swap dealer, or trading them on a registered exchange. The SEC’s charges also targeted 1Broker’s Austria-based chief executive Patrick Brunner.
BitMEX’s block of Quebec traders comes after the Canadian province’s financial regulator, the Autorité des marchés financiers (AMF), sent a letter to the exchange in early 2018 asking it to close all accounts linked to Quebecois, saying the exchange was not authorized to provide trading services.
“BitMEX has banned all US traders since 2015, and has been proactively closing accounts since the guidance was obtained by US regulators, in particular, the Commodities and Futures Trading Commission (CFTC),” said Joe Coufal, whose firm Wachsman represents the exchange.
NY to have the first crypto task force
Recently, New York became the first state in the US to create a task force in order to study how to properly regulate, define, and use cryptocurrencies. Governor Andrew Cuomo signed “The digital currency study bill, a8783b/s9013” into law.
ShapeShift regularly receives requests from various law enforcement agencies. In 2018, it assisted with 60 law enforcement inquiries from around the world. Below, you’ll find details from its legal and compliance team concerning requests for information over the past year.
Aiming to provide balanced reporting, we also include an opposing view expressed by European Central Bank policymaker Ardo Hansson: “Cryptocurrencies will probably die as a ‘complete load of nonsense.’ The bubble has already started to collapse, and maybe we should just see how far this collapse goes, and what is left when we’ve reached a new kind of equilibrium. I think we will come back a few years from now, and say how could we ever have gotten into this situation where we believed this kind of a fairy-tale story.”
I would treat Hansson’s view as biased because his occupation is regulation. Since his primary interest would be to avoid problems, it’s only natural that he would be vested in bursting what he calls the “Bitcoin bubble.”
At the same time, Estonian police issued almost 500 licenses to crypto-currency exchange providers in one year, and more than 440 licenses to companies offering wallet services.
The involvement of institutional investors in the crypto sphere has been postponed. According to Daniel H. Gallancy, CEO of SolidX Partners, it was unrealistic to anticipate Goldman Sachs to run a Bitcoin business before the year’s end.
As mentioned in our previous briefing, institutional involvement in the crypto sphere is one of the major positive factors, perhaps not immediately but in the near future. Henry Arslanian from PwC and Changpeng Zhao from Binance support this view, while representatives from financial entities such as Fidelity, Goldman Sachs, and Morgan Stanley have also hinted at this possibility.
We also mentioned that Daniel Gallancy’s company SolidX is trying to launch the first crypto ETF. They received the green light from the SEC, but registration and accommodation are taking longer than initially suggested. “The market had unrealistic expectations that Goldman or any of its peers could suddenly start a Bitcoin trading business. That was top-of-the-market-hype thinking,” said Gallancy.
According to Bloomberg, Goldman remains a focal point for expectations. The firm was among the first on Wall Street to clear Bitcoin futures, and sources confirm that last year they were preparing a trading desk – the bank even gave an interview to the New York Times about its plans. After considering a custody service for crypto funds, the firm invested in custodian BitGo Holdings Inc. They are also offering derivatives on Bitcoin called “non-deliverable forwards.”
Justin Schmidt, who was hired to head Goldman’s digital-asset business, said at an industry conference last month that regulators are limiting what he can do. Still, Goldman plans to add a digital-assets specialist to its prime brokerage division.
With regulators offering little clear guidance on how they will classify the broad universe of tokens – whether as commodities, securities or something else – banks and investment firms are treading cautiously. Criminal and regulatory probes aren’t helping either.
“We are clearing some futures around Bitcoin, talking about doing some other activities there, but it’s going very cautiously,” said Goldman Sachs CEO David Solomon in an interview to Bloomberg TV in China. “We’re listening to our clients and trying to help our clients as they’re exploring those things too.”
Although Goldman Sachs could clear Bitcoin futures with the assistance of CME, CBOE, and other established futures markets in the US, they cannot hold onto the cryptocurrencies owned by their investors or invest in the asset class on behalf of their clients without obtaining an approval to operate as a custodian.
“Custody is this foundational piece that is absolutely necessary. Custody is part of an overall integrated system where different parts need to work well with each other and safely with each other, and you have to be able to trust all the different parts in that chain, from buying something to transferring it to storing it in for the long-term,” Schmidt said.
Morgan Stanley, which hired Andrew Peel as their head of digital assets earlier in the year, has been technically prepared to offer swaps tracking Bitcoin futures since at least September, but has yet to trade a single contract, according to one source. Another source said that the contracts would be launched in September once there is proven institutional client demand.
Meanwhile, according to a different source, Citigroup have not traded any of the products they designed for cryptocurrencies within the existing regulatory structures. The so-called “digital asset receipts” enable trading by proxy without direct ownership of the underlying coins.
Officials for Citigroup and Morgan Stanley declined to comment on their cryptocurrency business. Meanwhile, Goldman’s “primary focus is thoughtfully and safely serving our clients’ needs,” said spokesman Patrick Lenihan.
In October, Fidelity Investments announced that they were preparing a new business to manage digital assets for hedge funds, family offices, and trading firms.
Another encouraging sign came in the same month from Yale University’s investment in a crypto fund.
“The more important story is all the infrastructure that’s being built now to enable institutional trading,” said Ben Sebley, a former Credit Suisse Group AG trader who is now head of the brokerage at crypto boutique NKB Group.
So, what can we conclude from all the above?
First, institutional involvement in crypto markets is more alive than dead. Work is underway. Despite problems and setbacks, top managers are commenting on this topic and indirectly confirming that Bitcoin ETFs will be launched, along with other services in the crypto market, sometime in the future.
Second, we see some competition rising among countries, as evidenced by recent media reports. Malaysia is a representative example. They are rushing to create better regulation and safer trading processes to position themselves to take the biggest piece of the crypto pie. Malaysia could get enormous money inflow if it became the capital of cryptocurrency ETFs and crypto branches of international banks.
“It appears as if progress is coming to a halt, yet nothing could be further from the truth,” said Eugene Ng, a former Deutsche Bank AG trader in Singapore who set up the crypto hedge fund Circuit Capital. “The bear market is going to allow many of these institutions to build the proper foundations without rushing to build-out infrastructure without adequate testing for fear of missing out on a gold rush.”
All this is a very valuable driving factor that brings great confidence for a bull trend on Bitcoin.
Tactical short-term issues
So, the long-term perspective looks promising or thrilling, but what about the tactical, short-term perspective?
In general, the delay of institutional investment in the crypto ecosystem supports our view that Bitcoin is likely to experience a further drop to our long-term target of $1800 before the bearish trend is over. Many well-known Bitcoin analysts have similar thoughts:
– “I think there’s a good chance we are going to retest $3K as a low, and there is a good chance it will probably break through that – if it hits that low,” said Civic CEO Vinny Lingham in an interview to Cheddar. “The market is definitely trying to find a bottom, and I don’t think we’ve found one yet. The reality is, it will probably trade sideways between $3-5K for another month or two, while it’s trying to find which way to go and when it finds direction it will be a breakout or a breakdown.”
– Aaron Brown, former Managing Director and Head of Financial Market Research at AQR Capital Management, provides an interesting analysis on the possible tempo of Bitcoin’s recovery, comparing it with itself in 2011 and 2013, as well as with NASDAQ and DJ indexes in similar situations. To put the price decline in perspective, the chart below shows Bitcoin prices in 2017 and 2018 in blue, and superimposes prices from Bitcoin’s 2011 and 2013 peaks, all scaled to the same peak price and time. Bitcoin’s 2017 price rise was smaller and steadier than earlier run-ups. The decline fell between the rapid 2011 event and the slower one of 2013.
What happened afterward? Well, in the 2011 event, Bitcoin bottomed within one year and was on its way up in less than two years. The 2013 event didn’t turn around for almost two years; it was four years before it set a new peak.
Or we could compare the 2018 crypto crash to the Dow Jones US Financials Index in 2007. The charts of one year before and one year after look similar. If crypto follows the same path, it could take more than three years to recover.
For instance, here is a Bitcoin/NASDAQ comparison. The 2000 boom-and-bust of the NASDAQ Composite Index was slower and took 15 years to recover. Crypto might stay low for a very long time, or go to zero and stay there forever. Recoveries from crashes are common, however.
In my personal opinion, it’s not correct to compare these markets. The US stock market was already mature with a well-built regulation framework in 2000, 2008 and 2011, while Bitcoin is at the first stage of development and still wild. Perhaps, we can draw a comparison between Bitcoin with the US stock market at the beginning of the 20th century.
Also, I’m not sure that equities could be compared to cryptocurrencies since they have no similarities upon which to base such comparison. In the above interview, Anthony Pompliano echoes the same view – he doesn’t see any correlation between cryptocurrencies, Bitcoin in particular, with high-tech companies like Apple, Facebook, and so on.
Another interesting technical factor, which seems to be important, is the 98% volatility drop in the Bitcoin market.
As major buyers wait for the proper conditions and levels to step into the market, speculators are losing interest in trading and leaving the market. This is a positive sign, since their exit purges the market of chaos and speculators, while those with a real interest in Bitcoin remain steadfast.
The bottom line
The bottom line is that the crypto market is showing progress; there is no doubt that it is developing. International companies, banks, and governments are showing real interest. This means that there’s a good chance of a bull trend in the foreseeable future.
At the same time, the current bear trend – coupled with the lack of regulation and legislation – is making institutional investors proceed with caution. The market’s healing period will probably be longer. The bear market may turn to flat and last longer than initially anticipated.
The fundamentals of the situation are in agreement, for the most part, with our technical view and aligned with our suggestion that Bitcoin will likely complete the last leg of its downward action before the major bear trend is over.
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