“Stairway to Heaven or Highway to Hell in 2018?”

2017 was a stellar year for cryptocurrencies, with the total market cap of the asset class surging by more than 30x from $17B at the beginning of 2017 to roughly $600B at the end of the year. A majority of the rise in valuation can be attributed to a proliferation of tokens created by the ICO frenzy, where the total capital raised from ICOs in 2017 ended at $3.7B versus a scanty $96M in 2016. One of the key milestones in 2017 was that Bitcoin started testing the waters of mainstream adoption as investors inevitably started realizing the inarguable benefits of cryptocurrencies and the launch of CME and CBOE futures, in addition to the FOMO created by the ever-rising price of bitcoin. To put this into context, Coinbase surpassed Charles Schwab, a leading online platform for traditional asset classes, in terms of the user base.

Enter 2018. Unlike in 2017, we expect bitcoin to have a steadier growth in 2018 as the impending deluge of institutional capital and the launch futures contracts in Dec-2017 are going to increase the liquidity and curtail the volatility to some extent. We also envision a tapered down ICO activity as compared to 2017 given the growing scepticism expressed by global regulators, which could lead to tighter regulations around ICOs.

Below are the key themes for 2018.

• BTC/BCH Paradigm: We expect the long-standing war between Bitcoin and Bitcoin Cash to continue into this year. Proponents of the Bitcoin Core believe that bitcoin in its current state offers users unseizable store of value and any changes to the underlying code such as increasing the block size, for example, would make the network less secure and undermine the store-of-value proposition. The Core believes that the transaction throughput could be increased by off-chain solutions such as Segregated Witness, Lightning Networks, etc. However, Bitcoin Cash advocates contend that medium of payment translates into store-of-value, and bitcoin needs to scale up for it become a reliable medium of exchange. Hence, they forked the BTC blockchain on Aug 1st by increasing the block size from 1MB to 8MB and formed Bitcoin Cash, which is theoretically cheaper and faster. Eminent bitcoin developer Jimmy Song in his article on Medium drew parallels between the ongoing scalability debate and the age-old Austrian and Keynesian economic theories.
• Regulatory Outlook: Regulatory intervention has been a key point of focus for crypto investors in the second half of 2017, with the US regulator proposing benign regulations around the offering of tokens during ICOs, and China imposing a complete ban on ICOs and bitcoin trading. In July this year, the SEC released a statement that said that certain ICO tokens are actually securities and subject to federal securities laws. Following the SEC’s decision, regulators of key financial markets such as Singapore, Canada and Dubai followed suit and proposed new regulations on ICOs to varying degrees of stringency. In 2018, we expect regulators across the world to tighten the screws on centralized cryptocurrency exchanges, calling for the stricter imposition of KYC norms on crypto investors. We see this as an opportunity for decentralized crypto exchanges such as 0x, OMG and Kyber Network to become mainstream players in crypto trading.
• Fund Inflows: The stellar outperformance of the crypto asset class in 2017 has caught the attention of institutional investors and HNIs. Based on our discussions, we expect to see an avalanche of capital flows into the asset class over the next 2 quarters, driven by Family Offices and UHNIs. Lack of institutional custodial framework is precluding the institutional money (pension funds, endowments and hedge funds) from entering the market. We are aware of credible and focused efforts being undertaken to build critical custodial infrastructure assets that would satisfy both regulatory and fiduciary requirements for institutional investors, following which we expect strong institutional inflows in the first half of 2018.

Happy Hodl’ing!