An analytical review of cryptocurrencies to date

Key Insights for 2018:

Although 11 bitcoin forks were scheduled for December they are already losing steam and it is unlikely that any of them will claim greater than 5% of bitcoins value. A Fork Generator for cryptocurrencies has been created that allows non developers to fork bitcoin, its hope is to make it so easy that forks will flood the market causing investor fatigue similar to what has happened with the ICO market. https://forkgen.tech/

With over 15 Bitcoin ETFs applications it is likely one is accepted over 2018 – after bitcoin ethereum will follow. In the more distant future indices that incorporate multiple cryptocurrencies such as the MVIS CryptoCompare Digital Assets 10 will provide pricing feeds for instruments that allow traders to invest in multiple cryptocurrencies.

The crypto-fiat boundary will be the front-line of the battle to regulate cryptocurrencies. From regulators perspective it is the easiest way to tackle money laundering and tax avoidance. The boundary will be fiercely contested to try and secure suitable law for both regulators and innovators.

There will continue to be an incessant supply of ICOs until regulators make more widespread and concrete laws or Ethereum has a serious correction of over 40% – 50%.

Privacy coins such as ZCash, DASH and Monero have already had significant bull runs this year. If government regulation clamps down on the use of cryptocurrency for money laundering and tax avoidance money will likely flow from bitcoin to the anonymous themed Crypto’s. They will then become the primary modes of dark net payments supplanting bitcoins use.

What will all the 466 ICO teams create with $4.25 Billion in 2018? Undoubtedly less than was promised but there will likely be some ‘unicorns’ amongst the pack. The exact structure of these are still to be defined fully but we expect a large failure rate due to the relative immaturity of a number of the projects and teams.

2017 Facts:
Top 10 Coins and YTD Return on Investments:

*BCH and BTG are forks of bitcoin that were created August 1st & October 25th respectively

*Estimated value as EOS raises Ethereum everyday in an auction style for a whole year.

466 ICOs in 2017
ICO total raise (2017) = $4.25 Billion
ICO Average raise = $7.9 Million

Almost every single metric of adoption has shown signs of exponential growth: exchange users, wallet downloads, social media chatter, google search trends, trading volumes, transactions per day etc. This google trend chart sums this up well:

2017 Timeline:
6/1/2017 – PBoC issues public warnings after meeting with major domestic exchanges around operational and regulatory policies
19/1/17 – 2 of Major Chinese ‘Big 3′, Huobi &OkCoin, halt margin trading
23/1/2017 – Big 3′ reveal intent to axe zero fee trading
26/1/2017 – Massive global trading drop, first day of less than $100m volume since 2015. This can be seen in figure X
9/2/2017 – PBoC issues warning to 9 Chinese exchanges regarding foreign exchange and AML regulations
16/2/2017 – BTCC halts withdrawals
28/2/2017 – Ethereum Enterprise Alliance launches
10/3/2017 – Winklevoss COIN ETF proposal rejected by SEC
17/3/2017 – Major exchanges release Bitcoin Unlimited network split contingency plan
28/3/2017 – SolidX’s ETF proposal rejectede by the SEC

3/4/2017 – Extension Block’ soft ffork proposal to raise block size emerges in Bitcoin
5/4/2017 – Covert use of ‘Asic Boost’ in mining chips adds fire to scaling debate
25/4/2017 – Gnosis ICO
10/5/2017 – Litecoin activates SegWit
22/5/2017 – Ethereum Enterprise Alliance announces 86 members
23/5/2017 – SegWit2x (New York Agreement) plans announced to scale bitcoin
7/6/2017 – Bitcoin fees hit all-time high daily average of $5.24
11/6/2017 – Daily ETH transactions exceed BTC transactions, at 240k to 222k
12/6/2017 – Bancor’s BNT ICO sets record of largest ever at $153
14/6/2017 – Bitmain announces UAHF contingency plan in event of August 1 UASF
16/6/2017 – Ether’s market cap reaches all-time high  of 84.2% of bitcoin’s

17/7/2017 – CoinDash ICO hacked – 45k ETH $7million sent to wrong address
19/7/2017 – Parity wallet breach leads to theft of 150k of ETH – $31 million
20/7/2017 – Miners vote 97% on BIP 91, stage is set to activate SegWit
25/7/2017 – SEC issues ICO guidance using the DAO as an example
1/8/2017 – BCH fork takes place
2/8/2017 – CBOE announce they will launch bitcoin futrues as early as Q4 2018
15/8/2017 – Eth transactions break 24hour record for any blockchain ever marks scaling milestone
23/8/2017 – First block > 1mb after segwit adoption, BCH price spikes
4/9/2017 – 7 Chinese regulators take regulatory action against ICOs
12/9/2017 – Any JP Morgan caught trading BTC to be fired
14/9/2017 – Chinese exchanges announce shutdowns after regulators signal a total reset for Bitcoin in the country
29/9/2017 – BTCC world’s oldest exchange closes after 2305 days

25/10/2017 – Bitcoin Gold forks
31/10/2017 – CME announces launch of Bitcoin futures
8/11/2017 – Parity Wallet vulnerability freezes $250 of Eth
4/12/2017 – SEC halts scam ICO called Plexcoin
6/12/2017 – NiceHash announces hack of 4,700 BTC worth around $70 million at the time
10/12/2017 – CBOE futures launches
11/12/2017 – SEC halts Munchee ICO, deemed security despite claiming to be a utility token
16/12/2017 – BTC all time high $19,870.62 on the CryptoCompare Index
18/12/2017 – CME futures launches
19/12/2017 – Youbit exchange announced a hack of 17% of its asset reserves and plans to file for bankruptcy
19/12/2017 – Coinbase launches and then freezes Bitcoin Cash trading
27/12/2017 – Poloniex announces tougher ID checks to trade

ICO Review:
$3.2 Million invested in January 2017, $720 Million peak in June. With a total of $4.25 Billion invested YTD.
Autumn saw an increase in scam ICOs and unsuccessful or postponed ICOs.
The SEC has started halting some scams and has deemed that utility tokens that are not fully functional should be classed as securities.
The majority of ICOs reside in Singapore, Switzerland and Gibraltar due to favourable regulations
Despite China’s ICO ban it is thought lots of Ethereum is still being invested in ICOs from China.
The Asian market has been the dominant buyer this year.
The highest returns came on the ICOs pre June. RoI’s have been dropping since.
Increasing supply of ICOs has led to more competition for investor funds, investor fatigue and a lower average raise.

ICO Case Studies:
GNO – Gnosis – April 24th, it was the first outlier that in hindsight was an indication of the ICO mania to come in the following months. The ICO used reverse dutch auction but the technique backfired and only 4% of tokens were sold for the $12.5 million raised giving the project an instant valuation of $300 million. However when the token went live it traded above its ICO price in Ether. This gave the green light to traders looking to ‘scalp’ ICOs whereby they buy and sell them within a week or month.

BAT – Basic Attention Token – 31 May – $36 million in 36 seconds and was one of the fastest ICOs, it caused stress on the Ethereum network and some bidders paid fees exceeding $6,000 to ensure their investment made it in. 185 purchases were successful, and over 10,000 failed.

EOS – 1 June – raised approx $180 million in the first 24 hours, however they have a strange model whereby EOS is auctioned every day for a year. The current estimate is that EOS has raised $700 million despite saying in the sale contracts that users have no rights, uses or purpose on the technology. It aims to be an Ethereum style platform that supports smart contracts and Decentralised applications (Dapps).

BNT – Bancor – 12 June  – This ICO could be picked out as the peak of the mania, raising $153 million in a few hours. The ICO caused significant stress on the Ethereum network slowing transactions and raising fees. Despite Bancor using a price floor where they used excess ICO funds to buy back tokens at ICO price the ICO has underperformed vs Ethereum and sellers managed to sell through the multi million dollar price floor.

XTZ – Tezos – 1 July – Raised $232 million in BTC and ETH during the first two weeks of July, depending on when they liquidated these assets the value of fiat holdings is likely to exceed $232. At the time Tezos was the largest ICO raise (now surpassed by EOS). The founders have been in a legal battle to retain control over the funds and the futures price of Tezos has underperformed vs BTC and ETH as a result.

FIL – Filecoin – 10 August –  Used KYC and AML and only allowed accredited investors in the US to invest. It raised $204 million but was under scrutiny due to its presale discounts offered to founders, then ‘strategic investors’ who received large discounts on ICO price.

Premiums:
BTC has recorded exceptionally high premiums in Zimbabwe (100%), Venezuela (60-80%), Brazil (20-30%) because they are weakening currencies and it is thought locals use it as an inflation resistant store of value. Japan has had premiums of up to 50% when the government announced bitcoin as legal tender.

South Korea has had the most consistently high premiums in any of the top 5 markets. Currently leading the cryptocurrency rally over the last two weeks with premiums of 15-25% across all of the top coins.

Regulation:
Poloniex – US based exchange – announced on Dec. 27 that it will soon disable all legacy accounts, that is unless these users complete the same verification process as its newer account users who must complete know-your-customer (KYC) due diligence. The exchange said a deadline for identification verification will be released within the first quarter of 2018. This is part of a wider move from regulators to control the fiat – crypto boundary to clamp down on money laundering and tax avoidance.

The much anticipated SEC statement on the Winklevoss twins BTC ETF was rejected on March 10th causing a short crash of only an hour which then reversed into a bull run. March 28th the SolidX ETF was rejected which had little to no impact on price.

Q1 2017 saw numerous restrictions on the Chinese markets including the halting of withdrawals & stopping 0% fee trading this can be seen in the chart below. Bitcoin daily volume to dropped from highs of over $10 billion to around $200 million/day or less (much of this was 0% fee wash trades). Despite the string of negative press the bitcoin price still rose. Exchanges were subsequently audited which resulted in the closure of all large Chinese Bitcoin exchanges in September and October. Some of the trading has been replaced by peer to peer trading via encrypted whatsapp groups or telegram. This has shown the community and the world that a truly decentralized cryptocurrency is incredibly hard to meaningfully ban, ultimately bolstering confidence and price.

Premiums:
Japan legalised Bitcoin as a form of legal payment in early April, this has resulted in many merchants adopting bitcoin payments. Coincheck, a bitcoin payment processor, has onboarded over 260,000 merchants in Japan this Summer after the law passed. The legislation has also embolden investors as it has given Bitcoin more legitimacy.

The demand from ‘Mrs.Watanabes’ (an economic term that describes the archetypal Japanese housewife, who actively invests to make a return on family savings, typically in FX) has been high. One explanation is that this considerable reserve of wealth is currently threatened on two fronts. Firstly yield is becoming harder to come by and with Low/ Negative interest rates in Japan, holding JPY is not seen as a suitable option. The practice of selling JPY for FX and carrying the higher interest rates back to Japan is becoming more obsolete with falling global interest rates and a general eking out of yield following the 2007 crash. For example New Zealand Rates are no longer a popular avenue for searching for returns. This has been leading to Japanese investors looking to BTC as an asset that is uncorrelated to traditional assets and therefore a good hedge in the event of a Japanese downturn or even global downturn – and also something to add returns to a portfolio.

Scaling Tensions:
The scaling and forking debates that have raged over the last year and peaked in Summer were focused on finding a way in which to improve Bitcoins scaling issues. The community was divided as how to do this with groups split into ‘big blockers’ and ‘SegWit’ (Segregated Witness) proponents. SegWit2x (New York Agreement – 23rd May, 2017) was a scaling agreement/compromise between many important figures in the Bitcoin ecosystem companies to increase block sizes to 2MB and implement SegWit. It received significant support: over 80% hash power, 58 companies in 22 countries and 20.5 million wallets.

Fees have risen from $0.25 to peaks of $30 during high network usage. However it seems clear that the Bitcoin network has been under coordinated attacks to increase fee sizes as these spikes typically subside to patches of very low usage. Which suggests that actual adoption as a form of payment is not growing. The chart below shows transactions in the mempool and the size of fee that was paid over the last 6 months, The blue block in the bottom right is thought to be spam attacks:

Forking:
After the announcement that Bitcoin Cash would fork Bitcoin the price rose from $2,000 to almost $5,000 in a month and a half. Investors realised that for every Bitcoin they held they received a free ‘airdropped’ Bitcoin Cash. Now the price of the free Bitcoin Cash is around $3,000.  Bitcoin Gold was the second high profile Bitcoin fork and even more investors bought into Bitcoin to claim their BTG which is currently worth $300.

The most controversial fork was the SegWit2X fork which was scheduled to take place mid-November however it was cancelled due to lack of support form the community. Those looking to cash in on the B2X fork by claiming free coins appear to have sold their extra BTC position after hearing the fork was cancelled. Which has contributed to Bitcoins to drop from $7,718 to $5,616 on the CryptoCompare Index.

There has been intense rivalry between Bitcoin supporters and Bitcoin Cash supporters as both parties wish to maintain or claim the ‘Bitcoin brand’ and network effect. Bitcoin Cash has 8MB blocks which has increased confirmation speeds and reduced the average fee/transaction.

Exchanges:
Youbit in South Korea suffered a hack of 17% of assets which has led to its closure. Despite this, the premiums on Bithumb exchange have been in the 15-25% range for all top cryptocurrencies vs the USD as shown in the Premiums section above.

Tether has been accused of printing USDT – a USD proxy – on a fractional reserve basis and then using the USDT to margin trade on Bitfinex and ultimately buy Bitcoin and raise the price. Tether has not yet released audits that would proof they have a 1 to 1 reserve of the $1 + Billion USDT in circulation. A lawsuit against twitter user @Bitfinex’ed is under way, accusing him of slander.

Coinbase recently listed Bitcoin Cash without an advanced announcement this combined with unusual trading activity prior to the launch has led to allegations of insider trading from coinbase employees. Cryptocurrencies are largely an unregulated market and this activity is suspected to occur on many exchanges. CNBC’s fast money twitter account appears to have been used to promote Bitcoin Cash tweeting misleading chart prices of Bitcoin Cash at valuations of over $8,500. The actual trading of Bitcoin Cash had to be halted straight away as the price jumped to $9,500. After almost 24 hours the trading was resumed and the price crashed to $3300 – $4,200 and is starting to stabilise around $3,000.

Futures and Hedge Funds:
The announcement that the CME Group would list bitcoin futures drove bitcoin price significantly and has been a sign of acceptance and legitimacy. However it is currently very biased towards longs, brokers such as Interactive Brokers require 5 times the margin collateral for going short. However I anticipate that as more US and Western companies start to mine cryptocurrency they may become the natural hedgers needed to make a healthier bitcoin futures market.

The number of hedge funds investing in cryptocurrency has increased from 55 to 170 from August to December.

Technicals:
Segwit has alleviated some scaling issues
Lightning is supposedly going to launch in 2018 but the verdict is still out on whether it wil be 2019 or beyond
Lightning network and Rootstock hold promise for instant and cheaper payments as well as smart contracts
The majority of hashpower remains in Asia but more advanced equipment from DragonMint as well as the ability to hedge mining risk may challenge the Chinese mining dominance.

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