Transformation in crypto: The start of Year 2017
We will talk in this article mainly about the investment possibilities in crypto markets. Please, don’t take it as investment advice. Keep in mind, big profits are always connected with big risks. Learn about the risks.
You can read about some of them in my previous article.
Lately most of the news is focused on Bitcoin, which is reaching its ATH (all time high). We expect this news flow to increase even more in the short term. While this is indeed an exciting time, I believe we should look more closely at the larger crypto landscape.
Consider this chart:
It represents the capitalization of the entire crypto market and we have just had a decisive breakout to new highs. This means we are most likely entering the next wave of crypto acceptance and would not be surprised to see continually rising prices for most or all major crypto assets.
It’s also true that the majority of the market cap belongs to Bitcoin (a bit less than 90 % as of the moment of this writing). Let us, however, look at a few more charts and maybe we will find other opportunities that aren’t right there on the surface.
But before we do this…
A short introduction to Elliott Waves
What I will use in this article for chart analysis is the applied Elliott Waves theory, which explains, in a visual way, crowd behavior. It describes how the market moves between two extremes: positive (hype) and negative (depression).
For some time, price and market sentiment will move up… then for some time it will move down…and the cycle repeats. These moves occur in either 5 or 3 wave shapes:
The move in the direction of the main trend is made of 5 waves, and the corrections are always in 3 waves. The waves are fractal in nature, meaning the patterns repeat themselves on any time scale.
I’ve had pretty good results using Elliott Wave theory to analyze crypto markets. The reason is simple — crypto markets can be very emotional, as many participants are aiming for extreme gains while exposing themselves to huge risks. The market is strongly driven by fear and greed — two basic motivators that we all need to survive, yet can also get us into trouble. Emotions display on the charts in pretty clear patterns (waves), painting the the regular cycle between hype/excitement and depression/panic.
Let us apply this knowledge now
Using Elliott Wave theory, let’s compare the market capitalization charts for “altcoins” (everything but Bitcoin) and the entire crypto market.
First, the altcoin chart:
The arrows are just for descriptive purposes — they do not represent actual expected prices or times. They show one important thing though: the altcoin market is entering the “third of a third” wave, which is something special in Elliott Waves theory. This is often the moment the crowd realizes that the main trend, either up or down, is occurring (and it is, by the way, the only time the crowd is right about price direction). The trend gets accepted by the majority. Good news keep coming, the price steadily climbs up… Good time to be “long” in the market.
Now let’s check the chart for the whole crypto market:
Here the pattern is slightly different. To the eye of the Elliott Waves practitioner, this difference is quite telling. We are already close to the middle of wave 3. We still need a few sequences of up and down to finish this wave. But the moves here won’t be as volatile and intense as the moves in the alts-only market, as the crowd is already “aware” of the benefits in crypto (they call it “blockchain” and mostly consider it to be Bitcoin).
What does this all tell us?
Based on this analysis, we can comfortably expect the alt crypto market to rise substantially more (in %) than the Bitcoin market over the next 6–12 months. We might see “alts” capitalization reach somewhere around $7 bln. This figure is based on a typical Elliott Waves Fibonacci projection, where wave 3 is either 1.61 or 2.61 the size of wave 1. We saw wave 1 rise from 0.5 bln to 2.8 bln (a move of around +$2.3 bln), so based on the next wave pattern, we could see an increase anywhere between $3.5 bln and 6 bln in the next move.
The question now is, which assets will bring in this additional money ?
For clues, let’s look at where alt coins may outpace Bitcoin with substantial technical advantages (and therefore offer enough to drive up market excitement). There are two areas where Bitcoin has been unable to keep up with innovation related to user benefits (we’ll skip topics like moving from PoW - proof of work, to PoS - proof of stake, for now):
- Smart contracts
- Anonymity
Smart contracts
Smart contracts could potentially have the greatest effect on the way we use the internet in the not-so-distant future. One way, which already exists now, is ICOs and tokenized economies. ICOs have had their share of problems already (not all funded projects will deliver what they promise) and we might see an ICO bubble pop at some point. Yet, ICOs are by far the most democratic, transparent, and frictionless ways to fund and run modern digital companies. I have little doubt that strong communities will be able to establish proper open-source environments to get the most out of this trend.
So far, Ethereum appears to be the de-facto platform of choice for developing smart contracts and the “rise of the ICO.” Most ICOs are created here and we expect the trend to continue. The openness of Ethereum platform allows many teams to work together on building the many needed components — such as decentralized exchanges, mobile clients, CDNs (content delivery networks), oracles, prediction markets, stable cryptocurrecies, the list goes on — for running the modern digital companies. No other platform is yet able to compete with this force of constantly growing, independent yet collaborative teams working together.
It means ETH (the cryptocurrency behind Ethereum) alone, with all “incorporated” Ethereum blockchain companies, could bring in a significant portion of this additional valuation.
Anonymity
Protecting one’s privacy has become a key area of concern in our digital social lives. From hacking to identity theft to other types of cyber (or physical) incursions, people are becoming more aware of how important it is to guard their personal activity online. Sharing your data is getting more and more unpopular, to say the least.
Blockchain technology (and Bitcoin as its biggest implementation) unfortunately does not provide privacy by default.
Platforms that are properly designed to give users all the benefits of blockchain technology plus unbroken privacy will get alot of attention this year (this trend has actually already started as of late 2016).
XMR, DASH, ZCash, and SDC are the main actors in this space (sorry if I forgot someone). They might bring quite a bit of additional valuation too.
Final note…
This article outlines my personal view of crypto markets on a macro level for the next year or two. Once again, don’t take it as investment advice. It is not. View it as motivation to learn more about crypto markets in general, the technologies behind them, and especially the risks of investing in them.
Those who have invested in cryptocurrencies for some time now know what FOMO (fear of missing out) and “pump-and-dump” are, and how real depression and panic feel. Those who are just considering entering the crypto investment world… be careful. Seek out some knowledge (for instance on our platform santiment.net) before dumping your savings into what you think is “the best ever” investment possibility.
Good luck and let the power of the crypto world stay with us!
Maksim Balashevich is the founder of santiment.net.
He has more than 15 years experience building and leading international teams, and more than 10 years experience in financial markets analysis.
Lately he has focused solely on Elliott Waves Theory, sentiment analysis and crowd psychology in crypto markets.
He also draws upon his unique background in a yogic way of life to foster a human-focused, balanced approach to building teams, communities and decentralized platforms. He believes it is especially important in an area like finance to promote trust and transparency from the beginning and on every level, to create a better society for all people.
