A Bitcoin ETF -- One of Three Bitcoin Turnaround Scenarios

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by Brian Sewell

SEC approval of a bitcoin ETF could attract an unprecedented level of investment in bitcoin. An SEC-approved bitcoin ETF represents the last of three potential factors that I believe could inspire a new wave of investor interest in bitcoin. As outlined in previous posts, the two other potential developments are:

  • Approval by the U.S. Commodity Futures Trading Commission of Bakkt, a proposed bitcoin futures trading system;
  • Conclusion of the Mt. Gox bankruptcy restitution proceedings.

Prospects of Bitcoin ETF SEC Approval

An ETF, or exchange-traded fund, is a marketable security that trades like a stock and tracks a stock index, a commodity, or a basket of assets. The SEC rejected a raft of applications for a bitcoin ETF in 2018, citing concerns over custody (the secure storage of assets) and market manipulation. Approval this year is by no means certain. SEC commissioner Hester Peirce, the Agency’s biggest booster of a bitcoin ETF, has recently become circumspect about the chances of approval, citing “very arcane rules,” adding, “I can’t speculate on the timing.”

But given persistent filings and revised proposals by U.S. companies, it could be only a matter of time before a proposed bitcoin ETF meets SEC criteria. Ric Edelman, founder of Edelman Financial Engines expressed confidence in a recent CNBC interview that the SEC will eventually approve a bitcoin ETF. “At that stage,” he added, “I will be much more comfortable recommending that ordinary investors participate."

VanEck SolidX Bitcoin ETF

The Chicago Board Options Exchange (Cboe) recently refiled an SEC application for the proposed VanEck and SolidX bitcoin ETF, widely regarded as the most likely cryptocurrency product to win SEC approval. VanEck will price its security using the MVBTCO index, which prices bitcoin based on over-the-counter (OTC) platforms. OTC markets are generally more liquid than futures markets.

The public now has until March 13th to file comments on this proposal. The Commission can deny or approve the proposal by April 5th, or request a 90-day extension, which could postpone a decision until July 5th.

Bitwise Bitcoin ETF

Bitwise Asset Management has also filed with the SEC for a bitcoin ETF. Bitwise has proposed a physically-backed bitcoin ETF tracking the firm’s Bitcoin Total Return Index. The index derives its price from various cryptocurrency exchanges. In contrast to the VanEck plan, and all past proposals, the Bitwise bitcoin ETF would use regulated third party custodians to hold its physical bitcoin.The firm registered on January 10th, which allows the SEC to make a decision by late March (or late June, assuming a ninety-day extension).

Global Impact -- South Korea

Federal U.S. regulatory approval of a bitcoin ETF could have global ramifications. South Koreans, for example, comprise roughly 30 percent of total cryptocurrency trading worldwide, according to one estimate, an extraordinary figure given the nation’s adult population of only about 50 million.

South Korea has experienced several high profile cryptocurrency scams, which spurred local regulators to ban both ICO's and the anonymous trading of cryptocurrency from September, 2017 through March 2018.

But South Korea’s only securities exchange, the Korea Exchange (KRX), is closely watching to see whether U.S. regulators approve a bitcoin ETF, which would inform its own regulatory policies, according to a KRX official speaking in The Korea Herald.

“The U.S. has been the front-runner on the cryptocurrency market and related derivatives,” said the official, “and there are strong voices supporting the launch of bitcoin ETF's within the [U.S.] market -- which is why we are observing the progress and response of the U.S. Securities and Exchange Commission’s decision on bitcoin ETFs.”

To help protect investors from volatility and manipulation, South Korea wants to see a robust underlying index for a bitcoin ETF.  “Providing a solid index required for the launch of such ETF's, and of its role when it is commercialized and integrated into the market,” said the official, “is being discussed expansively at the KRX because it would eventually concern investor protection issues.”

Bitcoin Price Potential

Bitcoin has the largest market capitalization of all cryptocurrencies, at $67 billion. That’s the equivalent of a U.S. large-cap stock. But it’s less than one tenth the size of the largest U.S. stock by market cap, Microsoft at $851 billion. That provides a sense for how substantial long-term investment could impact the price of bitcoin.

The Odds of a Bitcoin Turnaround

Let’s use probability to gauge bitcoin’s chances of attracting a new critical mass of long-term investors. There’s no guarantee that the SEC will approve one of two bitcoin ETF proposals. We don’t know whether, and when, the CFTC will approve Bakkt. Finally, it’s unclear when the Mt. Gox restitution case will come to an end. But if just one of these factors resolves this year in favor of bitcoin, the world’s largest cryptocurrency could attract a broader group of institutional and retail investors than ever.

Brian SewellBrian Sewell is Founder of Zion Trades, www.ziontrades.com, a cryptocurrency trading platform.

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This material is provided only for general educational purposes and is not investment, legal, tax or professional advice or an offer to buy or sell any assets. Opinions provided herein are exclusively those personal opinions of the author and should not be relied upon in making decisions regarding cryptocurrencies. This material may be inaccurate and there is no requirement that the author update this content or correct it at any time.



 


Bakkt Approval Could Boost Bitcoin

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by Brian Sewell

If Bakkt is approved by the U.S. Commodity Futures Trading Commission (CFTC), the proposed bitcoin futures trading system could contribute to a strong bitcoin turnaround. 

Appeal to Institutional Investors

The venture's gravitas makes it a potential game changer. As we described in our previous post on Bakkt, the venture's founder, Intercontinental Exchange (ICE), is arguably the world’s most successful operator of financial exchanges. Led by visionary entrepreneur Jeffrey Sprecher, ICE owns The New York Stock Exchange and leading futures exchanges in many major asset categories.

That unique track record seems to appeal to institutional investors, whose fiduciary guidelines typically require investing through government-regulated channels. The lack of U.S. regulatory approval helps explain why many institutions have sat on the crypto sidelines. Bakkt also appeals to some big name financial institutions. The proposed system “...is the only name we are considering in terms of client funds finding their way into crypto,” observed a trader at JP Morgan Chase in a recent interview. Since that statement, JP Morgan itself has recently announced the launch of its own centralized cryptocurrency. And that may not preclude JP Morgan from using Bakkt to trade bitcoin for its own account, or for clients.

Designed to Improve Bitcoin Fundamentals

Bakkt is designed not only to facilitate trading, but strengthen bitcoin’s fundamentals. Partnerships with tech giant Microsoft and retailer Starbucks, according to Bakkt, will help incubate the development of the next generation of convenient applications needed to fuel mass cryptocurrency adoption.

Expected to Launch Later This Year

The government shutdown and the absence of CFTC regulatory approval have repeatedly postponed Bakkt’s launch. But the venture will likely launch "later this year,” according to Sprecher’s statement during ICE’s February 7th earnings report.

Bakkt claims that the delay of a decision has allowed it to build a formidable base of institutions interested in its services. It’s also raised $182 million for the venture, and has itself invested substantially in the project, estimating its annual costs for Bakkt at over $20 million.

Given the deep experience of the ICE, it seems possible that Bakkt could receive US government approval for its venture this year. If so, investors could experience a new level of confidence in the future of bitcoin and the entire cryptocurrency market.

 

 

Brian SewellBrian Sewell is Founder of Zion Trades, www.ziontrades.com, a cryptocurrency trading platform.

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This material is provided only for general educational purposes and is not investment, legal, tax or professional advice or an offer to buy or sell any assets. Opinions provided herein are exclusively those personal opinions of the author and should not be relied upon in making decisions regarding cryptocurrencies. This material may be inaccurate and there is no requirement that the author update this content or correct it at any time.



 


Mt. Gox Bankruptcy: Resolution Could Boost Bitcoin

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by Brian Sewell, 694 words.

This post explains how actions aimed at providing restitution to creditors following the Mt. Gox exchange bankruptcy depressed the price of bitcoin, according to Goxdox, an anonymous entity that analyzes the Mt. Gox bankruptcy proceedings. The resolution of this case represents one of several factors I believe could spark a bitcoin resurgence this year, and support the overall cryptocurrency market.

Mt. Gox Bankruptcy 

Mt. Gox, formerly one of the largest cryptocurrency exchanges, declared bankruptcy in 2014 after announcing the loss or theft of approximately 850,000 bitcoins (then worth roughly 450 million USD). Some of those tokens have since been recovered. According to one estimate, the Mt. Gox trustee still controls 137,891 units of BTC, worth approximately half a billion USD at this writing.

Mt. Gox Trustee Accused of Dumping BTC

Goxdox recently leaked bank statements suggesting that Mt. Gox trustee Nobuaki Kobayashi artificially depressed the price of bitcoin in the winter and spring of 2018. In an effort to raise cash to compensate Mt. Gox creditors, concludes Goxdox, the trustee dumped about $312 million USD of bitcoin and bitcoin cash onto the market.

Kobayashi conducted the liquidation as part of investor restitution efforts. But the trustee was advised to liquidate the Mt. Gox positions in an auction or with an OTC broker, to avoid market disruption, according to Goxdox. Kobayashi instead sold the positions on a weekly basis through a Japanese exchange, Bitpoint.

Goxdox concludes that this action artificially depressed the price of bitcoin in the spring of 2018, and possibly earlier. For example, while BTC rallied past $9,900 by May 5th, according to Goxdox, Kobayashi’s sales led bitcoin to fall to $7,500 by June 5th. The consequent negative market sentiment caused BTC to sink even farther, claims Goxdox, to $6,200.

Mass BTC Liquidations Appear Over

The good news for the bitcoin market is two-fold: first, Goxdox appears to have identified an artificial, temporary factor that weighed down the price of bitcoin last year. These insights provide new transparency, which may help support investor sentiment. Second, the drag on the market caused by these sales seems to have ended. The Mt. Gox restitution status was switched in June from a bankruptcy process to “civil rehabilitation.” In Japan, this process allows creditors to receive restitution in assets, in this case, in bitcoin, rather than in a fiat currency. In essence, there seems no further reason for the trustee to liquidate mass quantities of bitcoin.

Outstanding Issues

Granted, there’s more to the Mt. Gox case than mass bitcoin sales. A series of unexpected twists make the process resemble a soap opera more than a bankruptcy proceeding. But as the case winds down, it’s unlikely that even a new turn of events will impact the price of bitcoin as negatively as the mass liquidations did.

The following outstanding issues could resolve this year, which could further support investor confidence:

  • Entrepreneur Brock Pierce claims that he acquired Mt. Gox in 2014, and wishes to reopen the exchange, paying the creditors using the equity of the company. But Mark Karpeles, the defunct exchange’s former CEO, refutes that Pierce ever bought the firm.
  • Karpeles himself has filed a plea of not guilty in his Tokyo trial, where he is accused of embezzling approximately 340 million yen (over $3 million) from the exchange and fraudulently manipulating Mt. Gox data. A verdict is expected on March 15th.
  • Bitcoin business incubator CoinLab has reportedly filed a 1.7 trillion JPY ($16 billion) claim against Mt. Gox concerning a failed partnership of the two entities. This suit could slow, or potentially disrupt, the restitution process to Mt. Gox creditors. But it may also become dismissed, since the restitution claim seems quite high.

Resolving Mt. Gox. Can Help Restore Investor Confidence

The Goxdox analysis represents  a step toward restoring investor confidence in bitcoin, since it identifies a temporary factor that artificially depressed the price of the world’s largest cryptocurrency by market capitalization.

79% of survey financial advisors received questions from clients on crypto in 2018, according to a poll of financial advisors by Bitwise Asset Management. Clear signals this year that the Mt. Gox restitution case is reaching a conclusion could help turn interest in cryptocurrency into investment.

 

 

Brian SewellBrian Sewell is Founder of Zion Trades, www.ziontrades.com, a cryptocurrency trading platform.

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This material is provided only for general educational purposes and is not investment, legal, tax or professional advice or an offer to buy or sell any assets. Opinions provided herein are exclusively those personal opinions of the author and should not be relied upon in making decisions regarding cryptocurrencies. This material may be inaccurate and there is no requirement that the author update this content or correct it at any time.



 


Will Facebook Cryptocurrency / WhatsApp Venture Strengthen Bitcoin?

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By Brian Sewell (695 words)

Crypto 2.0 appears imminent, led by corporate-controlled digital assets such as a Facebook cryptocurrency. The overall cryptocurrency sector could benefit if such ventures compel more people to adopt crypto. But if the social media giant treats financial payments customers with the same disregard for privacy that it's displayed toward its social media users, it would also make the case for decentralized rivals such as bitcoin.

Nevertheless, such ventures could well disrupt sectors from entertainment to financial services. Facebook, for example, will offer remittance payments to India, integrating a cryptocurrency stablecoin with its WhatsApp mobile messaging service, according to Bloomberg. The firm’s WhatsApp mobile messaging service has 200 million users in India, a nation that received $69 billion in overseas remittances in 2017, more than any other country.

India and The Developing World

As observed in our 2018 post, Developing World populations have the greatest incentive to use cryptocurrency for commerce because they lack reliable banking systems. With 2.27 billion global users, Facebook might have a significant opportunity to roll-out a convenient, low-cost remittance model throughout the Developing World. The global average cost of sending $200 was 7.1 percent in the first quarter of 2018, more than twice as high as the Sustainable Development Goal target of 3 percent. If it can reduce fees and raise convenience, the venture may achieve mass scale while also burnishing Facebook’s image.

Will The Developing World Trust Facebook?

But can Facebook garner trust in the wake of its massive customer data-sharing scandal involving Cambridge Analytica and a host of other internet firms? It can, says Richard Raizes CIO and General Partner of Plutus21, a Dallas-based investment firm focused on alternative assets including cryptocurrency. “Facebook ranks poorly among users for data privacy and trust. But most users don’t know that Facebook owns WhatsApp, which is a trusted messenger for over a billion users.”

Skepticism For Centralized Cryptocurrency

Yet Raizes wants to know more details about Facebook’s plan. “A decentralized cryptocurrency could be hugely innovative,” he says. “A centralized model, on the other hand, may put competitive pressure on Western Union, but not be a truly disruptive technology.”

Nic Carter, a Partner at Castle Island Ventures, offers a more pointed view: He expects Facebook to issue a centralized cryptocurrency, which he believes will gain traction because of its convenience for WhatsApp’s mass customer base. But he doesn’t think such a corporate-controlled model can compete with decentralized tokens, designed to prevent the very intrusions on privacy and violations of trust that Facebook has come to embody.

“FBcoin would further entrench Facebook’s control over its users,” Carter says, “moving from the data realm to the financial realm, too. While some enthusiasm for cryptocurrency may be diverted to Facebook’s (presumably centralized) cryptocurrency, the value proposition for free, uncensorable, trust-minimized money, will remain the same, and even be augmented.”

Tracking Crypto Adoption vs Investment

But tracking the adoption rate of decentralized, “trust-minimized money” such as bitcoin has proven elusive. A study by the Cambridge Centre for Alternative Finance concludes that 35+ million people own digital assets predominantly as an investment, not as a transaction medium. And no publicly available metric tracks the cryptocurrency adoption rate, i.e., the proportion of crypto owners that actually use cryptocurrency to engage in commerce.

This may help explain why investment issues such as SEC regulatory crackdowns and setbacks have so deeply rattled the cryptocurrency markets, impacting tokens that don’t currently fall under SEC rules, such as bitcoin. Given the dearth of practical applications, the lack of adoption data, and the popularity of cryptocurrency as a means for capital appreciation, investment factors seem to have driven the cryptocurrency markets far more than have fundamentals.

Decentralized Crypto Technology May Also Be Maturing

But just as Facebook seems to be developing a centrally-controlled cryptocurrency, technology for decentralized cryptocurrencies may also be maturing. The expected launch of Bakkt this year, for example, described in our recent post, is designed to spur a wave of applications facilitating the use of bitcoin. Further, RSK has developed an open-source platform for bitcoin aimed at enabling smart-contracts, near instant payments and higher-scalability. Such innovations could boost bitcoin adoption, supporting its price based more on fundamentals than investment appeal.

If FBCoin Fails to Protect Customers, Bitcoin May Benefit

If FBCoin fails to protect users' basic rights, then as Carter predicts, the case for immutable, decentralized cryptocurrency will become stronger than ever.

--

Brian SewellBrian Sewell is Founder of Zion Trades, www.ziontrades.com, a customer-focused cryptocurrency trading platform.

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This material is provided only for general educational purposes and is not investment, legal, tax or professional advice or an offer to buy or sell any assets. Opinions provided herein are exclusively those personal opinions of the author and should not be relied upon in making decisions regarding cryptocurrencies. This material may be inaccurate and there is no requirement that the author update this content or correct it at any time.



 


Bakkt - Why A Successful Launch Could Boost the Cryptocurrency Market

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By Brian Sewell (513 words)

A successful  launch of Bakkt's bitcoin exchange platform could impact the direction of the entire cryptocurrency market. Bakkt has high ambitions for what would be the first-ever bitcoin-settled futures contract. For Bakkt seeks to create more than a liquid, well-policed, U.S. regulatory-approved market to trade bitcoin. It also also plans to provide a scalable system for consumers, merchants, and businesses to use bitcoin to conduct cost-efficient global commerce.

Granted, as reported in The Daily Hodl, Bakkt isn't the only game on earth. Other exchanges are also vying to launch physically delivered cryptocurrency futures, such as Hong Kong-based CoinFLEX.

But how could news on US-based Bakkt still potentially impact the cryptocurrency market? According to a study by the Bank for International Settlements (BIS), announcements of general bans on cryptocurrencies, or restrictions that put them under the jurisdiction of securities law, have the greatest adverse effect on cryptocurrency prices. Conversely, announcements on ‘specific legal frameworks,’ tailored to cryptocurrencies and initial coin offerings, coincide with strong market gains. The study's authors surmise that the market generally reacts positively to progress on 'specific legal frameworks' because such regimes tend to have milder oversight rules than do securities law.

In applying to the U.S. Commodity and Futures Trading Commission (CFTC) instead of the SEC for approval of its platform, Bakkt seeks just such a special regulatory framework. So, if the platform successfully launches as planned on January 24th, or slightly later due to the holidays,  cryptocurrency prices could experience a bounce, or conceivably find more sustained support. 

Favorable regulatory announcements have coincided with a 1.52% rise in bitcoin prices, for example, within twenty-four hours, according to the BIS report, while unfavorable announcements have coincided with a 3.1% drop. The price move tends to be larger within the ten days surrounding the announcement, according to the study, with progress on specific legal frameworks boosting the price of bitcoin from 5% to 22%.

The market reaction could go either way, depending on how Bakkt fares. The March, 2017 SEC rejection of  a proposal to alter stock exchange rules to allow a bitcoin ETF caused bitcoin to drop 16% in the five minutes around the announcement, according to the report. And Bakkt’s launch has been twice postponed, most recently, to January 24th, 2019. But the outlook seems increasingly promising. According to The Wall Street Journal, Bakkt “...is expected to soon get regulatory approval.”

As we state in our previous post, Bakkt has plenty going for it: "Its owner, ICE (Intercontinental Exchange Inc.), has amassed an extraordinary record of creating, revitalizing, and optimizing regulated financial exchanges. Not only does ICE operate six leading regulated financial exchanges, including the New York Stock Exchange, but it sells data on exchange pricing and analytics, its biggest revenue generator. It would be hard to find a more experienced operator capable of securing the institutional and regulatory confidence to create a well-policed, liquid market."

If Bakkt gains regulatory approval and successfully launches its platform, its quest to add market integrity and fundamental value to bitcoin could provide a confidence boost to the entire cryptocurrency market.  

 

Brian SewellBrian Sewell is a founder of Zion Trades, a cryptocurrency trading platform https://www.ziontrades.com.

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This material is provided only for general educational purposes and is not investment, legal, tax or professional advice or an offer to buy or sell any assets. Opinions provided herein are exclusively those personal opinions of the author and should not be relied upon in making decisions regarding cryptocurrencies. This material may be inaccurate and there is no requirement that the author update this content or correct it at any time.

 


Liquid - A Bid to Improve Bitcoin Transaction Speed

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by Brian Sewell, 1,400 words

Still in its infancy, trading cryptocurrency as a financial asset involves inefficiencies that hamper the effectiveness of cryptocurrency exchanges, financial institutions, and investors. For example, unpredictable transaction times to send bitcoin to an exchange, or between exchanges, distorts market liquidity. A consequent delay in trading volume may also cause relatively small trades to move the price of bitcoin, leaving it vulnerable to volatility or price manipulation.

San Francisco-based Blockstream claims its innovation, Liquid, which went live last month, can make cryptocurrency markets more efficient, predictable, and profitable. Liquid “links cryptocurrency exchanges, brokers, and institutions around the world,” according to a Blockstream blog post, “enabling the rapid, confidential, and secure transfer of digital assets between participants.”

Current Bitcoin Transaction Times Are Unpredictable

Bitcoin’s current transaction speeds are unpredictable, observes Blockstream’s Director of Product Management, Allen Piscitello. Bitcoin’s average transaction speed appears efficient only at first glance, he says. In a ten-minute interval, the probability of a block being found is an estimated 63%. So approximately two-thirds of the time, it will take ten minutes or less to send bitcoin to an exchange and complete a transaction. The probability is 95% to find a block in a thirty minute time span, and 99.7% within sixty-minutes.

“But the chances of a bitcoin transaction taking an hour is not rare for a financial institution that produces large sample sizes, of nearly a hundred and fifty blocks a day," says Piscitello. For such an institution, he estimates, “the '95%' probability figure means that about eight times a day, it would take up to thirty minutes to send bitcoin to an exchange. And the '99.7%' probability for such an institution means that about every other day, it would take up to an hour to send bitcoin.”

Faster Transaction Times 

Instead using Liquid’s digital proxy for bitcoin, L-BTC, Piscitello says, speeds transaction times to a consistent two minutes or less. Pending sufficient company sign-ups, he says, Liquid can improve transaction speeds for “billions of dollars worth of bitcoin a day.”

How Liquid Works

Liquid creates such faster, more predictable bitcoin transactions, says Piscitello, because its “federated sidechain” system authenticates and organizes transactions onto the blockchain more efficiently than bitcoin’s traditional “proof-of-work” model. The proof-of-work model sets “miners” in competition with one another, racing to solve an equation in order to authenticate a transaction and place it in a blockchain ledger.

Liquid’s federated sidechain process instead enlists fifteen participating companies to collaborate with one another. Together, a subset of the functionaries authenticate a transaction, order it within the evolving chain of transactions on the blockchain ledger, and ensure its size remains within Liquid’s predetermined limits. This consensus-based approach for validating and placing a transaction, says Piscitello, makes Liquid a faster transaction mechanism than simply trading bitcoin.

After entrusting bitcoin to the functionaries, a company or individual wishing to trade bitcoin receives an equal amount of Liquid tokens (L-BTC), explains Piscitello. The Liquid system allows the trader to send the tokens to an exchange more quickly than sending bitcoin. The exchange that receives the L-BTC then credits the trader’s account with an equivalent amount of bitcoin. The trader can then conduct trades in bitcoin on the exchange.

Security

Liquid’s security protocols include a custom hardware device on the server, which uses a simple serial interface to protect the private keys that hold the bitcoin assets and update Liquid’s ledger. The device also validates that the funds either stay within the network or are paid only to a predetermined white list of participating financial institutions.This ensures that a functionary administering the Liquid blockchain ledger does not accidentally reverse an authenticated  transaction.

Morgan Steckler, CEO of iTrustCapital, which offers an IRS-approved platform allowing investors to move money from their retirement accounts into cryptocurrency, finds these security measures well thought out. "The use of a hardware device on the server to protect the private keys and ensure the funds stay within a predetermined white list ecosystem is a good strategy that is scalable,” he says.

Liquid’s Downsides

Cost

Liquid currently costs more than simply sending bitcoin. Investors pay 10-20 cents per transaction, compared to 5-10 cents using bitcoin’s current method. But Piscitello says the higher cost of sending L-BTC than simply sending bitcoin represents a worthwhile trade-off for the far faster transaction speed.

Scalability

Piscitello also underscores that Liquid is not a scalability solution for cryptocurrency. While Liquid's transaction speeds surpass those of bitcoin, Liquid’s overall capacity remains roughly equivalent to bitcoin’s. He adds, however that the same scalability solutions being developed for bitcoin, such as the Lightning Network, would also likely benefit Liquid.

Operational Risk

Piscitello concedes that Liquid isn’t perfect. Its federated side chain process depends on a small group to authenticate a transaction and place it in the block chain. If five of the fifteen functionary businesses needed to validate a Liquid transaction were simultaneously off the internet, due to an electrical outage or a cyber attack, that transaction would be delayed. “Bitcoin can withstand a partial outage,” he says. “Liquid cannot.”

Are Financial Institutions Using Liquid?

Blockstream has currently signed up over twenty-three exchanges, financial institutions, brokers, and traders to use Liquid. The list includes Bitmex the second largest cryptocurrency exchange by reported volume, OKEx (ranked 5), and Bitfinex (ranked 13). Blockstream plans to expand to fifty firms and eventually, to several hundred. While a subset of participating businesses will serve as functionaries to authenticate and operate the network, Piscitello says the remainder will have the full benefits of the network without administrative obligations.

Last month, TheRockTrading became the first exchange to accept Liquid for deposits and withdrawals, accommodating XBTO, which became the first cryptocurrency trading company to send L-BTC to an exchange to trade bitcoin. “From the time XBTO sent their L-BTC to TheRock, XBTO started trading in less than five minutes,” says Piscitello.

Liquid’s Big Test -- Full-circle Arbitrage Trade Between Exchanges

Piscitello says the successful completion of a “full-circle” arbitrage trade would represent one of the first major use cases of Liquid, which he hopes two institutions will conduct by the end of this year. A full circle arbitrage trade is a series of trades which generate profits by continuously taking advantage of an asset listed at a different price on two different exchanges. The faster a firm can conduct such trades, the more profit can conceivably be made. “Once using Liquid to conduct faster arbitrage becomes common,” says Piscitello, “I'd expect a sharp increase in value transfers by financial institutions on Liquid.”

Privacy and Regulation

In contrast to a bitcoin transaction, using Liquid preserves anonymity, says, Piscitello, an advantage for a business, which may not want to tip its hand to competitors. Since Liquid obscures all asset types and amounts that third parties transmit to Liquid, “there could be billions of dollars traded, and only the traders involved in the transactions would even be aware.”

Yet how will regulators, concerned with money laundering, tax evasion, and market manipulation, react to such lack of transparency? Piscitello points out that Liquid allows cryptocurrency exchanges to share information with an auditor, to prove the amounts traded were what they say they were, a strong deterrent, he says, against abusive activity.  

He adds that Liquid’s ability to send cryptocurrency more quickly to an exchange -- or between exchanges -- reduces the thin markets that can enable relatively small trades to move the market, and potentially, manipulate them. “By moving cryptocurrency more quickly between exchanges, opportunities for market manipulation will be shorter and more costly." Increased liquidity could also reduce market volatility, itself a key stumbling block for institutional investors to enter the crypto markets.

Skeptics

Richard Raizes, CIO and General Partner of Plutus21, a Dallas-based hedge fund that invests exclusively in cryptocurrencies and crypto assets, is skeptical of Liquid. "I'm just not convinced there's enough benefit here. Sure, it's faster than just sending bitcoin, but it's more expensive.” He also wonders why no U.S. exchanges have yet signed up for Liquid. "Are Liquid's regulatory barriers too onerous?" he asks.

"Liquid is an interesting sidechain approach,” adds iTrustCapital’s Steckler. “But the businesses needed to operate the network are trusted intermediaries, and ones that can reverse a transaction. So, Liquid is not trustless, decentralized, or immutable, as BTC is. It will be interesting to see if this model addresses the reasons a lot of capital is still waiting on the sidelines to invest in cryptocurrency.”

Brian SewellBrian Sewell is Founder of Zion Trades, www.ziontrades.com, a customer-focused cryptocurrency trading platform.

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This material is provided only for general educational purposes and is not investment, legal, tax or professional advice or an offer to buy or sell any assets. Opinions provided herein are exclusively those personal opinions of the author and should not be relied upon in making decisions regarding cryptocurrencies. This material may be inaccurate and there is no requirement that the author update this content or correct it at any time.



 


Bitcoin's Value - Cryptocurrency Forecast

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by Brian Sewell, 928 words.

The recent cryptocurrency market plunge raises questions about bitcoin's value and the cryptocurrency market outlook. Regulatory action may have contributed to market jitters. The SEC generally characterizes a token as a "security" when it has a controlling (or "centralized") entity attempting to provide investors a return. That would put such a token under SEC regulation, potentially subjecting it to sanctions if it hasn’t registered with the SEC.

ICO Quandary - SEC Death Knell?

This quandary applies to most U.S.-based ICO’s (Initial Coin Offerings), and may have recently helped depress the cryptocurrency market. The SEC recently settled charges against Airfox and Paragon Coin, the Agency’s first cases imposing civil penalties solely due to ICO securities that neglected to register with the SEC.

Nic Carter, Partner at Castle Island Ventures, a venture capital firm investing in blockchain infrastructure and application companies, doesn’t fault the SEC’s actions. He believes securities should always be highly regulated. SEC penalties and restrictions, however, represent a potential death knell for many ICO’s. Carter thus estimates that only a handful of the larger ICO-based tokens will survive, ones with the clout and robustness to deter an SEC judgement.

The SEC’s Strategy

How will the SEC regulate the hundreds of ICO-based cryptocurrency tokens? Carter thinks the Agency will pick its battles to get the most bang for its buck. He cites the high profile fining of boxer Floyd Mayweather and music promoter DJ Khaled for promoting the ICO of Centra Tech Inc. without revealing that they had received payment for doing so.

Analyzing Cryptocurrency Fundamentals

Assuming it avoids or survives SEC sanctions and restrictions, a token’s fundamentals, says Carter, represent the best indicators of future value. As co-founder of Coinmetrics, a resource devoted to bringing transparency to the cryptocurrency industry, Carter has developed a metric called “adjusted transaction value,” a nuanced tally of the dollar value of transfers on a network.

Bitcoin - Value and Outlook

Take bitcoin, a decentralized token which never had an ICO, and earned SEC designation as a “non-security.” Carter discounts bitcoin’s recent price dive because its adjusted daily adjusted transaction value has remained “quite robust” for the last six months, at roughly $1-2 billion. He estimates bitcoin's annualized adjusted transaction value at $500 billion to $1 trillion. That's small compared to payments methods such as Visa or ACH, he says, but substantial nevertheless.

Yet even his computations of bitcoin daily adjusted transaction value, he observes, may underestimate the token’s usage as a transaction medium. A single bitcoin transmission, he points out, can contain thousands of inputs. “There’s a lot more transaction capacity than last December,” he says, when bitcoin’s inability to handle rising transactions boosted fees and depressed its trading price. He cites the use of both SegWit, a software protocol providing increased block capacity for bitcoin transactions, and “batching,” which can send many transactions in a single transmission. He also would like to see a new metric, distinguishing investment transactions from commercial transactions, which would help provide an even clearer picture of a token’s fundamental value.

Long-term Forecast for Bitcoin

Will bitcoin become the new global currency? Speaking at Coindesk’s recent Consensus Invest cryptocurrency conference, Mohamed El-Erian, respected chief economic adviser of Allianz, forecast that bitcoin would instead find a sustained niche in global finance.

Carter, who also spoke at the conference, has a more specific view of that niche. Instead of serving as a mass retail payment mechanism, he thinks bitcoin will likely become an efficient, low-cost business-to-business transaction channel. Bitcoin could thus emerge as a dominant player in transactions between cryptocurrency exchanges, financial institutions, and businesses in other sectors of the global economy.

Transaction Activity As a Leading Indicator?

Carter feels “cautiously optimistic” about a recovery in the price of bitcoin, observing that its “on-chain turnover,” a price-adjusted measure solely of transaction activity, has undergone a two-month rise. Two of bitcoin’s highest transaction days of the year, he notes, occurred last month, when over 800,000 units respectively changed hands. He adds that bitcoin’s on-chain turnover level rose in 2014 and 2015, preceding the token’s sustained price rise, which started the following year and accelerated in 2017.

Ethereum

As for Ethereum, Carter thinks the SEC may not try to sanction the ICO-based token, due to its large market capitalization and popularity among developers. However, he thinks Ethereum stands in a “far more risky” position than bitcoin, citing plans to alter its entire network structure and its large number of competitors.

Cryptocurrency Forecast- Clouds & Silver Linings

Overall, Carter expects “very adverse events on the horizon,” meaning more crackdowns on U.S.-based ICO’s that neglected to register with the SEC, and more actions against overseas exchanges. The U.S. Department of Justice and the Commodity Futures Trading Commission, for example, are investigating whether Hong Kong-based Bitfinex and Tether manipulated the price of bitcoin. And though a Cyprus court recently withdrew its lawsuit against the founder of Russia-based BTC-e on suspicions of money laundering, the DOJ displayed its overseas mettle. It previously closed down the exchange and has requested its founder's extradition.

Is the cryptocurrency market approaching a dotcom-style shakeout? “The realization that the ICO model is unworkable has begun to filter through to many issuers and investors,” Carter says. He anticipates a “rocky seven to ten years” ahead. Nevertheless, he expects bitcoin to remain a market leader, followed by a handful of larger, decentralized “blue chip" tokens, including ethereum, and several non-ICO tokens, such as Stellar and Z-cash.

Market crash aside, he thinks cryptocurrency isn’t going away. “The genie is out of the bottle, and it's not going back.”

 

Brian SewellBrian Sewell is Founder of Zion Trades, www.ziontrades.com, a customer-focused cryptocurrency trading platform.

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This material is provided only for general educational purposes and is not investment, legal, tax or professional advice or an offer to buy or sell any assets. Opinions provided herein are exclusively those personal opinions of the author and should not be relied upon in making decisions regarding cryptocurrencies. This material may be inaccurate and there is no requirement that the author update this content or correct it at any time.



 


Can Stablecoins Fuel Crypto 2.0?

by Brian Sewell, 1805 words

The cryptocurrency market has languished for nearly ten months, with bitcoin, the leader by market capitalization, down over 50% for the year, and trust flagging in Tether, the most widely traded stablecoin. A breakthrough in scalability, regulation, or technology might revive this emerging sector, fueling a virtuous cycle of increased adoption, investment, and new software applications that makes commerce cheaper, faster, and more accessible. Such a tipping point might help fulfill cryptocurrency’s original raison d'être -- to create more evenly distributed economic opportunity across the globe.

Yet the volatility of most cryptocurrency tokens is hindering the sector’s development. A more stable cryptocurrency could increase the confidence of consumers, businesses, investors, and software innovators.

Stablecoins’ Current Role

A stablecoin such as Tether (USDT) provides market liquidity by allowing investors to rapidly trade from a volatile cryptocurrency to one designed for stability, through a 1 to 1 exchange with a fiat currency, such as the U.S. dollar. Being able to hedge positions in, say, bitcoin with a cryptocurrency proxy for a fiat currency is indispensable because most exchanges don’t allow customers to hold fiat currencies in their accounts. That’s because banks, the standard means to transfer fiat currency, generally don’t do business with crypto exchanges due to legal risks and regulatory ambiguity.

The Crypto Holy Grail

Now, a host of exchanges, developers, and funders are vying to create the Holy Grail of stablecoins, one that does more than provide market liquidity. Most new stablecoins are designed to become the new global means of exchange. In other words, the developer of most new stablecoins aspire to fuel Cryptocurrency 2.0.

Not everyone believes the stablecoin newcomers will ignite the next stage of the crypto revolution. A new comprehensive study, The State of Stablecoins, by cryptocurrency wallet maker Blockchain, concludes that the perfect stablecoin may be unattainable because a coin that effectively fulfills one function -- such as providing financial market liquidity -- might not also successfully fulfill another function, such as serving as an efficient means to buy and sell goods and services.

The Rise and Wobble of Tether

Despite such challenges, the success and vulnerability of Tether (USDT), the leading cryptocurrency by market capitalization, helps explain why a plethora of new stablecoins has recently hit the market. Tether operates on an ‘overlay network’ running on top of the bitcoin blockchain and is designed to be redeemable at a 1 to 1 exchange rate for the U.S. dollar (and euro). Tether has, with some notable recent exceptions, consistently mirrored the price of the dollar since its 2014 debut, enabling investors to readily trade back and forth between cryptocurrency holdings and this proxy for a fiat currency. Despite recent declines, Tether’s market cap has grown from ~$7million in 2017 to $2.11 billion today, making it one of the top 10 cryptocurrencies by market value. It comprises 93% of the stablecoin market and is the second most actively traded cryptocurrency.

Suspicions About Tether

But Tether’s dominance over the stablecoin market may be numbered. Though inconclusive, suspicions about Tether have damaged confidence not only in the world’s leading stablecoin, but in the entire cryptocurrency market. Allegations surfaced against Tether after bitcoin surged to an all-time high of nearly $20,000 in late 2017, then lost nearly half its value by early 2018. An anonymous paper wondered in January of 2018 whether Tether’s operators had used the stablecoin to manipulate the price of bitcoin during the cryptocurrency’s historic run up. Though a May University of Queensland study disputed this view, a June University of Texas study supported the original allegation. Detractors also wondered whether Tether possessed sufficient dollar reserves to make good on its promise of redeeming investors’ holdings at an exchange rate of 1 tether for to 1 US dollar.

Tether’s Lack of Transparency

Tether's owners and operators, which include the CEO of cryptocurrency exchange Bitfinance,  exacerbated suspicions by stating that it could not provide an independent accounting audit, which might have refuted the accusations. Despite Tether’s continued popularity as a liquidity mechanism, its owner’s failure to address these questions have damaged its credibility and may have worsened 2018’s cryptocurrency market doldrums.

A Tether reckoning seems near. On October 15th, Tether fell to an 18-month low, and traded as low as $0.925284 to 1 U.S. dollar, while 200 million tether coins have recently exited circulation. "Tether's recent decoupling from the dollar suggests the stablecoin market is ripe for a new generation of more transparent tokens," says Ryan Ballantyne, Executive Vice President of Blockforce Capital, an asset management firm that invests in cryptocurrency and blockchain companies. "We've seen a loss of confidence in Tether due to its lack of transparency, prompting many stablecoin newcomers to offer independent auditing and regulatory processes. Market forces have pushed many stablecoin operators to implement anti-fraud safeguards, which could reassure the entire cryptocurrency and market regulators could build upon."

New Stablecoins

Most new stablecoins espouse a more transparent, versatile alternative, typically with an open source code, meaning multiple developers can work on the project, audit the code, and potentially develop new applications. They fall into two categories:

Asset-backed Stablecoins

Asset-backed stablecoins derive their stability from collateralization by stored reserves. They comprise 77% of all launched or developing stablecoins, according to the State of Stablecoins report. They divide into two types:

  • Off-chain (also known as “fiat-backed”) are backed by reserves of fiat currency (or metal) that equal or exceed the value of the stablecoins in circulation (examples include Tether, the Gemini Dollar, Circle USDC, True USD, the Universal Dollar, and Paxos Standard).
  • On-chain are backed by reserves of cryptocurrency (examples include Dai and  Havven).

Garrick Hileman, head of research at Blockchain and author of the report, expresses skepticism that the asset-backed model is viable, due to its scalability issues. The more popular an asset-backed stablecoin becomes to conduct transactions, the more fiat and/or cryptocurrency reserves its operators must fund to back the additional coins needed to enter circulation. He questions whether developers of today’s reserve-backed stablecoins will have the wherewithal to invest the millions, if not billions, he estimates such a coin would need to support mass adoption.

Richard Raizes, CIO of Plutus21, a Dallas-based investment firm focused on alternative assets including cryptocurrency, believes that in the short term, a fiat reserve-backed, fully-audited, legally compliant stablecoin will still likely be the easiest stablecoin model to implement, understand, and gain traction.

What’s unclear, he says, is a clear frontrunner. “There is a race in the U.S. between several competitors," he says, "but all of them are having trouble differentiating themselves.” He predicts that the first stablecoin to clear the following hurdles will become the market leader: gaining SEC classification as a legal "non-security" that must still abide by U.S anti-money laundering regulations, arranging regular audits by a Big-Four accounting firm, and striking an exclusive partnership with a company such as Facebook with millions of users. He thinks other sources of competitive advantage would be a stablecoin offering real-time public access to audits and zero or negligible fees to convert stablecoins back to fiat currency.

Algorithmic Stablecoins

Algorithmic stablecoins are structured to achieve price stability from versatile coding, designed to constantly recalibrate the coin’s money supply to match demand. Although none has yet launched, algorithmic stablecoins comprise one third of all existing or developing stablecoins, according to the State of Stablecoin study. Examples include Basis, Terra, Carbon, and Fragments.

Since one hasn’t yet been launched, algorithmic stablecoins remain unproven. However the State of Stablecoins opines that long-term, algorithmic stablecoins may represent the most viable type of stablecoin. They don’t have the scalability limitations of reserve-backed stablecoins, concludes the report, typically have stronger network adoption incentives in the form of ‘seigniorage shares,’ or transaction fee dividends, and may become the model that reserve-backed stable coins eventually convert to.

Raizes underscores that although he thinks a crypto-backed or algorithmic coin will eventually become “wildly successful and serve as an infrastructure for mass adoption,” a winner, he says, will need a three-year plus track record as a stable, bug-free, low-cost transaction medium with proof that a government won’t censor currency trading on the entire platform due to suspicion of nefarious activity.

Chris Sullivan, Portfolio Manager at hedge fund Hyperion Decimus, believes that although algorithmic cryptocurrencies are unproven and may be imperfect, they could play a key transitional role in boosting adoption of cryptocurrency to pay for goods and services. Broad merchant adoption of a stablecoin to process sales transactions, he says, could represent the first step toward increased consumer adoption.

"Small and medium sized businesses, such as smoothie bars or clothing stores,” he explains, “may conclude that receiving stablecoin payments enables them to process transactions more cheaply, efficiently, and predictably than through either bitcoin or U.S. dollars. If a critical mass of merchants first start offering consumers strong incentives to pay in stablecoins because businesses think stablecoin transactions could improve their bottom lines, a rise in consumer adoption could well follow."

Can Stablecoins Take Cryptocurrency to a New Level?

The State of Stablecoins cautions against pegging all hopes on one of the stablecoins currently on the market or in development to take global commerce to a new level: "The technology is still nascent, and it is highly unlikely that the perfect stablecoin design exists at present,” concludes the report. “We expect further experimentation and innovation." Sullivan concurs: “It’s most likely that new stablecoins will serve as a bridge to what takes cryptocurrency to a new level," he says.

An Alternative View

But Matt Slater, Managing Partner of Synapse Capital, doesn't rule out that a stablecoin now on the market or in late-stage development could become a widespread, globally adopted cryptocurrency. Yet he thinks such a cryptocurrency must first achieve widespread use in Distributed Applications (dApps). "We’re a long way from mass use of stablecoins to buy coffee and engage in other types of transactions,” he says. “I think we’ll initially see dApps become early adopters of stablecoins, enabling fast, convenient, low-cost applications. Once liquidity increases, then consumer and business transactions become more feasible."

He predicts that another early sign of success will be one or more stablecoins that disrupt the cryptocurrency markets by powering the emerging group of Decentralized Exchanges (DEX's). A DEX is a smart contract-based crypto trading exchange that seeks to reduce hacking risks by not storing investor assets in a single location. Instead, a DEX is coded to automatically store financial transaction records, match buyers and sellers, and swap tokens, all on the blockchain.

"We're at a very experimental stage right now, Slater adds. "The wide variety of stablecoin models and tokens suggest that the market is learning, and we're on a promising trajectory."

Conclusion

Technology can evolve in unforeseeable ways. But if successful, the creation of one or more reliable, trusted stablecoins could advance the most significant financial transformation since the Medicis invented modern banking and financed an explosion of world trade.

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Brian Sewell

Brian Sewell is a Founder of Rockwell Trades (https://www.rockwelltrades.com), an institutional OTC cryptocurrency trading service, and Zion Trades, a cryptocurrency trading platform.

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How to Pick a Cryptocurrency Exchange

by Brian Sewell, 630 words
Chris Sullivan, a portfolio manager of Hyperion Decimus, which has recently launched a limited partnership hedge fund invested in cryptocurrencies and other assets, explains what he looks for in a cryptocurrency exchange.

Customer Service

Sullivan names high-quality, proactive customer service as the attribute most lacking in typical cryptocurrency exchanges. Ideally, he says, an exchange should focus on efficiency for onboarding, trade execution, confirmation, and problem resolution. He specifically looks for these customer service attributes:

  •     For exchanges facilitating trades over $100,000: Prompt, live phone support during business hours from an actual trade specialist with complete knowledge of the customer account and an understanding of the mechanics of trading;
  • For trades under $100,000, live chat is acceptable, or phone service by a well-informed representative knowledgeable of all exchange policies and the customer account.
  • An exchange providing only email customer service is unacceptable for institutional investors.
  • Wait times of under three minutes for access to all types of customer service.

Variety of Tokens

Sullivan likes to see an exchange offer between five and fifty tokens available to trade. This provides sufficient investment flexibility, and suggests that the exchange has a deep enough knowledge base to offer more than bitcoin.

Versatile Payment Form

An exchange should offer payments for transactions not only in bitcoin (BTC) or ether (ETH), but ideally, also in major fiat currencies, including the US Dollar (USD), Canadian Dollar (CAD), Australian Dollar (AUD), Euro (EUR), Japanese Yen (JPY), and British Pound (GBP).

Market Capitalization and Volume

For consistent liquidity, Sullivan looks for an exchange market capitalization of at least $150 million, and average daily trading volume of $10 million. He recommends checking a list of exchanges ranked by volume per unique visitor published by the Blockchain Transparency Institute. He currently likes the top two exchanges ranked by volume, Binance, with a monthly adjusted volume as of August, 2018 of $1.48 billion, and Bitfinance, with vol

ume of slightly over $500 million.

Investor Best Practices

Sullivan recommends that the moment an investor completes a transaction, the investor should transfer those holdings off the exchange, into either a wallet provided by the exchange, or a wallet provided by a qualified trust or custodian. He distinguishes between either a hot wallet for active traders or a  cold wallet for buy-and-hold investors.

Technical Infrastructure

Exchange Security

Although no exchange can guarantee complete security, Sullivan observes that a robust technology infrastructure can help an exchange work to monitor, detect, and react to hacking threats. He says the following protocols reflect high quality security for an exchange:

o   All personal customer data stored in an off-site, off-line, Tier III data center. That data center is comprised of high-security caged data racks that are SOC I, SOC II, and SSAE 16 type II verified;

o   The exchange should be accessible through a co-location facility.

Insurance

He notes that some exchanges, including Gemini and Coinbase, provide investors insurance in case their cryptocurrency holdings are hacked.

Connectivity - FIX

To increase the efficiency and reliability of online functionality and the quality of price feed (price timeliness), Sullivan says that an exchange should follow The Financial Information eXchange (FIX) protocol. FIX is the standard electronic protocol for quality assurance of pre-trade communications and trade execution for securities transactions. This protocol strives to reduce human error by ensuring that a trade request is communicated, routed, received, and stored in a uniform manner. This ensures transmission quality and reliability, as well as low latency access.

Outlook

Sullivan feels confident about the long-term outlook for cryptocurrency adoption and investment. “The cryptocurrency markets may be down for the year,” he explains, “but I think it’s only a matter of time before new applications boost the appeal of using cryptocurrency as a transaction channel, and regulations create a level of investment certainty that attracts more institutional investors.”

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Brian Sewell is Founder of Rockwell Trades (https://www.rockwelltrades.com), an institutional OTC cryptocurrency trading service.

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Who Needs Cryptocurrency?

by Brian Sewell (1,408 words)

Why use cryptocurrency to pay for anything?

Sure, we hear that a sustained rise in global cryptocurrency adoption could increase the price of popular tokens such as bitcoin, potentially enriching investors. And we read about businesses developing blockchain applications to lower their transaction costs. Or if we delve into bitcoin’s origins, we learn about crypto’s rebel appeal. A group of software developers made an ideology out of developing and using cryptocurrency to engage in secure peer-to-peer transactions without involving intermediaries such as banks and governments. That is, it seems, they wanted to stick it to “the man.”

U.S. Consumers Don’t Need Cryptocurrency -- Yet

OK. So, think about it. If you’re not a crypto punk libertarian or a bean counter, why would you switch to paying for things in cryptocurrency? Well, until new applications come on line, maybe you wouldn’t. U.S. consumers already have an array of fairly reliable options to make financial transactions. For example:

Debit Cards

U.S. debit cards are relatively convenient and cost-effective. Debit cards typically cost consumers on average only 24 cents per payment, and the number of U.S. per person debit transactions in 2016 averaged 23.6 per month. That makes the average annual cost of using a debit card only about $68. Granted, U.S. financial institutions limit how much users can withdraw at one time. And true, debit cards are vulnerable to fraud (which costs U.S. financial institutions an estimated $900 million in 2016). Sure, in some instances, debit cards are less secure than credit cards. Some institutions require debit cardholders to notify them within 60 days of a fraudulent transaction, or be liable for the entire amount. Overall, however, the U.S. debit card system serves consumers fairly well.

Credit Cards

Though credit cards cost U.S. cardholders on average about 2% per transaction, the cost for service seems reasonable, and a handful of states ban merchants from passing on credit card transaction fees to consumers altogether. Credit card holders enjoy an interest-free loan for as long as one month, which may be offset through rewards points, while timely repayment can bolster a user’s credit record. Though fraud remains a risk, credit card companies generally monitor well, and reimburse for losses. So, the main inconvenience for most credit card holders is reacting to periodic instances of fraud by changing a credit card number and updating an autopay.

Wire Transfers

Sending a U.S. wire transfer, which directly debits a bank account, costs roughly $30 within the U.S., and $50 to an overseas destination, not exorbitant except for those sending a large volume of payments. The process normally requires entering a receiving bank account number and routing number. Receiving a wire transfer costs slightly less than half that and in some cases is free. Venmo and Square Cash allow for free wire transfers if linked to a checking account (not via your credit card).

ACH Payments

Established by the Federal Reserve, ACH (Automated Clearing House) is an electronic money transfer between banks, which is typically free or extremely low-cost. 2015 ACH debit transfers by dollar value totaled $54.76 trillion, while ACH credit transfers accounted for a stunning $90.54 trillion.

Checks

Checks take time to clear, especially for a large or out-of-state payment, and carry risk of mail fraud. But the U.S. Postal Service is relatively reliable. Checks don’t incur substantial fees, as do many wire transfers, and are convenient for consumers who lack a debit card.

Who Needs Cryptocurrency More Than U.S. Consumers?

In other words, until new crypto applications come online, U.S. consumers lack strong incentive to pay for things in cryptocurrency. The same generally applies to consumers in the rest of the industrialized world. So then, what consumers benefit the most from cryptocurrency? I’ll tell you who. Many consumers in the Developing World. That’s where a critical mass of people  lack the secure, reliable, efficient bank accounts and credit cards to easily pay for goods and services. And that’s where many sole proprietors and other small businesses have a hard time selling their rice, or coffee, or clothing to customers outside their local communities for the same reason. They don’t have secure, modern online banking facilities.

Hope For The "Unbanked"

So, given today’s early stage applications, cryptocurrency adoption could grow fastest in emerging markets. Indeed, globally, an estimated 1.7 billion adults remain unbanked. And approximately two-thirds of them own a mobile phone that could help them use cryptocurrency to transact, and access other blockchain-based financial services.

The Developing World’s Use of Cryptocurrency

Data underscores the receptiveness of Developing World consumers to cryptocurrency as a transaction medium. The Asia Pacific region has the highest proportion of global users of cryptocurrency as a transaction medium (38%), followed by Europe (27%), North America (17%), Latin America (14%), and Africa/The Middle East (4%), according to a University of Cambridge estimate. Though the study’s authors caution that their figures may underestimate North American’s proportion of global cryptocurrency usage, they cite additional data from LocalBitcoin, a P2P exchange platform, suggesting that cryptocurrency transaction volume is particularly growing in developing regions, especially in:

  • Asia (China, India, Malaysia, Thailand)
  • Latin America (Brazil, Chile, Colombia, Mexico, Venezuela),
  • Africa/The Middle East (Kenya, Saudi Arabia, Tanzania, Turkey)
  • Eastern Europe (Russia, Ukraine).

Cryptocurrency’s Appeal In The Industrialized World

I believe consumers in industrialized nations would use cryptocurrency to engage in transactions when and if more secure, convenient, and lower cost applications emerge. New applications are already coming online to facilitate transacting, settling ledgers, and sharing/tracking data in a myriad of public and private sectors, from financial services and healthcare to government services and economic development. The pace of such development suggests that a new wave of cryptocurrency consumer applications may also come online that make paying for -- and selling -- goods and services to other consumers and to merchants faster and cheaper than ever.

Scalability

To help fuel more of these innovative applications, cryptocurrencies must become “scalable,” i.e., able to handle mass transactions simultaneously. Although a payment platform such as Visa can process thousands of electronic transactions per second, bitcoin can currently process only about three to seven transactions per second. That’s insufficient for the high volume that many evolving blockchain applications require if they become widely adopted. Indeed, in late 2017 and early 2018, bitcoin’s low scalability and its popularity as a payment method clogged networks, causing slowdowns and higher transaction fees. This setback may well have contributed to BTC’s year-to-date price decline of roughly 50%.

Enter several emerging projects. Bakkt, a financial trading platform recently proposed by the Intercontinental Exchange, plans to expedite bitcoin transactions by facilitating exchanges from within its anticipated stockpile of cryptocurrency. Plasma seeks to improve the scalability of Ethereum. The Lightning Network (LN) seeks to improve the scalability of bitcoin, Litecoin, and other cryptocurrencies.

The Lightning Network (LN)

According to cryptocurrency expert Andreas Antonopoulos, by not registering most transactions on the blockchain, The Lightning Network “...completely changes the scaling game. Now we can think about millions, and millions, and millions of transactions per second.” Antonopoulos cautioned that development hurdles remain, involving security, routing, and legal risks due to cross-border jurisdictions. But he also emphasized that though LN remains in “... the very, very early stages,” resolving the outstanding issues remains a question of simply executing the process of “engineering optimization.”

Still at the beta stage, LN will probably not solve bitcoin’s scalability challenges in 2018. And some observers question whether LN can scale bitcoin for mass transaction volume in the next two years. I think the collective brain power of three separate companies -- implementing the engineering optimization process and collaborating with a plethora of independent developers -- suggests that the Lightning Network will fulfill its promise. But if not, I think other solutions, will emerge to scale bitcoin and other cryptocurrencies. Bakkt, for example, seems a strong contender if approved by regulators.

Cryptocurrency Adoption Outlook

What's the outlook for consumer adoption of cryptocurrency? Worldwide, only an estimated 3.5% of households at most have adopted cryptocurrency as a transaction medium, while the cryptocurrency market remains down for the year. Nevertheless, although lower than in 2017, daily bitcoin transaction volume continues within the 150,000 - 250,000 range. Overall, cryptocurrency’s adoption rate in many emerging markets seems especially poised for continued growth. And once cryptocurrency achieves scalability, I believe the proliferation of related applications will help further boost consumer adoption in both industrialized and developing regions.

These factors contribute to why I think cryptocurrency is likely to transform how consumers and enterprises around the world do business.

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Brian Sewell is Founder of Rockwell Trades (www.rockwelltrades.com), an institutional OTC cryptocurrency trading service.

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