2017 was a huge bull market in cryptoassets. An investment in early 2017 could easily have gone up 100-fold by the end of the year. 2018, however, has been exactly the opposite. The market cap for cryptoassets as a whole has dropped from $800 billion to just over $200 billion. That means that most of these assets have fallen 70% or more. A 70% fall is more tolerable when it is preceded by gains of 100 times.
As I have said before, cryptoassets and blockchain technology represent an institutional revolution and we haven’t had one of those since the industrial age. Blockchain technology could potentially take over everything and leave huge corporations behind in the dust. But those huge corporations represent the power of today. Power doesn’t give up power easily. Instead, power does its best to absorb and eliminate potential threats. To me, that’s what 2018 has been about for cryptoassets.
First, we had the Securities and Exchange Commission (SEC) say that many new cryptoassets could be securities trying to get around being regulated.
500-1000 new initial coin offerings sprang up in 2017. The SEC publicly stated that many of them were probably securities trying to get around registering with the SEC and complying with US regulation. This means that the people behind about 500 projects risk legal action from the SEC and in many cases dumped their profits to raise funds for legal fees. In fact, in 2018, most of the new crypto projects don’t allow investors from the US because of their fear of the SEC. Elastos, for example, might be one of the better projects out there today but US investors cannot buy it because it is only sold on exchanges that do not allow US investors.
Second, big corporations are saying the BTC and other crypto assets will never amount to anything.
It’s another bubble. It’s all hype. But here actions were quite different from their words.
Here are a few examples.
Jamie Dimon CEO of JP Morgan Chase said, “Bitcoin is a fraud and is a valuation bubble that will burst.” He said that it was only fit for use by drug dealers, murders, and people living in places like North Korea. He said he would fire any employee who speculates in that currency market. Just a few months later, JP Morgan created a new position, dubbed Head of Crypto Assets Strategy. JP Morgan even partnered with ZCash to increase privacy on the blockchain.
Lloyd Blankfein, CEO at Goldman Sachs, said of Bitcoin: “Something that moves 20% {overnight} does not feel like a currency. It is a vehicle to perpetuate fraud. . . Bitcoin is not for me.” He also said, “A lot of things that have not been for me in the past 20 years have worked out, but I am guessing that this will not work out.” Then later we find that Circle, an affiliate of Goldman, had purchased the crypto trading exchange Poloniex. Goldman has also announced its intentions to open Bitcoin derivatives trading and that they will trade in physical Bitcoin, which is strange because all Bitcoin is digital. What they mean is that they’ll be able to deliver actual Bitcoin, instead of a derivative, which is what is used on the CME.
George Soros called Bitcoin a bubble in January this year. Now his $26 billion fund is now buying it.
Warren Buffett called Bitcoin “rat poison squared.” Buffet’s partner, Charlie Munger. tried to equate trading Bitcoin with the trading of human baby brains — he actually said that. But Buffet and Munger only invest in what they understand and have generally stayed away from anything high tech. Furthermore, they probably feel that their current business is threatened by this new form of technology. They have over $76 billion invested in financial firms which could see their profits centers absolutely gutted by blockchain technology.
All of this amounts to institutional money feeling threatened by cryptoassets / blockchain technology and the only way to deal with such a threat is to take it over and control it. How does big money do that? They are doing their best to drive the price down while they slowly accumulate.
Another issue is that most of the cryptoassets markets are quite unregulated. And that means that they are ripe for manipulation and trading on them is like the Wild West.
In the 1980s the NASDAQ was also such a market. It was frequently called the under-the counter market. The spread (i.e., the difference between the bid and the offer) for such stocks was frequently 50 cents or more. Let’s say a company had such a spread. A firm could buy it on the bid and hold it, Later, they would move up the ask, print the whole order and thus hide a 75 cent spread on say an $7 stock. In addition, they would then charge another 5% commission on top. Their total commission could be as high as 15% and that was legal. However, with increasing regulation and the NASDAQ cleaning up its act, we now can see commissions of 1 cent or even less. Such equity markets have changed dramatically and that will also happen with cryptoassets. But right now while it’s the Wild West, there is the most opportunity for those who know what they are doing.
Institutional money can buy securities – but they cannot hold them. The U.S. Investment Act of 1940 requires that securities be held by a custodian but there are no such custodians for cryptoassets yet. That’s the reason for at least nine Bitcoin ETF applications have been turned down so far. But this is all about to change.
- Namura Securities, a $100 billion Japanese company, is launching a service to be such a custodian.
- There are rumors that Goldman Sachs might do something similar.
Northern Trust, which already provides custodial services for most of the major global hedge funds is also rumored to be working on a method to provide custody for cryptoassets. - State Street, the second largest custodian in the US, is rumored to be looking at becoming a cryptoassets custodian.
- Coinbase, the worlds largest crypto exchange, has acquired a financial firm and will soon be an SEC regulated broker dealer. Suddenly millions of customers are going to be regulated.
- Ledger, which makes the Ledger-Nano Wallet, is also planning on offering a custody solution in late 2018.
- Intercontinental Exchange (ICE) owns the NYSE and 32 other exchanges around the world has partnered with Microsoft, BCG, and Starbucks to create an integrated platform that enables consumers and institutions to buy, sell, store and spend digital assets on a seamless global network. The new company will be called Bakkt.
These new firms and services will allow institutions to enter into the digital marketplace because there will be custodians who will hold and guarantee their assets. Many of these entities have the goal to launch by November 2018. The New York Stock Exchange just announced that they have plans for physical delivery of Bitcoin. So, what that means is that in order for them to physically deliver an actual Bitcoin, not just do a cash-settled transaction like the CME does right now, it means that they must have a solution for custodying or holding the Bitcoin.
And the final piece is that the CBOE has applied for a Bitcoin ETF. The SEC is not going to turn down the CBOE application for an ETF.
TD Ameritrade which has 11 million customers and $1.2 trillion in assets, had filed a patent which can facilitate real time transactions made with digital currencies. The firm is actually going to start teaching their customers about digital currencies.
And there is even more news. The Chinese government has been saying for some time that cryptocurrencies are terrible and that blockchain is evil technology. On the other hand there is a billion dollar blockchain fund launching with Chinese government backing. And a department of the Chinese government has even come out with a list of the top cryptoassets — mostly Chinese based, of course.
India had threatened to totally ban cryptocurrencies but is now saying it might launch its own cryptocurrency.
Finally, by the end of February 2018, over $1 billion had been committed to blockchain ICOs. We are also seeing a lot of legitimate, full-fledged venture capital firms now putting a lot of money into blockchain technology startups.
What does all of this mean?
Three things are about to happen very quickly (by the end of this year I would expect).
First, we will see custodial firms for cryptoassets allowing institutional money to come into the crypto space. Institutional money would love to come into cryptoassets because it’s not correlated with other assets. Just a small investment in cryptos could greatly improve a fund’s performance. Pension funds desperately need this because they cannot perform at the level they need to pay off all of their retirees.
Second, we will see a legitimate Bitcoin ETF – probably the CBOE one. This will probably be followed by an Ethereum ETF and then perhaps one for the Bloomberg Index for Cryptos. When this happens, everyone will be able to easily invest in cryptoassets.
Third, and this might take a little longer, we will see some tax reform on cryptoassets. Right now, you exchange fiat dollars for BTC. Then you use the BTC to buy another cryptoassets. If you have bought and sold Bitcoin already, then you have created a taxable event. This becomes a real pain for anyone who has done a lot of this, however, for any Forex transactions, there is a $600 rule in place. This means that profits on transactions less than $600 are not taxable. I’d hope to see such regulation in the crypto world before the end of 2019.
Any of these three things will take the capitalization of the crypto market to several trillion dollars. This probably means BTC at $50,000 and many of the smaller coins will be up 100 fold. And this is what I’m calling a one in a lifetime investment opportunity.
To help our Super Traders participate in this market, we held a special workshop in June this year and there will be a second one as part of the Super Trader Summit in December.
some really interesting points you have written.