Insider Insights December 2018 Issue

The Sell-off Silver Lining
US SEC’s View on ICOs and Institutional Developments

Throughout late 2018, a rush of panic-selling has swept through cryptocurrency markets, brought on by the SEC’s classification of ICOs as securities. After reaching its meteoric peak of nearly $20,000 in late 2017, the Bitcoin price has veered sharply to a mere $3,500. Much of the mainstream media has focused on the doom and gloom of shattered fortunes, but this assessment fails to account for nuance that shows the market is actually poised for growth.

Despite its crashing price, Bitcoin continues to enjoy increasing adoption rates among users, as well as institutional players holding firm with their plans to incorporate Bitcoin into their trading platforms. This makes it clear that the cryptocurrency market is percolating new opportunities in the midst of the external market selloff, and that the use cases for cryptocurrency remain brighter than ever, pointing to a wealth of opportunities underneath.

Firstly, some context will illuminate the reason for the large sell-offs in the latter part of 2018. As mentioned earlier, the SEC has decided to classify ICOs as securities, bringing a brand new set of rules and regulations into play for these projects. Not only are there fears of fines being levied or projects being shuttered, but there is the potential for lawsuits and civil charges or even criminal cases being brought forth against ICOs that fail to comply. There is some merit to this thought, as boxing champion Floyd Mayweather and music producer DJ Khaled were facing six-digit fines from the SEC for failing to disclose income they received to promote cryptocurrencies. Additionally, Mayweather is cooperating with the SEC’s investigation into an allegation of ICO fraud.

While these fines were a fraction of their net worth and would not impact them so terribly, such a move by the SEC has understandably spooked crypto traders and investors who carry a much larger proportion of their worth in cryptocurrency. This has pushed them to sell further so they can maintain some amount of liquidity, given that they are not given to holding so much money in fiat. In the end, this has exacerbated the sell-off.

What this context illuminates, however, is that the falling price is absolutely not a loss of faith in cryptocurrency per se. The sell-offs in question have various instigating factors, such as a need for sudden liquidity that did not exist a few months prior, genuine fear in the external cryptocurrency market, or borne out of a need to handle fines or expenses related to the recently implemented SEC regulations. Therefore, it is of paramount importance to disassociate the price of crypto from its utility and adoption. The falling price absolutely does not show that faith has been shaken in the fundamental principles of cryptocurrency; rather, data shows quite the opposite trend.

Despite the price of Bitcoin falling to 18% of its peak value, there has been a corresponding increase in active addresses per day of 20% over the same timeframe. [ed research: bitinfocharts.com and Coinbase price graph] Additionally, the Cambridge Centre for Alternative Finance released a report that the number of verified cryptocurrency market participants jumped from 18 million to 35 million over the course of 2018. It is clear that the largest players in the crypto space have taken note of this, as they are not deterred from rolling out new products. TD Ameritrade, the Intercontinental Exchange, Fidelity, ErisX, Coinbase, Goldman Sachs, Northern Trust, Mitsubishi UFJ Financial Group, Nasdaq, Citigroup, and many other Wall Street players are continuing to build and roll out Bitcoin products and services, even in light of the price drop; suggesting that these firms also see the healthy underpinnings in the market beyond the dollar value of the coin. If Bitcoin was truly a mere fad whose bubble had finally popped, then there would not be so much continuing investment from the world’s largest financial players.

Indeed, the investments made by these players have manifested into some heavy-hitting products scheduled to launch in the near future. ErisX, backed by TD Ameritrade, DRW, and Fidelity, among others has recently completed Series B funding. Since ErisX will be storing actual Bitcoin, it will reduce the total amount in the market considerably. Bakkt, operated by the owner of the New York Stock Exchange, is an offering scheduled to go live in January 2019, and will be the first of its kind as an institutional physical Bitcoin market. Finally, NASDAQ plans to pursue listing Bitcoin futures in 2019, even though they, too, have publicly acknowledged the price drop.

As adoption has increased, Bitcoin framework developers, too, have been hard at work resolving some of the biggest issues facing the currency. With the forthcoming Lightning Network framework for Bitcoin, two users will be able to take advantage of an additional layer on the blockchain and compress many individual transactions into one, greatly streamlining the verification process and allowing the network to push through that many more transactions per second. Through innovations earlier in 2018 Bitcoin transaction fees also saw a precipitous drop, falling from as high as $30 down to a mere $0.10.

For all these reasons, looking at the price of Bitcoin dropping and assuming that it’s a mere bubble that has popped and the markets are moving on is a superficial and incorrect assessment. There are numerous signs that the crypto market is still growing and is ripe for development and innovation.

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Regards,

Darius & Saul
Managing Partners