May 27, 2020
Stablecoins are the Future
By Kenetic Trading on The Capital
This week in crypto
Sentiment has taken a slightly more bearish tone as we look back over this past week. Last Thursday, the market experienced a big drawdown when popular Twitter account and blockchain analysis firm, @whale_alert published the news that 50 BTC had been moved from an address that had laid dormant since February 2009, only a month after Satoshi Nakamoto had mined the genesis block for him/her/themselves and brought the Bitcoin protocol into existence.
Twitter was alight with speculation that the pseudonymous creator Bitcoin had returned and was now moving the ‘’Satoshi coins’’ to exchanges to cash in on the enormous value that the haul would now be worth. This vast collection of an estimated 500K — 1m Bitcoin, mined in the initial phases of the project by Satoshi, have remained entirely dormant since creation. For years, this mysterious story has provided reassurance to the market that the now legendary creator had not only given the world a potentially revolutionary technology but sacrificed vast personal gain to ensure that the protocol was able to achieve the best possible success via the removal of considerable supply. However, should these coins start to be moved and liquidated then the impact on the market price of Bitcoin would be devastating.
Reassuringly for the market, analysts were quick to point out that the BTC transfer was very unlikely to be that of Satoshi. The technical details of which are beyond the scope of this weekly (read here for more info), but what this does highlight is how skittish this market is and how sentiment is so important to the health of the market. This potentially very bearish news, despite being debunked, has led to a retreat in prices with Bitcoin losing ~10% in value at the time of writing.
With softer sentiment and Bitcoin’s price now consolidating within the 2 giant triangle patterns, we would like to see some sustained sideways consolidation, which in our opinion is a more sensible, realistic and ‘healthy’ set up for a breach of the triangles and an attempt of new all-time highs in 2021.
With the momentum indicators cooling off a little, price could grind down to the log long term trend line and provide buying opportunities — target $7,900 — $7200 but as we have seen it doesn’t take much for sentiment to shift and bulls to regain control and move prices higher.
A possible catalyst this week is Goldman Sachs hosting a public Webinar later today entitled ‘’US Economic Outlook and Implications of Current Policies for Inflation, Gold, and Bitcoin.’’ This webinar is clearly a result of increasing incoming client interest to GS and makes for a nice continuation of the ongoing institutional interest in the market spurred by Paul Tudor Jones’ public backing several weeks ago. The content of this webinar will no doubt be scrutinized by the crypto market and could provide bullish (or bearish) fuel for the price action going forward. It will certainly be very interesting to understand the market view of one of the most successful and high-profile investment banks in modern finance. Taking a step back, it is quite remarkable to think that Bitcoin is now being publicly discussed by Goldman Sachs and how the once vehemently anti-Bitcoin JP Morgan is now banking some of the largest crypto businesses in the US, Coinbase, and Gemini. It is clear that Bitcoin is well and truly on the radar of the major institutions of the world and equally clear that the vast majority have yet to make their move into the space.
If indeed there is another significant price move upwards, towards $50,000 and beyond, then it will likely be led by the clients of these major banks. Webinars, the provision of banking services, and well-known macro investors going public with their holdings all add credibility, intrigue, and reassurance to the conservative billions of $s sitting on the sidelines, desperately searching for a return in this theoretically inflationary economic environment.
Stablecoins are the Future
Headlines were made this week as Tether, the most popular USD pegged ‘’stablecoin,’’ overtook Ripple (XRP) to become the 3rd largest digital asset by market capitalization at 8.8bn USD. Despite the controversy surrounding Tether, many argue that without its liquidity Bitcoin and other cryptocurrencies would have seen significantly less interest around the world. With over 34.5bn USD in volume traded in the past 24 hrs, Tether is predominantly used as the trading pair of choice versus many cryptocurrencies on exchanges. This has been Tether, and indeed most other stablecoins, major and only use case for many years. This is unsurprising when you look at the history of Tether and its shared ownership with long-established Asia based exchange Bitfinex, and understand that Tether was conceived as a way to allow traders to enter and exit digital assets into USD seamlessly, and move USD between exchanges without the bottleneck of traditional banking rails. This digitization of the USD ultimately benefits exchanges and their shareholders the most.
It is not coincidental that beyond the use in trading on exchanges the size of the aggregate market for USD pegged stablecoins has dramatically risen in recent months. In parts of the world where local banking systems are less ‘’reliable’’ than in Europe and the US, businesses are choosing to run their operations using stablecoins settled on the Ethereum network rather than traditional USD via the banking system. Circle’s CEO, Jeremy Allure reports that the USDC issuer is seeing the following -
“New sign-ups are coming from e-commerce marketplaces, advertising networks, luxury goods producers, recruiting platforms, digital content markets, peer-to-peer lending platforms, payment companies, software firms, professional services firms, rewards businesses, mobile banking providers and other internet companies’’
In times of crises, where emerging market banks are under significant stress, businesses are choosing to opt-out of the traditional system and leverage the advantages of a more seamless, lower risk banking system using blockchain technology.
The risk of fractional reserve banking to businesses’ USD deposits or government intervention and restriction to withdrawals and transfer of USD (as seen in Lebanon, Russia, Argentina, etc.) has been exacerbated by the accelerating global USD shortage caused by the COVID-19 induced economic slowdown. This has forced the market to seek alternatives to hedge this risk and although not initially conceived for the purpose, stablecoins, and especially Tether and Circle’s USDC have seen significant increased adoption. Businesses have chosen to adopt stablecoins that benefit from being fully reserved with USD held at banks (typically as T bills) and that are settled in a permissionless, faster, and cheaper way than the traditional banking rails offer. For businesses and individuals to be able to access a banking system and gain exposure from the mighty USD in regions of the world where banking is corrupted and inflation is high, is a very powerful development of this technology. However, if the adoption rates continue and accelerate then the weakest currencies could face collapse, and with this brings additional problems and hardships that will be hard to predict. We are a long way from this today but like most technologies, adoption is slow initially before it enters the J curve/hockey stick.
Many Bitcoin purists will balk at the idea that a USD pegged digital asset is undeniably becoming a success story of the industry and that the Ethereum network which settles the transaction is one of the main beneficiaries. It will be fascinating to watch the adoption increase in the coming months and years and how these private companies, which are essentially running their own currency policies, expand their user base and compete (as they should) with the expensive, restrictive and slow legacy banking system.
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