Cryptocurrency Analysis: Premonitions And Foreboding
As the Federal Reserve issues its own warnings of a particularly large market drop, investors continue to seek certainty where none can be found in any market.
As covered by Fortune writer Chris Morris, issues include trade tensions, rising corporate debt with weak balance sheets, rising geopolitical uncertainty and other potential adverse shocks. The Federal Reserve states:
“The resulting drop in asset prices might be particularly large, given that valuations appear elevated relative to historical levels.”
“Even if central bank policies are fully anticipated by the public, some adjustments could occur abruptly, contributing to volatility in domestic and international financial markets and strains in institutions,”
This means that corporate bonds, many government bonds and the stock market all remain risky investments in the upcoming year.
As I covered in yesterday’s article “Cryptocurrency Analysis: The U.S. Dollar Influences the Price”, there is a risk to the U.S. Dollar price of Cryptocurrencies as they are strongly tied. I also pointed out that the real estate market also has risks. In light of this, will the cryptocurrency industry survive?
Jeffrey Sprecher says yes it will. He is the CEO of IntercontinentalExchange and Chairman of the New York Stock Exchange and he spoke at the Consensus Invest conference in New York on November 27th. Responding to the question of cryptocurrency’s survival:
“I’d say the unequivocal answer is yes,” he said, adding that “we’re kind of agnostic to price.”
There are still many roadblocks ahead for cryptocurrencies in 2019. The current SEC Chairman Jay Clayton wants to see better market surveillance and custody before a cryptocurrency-related ETF will be approved. Even though exchanges such as Gemini have added surveillance tools powered by the NASDAQ, and custody tools that are strong, leading advisors to the SEC remain skeptical:
"We've seen some thefts around digital assets that make you scratch your head," Clayton said, "We care that the assets underlying that ETF has good custody and that they're not going to disappear."
The NASDAQ plans to add a futures market during the first three months of 2019. The Commodity Futures Trading Commission remains friendly to cryptocurrencies and is likely to issue final approval for the NASDAQ to begin trading futures. Traders will now be able to use a large exchange with higher volume to trade futures contracts in addition to the CME and CBOE exchanges.
In the midst of all this, it is important to clearly understand the underlying cryptocurrency assets that are being traded. Presently, “market capitalization” is utilized as an important metric to judge the overall size and health of a cryptocurrency. Aat de Kwaasteniet writes in a Medium post that this value is meaningless when judging a cryptocurrency. As evidenced by Tron (TRX), by manipulating the count of coins outstanding between September 29, 2017 and October 8, 2017, they were able to jump from 98th place to 35th place even though the trading volume remained at about $50,000 to $200,000 per day. According to Aat’s analysis, other cryptocurrencies that have performed a similar manipulation strategy includes Ripple, EOS and Cardano.
Bitcoin currently creates about 1,800 new coins daily. Ethereum creates about 19,000 coins daily. This means that there are approximately $7.2 million USD in new Bitcoins and $2 million USD in new Ethereums created daily based on today’s price. By volume, according to World Coin Index, Bitcoin transacts $3.56 Billion daily (4% of marketcap) and Ethereum transacts $1.38 Billion daily (10% of marketcap).
The true measure of volume is hard to calculate because many exchanges support “off chain” transactions. Furthermore, some exchanges post misleading (zero cost, and other) trades that artificially inflate the volume metrics.
Both Coinbase and Gemini now offer OTC trading for financial institutions, both are important steps towards broader adoption of cryptocurrencies as a trusted financial instrument. Such block trades would offer an important liquidity step for businesses seeking to settle large amounts of transactions at once.
Still many short-term traders are expecting the U.S. Dollar rate to bitcoins to stay on the “moon math” path with the US. Dollar price of a bitcoin approaching something between $10,000 and $100,000 by January 2020.
With the State of Ohio, and other merchants using Bakkt planning to accept Bitcoin as a payment method next year, cryptocurrency’s future remains bright indeed. Even though there are a lot of uncertainties in the world, innovators are continuing to contribute towards a global platform of trade and commerce powered by cryptocurrencies.