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The Effect of Derivatives on Crypto

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Although they have had a slow rollout, derivatives for cryptocurrencies have been gaining support over the last year. Many worried that with Bitcoin ETFs stalling in their adoption, this could extend to derivatives. However, the demand for these products has continued to grow for various reasons we are going to examine in this article.

Derivatives are financial instruments that allow you to speculate on the price movement of a good without having to actually take ownership for that good. Some companies use them in order to hedge their positions and smooth out their income, but at the same time, derivatives were a large part of the volatility that led to the last major recession in 2008.

Current Status of the Market

Right now there are not many big players in the game, but more firms developing their own solutions and releasing them, you can expect to see the competition intensify in the next few months. The landscape includes everyone from privately funded investment funds to public exchanges. A big part of the market is about institutions gaining access to cryptocurrencies in a way that is less risky for their client base.

There are companies like LedgerX, which has experienced continually increasing demand for their cryptocurrency derivative products as 2018 has progressed. But where things get interesting is when existing financial players delve into cryptocurrencies.

The Chicago Board of Exchange (CBOE) started offering Bitcoin futures on December 10th, 2017, and this marked a change in the market. When well-regulated derivatives exchanges begin to acknowledge the legitimacy of cryptocurrency (or at least the high demand from their customers) it is a signal of a larger shifting of the tides in the works.

The plot thickens as recent rumours about Goldman Sachs hiring a cryptocurrency trader seem to be all-but-confirmed. Their goal is to figure out their customers’ direct needs and although they do currently clear Bitcoin futures, they are very cautious about further expansion into the cryptocurrency space.

In terms of sentiment, all of these actions together signal a shift in the way the legacy financial industry views cryptocurrency. A common retort used to be that Bitcoin was not a currency, but now that demand has continued to increase, banks are much more willing to cooperate and cater to their customers.

2nd Order Effects

It may be nice to have cryptocurrency derivative products available, especially for the firms who are making tons of money selling them, but it is also important to think about how this will affect the cryptocurrency market as a whole. Derivatives distribute the risk in a way that allows speculators to make bets without actually owning the cryptocurrency. Bitcoin has gained traction, but it is unclear how this sort of institutionalized speculation would affect it in these early stages.

The general argument for derivatives is that they allow for more liquidity and trading volumes of non-blue chip coins. Companies issuing derivatives for these alt-coins would increase the general awareness of these coins and their quality, which could lead to heightened demand for the coins.

Additionally, with every company, exchange, or investor who trades anything cryptocurrency related, regulators feel further pressure to regulate them more fairly. The current “no man’s land” crypto is in can’t last forever, and if the adoption of derivatives helps, then this is a clear benefit.

On the flip side, derivatives allow for bets against Bitcoin as well as the ability to invest in cryptocurrencies without owning them. This could lead to decreased demand, which may affect it negatively, since it hasn’t reached equilibrium like other currencies have.

Cryptocurrencies are an inherently risky asset, and with the introduction of derivatives, there are a lot of different things that could happen in this space. Increased volatility may ensue, but with it may come increased adoption.

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Important: Never invest (trade with) money you can't afford to comfortably lose. Always do your own research and due diligence before placing a trade. Read our Terms & Conditions here. Trade recommendations and analysis are written by our analysts which might have different opinions. Read my 6 Golden Steps to Financial Freedom here. Best regards, Jonas Borchgrevink.

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Bitcoin

What Economists Don’t Understand About Bitcoin

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Of all the things to irritate a Bitcoin enthusiast, perhaps the worst is when economists come out with their negative opinions regarding Bitcoin. Paul Krugman, the prince of establishment economists, recently publish “Transaction Costs and Tethering”. The article explained why he believed Bitcoin would collapse, and was designed to create controversy.

The first thing we all need to realize is that Bitcoin is at its core an anti-establishment construct, whereas economists are all “buyers” of the current system and believe it is working well. These economists look at HODL’ers belief that Bitcoin is a hedge against the fiat system as a fringe bet, whereas Bitcoiners generally believe there are major problems endemic in the system.

Bitcoin as an Inefficient Protocol

The common point naysayer will make (and Krugman did rest heavily on this point) is that Bitcoin is extremely inefficient. The amount of electricity it uses and fees charges for transactions is higher than any option in our current system, and it is a step backwards.

What these criticisms fail to factor in is the fact this is all on purpose. Efficiency isn’t always a good thing. The army maxim “two is one, and one is none” could be considered inefficient, but sometimes survival is more important than efficiency.

Efficiency is what has brought about much of global warming and pollution. It was “more efficient” to do things a certain way, but that also led to short-term compromises of the future. And as more investors come out to say we can expect major problems in our future due to the way the economy has been run, it is possible that the way the pensions, fiscal deficit and financial markets have been managed might not have been the safest way.

Safety in Volatility

Bitcoiners tend to believe that Bitcoin is a safer method than the current system, even though there is a high degree of volatility. All the risk is visible, like waves on a lake, whereas the dangerous part lies beneath the water.

The argument that the current fiat system has held up well is true, but that says nothing about where the market is going to go in the future. As we know regarding investment funds, past performance doesn’t indicate future returns. This applies to the entire financial system and is exactly why Bitcoin is taking such a strong hold on the zeitgeist at this period in time.

Economists seem generally unable (or unwilling) to grasp the idea of an impending crash that changes the entire economy. But then again, were they ever able to accurately predict crashes and crises in the past?

What This Means For the Future

The fact that this group of financial experts can’t understand the “doom and gloom” predictions of those who are pro-Bitcoin says a lot about how they think about risk in the markets. The future is always uncertain, and an improvement in efficiency today says nothing about improvements that may occur tomorrow. It may be preferable to have a robust solution that can withstand a massive crisis than to put all of our trust in banks.

If anything, the real estate crash of 2007 and continuing sovereign debt crisis should be enough of a problem that we can all admit the system isn’t perfect. Yes, the US dollar has served the economy well until now, but the future is always uncertain. Efficiency has gotten us this far without major calamity, but it might be time to focus on safety in the markets as well. And as anyone who has struggled to put a life jacket on knows, safety is inefficient.

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Important: Never invest (trade with) money you can't afford to comfortably lose. Always do your own research and due diligence before placing a trade. Read our Terms & Conditions here. Trade recommendations and analysis are written by our analysts which might have different opinions. Read my 6 Golden Steps to Financial Freedom here. Best regards, Jonas Borchgrevink.

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Bitcoin

How is Bitcoin Actually Faring Right Now?

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It’s easy for pundits to come up with short-term forecasts of where the price of Bitcoin is going to go, but to do a deep analysis into the developments that have occurred over the last year takes work. There are three main ways we can assess how well Bitcoin is faring as a burgeoning asset: technology, regulations, and ecosystem.

By giving each of these an objective analysis, it is possible to get a strong idea of what direction Bitcoin is heading in and whether it will be around in a decade. And for the HOLD’ers, this is what they care about most.

Development of Technology

The most commonly discussed advancement in the Bitcoin network is the implementation of the Lightning network. Capacity is continuing to grow for the network, but it is still quite a ways off from having an adequate capacity for the expected needs of the base Bitcoin network. The main issue are the fees lightning nodes ear; they are considered to be low relative to other node operations, and it may not be economically feasible to run these nodes.

The good news is Lightning network has made it much cheaper to send payments. This is perfect for small purchase like buying goods and services. However, the current wallet bugs make it unlikely a large number of users may safely use the Lightning network without routing errors costing them money.

SegWit adoption is continuing and has reached approximately 40% of the network. This change allows for more transactions to be stored per block, which speeds up the number of transactions per second with no downsides.

The combined effect of Lightning network implementation and SegWit adoption has brought fees down by 100x. It must also be taken into account that network usage has also decreased in this time, as that would be a factor in the demand for trading.

The Regulatory View

Recent rulings have enforced the view that Bitcoin is a commodity, which means there is a more certain regulatory view for it than many other cryptocurrencies.

At the same time, the Winklevoss twins attempted to start a Bitcoin ETF and was denied their proposal. It is likely an ETF will eventually be created, but more work must be done to demonstrate the resilience of the market against manipulation.

Another perspective here is related to regulatory arbitrage. Many companies and protocols are moving to countries where they have more security and certainty regarding the government’s position on crypto assets. Although this won’t directly affect the governance of Bitcoin, it will continue to affect the locations of trading platforms.

Development of the Ecosystem

We are seeing the spread of more closed end funds, in-house crypto-trading desks, and many more functions that are related to cryptocurrencies occur. This is a positive sign for the overall ecosystem and where we can expect it to head in the next while.

The continued development of all these aspects of Bitcoin make it seem more and more likely that adoption as a form of digital gold will occur. Nothing is certain, but Bitcoin is the most “black-and-white” asset in the crypto space, so it is a good indicator for the potential of the rest of the industry as well.

Featured image courtesy of Shutterstock.

Important: Never invest (trade with) money you can't afford to comfortably lose. Always do your own research and due diligence before placing a trade. Read our Terms & Conditions here. Trade recommendations and analysis are written by our analysts which might have different opinions. Read my 6 Golden Steps to Financial Freedom here. Best regards, Jonas Borchgrevink.

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Altcoins

Vitalik Buterin: What Were You Thinking?

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Enough with all the stuff over fake news versus real news.  It is hard to find reality these days. What information is coming from trustworthy sources versus those with a secret interest to promote?  I am not talking about the stuff coming from the White House, FBI, CIA or any of those folks. I am talking about something much more important.

What I am getting at is news in the crypto world where our digital assets are invested. Just the other day, I wrote a piece raising the question whether crypto usership for acquiring goods and services was falling.  Those who collect data on these trends seem to think it is.

There could be lots of reasons for this, both in the method of collecting the data as well as real human behavior.  One thing seems clear, crypto prices keep getting further away from those frothy levels of last Christmas.

We also have to keep in mind that there is no such thing as long term history with crypto. It is inherently volatile.  So the analysis of data can change quickly.

Goldman Sachs Was Bad Enough

Last week’s conflicting headlines coming from Goldman Sachs via Business Insider claiming that the big investment bank was pulling back on its plans to open a crypto trading desk in favor of a more limited commitment to essentially offering a wallet for big institutional investors sent a quick shock through prices.  It didn’t matter that other sources at Goldman merely claimed they were delaying the rollout.

What’s With Vitalik?

So if you are the founder of some pretty amazing technology whose success ultimately depends on mass adoption, you would expect to hear a constant barrage of exciting news about your project, kind of like Elon Musk.

But not Vitalik Buterin.  Over the weekend headlines from Ethereum World News read: “There Isn’t An Opportunity For Another 1000x Growth”.

The source of the headline comes from Bloomberg News who interviewed Buterin at the recent Ethereum & Blockchain Conference in Hong Kong. Below is Vitalik’s direct quote:

“The blockchain space is getting to the point where there is a ceiling in sight.  If you talk to the average educated person at this point, they probably have heard of blockchain at least once. There isn’t an opportunity for yet another 1,000-times growth in anything in the space anymore.”  Buterin’s remarks were described as a shock to those attending the conference.

Nobody is challenging the depth of Buterin’s knowledge, but what is happening in that part of his brilliant mind that is devoted to common sense?  As the co-founder of Ethereum whose success thus far is build on applications developed by others, why would you want to disparage the future?  It positively makes no sense.

What makes sense, as the article points out, is a long-term growth plan that encourages a steady flow of adoption and real world use.  Bravo for that observation and one I totally agree with. But that wasn’t working at the conference. “That strategy (marketing and worldwide adoption) is getting close to hitting a dead end.”

But here is the killer. Rather than focusing on evolutionary developments like Bitcoin’s Lightning Network or Ethereum-based Raiden Network, Buterin chooses to dwell on the obvious.

“. . . every present day existing blockchain, including ETH and BTC, sucks. . . . “.

Connecting the Dots

Whether accurate or not, Buterin’s opinions, at best, were ill timed.  If you believe them to be accurate, why would you invest in Ether or any other crypto?  It would make no sense to do so. On the other hand if his comments were cleverly crafted to discourage rampant speculation and volatility, that is not his job.  In fact, it is a form of manipulation. That is not smart.

Featured image courtesy of Shutterstock. 

Important: Never invest (trade with) money you can't afford to comfortably lose. Always do your own research and due diligence before placing a trade. Read our Terms & Conditions here. Trade recommendations and analysis are written by our analysts which might have different opinions. Read my 6 Golden Steps to Financial Freedom here. Best regards, Jonas Borchgrevink.

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4.4 stars on average, based on 104 rated postsJames Waggoner is a veteran Wall Street analyst and hedge fund manager who has spent the past few years researching the fintech possibilities of cryptocurrencies. He has a special passion for writing about the future of crypto.




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