What they are and what they’re not. Probably.
Here at Coin Sciences, we’re best known for MultiChain, a popular platform for creating and deploying permissioned blockchains. But we began life in March 2014 in the cryptocurrency space, with the goal of developing a “bitcoin 2.0″ protocol called CoinSpark. CoinSpark leverages transaction metadata to add external assets (now called tokens) and notarized messaging to bitcoin. Our underlying thinking was this: If a blockchain is a secure decentralized record, surely that record has applications beyond managing its native cryptocurrency.
After less than a year, we stopped developing CoinSpark, due to both a push and a pull. The push was the lack of demand for the protocol – conventional companies were (understandably) reluctant to entrust their core processes to a public blockchain. But there was also a pull, in terms of the developing interest we saw in closed or permissioned distributed ledgers. These can be defined as databases which are safely and directly shared by multiple known but non-trusting parties, and which no single party controls. So in December 2014 we started developing MultiChain to address this interest – a change in direction that Silicon Valley would call a “pivot”.
Two years since its first release, MultiChain has proven an unqualified success, and will remain our focus for the foreseeable future. But we still take an active interest in the cryptocurrency space and its rapid pace of development. We’ve studied Ethereum’s gas-limited virtual machine, confidential CryptoNote-based systems like Monero, Zcash with its (relatively) efficient zero knowledge proofs, and new entrants such as Tezos and Eos. We’ve also closely observed the crypto world’s endless dramas, such as bitcoin’s block size war of attrition, the failures of numerous exchanges, Ethereum’s DAO disaster and Tether’s temporary untethering. Crypto news is the gift that keeps on giving.
Crypto and the enterprise
Aside from sheer curiosity, there’s a good reason for us to watch so closely. We fully expect that many of the technologies developed for cryptocurrencies will eventually find their way into permissioned blockchains. And I should stress here the word eventually, because the crypto community has (to put it a mildly) a far higher risk appetite than enterprises exploring new techniques for integration.
It’s important to be clear about the similarities and differences between cryptocurrencies and enterprise blockchains, because so much anguish is caused by the use of the word “blockchain” to describe both. Despite the noisy objections of some, I believe this usage is reasonable, because both types of chain share the goal of achieving decentralized consensus between non-trusting entities over a record of events. As a result, they share many technical characteristics, such as digitally signed transactions, peer-to-peer networking, transaction constraints and a highly robust consensus algorithm that requires a chain of blocks.
Despite these similarities, the applications of open cryptocurrency blockchains and their permissioned enterprise counterparts appear to be utterly distinct. If you find this surprising or implausible, consider the following parallels: The TCP/IP networking protocol is used to connect my computer to my printer, but also powers the entire Internet. Graphics cards make 3D video games more realistic, but can also simulate neural networks for “deep learning”. Compression based on repeating sequences makes web sites faster, but also helps scientists store genetic data efficiently. In computing, multi-purpose technologies are the norm.
So here at Coin Sciences, we believe that blockchains will be used for both cryptocurrencies and enterprise integration over the long term. We don’t fall on either side of the traditional (almost tribal) divide between advocates of public and private chains. Perhaps this reflects an element of wishful thinking, because a thriving cryptocurrency ecosystem will develop more technologies (under liberal open source licenses) that we can use in MultiChain. But I don’t think that’s the only reason. I believe there is a compelling argument in favor of cryptocurrencies, which can stand on its own.
In favor of crypto
What is the point of cryptocurrencies like bitcoin? What do they bring to the world? I believe the answer is the same now as in 2008, when Satoshi Nakamoto published her famous white paper. They enable direct transfers of economic value over the Internet, without a trusted intermediary, and this is an incredibly valuable thing. But unlike Satoshi’s original vision, I do not see this as a better way to buy coffee in person or kettles online. Rather, cryptocurrencies are a new class of asset for people looking to diversify their financial holdings in terms of risk and control.
Let me explain. In general people can own two types of asset – physical and financial. For most of us physical assets are solid and practical items, like land, houses, cars, furniture, food and clothing, while a lucky few might own a boat or some art. By contrast, financial assets consist of a claim on the physical assets or government-issued money held by others. Unlike physical assets, financial assets are useless on their own, but can easily be exchanged for useful things. This liquidity and exchangeability makes them attractive despite their abstract form.
Depending on who you ask, the total value of the world’s financial assets is between $250 and $300 trillion, or an average of $35-40k per person alive. The majority of this sum is tied up in bonds – that is, money lent to individuals, companies and governments. Most of the rest consists of shares in public companies, spread across the stock exchanges of the world. Investors have plenty of choice.
Nonetheless, all financial assets have something in common – their value depends on the good behavior of specific third parties. Furthermore, with the exception of a few lingering bearer assets, they cannot be transferred or exchanged without a trusted intermediary. These characteristics create considerable unease for these assets’ owners, and that feeling gains credence during periods of financial instability. If a primary purpose of wealth is to make people feel safe in the face of political or personal storms, and the wealth itself is at risk from such a storm, then it’s failing to do its job.
So it’s natural for people to seek money-like assets which don’t depend on the good behavior of any specific third party. This drive underlies the amusingly-named phenomenon of gold bugs – people who hold a considerable portion of their assets in physical gold. Gold has been perceived as valuable by humans for thousands of years, so it’s reasonable to assume this will continue. The value of gold cannot be undermined by governments, who often succumb to the temptation to print too much of their own currency. And just as in medieval times, gold can be immediately used for payment without a third party’s assistance or approval.
Despite these qualities, gold is far from ideal. It’s expensive to store, heavy to transport, and can only be handed over through an in-person interaction. In the information age, surely we’d prefer an asset which is decentralized like gold but is stored digitally rather than physically, and can be sent across the world in seconds. This, in short, is the value proposition of cryptocurrencies – teleportable gold.
On intrinsic value
The most immediate and obvious objection to this thesis is that, well, it’s clearly ridiculous. You can’t just invent a new type of money, represented in bits and bytes, and call it Gold 2.0. Gold is a real thing – look it’s shiny! – and it has “intrinsic value” which is independent of its market price. Gold is a corrosion-resistant conductor of electricity and can be used for dental fillings. Unlike bitcoin, if nobody else in the world wanted my gold, I could still do something with it.
There’s some merit to this argument, but it’s weaker than it initially sounds. Yes, gold has some intrinsic value, but its market price is not derived from that value. In July 2001 an ounce of gold cost $275, ten years later it cost $1840, and today it’s back around the $1200 mark. Did the practical value of dental fillings and electrical wiring rise sevenfold in ten years and then plummet in the subsequent six?
Clearly not. The intrinsic value argument is about something more subtle – it places a lower bound on gold’s market price. If gold ever became cheaper than its functional substitutes, such as copper wiring or dental amalgam, electricians and dentists would snap it up. So if you buy some gold today, you can be confident that it will always be worth something, even if it’s (drastically) less than the price you paid.
Cryptocurrencies lack the same type of lower bound, derived from their practical utility (we’ll discuss a different form of price support later on). If everyone in the world lost interest in bitcoin, or it was permanently shut down by governments, or the bitcoin blockchain ceased to function, then any bitcoins you hold would indeed be worthless. These are certainly risks to be aware of, but their nature also points to the source of a cryptocurrency’s value – the network of people who have an interest in holding and transacting in it. For bitcoin and others, that network is large and continuing to grow.
Indeed, if we look around, we can find many types of asset which are highly valued but have negligible practical use. Examples include jewelry, old paintings, special car license plates, celebrity autographs, rare stamps and branded handbags. We might even say that, in terms of suitability for purpose, property in city centers is drastically overpriced compared to the suburbs. In these cases and more, it’s hard to truly justify why people find something valuable – the reason is buried deep in our individual and collective psyches. The only thing these assets have in common is their relative scarcity.
So I wouldn’t claim that bitcoin’s success was a necessary or predictable consequence of its invention, however brilliant that may have been. What happened was a complete surprise to most people, myself included, like the rise of texting, social media, sudoku and fidget spinners. There’s only one reason to believe that people will find cryptocurrencies valuable, and that is the fact that they appear to be doing so, in greater and greater numbers. Bitcoin and its cousins have struck a psychoeconomic nerve. People like the idea of owning digital money which is under their ultimate control.
Against crypto maximalism
At this point I should clarify that I am not a “cryptocurrency maximalist”. I do not believe that this new form of money will take over the world, replacing the existing financial landscape that we depend on. The reason for my skepticism is simple: Cryptocurrencies are a poor solution for the majority of financial transactions.
I’m not just talking about their sky-high fees and poor scalability, which can be technically resolved with time. The real problem with bitcoin is its core raison d’être – the removal of financial intermediaries. In reality, intermediaries play a crucial role in making our financial activity secure. Do consumers want online payments to be irreversible, if a merchant has ripped them off? Do companies want a data loss or breach to cause immediate bankruptcy? One of my favorite Twitter memes is this from Dave Birch (although note that bitcoin is not truly anonymous or untraceable):
Help! I want my anonymous untraceable electronic money back, part 97: South Korea https://t.co/LoImbsZnEV
— David G.W. Birch (@dgwbirch) July 5, 2017
Help. I want my anonymous untraceable electronic money back, part 97: Ethereum tokens https://t.co/Qi5w04dFAo
— David G.W. Birch (@dgwbirch) June 18, 2017
While it’s wonderful to send value directly across the Internet, the price of this wizardry is a lack of recourse when something goes wrong. For the average Joe buying a book or a house, this trade-off is simply a bad deal. And the endless news stories about stolen cryptocurrency and hacked bitcoin exchanges aren’t going to change his mind. As a result, I believe cryptocurrencies will always be a niche asset, and nothing more. They will find their place inside or outside of the existing financial order, alongside small cap stocks and high yield bonds. Not enough people are thinking about the implications of this boring and intermediate outcome, which to me seems most likely of all.
A pointed historical analogy can be drawn with the rise of e-commerce. In the heady days of the dot com boom, pundits were predicting that online stores would supersede their physical predecessors. Others said that nobody would want to buy unseen goods from web-based upstarts. Twenty years later, Amazon, Ebay and Alibaba have indeed built their empires, but physical stores are still with us and attractive to buy. In practice, most of us purchase some things online, and other things offline, depending on the item in question. There are trade-offs between these two forms of commerce, just as there are between cryptocurrencies and other asset classes. He who diversifies wins.
Now about that price
If cryptocurrencies will be around in the long term, but won’t destroy the existing financial order, then the really interesting question is this: Exactly how big are they going to get? Fifty years from now, what will be the total market capitalization of all the cryptocurrency in the world?
In my view, the only honest answer can be: I’ve no idea. I can make a strong case for a long-term (inflation-adjusted) market cap of $15 billion, since that’s exactly where crypto was before this year’s (now deflating) explosion. And I can make an equally strong case for $15 trillion, since the total value of the world’s gold is currently $7 trillion, and cryptocurrencies are better in so many ways. I’d be surprised if the final answer went outside of this range, but a prediction this wide is as good as no prediction at all.
Most financial assets have some kind of metric which acts to anchor their price. Even in turbulent markets, they don’t stray more than 2-3x in either direction before rational investors bring them back into line. For example, the exchange rates between currencies gravitate towards purchasing power parity, defined as the rate at which a basket of common goods costs the same in every country. Bonds gravitate towards their redemption price, adjusted for interest, inflation and risk, which depends on the issuing party. Stocks gravitate towards a price/earnings ratio of 10 to 25, because of the alternatives available to income-seeking investors. (One exception appears to be high-growth technology stocks, but even these eventually come back down to earth. Yes, Amazon, your day will come.)
When it comes to the world of crypto, there is no such grounding. Cryptocurrencies aren’t used for pricing common goods, and they don’t pay dividends or have a deadline for redemption. They also lack the pedigree of gold or artwork, whose price has been discovered over hundreds of years. As a result, crypto prices are entirely at the mercy of Keynesian animal spirits, namely the irrational, impulsive and herd-like decisions that people make in the face of uncertainty. To paraphrase Benjamin Graham, who wrote the book on stock market investing, Mr Crypto Market is madder than a madman. The geeks among us might call it chaos theory in action, with thousands of speculators feeding off each other in an informational vacuum.
Of course, some patterns can be discerned in the noise. I don’t want to write (or be accused of writing) a guide to cryptocurrency investing, so I’ll mention them only in brief: reactions to political uncertainty and blockchain glitches, periods of media-driven speculation, profit-taking by crypto whales, 2 to 4 year cycles, deliberate pump-and-dump schemes, and the relentless downward pressure caused by proof-of-work mining. But if I could give one piece of advice, it would be this: Buy or sell to ensure you’ll be equally happy (and unhappy) whether crypto prices double or halve in the next week. Because either can happen, and you have no way of knowing which.
If the price of a cryptocurrency isn’t tied to anything and moves unpredictably, could it go down to zero? Barring a blockchain’s catastrophic technical failure, I think the answer is no. Consider those speculators who bought bitcoin in 2015 and sold out during the recent peak, making a 10x return. If the price of bitcoin goes back to its 2015 level, it would be a no-brainer for them to buy back in again. In the worst case, they’ll lose a small part of their overall gains. But if history repeats itself, they can double those gains. And maybe next time round, the price will go even higher.
This rational behavior of previous investors translates into a cryptocurrency’s price support, at between 10% and 25% (my estimate) of its historical peak. That’s exactly what happened during 2015 (see chart below) when bitcoin’s price stabilized in the $200-$250 range after dropping dramatically from over $1000 a year earlier. At the time there was no good reason to believe that it would ever rise again, but the cost of taking a punt became too low to resist.
So I believe that cryptocurrencies will be with us for the long term. As long as bitcoin is worth some non-trivial amount, it can be used as a means of directly sending money online. And as long as it serves this purpose, it will be an attractive alternative investment for people seeking to diversify. The same goes for other cryptocurrencies that have reached a sufficient level of interest and support, such as Ethereum and Litecoin. In Ethereum’s case, this logic applies whether or not smart contracts ever find serious applications.
On that subject, I should probably (and reluctantly) mention the recent wave of token Initial Coin Offerings (ICOs) on Ethereum. For the most part, I don’t see these as attractive investments, because their offer price may well be a high point to which they never return. And the sums involved are often ridiculous – if $18 million was enough to fund the initial development of Ethereum, I don’t see why much simpler projects are raising ten times that amount. My best guess is that many ICO investors are looking for something to do with their newly-found Ether riches, which they prefer not to sell to drive down the price. Ironically, after being collected by these ICOs, much is being sold anyway.
Back to reality
There’s a certain symmetry between people’s reactions to cryptocurrencies and enterprise blockchains. In both cases, some shamelessly drive the hype, claiming that bitcoin will destroy the financial system, or that enterprise chains will replace relational databases. Others are utterly dismissive, seeing cryptocurrencies as elaborate Ponzi schemes and permissioned blockchains as a technological farce.
In my view, these extreme positions are all ignoring a simple truth – that there are trade-offs between different ways of doing things, and in the case of both cryptocurrencies and enterprise blockchains, these trade-offs are clear to see. A technology doesn’t need to be good for everything in order to succeed – it just needs to be good for some things. The people who are doing those things have a tendency of finding it.
So when it comes to both public and private blockchains, it’s time to stop thinking in binary terms. Each type of chain will find its place in the world, and provide value when used appropriately. In the case of cryptocurrencies, as an intermediary-free method for digital value transfer and an alternative asset class. And in the case of enterprise blockchains, as a new approach to database sharing without a trusted intermediary.
That, at least, is the bet that we’re making here.
Disclosure: The author has a financial interest in various cryptocurrencies. Coin Sciences Ltd does not.
Please post any comments on LinkedIn.
Buyer of Jack Dorsey’s ‘genesis tweet NFT’ reportedly detained in Iran
Iranian Cyber Police have reportedly arrested Bridge Oracle CEO Sina Estavi, according to a tweet pinned to Estavi’s Twitter account.
A rough translation of the tweet reads:
“The owner of this account was arrested on charges of disrupting the economic system by order of Special Court for Economic Crimes. Official judicial authorities will provide additional information.”
The same tweet is also pinned to the official account of Bridge Oracle, a Tron Network-based public oracle system. At the time of writing, the price of Bridge Oracle’s native token, BRG, has taken a sharp dive, crashing by more than 65%, according to data from TradingView.
Bridge Oracle is said to be a Malaysia-based blockchain company, but Estavi’s other venture, cryptocurrency exchange Cryptoland, was operating in Iran. Cryptoland’s Twitter account shares the same pinned tweet. No further information was shared publicly by the authorities.
Estavi is known for his heated bidding battle with tech entrepreneur and Tron CEO Justin Sun to buy Jack Dorsey’s first-ever tweet as an NFT. Twitter’s first tweet is dated March 2006 and reads, “Just setting up my twttr.”
In the end, Estavi successfully purchased the NFT for more than $2.9 million, or 1,630 Ether (ETH). Dorsey converted the proceeds to Bitcoin (BTC) and donated them to a charity organization in Africa.
Earlier this year, Estavi was sued by former Bitcoin.com CEO Mate Tokay for allegedly failing to pay him for his services. In his claim, Tokay also alleged that there’s an inconsistency between the purported and actual circulating supply of BRG.
Cointelegraph reached out to Bridge Oracle for comment. This article will be updated should they reply.
Bank of America to Settle Stock Trades on Paxos Network
The information on or accessed through this website is obtained from independent sources we believe to be accurate and reliable, but Decentral Media, Inc. makes no representation or warranty as to the timeliness, completeness, or accuracy of any information on or accessed through this website. Decentral Media, Inc. is not an investment advisor. We do not give personalized investment advice or other financial advice. The information on this website is subject to change without notice. Some or all of the information on this website may become outdated, or it may be or become incomplete or inaccurate. We may, but are not obligated to, update any outdated, incomplete, or inaccurate information.
You should never make an investment decision on an ICO, IEO, or other investment based on the information on this website, and you should never interpret or otherwise rely on any of the information on this website as investment advice. We strongly recommend that you consult a licensed investment advisor or other qualified financial professional if you are seeking investment advice on an ICO, IEO, or other investment. We do not accept compensation in any form for analyzing or reporting on any ICO, IEO, cryptocurrency, currency, tokenized sales, securities, or commodities.
Is Bitcoin nearing another Black Thursday crash? Here’s what BTC derivatives suggest
Bitcoin’s 51.4% crash in March 2020 was the most horrific 24-hour black swan event in the digital asset’s history. The recent price activity of the past week has probably resurrected similar emotions for investors who experienced the Black Thursday crash.
Over the past week, Bitcoin’s (BTC) price dropped 29% to reach a three-month low at $42,150. $5.5 billion in long contracts were liquidated, which is undoubtedly a record-high in absolute terms. Still, the impact of the March 2020 crash on derivatives was orders of magnitude higher.
To understand why the current correction is less severe than the one in March 2020, we will start by analyzing the perpetual futures premium. These contracts, also known as inverse swaps, face an adjustment every eight hours, so any price gap with traditional spot markets can be easily arbitrated.
Sometimes, price discrepancies arise during moments of panic due to concerns about the derivatives exchange’s liquidity or market makers being unable to participate during times of extreme volatility.
On March 12, 2020, the Bitcoin perpetual futures initiated a much larger descent than the price on spot exchanges. This move is partially explained by the cascading liquidations that took place, creating a backlog of large sell orders unable to find liquidity at reasonable prices.
The aftermath of the bloodbath resulted in futures perpetual contracts trading at a 12% discount versus regular spot exchanges. BitMEX, the largest derivatives market at the time, went offline for 25 minutes, causing havoc as investors became suspicious about its liquidity conditions.
By comparing this event with the most recent week, one will find that sustainable price discrepancies are very unusual. Even a temporary 12% gap doesn’t occur, even during the most volatile hours.
Take notice of how the perpetual contracts reached a peak 4% discount versus regular spot exchanges on May 13, although it lasted less than five minutes. Market makers and arbitrage desks could have been caught off guard but quickly managed to recoup liquidity by buying the perpetual contracts at a discount.
To understand the impact of those crashes on professional traders, the 25% delta skew is the best metric, as it compares similar call (buy) and put (sell) options’ pricing. When market makers and whales fear that Bitcoin’s price could crash, they demand a higher premium for the neutral-to-bearish put options. This movement causes the 25% delta skew to shift positively.
The above chart displays the mind-blowing 59% peak one-month Bitcoin options delta skew in March 2020. This data shows absolute fear and an incapacity to price the put (sell) options, causing the distortion. Even if one excludes the intraday peak, the 25% delta skew presented sustained periods above 20, indicating extreme “fear.”
Over the past week, the skew indicator peaked at 14%, which isn’t very far from the “neutral” -10% to +10% range. It is indeed a striking difference from the previous months’ negative skew, indicating optimism, but nothing out of the ordinary.
Therefore, although the recent 29% price drop in seven days could have been devastating for traders using leverage, the overall impact on derivatives has been modest.
This data shows that the market has been incredibly resilient as of late, but this strength might be tested if Bitcoin’s price continues to drop.
The views and opinions expressed here are solely those of the author and do not necessarily reflect the views of Cointelegraph. Every investment and trading move involves risk. You should conduct your own research when making a decision.
US Investment Bank Cowen to Offer Crypto Custody Services
Buterin Plugs UNI as Next Oracle Token
Bitwise Launches ‘Crypto Innovators’ ETF
Which ‘green’ cryptocurrency is Tesla likely to add for payments?
Elon Musk Pokes Massive Hole in the Bitcoin Market After Halting Bitcoin Payments at Tesla
Facebook’s Diem Enters Crypto Space With Diem USD Stablecoin
Venture platform Cognitive Blockchain invests in cross-chain compute network Cudos
Ethernity Chain Memorializes Tony Hawk’s Latest 540 Skate Trick With NFT
Vitalik Buterin Dumps His SHIB, Price Tanks 30% In 1 Hour
The STC Token is Live – And Over 10 Crypto Exchanges are Ready for It
Diem parters with Silvergate bank to launch stablecoin in the US
DeFi Staple UMA Launches “Optimistic Oracle”
MicroStrategy Buys Another $15M Worth of Bitcoin at $55K
In Less than A Week, How Internet Computer (ICP) Climbed To The Top 10
Here’s why Ethereum, AAVE, ALPHA are unfazed by Bitcoin’s latest ‘Elon candle’
Vitalik Buterin Has Dumped His Unsolicited Doge-Clones
Central Bank of Bahrain and JPMorgan to work on digital currency settlement pilot
Diem Relocates From Switzerland to the US to Launch an USD-Backed Stablecoin
Government Adoption: Cryptos are property in Texas, Hungary to cut taxes
AppSwarm’s DOGE division calls for a global dev teams to build off Dogecoin
Blockchain6 days ago
Palantir Accepts Bitcoin for Payments and Considers Adding BTC to Balance Sheet
Blockchain1 week ago
Ray Dalio’s Bridgewater CFO leaves to work on Bitcoin full-time
Blockchain1 week ago
Ethereum price closes in on $4K as Shiba Inu (SHIB) steals Dogecoin’s thunder
Blockchain1 week ago
CFO of World’s Largest Hedge Fund Joins Institutional Bitcoin Firm NYDIG
Blockchain1 week ago
Ethereum (ETH) Hits $3800 ATH As Coinbase Premium Shoots With Institutional Interest
Blockchain1 week ago
Crypto Banter Will Give Away Over $500K To 10 Eligible Community Members
Blockchain1 week ago
Legendary Pelé NFT Set to Drop on Ethernity May 8
Blockchain1 week ago
Dogecoin Plummets 30% From Highs Following Elon Musk’s SNL Appearance