Correction is Exactly What the Crypto Market Needed

The end-of-the-world crowd reared their heads this week propped up by China’s crackdown on crypto mining, along with investor sentiment, and high gas prices are starting to push the market to its brink.

On the morning of May 19, 1536, Henry VIII’s fallen queen ascended the scaffold, delivered a conventional speech praising the king as a “gentle and sovereign lord” and knelt to receive the death blow. The executioner struck Anne’s head off with a single swing of his sword. She even tipped the executioner, before the hack to show her gratitude for his diligence. What a classy woman.

Bitcoin and Ethereum are the King and Queen of the cryptos, although ETH is technically an altcoin, it really isn’t. While credit definitely goes to BTC for creating the space, as with most households leave it to the woman to do all the chores, like creating the DeFi space. And like many couples, crypto folks tend to be either in the BTC or ETH camp but not both. Kind of like skating, you have your figure skaters with their fancy Axel and Lutz jumps in glam outfits, while hockey’s main goals are trying to keep their teeth intact. Both disciplines are skaters — but different.

2020 was the year of DeFi with a total-locked value (TVL) surpassing $100B. That is because Ethereum was brilliantly created to be Turing complete. In other words, Ethereum transactions can execute programmed code, known as SmartContracts, and when certain stipulations are met the SmartContract will self-execute further actions. SmartContract is a powerful paradigm that is at the core of Ethereum’s value and thereby the creation of DeFi.

BTC meanwhile has been positioning itself as Gold 2.0 but has missed out on the DeFi buzz as it is not Turing capable which in the context of DeFi means smartcontracts. BTC HODLers would have to either exchange their BTC to ETH, or wrap it into WBTC which is an ERC20 token that is pegged at 1:1 with BTC. Either way, using BTC for DeFi is inconvenient at best while also incurring exchange transaction and gas fees. But that may start to change with the Taproot upgrade.

Taproot and Polygon

They key to tying the two camps, or interoperability, starts with the adoption of Taproot, a BTC soft fork, or upgrade, that will add many new features, including the ability to enable smartcontracts on the BTC blockchain. Consensus voting looks good and Taproot will be activated in Nov. There are other big features rolled up into Taproot such as Schnorr digital signing for native multi-sig support, improved block storage, and other things which should improve efficient and thereby lower transaction fees.

Yesterday I receive my salary in the form cryptos and because of my choice in a ERC20-based coin, more than 10% of my salary had to be paid in GWEI (gas) to commit the transaction. That really goes against the promise of cryptos for efficiency. But not to be outdone, on the Ethereum side, Polygon is going to help lower gas fees by basically forming the Lightning equivalent for Ethereum, and allowing interoperability between all the blockchains.

Both Taproot and Polgyon are really significant initiatives in the crypto world, and a lot of people, effort, and energy, no pun intended, are being allocated to the crypto space to further its development. Chia Network, founded by Bit Torrent creator, and my classmate at Stuyvesant, is working on a greener alternative that is based on Proof of SpaceTime (PoSt), and suddenly mining hardware prices have collapsed in exchange for a spike in storage prices.

Conclusion

This has been a very interesting week for cryptos, first with the continuing volatility in cryptos. My crypto investment company, QuantDART, has seen a rise in redemptions which is completely understandable. But many of our investors have a fundamental belief and confidence in the future of cryptos, or an increasing distrust in the value of fiats due to the recent quantitative easing from the pandemic.

I believe that the Fed did the right thing by injecting money into the economy. But printing about $9T to $14T depending on the source, is a difficult pill to swallow to have to deal with for the future. Call it kicking the can down the road, but already real estate prices are starting to spike and could have significant negative socioeconomic ramifications later. Stocks seem to do well, but that’s only because it’s priced against the US dollar so this is just another reflection of the potential hyperinflation that is looming.

I do not know if crypto prices are going up or down. I have no idea as I tell everyone and our clients. But with any investment, a runaway rocket is NEVER good, and BTC is still up over 300% in the past year despite the correction. Likewise, I see corrections as analogous to vaccinations. Yes, it stings. You may feel nausea, get a fever, experience chills and soreness. But it’s small price to pay for a bigger calamity. In red states, I would swap out the vaccination analogy for the Capitol Insurrection — a few rioters may be killed but at least you got your message out.

China recently announced en end to crypto mining operations within China, and while that helped fuel the correction fire, the good news is that it is merely a disruption in BTC prices and that there is little long-term effect, if any, on crypto valuations. Yes major mining operations are relocating out of China, and there are crypto trading firms in China and HK are affected, but for the most part, these are small disruptions.

Here is my bulleted summary:

• Corrections, although anxiety-inducing, are good the long-term prospects in any kind of investment.
• This correction should be minor compared to previous big crypto corrections, although no can say for sure. Also the participants of the last runup has attracted more institutional capital which indicates that crypto adoption is spreading. And since this is still early in the long scheme of things for cryptos, that is a great sign for cryptos in the long-term.
• The two fairly dissociated sides of BTC and DeFi (ETH) now coming together with Taproot from the BTC side, and Polygon (MATIC) on the Ethereum side will further add synergies to the crypto space.
• Other mining models, such as PoSt, and other new technical innovations will further make cryptos and DeFi more efficient and easier to use.
• Crypto participation is getting to a level where even big news like the recent crackdown on Chinese mining do not sustain long-term bearish effect.

If BTC and Ethereum can gain synergies together, the future of cryptos will be even brighter. Stay tuned.