2017 was one of the most interesting years for cryptocurrency yet. We watched and debated over the implementation of various scaling protocols, saw the introduction of the first futures contracts traded on highly reputable financial exchanges, and were glued to our screens checking how much our paper worth was increasing each day during the massive runs almost all cryptocurrencies experienced. After the holidays, it’s almost felt as if the hangover has set in from the sometimes irrational exuberance over blockchain technology. We’ve had the party, but where does that leave us now? If you only care about the price of your favorite cryptocurrency, 2018 may not be the most exciting year for you. However, for those who care about increasing adoption and better tech the year is already off to a roaring start. In the following sections of this update, I’ll go over some of the most notable happenings in the crypto economy thus far in 2018 and provide some commentary on where things may be going over the rest of the year.
The pace of adoption for cryptocurrency and blockchain technology has been much more intriguing than the price in 2018. Celebrities, CEOs, and average Joe’s can’t seem to stop talking about crypto. Major companies are announcing varying degrees of cryptocurrency support, and finance magnates are beginning their regulated journeys into cryptocurrency through futures and new hedge funds. Over the course of this year, adoption of blockchains and cryptocurrency will continue to increase regardless of price action. Will Bitcoin be dethroned as the king? Only time will tell, but based on the current trajectory, it’s not likely this year if only for the reason that Bitcoin products are being traded on major stock exchanges.
When the first futures contracts for Bitcoin expired this past month, history was made. Some have speculated that these futures contracts played a part in the downturn in price for Bitcoin this year. The argument is that the peak price in December, which occurred right around the launch of the first futures contract, was the result of traders loading up on the underlying asset. At the same time they would place a short on the new futures contract and sell the underlying asset off around time of contract expiration. This would drive prices down and result in a profitable short.
Whether this was the case or not, volume for both futures offerings has been relatively low this year, especially when compared to actual Bitcoin trading volume. However, the fact that there are legitimate, regulated contracts trading for Bitcoin at all is bullish in and of itself as it indicates a growing acceptance of cryptocurrency as an asset class. Over the rest of the year, volume will likely increase in these futures markets as investment firms become more comfortable trading them. Also, when Goldman Sachs Group Inc. (NYSE: GS) launches their cryptocurrency trading desk, slated for no later than the end of June 2018, expect regulated Bitcoin trading to increase and for other cryptocurrencies like Ethereum or Ripple to potentially see their own futures offerings.
In the vein of regulated cryptocurrency-related financial products, one can’t forget Overstock’s tZERO platform (NASDAQ: OSTK) which caused a lot of excitement with their ICO and subsequent implementation of a regulated platform for trading equity tokens. This past month, Kodak (NYSE: KODK) announced the upcoming launch of the KODAKOne platform which will be the first third-party token to trade on tZERO’s exchange. As the website for the new cryptocurrency states:
The KODAKOne image rights management platform will create an encrypted, digital ledger of rights ownership for photographers to register both new and archive work that they can then license within the platform. KODAKCoin allows participating photographers to take part in a new economy for photography, receive payment for licensing their work immediately upon sale, and sell their work confidently on a secure blockchain platform.
Despite how incredible it is that less than 10 years after the launch of Bitcoin we’re seeing a major company implement their own public blockchain, there are still conflicting opinions on whether this a good thing or not. On one hand, companies have capitalized on the blockchain craze without offering much in terms of product. An example of this is the iced tea manufacturer who was facing potential delisting from the Nasdaq who rebranded to Long Blockchain Corp (NASDAQ: LBCC). For no apparent reason other than tying a buzzword to their company, their stock price surged mere minutes after the announcement. Bitcoin or Ethereum maximalists might also argue that, unless Kodak’s coin is operating on an already established blockchain, it’s just another altcoin. On the other hand, unlike LBCC’s quick fix to a company problem, Kodak’s offering at least has a strong idea behind it which has some similarities to Factom (FCT).
In the above examples, Bitcoin is discussed in the context of being an asset class, but some users argue that it should actually function as a payments network. The latter use case has not been very forgiving in the past few months due to fees on the main Bitcoin chain. This led to alternatives like Bitcoin Cash springing up, but many would argue that the solutions offered by forks like this still won’t work long-term and the amount of users on alternative blockchains pales in comparison to the main one. Even Ethereum saw it’s transaction fees rise dramatically last year after a surge in adoption prompted by massive price increases. A result of these elevated fees is the rejection of Bitcoin and other cryptocurrencies as a payment method. In December, gaming giant Steam ceased support for Bitcoin payments, and in January Stripe announced their intent to follow suite. However, Stripe’s take was a bit more positive than Steams,
[…] we remain very optimistic about cryptocurrencies overall. There are a lot of efforts that we view as promising and that we can certainly imagine enabling support for in the future. We’re interested in what’s happening with Lightning and other proposals to enable faster payments. OmiseGO is an ambitious and clever proposal; more broadly, Ethereum continues to spawn many high-potential projects. We may add support for Stellar (to which we provided seed funding) if substantive use continues to grow. It’s possible that Bitcoin Cash, Litecoin, or another Bitcoin variant, will find a way to achieve significant popularity while keeping settlement times and transaction fees very low. Bitcoin itself may become viable for payments again in the future. And, of course, there’ll be more ideas and technologies in the years ahead.
It’s likely over this year that Lightning and better scaling solutions will emerge on Bitcoin and other cryptocurrencies allowing them to become an efficient means of payment again. The beauty of cryptocurrency is that it’s not limited by one use case. It can function simultaneously as an asset class, a tool for businesses, and a means of exchange once development has matured. Since Stripe’s cessation of Bitcoin support doesn’t come until April, it’s possible they may even backtrack should the Lightning Network prove itself to the world as quickly as well...lightning strikes. More on development of the Lightning Network later.
It’s clear is that companies are recognizing the potential value that integrating blockchain technology into their business can provide. Over the course of the rest of the year, one can be certain we’ll see other companies attempt to capitalize on this trend with increasingly legitimate use cases as the markets grow weary to pump and dumps based on no substance. We’ll also see a broader acceptance of cryptocurrency as an asset class rather than just as a means of payment. One catalyst for this may be Robinhood, the beloved stock-trading app that somehow manages to offer commission-free trading to citizens of the United States. Robinhood announced their intent to offer low-cost cryptocurrency trading to their users over the coming months and enabled cryptocurrency price alerts and tracking in their app. Within four days, over one million people signed up to get access to the trading features when they becomes available. One million people seems like a large number, but it also shows how much potential for growth and acceptance there is for cryptocurrency, not only in the United States but also in the rest of the world.
Robinhood isn’t the only new player to jump in and compete with companies like Coinbase in cryptocurrency brokerage though. Square’s Cash App now allows its users to instantly buy and sell Bitcoin. Square CEO Jack Dorsey tweeted:
Since Jack is also the CEO of Twitter, his comments about supporting Bitcoin are very telling of what the leaders of some of the biggest technology companies think about cryptocurrency. Early in the year, Mark Zuckerberg expressed his belief that cryptocurrency represents an important counter trend to centralization in a Facebook post about his annual challenge. He also said he intends to research the positive and negative aspects of cryptocurrency and see how he can better manage his services with the technology. Facebook, however, has implemented a ban on all cryptocurrency related advertisement on Facebook and its extended platforms including Instagram. Some may argue that this is a setback in adoption, but in reality it will protect a lot of newcomers to cryptocurrency from getting involved in fraudulent ICOs and pyramid schemes that have arisen in tandem with legitimate cryptocurrency. This demonstrates the need for clearer regulatory requirements as well as stricter vetting of new cryptocurrencies.
The regulatory environment surrounding cryptocurrency has been tumultuous this year to say the least. One of the biggest questions we’ve faced is, “what will South Korea do about cryptocurrency?”
During January, it seemed that every few days a new story emerged about South Korea banning or clamping down on crypto trading followed by someone proclaiming that this was not true. At one point, multiple government agencies were actually contradicting each other about whether a ban was coming, likely, or discussed merely in passing. Luckily the minister of finance, Kim Dong-yeon, came out at the end of January and said, “there is no intention to ban or suppress cryptocurrency” and “regulating exchanges” is the immediate task. This is good news for those who want to see global acceptance of cryptocurrency as regulation is necessary for existing governments to integrate the assets. Although regulation needs to be lenient enough to not stifle adoption.
What South Korea’s regulation will entail exactly isn’t clear yet, but it seems cracking down on forex related crime is the priority. As Engadget writes,
Only licensed banks and brokers may offer foreign exchange services in South Korea, with companies and residents moving more than $3,000 out of the country needing to submit documents to authorities explaining the transfer. It’s not yet clear exactly how the government plans to tighten regulation, although it has now imposed new rules that stipulate only real-name bank accounts can be used for trading, which it hopes will help tackle money laundering and other crimes.
China expressed similar concerns about capital flight and banned online cryptocurrency exchanges and ICOs altogether a few months ago with OTC exchange taking its place. Many of the customers of the Chinese exchanges likely fled to the South Korean ones resulting in the current government concerns. In time a global regulatory framework will form making these issues a thing of the past.
Russia, for example, has a draft bill that proposes integrating cryptocurrency as “digital financial assets” that can represent property or equity on a blockchain. From Forbes,
“The purpose of these bills is to define the scope of action and of the regulations of cryptocurrencies, not their prohibition, and this is good news for Russia,” says Anti Danilevski, CEO of KickICO, a blockchain platform for fundraising in crypto that raised over $80 million in 2017 in their initial coin offering, or ICO.
Russia’s strategy is to allow cryptocurrency, but they currently do not want to recognize it as competition for state-sanctioned currency and instead as an asset. The bill dictates outright that cryptocurrency is not money or legal tender. This is due to the high likelihood of Russia launching their own “CryptoRuble” sometime in the next few years which would be the only legal digital currency in the country.
In the United States, no new regulation has come to the forefront in the past month, but a U.S. District Court has frozen the assets of BitConnect, an alleged Ponzi scheme which shutdown mid-January. Also, the SEC has continued its crackdown on illegal ICOs when they shut down what was touted as being the first “decentralized bank.” This was the first time that the SEC appointed a receiver to manage the property of a defendent in an ICO-related case, and sends a strong message to those seeking to exploit the exponentially increasing amount of capital flowing into cryptocurrency. Steven Peikin, Co-Director of the SEC’s Enforcement Division, stated,
“We will use all of our tools and remedies to protect investors from those who engage in fraudulent conduct in the emerging digital securities marketplace.”
Concerns have also arisen around Tether, which offers a dollar-pegged cryptocurrency used on some of the largest exchanges. Bloomberg ran a story detailing the issuance of a subpoena to Tether which is run by senior members of Bitfinex, one of the largest exchanges trading Bitcoin. Bloomberg’s initial article included an inaccurate date for when the subpoena was sent which spooked markets. Bloomberg later corrected the article, saying that the subpoena was issued at the beginning of December instead of the end of January. Details beyond the subpoena are scant, and neither Bitfinex or Tether has provided much in the way of an update about what is occurring. Some have speculated that illegally printed Tether USD tokens have been the cause of the massive rise in prices cryptocurrency has seen in the past few months. If proven correct, there will likely be a strong initial reaction in the markets, but the actual amount of Tether in existence is only a tiny fraction of the current cryptocurrency market cap and will likely be forgotten or overshadowed by further adoption in the coming months. Still, caution should be taken when investing given this developing situation.
As there are over 1000+ altcoins, this section will only focus on Bitcoin and Ethereum.
Bitcoin and Ethereum are both on the cusp of a paradigm shift in the way they manage transactions, and 2018 will be the year it all comes to fruition. With Bitcoin, SegWit adoption is increasing, and the Lightning Network is running on the mainnet, albeit with low consumer activity. For Ethereum, this is the year of Casper where the mining algorithm switches from Proof of Work to Proof of Stake. These developments may be enough to allow both Ethereum and Bitcoin to scale to Visa-level transactions per second.
SegWit, an update that eliminates transaction malleability and effectively increases the Bitcoin blocksize resulting in lower fees, was released for Bitcoin last August, but adoption has been slow. One point of concern for many Bitcoin users has been the slow pace of adoption by large businesses operating on the Blockchain such as Coinbase. It’s argued that until these major companies implement SegWit, adoption will stall resulting in unnecessarily high fees and Blockchain bloat. Research was done into the unnecessarily large amount of space transactions from Coinbase were taking up in each block, and users criticized the company for taking too long to implement what they argued is a simple upgrade. This appeared to prompt a response from the company’s CEO,
SegWit is a key component of the Lightning Network and will become a necessary feature to take advantage of layer two payment solutions. Luckily the main release candidate of Bitcoin Core will add native SegWit support through the GUI and change address format to the new bech32 address format. This update is scheduled for May 2018 and will remove any remaining hurdles for companies to adopt SegWit. As the Lightning Network grows from the small testing environment it exists in today to a fully-functional layer 2, transaction fees should approach zero and possibly even become negative in certain circumstances; yes, you could theoretically be paid for sending a transaction.
Blockstream, one of the largest contributors to Bitcoin code and the Lightning Network, launched a store which accepts real Lightning transactions, and TorGuard is accepting mainnet Lightning payments as well. While it’s not recommended to transact with significant funds on the network yet, it’s impressive to see it all coming together and functioning. As the year progresses, expect the network to continue to grow. You can view a live map of the nodes who’ve joined the Lightning Network mainnet by clicking here.
There are many other BIPs (Bitcoin Improvement Proposals) such as Shnorr signatures, TumbleBit, and Sidechains which could do anything from increase security, privacy, and transaction throughput to allow for altcoins to be tied directly to the Bitcoin blockchain. There’s a detailed article covering each of these proposals which you can read more about at Bitcoin Magazine.
Ethereum is one of the few cryptocurrencies that has seen its price rise a considerable amount year to date. This has likely been spurred by the release of the Casper testnet. As mentioned, this upgrade will switch Ethereum from PoW to PoS. The runup in prices was likely due to backers buying Ether in order to prepare for staking and earning interest, a process that will require significant ETH holdings to accomplish. The release date for Casper isn’t confirmed as of yet, but you can expect it to come this year.
Casper will promote scaling as well as reduce the carbon footprint of Ethereum, something that has been a dark cloud over all PoW reliant cryptocurrencies due to our current use of predominantly non-renewable resources. After the CryptoKitties debacle of December, scaling is a necessity on Ethereum. Two of the major methods of achieving this proposed by Vitalik Buterin are via sharding and Plasma. These are fairly technical topics that you can research more if you’re inclined, but needless to say their end-goal is to bring the Ethereum network up to thousands of transactions per second or more, potentially into the billions range.
Whether these developments for both Bitcoin and Ethereum will succeed in improving issues with scaling and combating rising transaction fees will become apparent later on this year as these solutions go live.
When examining the positive developments taking place in the cryptocurrency world, it’s hard to be pessimistic. Prices, however, may be a point of pain for those who just got into this economy in late 2017. It’s impossible to say with certainty what the fiat value of the main cryptocurrencies will be later this year, but based on the news and facts available today, it’s the opinion of the author and many others that the price of Bitcoin and Ethereum will be markedly higher by the end of 2018. Either way, the development efforts taking place, the integration into the existing financial structure, and the softening tone of mainstream media and general public will pave the way for a future where cryptocurrency is deeply integrated into our lives. The best investment strategy for those just diving in today is to dollar cost average into a diversified portfolio and hold for potential long-term returns.
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Disclosure: The author of this article has investments in Bitcoin, Ethereum, and a few other cryptocurrencies. The contents of this article should not be considered professional financial advice. Cryptocurrencies are volatile assets and can potentially become worthless. Do not invest more than you can afford to lose, and make sure you research all investments thoroughly.