Is The Great Cryptosphere Reset Coming? — Bitcoin and Cryptocurrencies
Introduction to Me
Some of you may know me through my handler, PureLogic, in the Trollbox — the (in)famous trader chat at U.S. based digital currency exchange, Poloniex.
If for some reason you want to contact me, leave your contact information in the comments section below and I’ll get in touch with you in one way or another.
This is my first post; therefore, please ignore any errors or overruns etc... I am not a seasoned writter. This is essentially a dump of data/ information to support the thesis in the reset of the Cryptosphere based on the state it’s currently in.
Most traders will find the Prices & Traders section most appealing, although I strongly encourage reading each section as it provides a complete picture of where we are today.
The purpose of this post is to cut through the current exuberance [3/3/2017] and holistically evaluate whether we are about to start a market cycle that will result in the great reset of the entire Cryptosphere. The aim of this post is to keep the facts simple and take a top down approach.
Moreover, check out this post Lee Cocking who has worked in the blockchain industry for the past 24 months. Combine these two posts to gain clarity. As Soul II Soul said “back to life, back to reality”
What is the Great Reset?
Simply put — the entire Cryptosphere goes through a transformational change that results in causalities of inefficient players and bad actors, replaced with new entrants and the old guards that survived. This will result in a landscape that looks vastly different than it does today — and for the better.
What is the Cryptosphere?
The ecosystem that supports Bitcoin, Cryptocurrencies and other Digital Assets at various parts of the value chain. This list is not intended to be comprehensive nor exhaustive:
· Miners, Wallets, Storage, Exchanges, Payment Processors, Merchants, Capital Providers, Traders, Media & Advocacy, Developers, Blockchain Tech (DLT Protocols), Financial Services
Quick Summary on Bitcoin and it’s Genesis Block
The blockchain ecosystem as we know it today has evolved from the release of the Bitcoin whitepaper on October 31, 2008 and subsequently the deployment of the Bitcoin protocol and mining of the genesis block on January 3, 2009.
Bitcoin’s decentralized, distributed, permission-less protocol was designed to enable peer-to-peer transfer of value between users, documented on an immutable ledger without an intermediary nor central authority. Bitcoin aimed to solve several pain points facing money and payments:
· complete access to one’s fund;
· fast, border-less and low cost P2P transfers;
· auditable and verifiable immutable ledger;
· store of value via deflationary framework; and
· enhanced privacy, security and network stability provided by the implementation of cryptography and a distributed and decentralized proof-of-work protocol.
Key takeaway: Bitcoin was spawned during the financial & credit crisis that sparked uncertainty and lack of confidence in the worldwide financial system.
This led the world’s central bankers to deploy monetary tools such as easy monetary policy that resulted in a historically low interest rate environment, wide devaluation of currencies and eventually inflated asset prices. Some may have called it a race to the bottom; however, that is a conversation for later.
Rise of Alternative Cryptocurrencies and Digital Assets
Given the success of Bitcoin’s value proposition, there was an emergence of alternative cryptocurrencies and digital assets. Many are variants or forks of the bitcoin protocol with updates to improve functionality to support use cases and improve market adoption (i.e. Litecoin).
As the concept and adoption of digital currency improved, various protocols were developed to meet the needs of digital currency users. For example, given the recent interest in Bitcoin by regulatory bodies and security agencies, the need for anonymous, private and secure transfer of value emerged. Digital currency such as Zcash, Dash and Monero were designed specifically to address privacy and anonymity through various methods.
Vitalik Buterin identified another use case for blockchain with the release of the Ethereum whitepaper. In plain english — the Ethereum network was designed to be a single public chain secured by miners using POW, eventually switching to POS, to secure this single public network to provide developers a platform to develop decentralized applications for specific use cases instead of building and securing their own blockchains for said use case. Want it in simpler terms? Build and secure the operating system with enhanced functionality [Mac OS/ Windows/ Linux] and let everyone build applications/ programs that run on that operating system [Excel/ Angry Birds/ Chrome].
Key takeaway: Ask yourself this simple question. Why have a separate blockchain that you would need to secure for each coin that serves a different utility either economically or functionally, when there is only a certain amount of network hash rate to go around. More can be brought online but then it becomes a questions of the economics.
The security of any network and their entire ecosystem is at risk when members of the Cryptosphere are economically, financially, politically or maliciously incentivized to act against another, and they will. This is based on Game Theory. Therefore, Vitalk sought to secure one network and allow others to build their use cases via decentralized apps on top of it.
ICOs/ Crowdsales
The DAO, enough said?
Key takeaway: Lack of appropriate due diligence (legal, operational, commercial, financial etc.), regulation, agreed upon frameworks and accountability has created an environment of uninformed investors and speculators taking excessive financial risk. Simply they are not doing their homework, nor are the teams that are conducting crowdsales willing to provide enough information.
Right now we are in the midst of a phenomenon with raising capital on the blockchain. Investors/ speculators feel the need take significant financial risk due to historical returns of ICOs. The teams that are launching the ICOs are in a position where they do not have to provide anything more than a white paper and some code for review in a take it or leave it scenario. The communities are becoming better at identifying the weaker players; however, they are in the minority at the moment.
Market Size
At the time of writing this March 3, 2017:
659 Currencies / 76 Assets / 2733 Markets
$24,169,502,747 / 24h Vol: $543,613,477 / BTC Dominance: 84.7%
Key takeaway: Incredibly fragmented. In fact, let us call it micro-fragmented. There is far too much fat here to sustain an efficient ecosystem.
Exchanges
There are over 131 exchanges globally with many more most likely, each with their own infrastructure, services, trading capabilities & fee structure, liquidity, deposit & withdrawal procedures, transaction security practices, management team & owners, KYC/ AML procedures, regulatory & compliance requirements etc…
Management teams, employees and third parties are often unknown or there is often a lack of clarity. Support can be poor and your cryptocurrency, digital asset and fiat can take up to 48 or longer to release at times.
Execution can be horrid when you’re unable to place a trade because the infrastructure is non-responsive. However, there are still trades going through which is suspicious, no?
Not all traditional banking incumbents accept cash transfers from bitcoin exchanges for various reasons.
Citizens from various countries are unable to trade on some global exchanges.
Futures (non-delivery), CFDs, excessive leverage, no fee trades, adding of new coins/ assets have led to malicious trading activity such as falsified volume profiles, and concerning price fluctuations that could lead one to the conclusion of price manipulation by various parties throughout the value chain.
Perfect example right now is the recent move to nearly USD50 in DASH. Read the article below and ask yourself, who are the ones that really gained during this 2 month move, followed by a super spike yesterday 3/2/2017. Insiders? Just think about it…
With no physical delivery and excessive leverage, price volatility can be unnatural and at times one must ask the question — how is the exchange making enough money when they have large staffs and other costs, yet charge no fees except for withdrawal…?
Key takeaway: Exchanges are high level targets for hackers and malicious actors. The lack of transparency and sheer number of exchanges all around is concerning. Yes it feeds the decentralization aspect of blockchain but the lack of controls and overall negatives outweigh the positives at the moment. Furthermore, some of them are collecting incredible amounts of fees with lack of best in class tools and platforms that you would have access to outside of the Cryptosphere. Too much fat and too much money to care to really update at this point. The first movers hold a significant advantage due to branding, perceived security and thus are propelled by network effect.
Traders:
Firstly, we must acknowledge that Bitcoin is THE dominant force in the Cryptosphere in terms of purchasing power and store of value at the moment. Medium to large holders, or even a coordinated group of holders can have a significant influence on the price of smaller market cap coins/ assets. Check out the link on fairpumps.net below, really? C’mon…
Second, there is significant confirmation bias within the ecosystems. For example, if majority of traders use technical analysis such as moving averages, RSI, and a momentum indicator, it’s easy to decipher those trading scenarios would play out because they’re trading and executing trades in that direction. Same goes with the cup and handle formation the bitcoin community has been speaking for a year.
Thirdly, there are far too many unskilled traders that are absolutely getting taken advantage of. It does not help that powerful bots have been unleashed on the markets. These unskilled traders are bringing a knife to a gun fight. Further, it does not help that these trader chats, slack channels, telegram, gitters, reddit forums, articles from crypto specific websites are where a lot of these unskilled traders attempt to get their information from to make financial decisions. Some are even margin trading without understanding the consequences because of a lack of regulation, risk controls, documentation, barriers.
Do you really feel you’re not out gunned? Check out the below and that’s only a part of it.
Bots
Top bots from Medium blog:
Platform (case study on an individual who used data from this platform to create his own Algo)
News:
Moreover, remember when the devaluation of the Yuan to USD was considered the driving force behind bitcoins price movement with excessive volume and trading a premium to western exchanges? Mind you during this time, the western exchanges had anemic volume in comparison. Well after the recent PBOC activity and diminished trading volumes, it seems that Japan has picked up the volume workload and are the market leaders with a premium. At other moments it was discussion around India, Venezuela, Nigeria or the doom and gloom of the global economy that was driving the price in Bitcoin. Now apparently it is because of the SEC approval looming around the corner on theCOIN ETF. Furthermore, there’s now talk about gold parity, something many traders were aiming for (confirmation basis in play?).
What about China creating it’s own digital currency? With the high concentration of Bitcoin and Litecoin Miners in China and various PBOC capital controls — how do you think that impacts the Cryptosphere if Bitcoin is the conduit to all other alts?
Ask yourself have the key drivers for bitcoin really changed? Think about this long and hard and ask is this confirmation bias playing out? Also, a lot of is buying back and forth via bots or traders selling/ taking profit and re-buying, and then there are long term holders. Don’t get me wrong — new money is definitely coming in, but who are the larger players that can move the market as they wish at this point in time prior to the next market cycle?
Key takeaway: It is very difficult for major financial institutions to take a position in Bitcoin or other cryptocurrencies due to regulation & compliance. It is also difficult for employees and/ or their immediate family that are employed at large institutions, MNC and conglomerates which are evaluating blockchain technology to purchase these digital assets because of internal independence requirements. This is a fact. Don’t get me wrong, there are members out there that do dabble in this space, but on a percentage basis, they are not market movers. I should also mention that traditional institutions are buying bitcoin — but mostly for ransomware, not as an investment.
Miners:
The Bitcoin miners and community simply can’t get their act together when it comes to scaling. Honestly, the profits they are receiving now are far above historical norms with Bitcoin price at c. USD 1,273 / CNY 8,371 at the time of writing this, there is no incentive for them to move. The largest miners are also primarily located in China with rumored subsidized or even free energy costs, which begs to question how that supports decentralization. I’m confident this is one of the key factors playing into the the decision the SEC will make soon.
This also goes for the profit Alternative Cryptocurrencies are returning right now. Mining profitability is at an all-time high across board with Bitcoin and other Alts.
With Bitcoin you can make the argument that it is because of the halving effect, global instability, China, corporate/ government interest and potential adoption etc…
I would also like to note that there is intrinsic value in the underlying hardware required to perform POW, especially with Bitcoin. However, I believe there are a lot of people that assume just because the underlying value of the hardware is X, it uses Y amount of energy compared to Country A and has more computing power than Tech Company B that Bitcoin or any other POW coin must have a baseline value.
As this is a post that is supposed to keep in simple, I’ll do just that. Hash power is a laggard and follows price of the asset. The market sets the price of that asset. If the market no longer deems that asset has intrinsic value for it’s specific use case, the underlying hardware value will not set the coin’s price. In fact the coin will plunge and the economics of cryptoeconomics will force the hash rate to decrease over time as miners turn off their rigs if they’re running at a loss (large minors can withstand headwinds for sometime and continue to operate at a loss, which is also in there benefit to ensure the network remains secured and their investment continues to hold value — but question is how long. However, it starts with the small players shutting down their rigs that are running at a loss, which will drop the hash rate that then impacts the block times and eventually causes the difficulty rate to decrease in order for the protocol to run as is in terms of block times. The longer this goes on, the more miner casualties would be abound unless there is significant advancement in the hardware space that yields far more powerful hardware with far lower cost of operating.
Key takeaway: Economic and market theory states that inefficient markets are made efficient by resources being diverted in that direction until efficiency is squeezed out and the profitability drops. Then the next opportunity will be exploited, rinse and repeat.
Think of it like Uber’s surge pricing. If there is lack of Ubers in an area where demand is high, surge pricing kicks in and Uber drivers are incentivized to go to that area of high demand as they are rewarded financially. As more Uber’s enter the area to get customers, the demand begins to decrease and the surge pricing lowers — eventually going back to the standard pricing.
Market Cycles & Catalysts
We can all agree that markets have their ebb and flows. These market cycles are not just lines on a chart, they’re frequently similar, occur across every asset class and time frames because of the various internal and external factors impacting market and ecosystem.
To provide context, just think about the dotcom bust, and the housing crisis/ financial crisis. Common themes emerge, there is an over exuberance that builds up over time for each specific crisis, causing money to flow to inefficient players with weak fundamentals so they can join the party, there is a lack of regulation as regulators do not want to stifle innovation nor economic gains. Markets begin to develop where unskilled & unknowledge investors enter the market only to eventually lose. In every single one of these cases, the bubble pops and the entire ecosystem goes through a radical transformation. The strongest of the old guard survive, the weak are eliminated, and new entrants emerge from various fractions to rebuild the ecosystem that is sustainable with a focus on protections, rules and regulation.
Blockchain technology was built on the principal of a trustless system that removed the need for a third party that traditionally acted as a check and balance. This principal amongst many others has created a community that adheres to these principals strictly. However, we must realize to deploy this technology in the world we all live in today, we need to build consensus with the current actors/ incumbents and that is done through collaboration to identify areas of common ground, solutions to disagreements and eventually consensus. Rarely do large scale fundamental shifts occur in anything without those factors.
Key takeaway: Nothing stays the same and it’s not different this time. You need a catalyst to start the domino effect. This looks to be the combination of the PBOC, the decision incoming from the SEC on the Winklevoss’ COIN ETF and the likely Fed rate hike [detailed below].
Prices & Traders
Taking into consideration everything above, especially around financial institutions, corporations, their employees issue with independence — you need to objectively ask yourself who are the holders of Bitcoins and Alts, what are their intentions, how long have they held, are they aware of the reset button about to be hit across the entire cryptosphere, and where are they moving their new found wealth to?
Remember everyone in the trollbox, trading view chat box, reddit, slack etc.. always talk about cashing out to buy a house, a boat, cars, vacations and well other things I will not mention here… But the keywords — cashing out!
From what I can see, Bitcoin rose starting 2015, followed by an Alt coin pump in their respective Bitcoin pairs early 2016 to summer 2016, then exchanges opened significantly more fiat gateways during that time in Alt coins. Eventually, both the price of Bitcoin and Alt coins suffered as the Cryptosphere dealt with the DAO issue and exchange hack. Eventually alts started to move lower in their BTC pair (with exception of the likes of XMR and others). In Q4 2016 you will notice a surge in volume with Alt coins but specifically in their fiat pairs, followed by this final push we are currently viewing in Alts across both fiat and BTC pairs. This was most likely for the larger Bitcoin players accumulating Bitcoin through altcoins.
Obviously this current Bitcoin push to new all-time highs led to the alt/btc ratios dropping in Q3 2016, Q4 2016 and Q1 2017.
Also yes, when Bitcoin rises, typically Alts follow, but we’re up nearly 3x in market cap in a year. We’ve passed Bitcoin all time high on multiple exchanges, reached and passed gold parity, completed the cup and handle (some claim) and Ethereum and Factom are gaining mainstream corporate and governmental attention and interest.
So there’s a lot more to this move than meets the eyes.
Simply stated, there seems to be a large coordinated powerful exit pump across all major exchanges and pairings (alt/btc and alt/fiat).
Actors in Plain Sight
Want to talk about malicious actors in the trading game? Sure, here are some links on how price is manipulated.
Also lets take a very recent and real example with Barry Silbert, founder of Digital Asset Group. He posted a tweet that “Anybody else feeling bitcoin > $800 today??” That very day, Bitcoin moved higher into 800. Coincidence? Maybe… lets dig a little deeper
What about when he asked where to find short interest on ETH? Does anyone actually believe that Barry Silbert does not know how to find short interest when he is an early adopter of Bitcoin, has two investment trusts, BTC and ETC through Grayscale, has invested many millions of dollars into blockchain startups - including 19 bitcoin exchanges around the world? He’s BTC/ETC/ZEC first and foremost and sent an Ominous message with his various tweets. C’mon…
Further, if you know about Crypto history you are aware that Fontas was at the root of many pump and dumps. He recently laid out some points on the @cryptocurrency tradingview chat as to the environment back in the day. It definitely raises an eyebrow and you should ask yourself, is this time really different — just pay close attention to his final quote.
Fontas
then out comes the ASIC war
when 2013 happened the ASIC scams were incredible
avalon, butterflylabs
super delayed shipments
they wree mining btc with the first ones off the line
who could blame them it’s fukin $50000 of btc per machine per week
so people who preordered got their machines super late and there were lawsuits and it was a whole big mess
and all the pyramining pyramid schemes
holy hell
bitcointalk was like scam heaven
OH MAN
Remmeber the altcoin bubbles???
bruhhh
at first it was the old guard
IOC, devcoin, namecoin
standard stuff, new ideas
but then I started pumping things
and peeople started getting nutty
Feathercoin was the first
it was just litecoin with a few numbers changed
then everything happened so quick
new altcoin everyday
people pumping people dumping
holy hell
what were the others
I remember pumping feathercoins before
I was jsut tryna make some pumps
Goldhead
@Fontas will u be making waves as in 2013? or just sell quietly? LOL
imagebin. ca/v/3E6H64uhIzvr
Fontas
I will make waves if the situation arises
and I find it profitable
One other thing, going back to exchanges and their manipulation… here’s another insight:
Fontas
I dont like leverage any more than 2.5x or 3x on okcoin… they pull all sorts of shit
mostly stop runs
Key takeaway: Just think objectively about what you just read above. Does that make you feel comfortable?
SEC
Back to subject at hand, this this final step could be a significant push upward in BTC price utilizing the leverage and exiting into fiat and lower market cap alt coins or coins that haven’t moved much recently before the SEC decision. Following the SEC decision, we could see a deflation in market cap across the entire Cryptosphere. This is just in the short/ mid term, not long term. Regulation will be a critical driver of the next market cycle and there are definitely going to be some very strong winners that come out of this, just like Microsoft, Oracle and other tech giants made it out of the tech bubble.
Federal Reserve Rate Hike & Implications
There is also a unique situation with the looming Federal Reserve rate hike. The U.S. economy is showing strength and a rate hike may not impact the equity markets negatively, to the extent seen in Q1 2016 at this moment in time. The Fed rate hike is a signal to the markets the labor force and overall market is strong. It’s dovish, especially for financial institutions that perform much better in a higher interest rate environment that is growth focused. Bitcoin will be tested as traditional investments, especially US treasuries will provide higher yields with lower risk. Take this concept and apply it globally. If other nations follow suit — the return investors are able to return on traditional “safe” assets such as government bonds or investment grade corporate bonds will provide yields that are enticing, thus potentially drawing capital away from Bitcoin. Under this scenario, global growth would be expected to be increasing and rate increases will lead to strong currencies. This is an environment that Bitcoin has not been tested in — yet!
For those of you that believe that Bitcoin and other Alternative Currencies and Digital Assets have native favorable economics built into the protocol and this is an unlikely scenario, I see this. Yes, you are correct; however, far more than the protocol will dictate the price. I am not calling this an end or an epic crash, I’m calling a reset to the ecosystem based on traditional market cycles that have applied to every asset class. The long-term trend, barring unforeseen circumstances or events, should be up for the likes of Bitcoin, Ethereum and others as long as the developer mind share, community engagement and market adoption fundamentals remain in tact.
Key takeaway: Even though new money has entered the space and main stream attention has been on Bitcoin due to its low volatility and high performance relative to commodities, currencies and other assets, there are barriers to entry and several risk factors that would influence who is holding Bitcoin, Alternative Currencies and Digital Assets at the moment and where future capital flows will be directed based on traditional market forces in action.
CONCLUSION: What does this mean for the Cryptosphere?
Deflation in the overall market cap of Bitcoin and other Cryptocurrencies and Digital Assets in the short/mid term. This is not for each and every asset, there will be volatility and multiple winners and losers throughout the cycle. Some may be winners one moment and losers the next. Vice versa.
Bitcoin and Litcoin miners and community figure out scaling issues as they are incentivized due to lower profits.
Also, on a higher level, one can expect broad consolidation, enhanced competition, improved goods and services, investor protections, increased regulatory & compliance requirements and collaboration between federal governments, their agencies and their communities, global collaboration across industries and governments, industry and investment best practices deployed etc…
I do not foresee the end by any means nor am I FUD’ing or being Mr. Doom. This reset will birth a new, healthier and sustainable Cryptosphere that will lead us into the next era with wide scale adoption.
Disclaimer
This material is for information and illustrative purposes only and does not purport to show actual results. It is not, and should not be regarded as investment advice or as a recommendation regarding any particular security or course of action. Opinions expressed herein are current opinions as of the date appearing in this material only and are subject to change without notice. Reasonable people may disagree about the opinions expressed herein. In the event any of the assumptions used herein do not prove to be true, results are likely to vary substantially. All investments entail risks. There is no guarantee that investment strategies will achieve the desired results under all market conditions and each investor should evaluate its ability to invest for a long term especially during periods of a market downturn. No representation is being made that any account, product, or strategy will or is likely to achieve profits, losses, or results similar to those discussed, if any.