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Professional Demand for Digital Assets

Crypto Research
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Professional Demand for Digital Assets

Throughout Europe, investors have already invested millions of Euros and Swiss Francs into digital assets. Without a doubt, this is of significant importance for the economy in general and the crypto sector in particular, since these investors also play a major role in price movements. However, there are still only a small number of reports that systematically assess the demand for cryptocurrencies.

The first study was not focused on the German-speaking countries, and the second has not been published yet. Between November 2019 and early March 2020, Greenwich Associates under the auspices of Fidelity Digital Assets, Fidelity Center for Applied Technology, and Fidelity Consulting interviewed almost 800 investors across the U.S. and Europe.

Across the U.S. and Europe, 36% of the survey’s 774 respondents said they own cryptocurrencies or derivatives. The results show that over a third of institutional investors own digital assets. According to the survey, European investors generally have a more progressive view of digital assets, made evident when comparing the responses across all categories. Interestingly, this study found the same result: 36% of the survey’s 55 asset allocators said they have exposure to cryptocurrencies in the portfolio already.

The one survey that has targeted institutional demand for cryptocurrencies in the DACH region is BaFin’s survey of crypto asset derivatives. The German financial market regulator conducted a survey in late 2019; however, they have not published the results yet. In the survey’s preliminary research report, BaFin reported that there has been enormous growth of certificates that hold digital assets and contract for difference trading. Over 1,000 different certificates are on the market that have exposure to digital assets, and contracts for difference trading volume grew from €10 billion a month in August of 2018 to over €15 billion a month by January of 2019.

This study marks the first comprehensive survey of institutional investors on the topic of digital assets ever conducted across the German-speaking regions. The analysis contains key highlights of the survey’s results in addition to commentary from Crypto Research Report and Cointelegraph Research. Our experience combined with the proprietary dataset drives the unique perspective on the industry’s trends presented in this report.

Methodology

This survey had 55 responses from professional investors across the German-speaking countries including 44 online interviews and 11 case studies via telephone. Respondents included traditional banks, asset managers, and pension funds. This report focuses on buy-side, not sell-side asset allocators. Therefore, we did not send this survey to crypto funds that are invested 100% in digital
assets. The goal of this report is to gauge the demand for digital assets from traditional financial intermediaries.

The survey was delivered via email to all registered professional investors with BaFin (Germany), FMA (Austria), FINMA (Switzerland), and the FMA (Liechtenstein) between the months of June to September of 2020. With the help of local banking associations, the survey was also sent out to the members of the BVI Deutscher Fondsverband and BAI in Germany, the Austrian Bankenverband, the Liechtensteinischer Anlagefondsverband, and members of SFAMA in Switzerland.

The majority of the respondents came from Switzerland (16) followed by Austria (10), Germany (7), and Liechtenstein (6). When sorting the survey results by country, the respondents from Switzerland managed the most assets with €278 billion. Austria’s respondents worked in firms with the highest headcount. The majority (83%) of the respondents worked in firms with less than 50 employees. Only three women that were in charge of asset allocation decisions at their company responded to the survey compared to 39 men. The median age of the respondent was 47.5 years old.

Current Exposure

Over a third of the surveyed asset managers have invested in digital assets, while about 64% of respondents have not invested yet. Among the institutional investors who have had exposure to digital assets, approximately 69% of respondents have 10% or less of their assets under management in crypto assets. Notably, over a third of those surveyed have only 1% or less of their assets under management in crypto assets.

Question: Has your company invested in crypto assets in the past?

Source: Cointelegraph Research

This survey was conducted during the 2020 shutdown of the economy due to the government’s response to the Corona virus. During mid-March, many investors de-risked their portfolios and went into cash. From peak (February 19, 2020) to trough (March 17, 2020) Bitcoin lost 50% of its value, and briefly trading in the high 4000s. Since then, the price has recovered 115% to above $10,000. Bitcoin has performed better than equities, fixed income, real estate, and gold year to date (as of October 8, 2020). If governments continue to stimulate the economy with newly created money, then this trajectory is expected to continue. If the fiat faucet is ever turned off, there will likely be an ensuing correction in all asset classes.

Question: What percentage of your company’s assets under management are invested in crypto assets?

Source: Cointelegraph Research

This article is an extract from the 70+ page Discovering Institutional Demand for Digital Assets research report co-published by the Crypto Research Report and Cointelegraph Consulting, written by eight authors and supported by SIX Digital Exchange, BlockFi, Bitmain, Blocksize Capital, and Nexo.

It is important to note that these figures apply to digital assets in general, but that there is a variety of these assets that are viewed by investors from different angles. Therefore, we will take a look next week at exactly how the interest is composed and what the conditions are for investors to make their purchases.

Survey Shows 61% of Wealthy Investors in Europe Have Already Bought or Plan to Buy Digital Assets

Crypto Research
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Survey Shows 61% of Wealthy Investors in Europe Have Already Bought or Plan to Buy Digital Assets

New survey on professional investors in Europe finds that 36% have already bought crypto. The percentage of big investors that plan to buy crypto in the future is even higher.

To gain a deeper understanding of how professional investors feel about digital assets, the Crypto Research Report and Cointelegraph Consulting has co-published a 70+ page research report written by eight authors and supported by SIX Digital Exchange, BlockFi, Bitmain, Blocksize Capital, and Nexo. The Discovering Institutional Demand for Digital Assets report highlights which coins wealthy investors already own and which ones they plan to buy in the coming months. The report also covers the most popular regulated funds and structured products that are designed for investors from the traditional finance realm.

cointelegraph-crypto-research-report-discovering-institutional-demand-for-digital-assets-in-dach-region

Download the full report here, complete with charts and infographics.Download

The total assets under management managed by the 55 asset allocators that participated in the survey was over €719 billion, which almost double the entire market capitalization of the digital asset market. Out of those professional investors, 36% already had blockchain-inspired assets in their portfolio either through direct investment in cryptocurrencies, stablecoins, and security tokens or via funds, structured products, or futures. Out of the remaining 64% that have not yet invested, 39.29% plan to invest. This results in 61.15% of professional investors in the survey either already owning digital assets or planning to buy in the future.

The majority of investors with exposure to cryptographic assets were primarily interested in Bitcoin and Ethereum. Around 88% and 75% of respondents exposed to cryptocurrencies have invested in these cryptocurrencies, respectively. However, institutional investors appear to be increasingly interested in security tokens. Out of the 39.29% of investors that plan to invest in the future, security tokens were more popular than Ethereum and other alternative coins.

Some investors hold cryptographic assets for speculation rather than for use as a medium of exchange. They hope to “front-run” Wall Street by buying in before bigger pockets enter the market. Putting the fear of missing out aside, there are genuine reasons to be excited about institutional investors joining the space. Institutional investors hold the majority of the world’s wealth. The sheer size of the wealth managed by professional investors like pension funds, university endowments, and insurance companies is enough to have a dramatic impact on the entire digital asset industry if they enter the market. For years, there have been rumors that institutional investors were starting to buy cryptocurrencies, and now, the most recent academic survey provides evidence that this rumour is true. 

The survey was conducted during June through September 2020 by Professor Dr. Philipp Sandner from the Frankfurt School of Finance & Management’s Blockchain Center, Professor Dr. Alfred Taudes from the Vienna University of Economics and Business’ Austrian Blockchain Center, and Cointelegraph’s Director of Research, Demelza Hays. The report is co-published by Cointelegraph Consulting and Crypto Research Report. 

We would like to express our profound gratitude to our premium partners for supporting the Crypto Research Report.

Our team of academics and seasoned blockchain technologists can cover a diverse range of topics including tokenomics, macroeconomics, legal, tax, central bank digital currencies, decentralized finance, supply chain logistics, and venture capital. To work with the Crypto Research Report and Cointelegraph Research team on creating a one-of-a-kind report, contact us at [email protected].

Review: Liechtenstein Tax Law by Matthias Langer

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Review: Liechtenstein Tax Law by Matthias Langer

In the book, The Liechtenstein Tax Law, Matthias Langer hits the nail on the head in respect to taxation of blockchain and FinTech companies in Liechtenstein. Alongside the tax law basics of Liechtenstein, Matthias Langer hits the nerve of the time by addressing the regulations for the taxation of blockchain and FinTech companies, and thus creates tax law clarity.

Published in 2019, the book opens up with the history of the Principality of Liechtenstein before moving on to the main topics of company, foundation, and trust law. The existing legal forms are presented concisely, followed by an overview of the type and scope of Liechtenstein’s audit, review and disclosure requirements, as well as the existing accounting regulations.

Matthias Langer has worked as a tax consultant in Liechtenstein for eleven years and now has his own law firm in Triesen. In the book, he delves into topics such as property and acquisition tax, gifts and inheritances, and income tax. The taxation of investment funds and foundations, as well as international tax law pertaining to offsetting and relocation find their way into the reading. Since Liechtenstein is also one of the pioneers in the blockchain and fintech, their handling of taxation is of great international interest. After a brief explanation of the basic terms and the balance sheet approach to cryptocurrencies, the peculiarities of the acquisition, income and value-added tax are discussed. In addition to differentiating different types of coins, the reader learns the tax significance of the transfer, trading, and storage of coins and tokens.

The book is easy to read due to the structure and short and accurate explanations that are illustrated with examples. In addition, the book enables quick reference and comprehension without the reader having to have in-depth tax knowledge. Although the book is primarily aimed at prospective entrepreneurs in Liechtenstein, it also contains information that is interesting for those who want to learn more about life in Liechtenstein and the country itself.

In summary, the book deals with all essential aspects of tax law in Liechtenstein. The treatment of tax law specifics of blockchain and fintech companies deserves special mention. The reader leaves the book with a deeper level of understanding of how crypto funds work and the taxation of cryptocurrencies. The book is only available in German at this time and can be bought on the publisher website, Springer Verlag.

Venture Capitalists Are Still Investing in Blockchain Startups During Covid-19

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Venture Capitalists Are Still Investing in Blockchain Startups During Covid-19

Relai, a Dollar Cost Averaging bitcoin investing phone app made in Switzerland, announced a successful closing of its 200K CHF seed round at a valuation of 1M CHF – showing that venture capitalists are still investing in blockchain-inspired startups even during Covid-19. Among the investors is the controversial Bitcoin maximalist Giacomo Zucco, who served for the last years as board member of the Bitcoin Association Switzerland.

Relai allows its users to buy & sell Bitcoin directly via bank payment, without any account creation or KYC/AML verification, while still being fully regulatory compliant. The service is offered through a free, simple & user-friendly Smartphone App and available to all European countries. After only two months of being live, Relai’s volumes and revenues in August have more than doubled compared to July. The Relai App has been downloaded almost 2,000 times in more than 20 countries and processed well over 300’000 CHF/EUR in Bitcoin investments. More than 30 Bitcoins have already been sold, mostly to newcomers.

“Relai aims to finally boost Bitcoin mass adoption by making investing in Bitcoin as easy as finding a match on Tinder. While our great first numbers are a positive surprise, it doesn’t surprise me at all that people hate KYC and dealing with complicated user interfaces of Bitcoin & Crypto Investing Apps. If given the alternative, most newcomers will choose a service that is easy and KYC-less, for both convenience and privacy reasons.”

Julian Liniger, CEO of Relai

The most liked and most used feature of the Relai App is it’s DCA (Dollar Cost Average) function. Users can set up a weekly recurring buy order and watch their sats dropping in automatically.

“Bitcoin is currently affected by false dichotomies. You have economics-oriented experts advising newcomers to save and “stack sats” as opposed to focus on trading or spending, while infosec-aware experts advise them to avoid dangerous traps like KYC surveillance. You have terrible shitcoin-casinos wrapped in great mobile UX, versus Bitcoin best-practices limited to command-line. I like Relai since it tries to break these dichotomies with a minimalistic, intuitive, privacy-oriented, saving-oriented, Bitcoin-only design.”

Giacomo Zucco, Relai Advisor

Good Money in the Digital Age – Interview with the MWC Team

Crypto Research
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Good Money in the Digital Age – Interview with the MWC Team

What makes good money and how has the digital age changed the meaning of this term? This article takes a look at the key characteristics of a sound currency and then apply these to the MimbleWimble Coin. We will also speak with the developers of this project and demonstrate how a MWC transaction is executed.

A good money in the digital age must be: (1) recognizable, (2) scarce, (3) censorship resistant, (4) durable & indestructible, (5) extensible, (6) salable, (7) portable, (8) fungible, (9) private, and (10) divisible. However, most cryptocurrencies don’t meet these criteria. In 2019, one of the most talked about coins was “Grin.” However, investors quickly realized that Grin’s high inflation rate and lack of a hard cap on supply was worse than the inflation in the US dollar. This made people wonder why they should buy Grin with US dollars if Grin is a worse store of value. The Grin emission rate is 1 Grin per second indefinitely. There will be 31,536,000 Grin created per year. Currently, there are approximately 43 million Grin. This results in a very low stock-to-flow ratio in the early years. During 2020, the stock-to-flow ratio of Grin is approximately 1.19x or approximately 43,000,000 Grin divided by the new production of 31,536,000. This acts as a transfer of wealth from holders to miners.

Figure 25: The Number of New Coins Created Per Day

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Source: Coinmarketcap.com, various white papers, CryptoResearch.Report

Figure 26: US Dollar Value of New Coins Created Per Day

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Source: Coinmarketcap.com, various white papers, CryptoResearch.Report

As Saifedean Ammous explains, a low stock-to-flow ratio results in a transfer of value from holders of the asset to producers, while a high stock-to-flow ratio results in lower costs, measured in the asset itself, for holders. Before Grin launched, a MWC developer suggested there be an supply cap and emission rate change but was swiftly rejected by the Grin community which acted as a green light and was part of the inspiration for forking from Grin. After all, financial innovation is about trying many different approaches when bringing monetary products to market for consumers to enjoy. Every four years is a Bitcoin halving, and after the May 2020 halving the Bitcoin stock-to-flow ratio will be approximately 55. This will make it comparable to gold. MWC addressed the hard cap problem and low stock-to-flow ratio problem by placing a hard cap of 20,000,000 on the coin and then having a much slower emission rate Like Bitcoin, MWC uses a pure proof-of-work algorithm and has the highest stock-to-flow ratio of any base-layer MimbleWimble coin. By October 2020, MWC will have a stock-to-flow ratio almost equal to Bitcoin’s. And by February 2021, it will have a significantly higher stock-to-flow ratio.

When looking at the number of coins created per day, MWC, Monero, Bitcoin, and Bitcoin Cash are the lowest. In terms of the US dollar value of the number of coins created per day, MWC is still the lowest, followed by Monero and Dash. Finally, the US dollar value of new coins created per year in relation to their US dollar market capitalization is also the lowest for MWC with 1.2 % followed by Bitcoin with 1.7 %, Monero with 2.8 %, Litecoin with 6.1 %, Dash with 8.4 %, and Zcash with an astonishing 35.1 %(!).

However, MWC has received some pushback from the cryptocurrency community because of how the initial stock was created. According to the whitepaper and protocol, half of the total supply of MWC were to be mined with proof of work mining, and the other half were created in the genesis block. From this initial stock of 10,000,000 MWC that was worthless when created, 2,000,000 MWC were immediately distributed to the developer team, 2,000,000 MWC were allocated to the HODL Program, and 6,000,000 MWC were airdropped to any Bitcoin holders who successfully registered over a three month period and claimed their MWC allocation during December 2019. Over 5.4 million MWC were successfully airdropped for free to Bitcoin holders and at the time had a total value less than $2 million. MWC primarily uses the C31 proof-of-work algorithm and MWC’s new monthly emission from a pure proof of work algorithm is about $500k.

How To Do A MWC Transaction

MWC was created to meet the demand for transferring money online with full privacy because Bitcoin transactions aren’t that private or fungible.2 MWC payments are slightly different to Bitcoin transactions, the least of which being that there are only outputs and no addresses. After all, everything is CoinJoined with Confidential Transactions and then the signatures are aggregated in the blocks.

To get started, you have to download a MimbleWimbleCoin wallet. To provide some context, the other privacy coin, Grin, relies mainly on command line interface tools, but they can be difficult for non-technical people to use. This is why MWC has created a very easy-to-use wallet that can be downloaded here: https://www.mwc.mw/downloads

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After you have successfully setup your wallet, there are two main ways to send and receive transactions called the MWCMQS method and the File method. In general, this involves six steps:

  • The sender creates the transaction using output(s)
  • The receiver signs the transaction
  • The receiver returns the transaction to the sender
  • The sender signs the transaction
  • The sender broadcasts the transaction to the network
  • The miners confirm the transaction in a block and add it to the blockchain

The MWCMQS Method

Sending and receiving via the MWCMQS method will be most similar to a Bitcoin transaction. However, both the sender and receiver must be able to interact. This means the receiver must be online and listening with the address the sender is attempting to send to. This means you cannot just provide an address and turn off your laptop and go to bed like you can with BTC, LTC, etc.

To get started, open up the wallet and click “Receive” in the left-hand menu. Copy the mwcmqs:// address and send it to your partner. Sending via email or a messaging application is fine. In order for your partner to send you a transaction, your wallet will need to be online and listening (in the lower right the MWCMQS will need to be green) for that specific address.

Once your sender copies in the address that you send them, they can paste in the address on the wallet by clicking on the “Send” option in the left-hand menu. They can also send a message along with the transaction.

The File Method

Although the MWCMQS method is the easiest method for people that used to send Bitcoin transactions, the most private way to send MWC transactions is with the File method.

Sending and receiving by File requires five steps.

  • The sender creates the transaction and generates a .tx file
  • The sender provides the .tx file to the receiver
  • The receiver signs the transaction and generates a .tx.response file
  • The receiver provides the .tx.response file to the sender
  • The sender signs the transaction and broadcasts it to the network by finalizing the transaction

To get started, a sender will attach the mwc-payment.tx file to an email and then email this file to the receiver. This covers the first two steps. The receiver must then download the file from the email and then go into their MWC wallet and insert the file. Depending on your operating system, a little box may pop up when you click “Receive mwc by file.” This box will ask you for permission to access files in your Downloads folder. Once you click “OK” you will need to find the specific .tx file that the sender sent you.

Then the receiver needs to email back a new mwc-payment.tx.response file, which will constitute the next two steps. Then, the final step will be finalizing the transaction on the sender’s side. The sender and receiver can check the transaction on the block explorer: https://explorer.mwc.mw/. By clicking in the upper right corner on the Gear, MWC users can see their transactions on the blockchain by double-clicking on the output. What is cool is that only you and the person you transacted know how many MWCs are associated with that particular output.

Fireside with the MWC Team

  • Are you inspired by Austrian economics? If so, please who is your favorite Austrian economist? What is your favorite book on Austrian economics? And, last but not least, what is your favorite quote?
  • Yes, we like the Austrian school of economics because of its objectivity. It is about understanding how things are in contrast to how we many want them to be. Mises, Rothbard, Gordon, Block and others have produced some excellent work. Human Action is a foundational text in the area. We are monetary sovereignty maximalists and are big fans of any means that help accomplish that purpose or aim whether that comes in the form of gold, silver, Bitcoin, Dogecoin, MWC or whatever. As Mises explained, “It is impossible to grasp the meaning of the idea of sound money if one does not realize that it was devised as an instrument for the protection of civil liberties against despotic inroads on the part of governments. Ideologically it belongs in the same class with political constitutions and bills of rights. The demand for constitutional guarantees and for bills of rights was a reaction against arbitrary rule and the nonobservance of old customs by kings. The postulate of sound money was first brought up as a response to the princely practice of debasing the coinage. It was later carefully elaborated and perfected in the age which—through the experience of the American continental currency, the paper money of the French Revolution and the British restriction period—had learned what a government can do to a nation’s currency system… Thus, the sound-money principle has two aspects. It is affirmative in approving the market’s choice of a commonly used medium of exchange. It is negative in obstructing the government’s propensity to meddle with the currency system.”
  • You mention that the MWC team are invested in Bitcoin. Are you invested in any other privacy-related coins?
  • We do not know. The MWC Team is composed of a significant number of people who are united by the purpose or aim of monetary sovereignty. And part of that means that what each of us does with our own money is our own business and not the business of others.
  • What do you say to the argument, “Only criminals use privacy coins?”
  • Without the ability to keep secrets, individuals lose the capacity to distinguish themselves from others, to maintain independent lives, to be complete and autonomous persons. This does not mean that a person actually has to keep secrets to be autonomous, just that she must possess the ability to do so. The ability to keep secrets implies the ability to disclose secrets selectively, and so the capacity for selective disclosure at one’s own discretion is important to individual autonomy as well.

Secrecy is a form of power. The ability to protect a secret, to preserve one’s privacy, is a form of power. The ability to penetrate secrets, to learn them, to use them, is also a form of power. Secrecy empowers, secrecy protects, secrecy hurts. The ability to learn a person’s secrets without his or her knowledge — to pierce a person’s privacy in secret — is a greater power still.

We want to help humanity exercise their unalienable right to secrecy, or in other words, to have you and your property left alone. This is even more important now that we have tools like Bitcoin and MWC which are based on public-private key encryption.

  • Who is the target demographic for privacy coins? What do you think is the average demographic of a privacy coin user? I mean, do you think that privacy coins are primarily used in developed countries or in developing countries? Do you think they are used by relatively rich people or relatively poor people?
  • We are not really sure since we have not done much market analysis besides personal introspection. For the most part, we have been significant Bitcoin holders for many years but are cognizant of its characteristics and how it does not necessarily perform very well all of the jobs we may want it to. We saw the opportunity to build a product we wanted to use ourselves, extremely scarce ghost money, and the other monetary entrepreneurs in the marketplace were currently neglecting that market demand or choosing design characteristics we did not find compelling in a product. So we built the type of monetary product we wanted to use ourselves.
  • What are the main points on the roadmap for MWC during the next 12 months?
  • Fully distributing the initial stock via the unclaimed airdrop fund and HODL program, additional exchange integrations, greater market liquidity, additional Grin rebases, release a mobile wallet, atomic swaps, a decentralized exchange, multisig, Lightning Network and other features.

Conclusion

The MWC network was launched in November 2019 and has functioned flawlessly with 100 % uptime. The MWC team considers the protocol ossified and currently sees no need for a future hard or soft fork unless a defensive action were required to protect the network. We feel the MimbleWimble sector may be neglected, to contain significant disruptive technological innovation potential, and there may be significant information asymmetry in the market. This type of technology is especially important in the age of surveillance.

Disclaimer: The author of this article owns MWC.

What Are Privacy Coins? What is MimbleWimble?

Crypto Research
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What Are Privacy Coins? What is MimbleWimble?

Privacy is an important right that we must protect at all times. But not only authoritarian states can attack our privacy, other malicious actors can also use the knowledge about our financial situation against us. For this reason, Privacy Coins and other privacy options might play an essential role in the future of digital money.

One of the main reasons for Bitcoin’s success and popularity, is its trustless design. Instead of trusting humans with clearance and settlement of financial transactions, Bitcoiners opt to trust software protocols. What was particularly revolutionary about Bitcoin was how the network used proof-of-work to stop double-spending attacks and how anyone around the world could validate new transactions and store a copy of the database’s history. Imagine if Credit Suisse or Bank of America not only allowed anyone to see their entire database of transactions, but also allowed anyone to vote on the validity of new transactions.

However, over time becoming a validating node on the Bitcoin network became increasingly expensive and exclusive because of the size of the Bitcoin blockchain. Without heavy investments in computing power, relaying new transactions and storing a copy of the database is impossible. A newcomer to the Bitcoin blockchain needs to spend approximately one week downloading the 277-gigabyte database of existing transactions in order to participate in the validation of new transactions. However, the “blockchain” associated with Bitcoin is only one type of distributed ledger database architecture. There are also other kinds of distributed ledger databases, such as IOTA’s directed acyclic graphs that we explored in the June 2018 edition of the Crypto Research Report. This article discusses a different type of distributed ledger architecture called MimbleWimble that has specific advantages and disadvantages compared to Bitcoin’s blockchain.

What Are Privacy Coins?

In a recent report by the European Union Blockchain Observatory and Forum called, Legal and Regulatory Framework of Blockchains and Smart Contracts, the authors explicitly state that regulators should use blockchain explorers to track transactions and to find out personal information about the senders and receivers of Bitcoin transactions.

While not always identifiable at the moment of the transaction, given enough time and effort, many parties to a transaction can be unmasked. Therefore, at this point there is no question of total impunity for blockchain actors.

Thirdly, however, it cannot be denied that some privacy-focused blockchains, for example Monero or ZCash, can provide bad actors with effective tools for true anonymity. It is important to note that in practice anonymous transactions are currently not widely used: Bitcoin and Ethereum, the most popular platforms, do not support anonymity.

Governments also try to discourage the use of anonymization techniques in blockchain networks by, for example, imposing AML rules, thereby policing the gateway between the worlds of cryptocurrencies and fiat money (see also next section). That said, while anonymisation does not pose a significant enforcement risk on public permissionless blockchains at the moment, should the use of anonymous blockchains spread significantly, it could become a problem.

It seems that providing states with identification tools (potentially under the control of courts or through the private sector on a payment basis) should be a minimum condition necessary for a state’s ability to enforce the responsibility and thus to ensure the impact of the law on human behaviour in the blockchain space.

Many market participants consider fungibility a characteristic of good money. Bitcoin lacks fungibility, which means bitcoins can be traced to their initial transaction when they were mined. Privacy coins are coins that attempt to improve upon Bitcoin’s privacy by hiding the amounts that are traded and the wallet addresses involved in the transaction. Privacy coins use technologies such as coin mixing and confidential transactions. The largest privacy coins include Dash, Monero, Zcash, Grin, Beam, and MimbleWimbleCoin. In 2014, Dash was launched, and it was the first privacy coin on the market. Dash gives each user the option to make each transaction private or not. Dash’s technology uses coin mixing to obscure information about the sending and receiving addresses, and only 2 % of Dash transactions use Dash’s privacy option. The rest of Dash’s transactions are just as traceable as Bitcoin transactions. A few months after Dash came out, a new privacy coin called Monero was released to the market. Unlike Dash, every Monero transaction is private. Blockchain explorers don’t see the amounts being sent in Monero transactions. Monero introduced ring confidential signatures, which provide very strong privacy for Monero users. A few years later, Zcash came out in 2016, and then more recently, in 2018, the MimbleWimble base layer coins Beam and then Grin came out.

Figure 1: Performance of Privacy Coins, 2016–2020

Source: Coinmarketcap.com, CryptoResearch.Report

However, the developers of privacy coins face design choices that each have unique tradeoffs. For example, Monero is more private than Dash because the transaction amount is hidden, but Monero is less scalable because it takes more resources to run a full node, which makes it less censorship-resistant. Another tradeoff is between being able to prove a coin is scarce and having privacy features. Blockchains that obscure the amounts being transacted have difficulty determining the total amount of coins in circulation. In a recent interview on the Academic Blockchain Podcast with the Chief Technology Officer of Ledger, Demelza Hays discussed Zcash’s “inflation bug.” Zcash’s inflation bug makes it impossible for anyone to actually calculate the total amount of coins in existence. This means that there could be an infinite amount of coins in existence, which goes against one of the pillars of a good money in the digital age, namely, scarcity. However, the MimbleWimble protocol uses mathematical proofs involving excess values of intermediate transactions to prove that all debits and credits in the ledger sum to zero.

Figure 2: Year-to-Date Return of Privacy Coins

Source: Coinmarketcap.com, CryptoResearch.Report

But what is MimbleWimble? In 2016, an anonymous person released the MimbleWimble protocol to increase Bitcoin’s scalability and privacy. MimbleWimble is a way to sign and validate transactions without needing to validate each historical transaction and to include the inputs of a transaction into a new transaction’s hash. This drastically reduces the size of the blockchain. Proponents originally proposed MimbleWimble as a sidechain or soft fork to Bitcoin; however, the current implementations of the MimbleWimble protocol are by new cryptocurrencies that created new blockchains including Grin, Beam, and MWC, that elegantly apply MimbleWimble in the base layer.

During 2019 and into 2020, much of the MimbleWimble hype had died down along with the market caps of Grin, currently about $19 million, and Beam, currently about $16 million. MimbleWimbleCoin (MWC) forked from Grin in November 2019 and hit a low of $0.25 per coin with less than a $2 million market cap in early December. However, since December, the market cap of MWC has grown 6,100 %. The MWC market cap is currently around $125 million and has been consolidating over $100 million for most of the past two months. By market cap, MWC is currently the 3rd largest privacy coin behind Monero and Zcash and the 13th largest proof-of-work coin behind Bitcoin Gold and Decred. MWC is currently traded on Hotbit, Bitforex, Whitebit, Trade Ogre, and Toktok.

The two ideas that form the basis for MimbleWimble stem from the Blockstream co-founder Gregory Maxwell’s work on “Confidential Transactions” and “CoinJoin.” Confidential transactions use encryption so the public blockchain doesn’t show the amount of coins being sent or received in a transaction. For example, in Bitcoin, anyone can see the amount of Bitcoin that is sent in each transaction. However, in MWC, the public cannot see how much is being sent even though verification can be done of adherence of the transaction to the consensus rules to, for example, prevent double-spending and enforcing the total number of coins. The second innovation that the MimbleWimble protocol uses is CoinJoin. This means that multiple transactions in the network are merged into one transaction so that blockchain forensics cannot discern the real sender and real receiver of a specific transaction.

Figure 3: The Newest Privacy Coin on the Market: MimbleWimbleCoin

Source: Coinmarketcap.com, CryptoResearch.Report

However, there are disadvantages of the MimbleWimble protocol as well. For example, the MimbleWimble protocol doesn’t allow extensive scripting. Fortunately, there has been significant research done since then, and with MimbleWimble these types of scripts and applications are possible: Multi-signature transactions, time locks, atomic swaps, and hashed time-locked contracts which are the building block of payment channels and Lightning Network. Another large disadvantage of coins that use the MimbleWimble protocol including Grin, Beam, and MWC is that currently these blockchains aren’t widely used. Until more people use these coins and more people send transactions, the benefit of privacy from their use may be limited.

In the coming week we will take a closer look at MimbleWimble and also talk to the developers behind MWC. In doing so, we will also look in detail at how a MimbleWimble transaction actually works and what benefits it brings.

Demand for Tether, not Bitcoin

Pascal Hügli
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0
Demand for Tether, not Bitcoin

Tether has traditionally been seen as an on-ramp for investors looking to acquire larger quantities of Bitcoin, but the continued increase in the market capitalization of Tether is not necessarily the result of an increase in that demand. Instead, a different phenomenon seems to be emerging: There is a demand for tether as a value in and of itself. This is due to the fact that the Stablecoin is widely used as a settlement vehicle for arbitrageurs between crypto trading exchanges.

Over the past few years, the trading exchanges for cryptoassets have become more professional, which has also made the arbitrage business more professional. Arbitrage is being conducted with ever-larger sums of money – a stable settlement currency such as the USDT seems predestined for this. Tether is also used for arbitrage purposes by individual traders. If the Bitcoin price falls, these players switch their funds into the stablecoin in order to minimize losses and buy back in at a lower price.

Having a stable currency that is denominated in dollars lets you handle your books with more ease. So, as a matter of fact, there has been a tetherification of the crypto exchange industry. With exchanges, Bitcoin has been supplanted by Tether as the base currency. Several exchanges like Binance, OKEx, or Huobi have even launched Tether-denominated futures products.

Over the last couple of months, Tether supply on exchanges has been growing significantly. It’s not only exchanges that make use of Tether’s stable characteristics, USDT is also used for arbitrage purposes by individual traders. If the Bitcoin price falls, these players switch their funds into the stablecoin Tether in order to minimize losses and buy back in at a lower price.

Figure 21: During the Last Two Years, Tether Supply on Exchanges has Grown from the Millions into the Billions.

Quelle: Coinmetrics.io, CryptoResearch.Report

But not only arbitrage trading between crypto exchanges but also the moving of funds between individual countries is facilitated by a stablecoin like Tether. It is well known that one of the first major uses for Bitcoin was to circumvent capital controls. The first major price increase at the end of 2013 is said to be mainly due to Chinese people moving their savings out of the country.

However, the volatility of Bitcoin has always been a thorn in the side of capital refugees. And indeed, little seems to be gained by taking your capital out of the country only to see it be eaten away by Bitcoin’s volatility during the trade.

With the launch of Tether, new opportunities for capital flight have suddenly opened up. It is therefore understandable that USDT has been discovered as a killer application. Tether is used as a cross-border crypto dollar, especially by Chinese traders and business people exporting to Russia.

Everyone Wants US Dollars

There is a reason why Chinese businessmen hold a dollar-denominated stablecoin. The US dollar is currently the global reserve, reserve and trading currency. All major commodities are settled in US dollar, which is why it now accounts for 4.7 times global imports and 3.1 times global exports. For non-US companies it therefore often makes more sense to invoice in US dollars.

But it’s not only invoices that are issued and settled in US dollars. Companies around the world have nearly 60 trillion US dollar-denominated debts. This creates an ongoing demand for US dollars to service the debts of emerging and developing countries, which will not leave their currencies unaffected. The latter currencies are likely to depreciate against the dollar, which is bound to result in increased capital controls.

The most recent example is Lebanon. Local banks there are currently in the middle of a fight against capital flight, which is why restrictions on foreign currency withdrawals, especially for US dollars, have been tightened. Tighter controls on capital movements are likely to increase not only in underdeveloped countries, but the eurozone could also become more restrictive in this regard in the foreseeable future.

In contrast to the Japanese yen and the Swiss franc, which as currencies still enjoy the character of a safe haven, demand for the euro correlates mainly with the demand for exports from the eurozone. The sooner the euro liquidity created by the European Central Bank’s ultra-expensive monetary policy exceeds international demand for the euro relative to the dollar, the faster the former will lose value. Tighter capital controls to support the euro would primarily affect European banks. They still carry large US dollar positions on their balance sheets. Without having sufficient US dollar deposits, they need to have open channels to access US dollars at all times. Tighter capital movement controls would certainly be an obstacle in that regard.

The use of crypto dollars, especially Tether, might serve as a helping and welcoming solution. Not only can potential capital controls be more easily be circumvented, but transactions using crypto dollars are generally easier to initiate and process than those using the traditional financial infrastructure.

The demand for Tether which is not an equal demand for Bitcoin should, therefore, already satisfy several real needs today. Apart from the use cases described above, particularly the increasing demand for dollars in a world of increasing capital controls will accelerate a sort of “hyper crypto dollarization.” Ironically, what we have been witnessing is the dollarization of public blockchains, which is bound to grow in next couple of years.

To Tether or Not to Tether?

Pascal Hügli
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0
To Tether or Not to Tether?

Since the beginning of the year, the market capitalization of the Stablecoin Tether (USDT) has risen significantly. This once again raises various questions that have caused some controversy around Tether in the past. What is the extent to which Tether is backed by real US dollars? Is there a correlation between the market capitalization of Tether and the price of Bitcoin? For what purpose is Tether mainly used?

In September 2018, US Tether (USDT) reached a temporary high in market capitalization of just over $ 2.8 billion. By mid-November, market capitalization then dropped to below $2 billion. This correction was followed by a fall in the price of Bitcoin to almost $ 3,000 per Bitcoin shortly before the end of the year.

Today, the price of Bitcoin is once again higher, and the market capitalization of Tether has also risen continuously since then to over $8 billion. Not only has the outstanding amount of Tether hardly ever fallen, not even temporarily, but the issuance rate of new Tether has also shown sudden, erratic increases since the beginning of this year; a total of three in number, each greater than the previous one.

As one of the big black boxes of the crypto world, many secrets and speculations surround Tether, further fueled by these abrupt growth spurts in market capitalization. Aside from the rumors and speculation, USDT is still regarded as a so-called on-ramp for investors to easily and quickly invest in Bitcoin.

It’s a fact that Tether has been used as a gateway into the Bitcoin world. However, if Tether was an on- and off-ramp, then the market capitalization of Tether would in theory have to fall every now and then, because USDT would have to be burnt at intervals by the Tether Treasury when holders cash back out into fiat or go into Bitcoin. Since, the market capitalization of Tether has risen steadily over the past 18 months without significantly falling even once, this suggests that Tether is essentially not acting as both on-and off-ramps.

Figure 19: Negative Correlation Between Change in Tether Supply and Bitcoin Price

Source: Coinmetrics.io, CryptoResearch.Report

The argument against this is that the demand for Bitcoin is very volatile. During the last two years, there have been repeated periods when Bitcoin’s price fell, while Tether’s market cap remained the same or even went up. If USDT were used primarily as an on- and off-ramp, its positive correlation with Bitcoin would have to be much stronger. This isn’t the case, especially since there are even indications that the correlation is negative. This leads to the conclusion that something else more serious is afoot.

Alternative Explanation Sought

For example, some market observers suspect that USDT is being created without collateralization. So, Tether would be created specifically by Tether Limited and its parent company BitFinex and held in fractional reserves in order to drive up the Bitcoin price, so the argument goes.

This way the critics argue that BitFinex is trying to generate excitement among retail investors, which would then turn into a hysteria of FOMO leading up to a new Bitcoin bull run. This is how some analysts explain the fact that on May 14, a few days after the Bitcoin-halving, the Tether market capitalization suddenly rose from just over $6 billion to almost $9 billion.

What sounds like a conspiracy theory to some, others consider to be a fact: After all, the two companies BitFinex and Tether Limited would have strong incentives to run such games. As the New York Secretary of Justice pointed out, only about
70 % of outstanding Tether is secured by cash and cash equivalents. This hole when it comes to collateralization, according to the skeptics of Tether, could of course be filled up step by step if Bitcoin stabilizes at a higher level supported by private investors. The collateralization that BitFinex partly holds in Bitcoin as well would then have more value that could be sold for dollars and improve the reserve ratio.

Tether as a Savior

Another hypothesis to explain the abrupt rise in Tether market capitalization on May 14 is that BitFinex is going out of their way to secure the survival of certain miners with USDT loans. Bitcoin miners today operate highly specialized ASIC processors, of which two different ones are currently in use: the Antminer S9 and the Antminer S17.

The major difference between these two mining hardware devices is mainly their different efficiency. Although the S17 has about 50 % higher power consumption than the S9, a miner using the former achieves a 300 % higher hash rate. As a result of this higher efficiency, Antminer S17 accounts for a much higher share of Bitcoin mining, at just over 61 %. The use of the S9 type is just over 38 %.

And it is precisely these miners, so the argument goes, that are dependent on support, as they have become unprofitable after the halving. However, in order to not have to empty out their Bitcoin treasuries and generate downward pressure on the Bitcoin price, these miners could be buying time with USDT loans – time to renew their hardware equipment that had become unprofitable.

Speculations and theories of this kind always sound tempting. It is also difficult to refute them completely. But it is just as difficult to provide definitive evidence. In the end, it is argument against argument.

What stands against the BitFinex miner thesis is the fact that miners today are farsighted, long-term invested players. As rational players in a very competitive, highly innovative and little-regulated field, it can be assumed that precisely those miners with older Antminer S9 have taken precautions. They could have moved to a location with much lower electricity costs so that their Antminer S9s are still profitable even after the block reward was halved.

Figure 20: Miner Hash Rate Has Dropped

Source: Blockchain.com, CryptoResearch.Report

Again, there is friction and uncertainty in the real world. Not knowing the unpredictable could have caused miners to miscalculate long-term contracts with electricity providers, which is why they cannot easily relocate mining farms overnight. It is and remains a fact: We can only speculate about what is really the case.

Many years ago, observers in the crypto scene voiced their suspicion that the Stablecoin Tether (USDT) was not 100% covered by actual US dollars. While concrete information confirming these suspicions has repeatedly been the subject of discussion in the crypto media in the past, it is not certain to what extent this information can be transferred to the current situation. Due to the strong increase in Tether since the beginning of the year, it should be avoided to postulate a 1:1 correlation to older news.

The Relationship between On-Chain and Off-Chain Transaction Speed and Price

Crypto Research
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0
The Relationship between On-Chain and Off-Chain Transaction Speed and Price

This article is intended as a final conclusion for our series on the absolute valuation approach for cryptocurrencies. In doing so, we will also address the criticism of the equation of exchange model and compare the on- and off-chain speed of different cryptocurrencies.

The theory of velocity presented in the equation of exchange model that is commonly applied to crypto assets would question the business model of utility coins and payment coins that have no incentives to hoard via staking and are expected to have a high velocity as people spend the coins frequently. In support of this theory and Buterin and Samani’s analysis, Coin Metrics’ State of the Network #37 showed how Bitcoin’s on-chain velocity has been steadily decreasing and the price has been going up.

However, we also calculated Bitcoin’s off-chain transaction velocity and found the opposite pattern. We found that Bitcoin’s price and Bitcoin’s exchange activity both went up at the same time over the past few years. On-chain velocity is the velocity generated solely by transactions on the blockchain, whereas off-chain velocity is the velocity generated by trading activities on cryptocurrency exchanges.

Figure 1: Bitcoin’s Off-Chain Velocity is Positively Correlated with Bitcoin Price

Quelle: Coinmetrics.io, CryptoResearch.Report

We wanted to check these results with other coins, so we calculated on-chain and off-chain velocity for Ethereum, Bitcoin Cash, Litecoin, and Stellar in order to see if coins were trading hands more frequently on-chain (inter-exchange and off-exchange) or off-chain (intra-exchange).

Figure 2: 90-Day Moving Average Bitcoin On-Chain and Off-Chain Velocity

Quelle: Coinmetrics.io, CryptoResearch.Report

We found that for almost all coins, on-chain velocity is decreasing, while off-chain velocity is increasing. We interpret this to mean that growth in the number of speculative transactions on exchanges is faster than growth of utility transactions to buy goods and services.

Figure 3: 90-Day Moving Average Ethereum On-Chain and Off-Chain Velocity

Quelle: Coinmetrics.io, CryptoResearch.Report

Figure 4: 90-Day Moving Average Bitcoin Cash On-Chain and Off-Chain Velocity

Quelle: Coinmetrics.io, CryptoResearch.Report

Figure 5: 90-Day Moving Average Litecoin On-Chain and Off-Chain Velocity

Quelle: Coinmetrics.io, CryptoResearch.Report

Figure 6: 90-Day Moving Average Stellar On-Chain and Off-Chain Velocity

Quelle: Coinmetrics.io, CryptoResearch.Report

It is interesting to observe similar trends in velocity among almost all of the cryptocurrencies. Higher velocities before the cryptocurrency matures and more stable and lower velocities later on. Stellar seems to be an exception to this rule (mainly looking at the huge jump in velocity late 2019), but as we know, Stellar’s Coinbase is heavily centralized and it is likely that this is a foundation transaction distorting the numbers.

It is also worth noting the huge jump in off-chain velocities among all cryptocurrencies in 2019-2020 coinciding with the drop in on-chain velocity. This suggests that traders who operate exclusively on exchanges and trade with high volumes are becoming the dominant force in the crypto asset market instead of long-term holders.

The results that we found do contradict Buterin and Samani’s theory because we found that velocity is increasing and the price is going up, even though their model says the price should be going down. Scott Locklin’s critic of their work may hold the answer. As Locklin points out, applying Fisher’s MV = PT equation of exchange directly to crypto assets doesn’t work because of two main reasons:

“The inverse of (average) token velocity is not average holding time. For example, let us postulate a money supply of 10 tokens in an economy with a velocity of 10 times per day. If 9 of the tokens are traded once every 1000 days, and one of the tokens 99.991 times a day, this gives mean token velocity 10 times per day. However, the average holding time for a coin in this ecosystem is 900.001 days, not 1/10 day per transaction.”

“Similarly, while Fisher’s equation of exchange is an equilibrium model (which I suppose could be called “steady state”), it does not depend on the number of users.”

Locklin does a few transformations to the equation and argues that user adoption really does matter for the price of a coin. As more people come to the network and demand the coin, the price goes up. Locklin’s critique is straight forward. If more people demand Bitcoin and Ethereum for buying coffees or for speculating, the result is similar. Either way, people are trading economic resources for cryptocurrencies and bidding up their prices. In defense of Buterin and Samani, speculation on financial assets is normally left out of GDP metrics. Foreign exchange volume isn’t included in GDP, for example, and therefore, analyzing the velocity of crypto asset speculation may not be appropriate.

Final Word

Vitalik’s token economic concepts of velocity and velocity sinks that encourage hoarding are important; however, the analysis is static and doesn’t consider new user adoption and growing demand. If cryptocurrencies gain adoption for long-term hoarding purposes or for short-term spending on speculation or coffees, the price of crypto assets will go up. High velocity on-chain and low velocity off-chain suggests that crypto assets are becoming increasingly used for speculation and not for store of value.

The Status of Cryptocurrency Adoption

Demelza Hays
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0
The Status of Cryptocurrency Adoption

The list of addressable target markets for cryptocurrencies is very long, but what is the current adoption level and what growth can we expect in the coming years? Although this question cannot be answered unambiguously, there is a certain spectrum of realistic possibilities, defined by pessimistic and optimistic limits.

Once the M, V, P, and Q are estimated, the penetration rate of each TAM by each cryptocurrency is calculated. This is called the adoption rate, and this is based on an assumption regarding future use of the currency for each use case. To estimate adoption, there are two mains methods: first, estimating the growth in the number of people owning crypto per year and, second, fitting a curve to the historical growth in active wallet addresses.

Forecasting Adoption with Historical Data on the Growth in the Number of People Using Crypto Worldwide

Approximately 40+ million cryptocurrency users exist globally according to our research. The number of registered accounts on the biggest crypto exchanges serve as a usable proxy. Coinbase for example has more than 30 million users (CoinTelegraph). Binance founder Changpeng Zhao (CZ) recently said in an interview that they have about 12 to 15 million registered users and about 0.5 to 2 million daily active users. There are several other similarly big exchanges, like Kraken, Bitstamp, Bitfinex, Bittrex, Huobi, and OKEx. Assuming that Coinbase has the most users, there must be at least 30 million cryptocurrency users. Binance and Coinbase together have about 45 million users. This averages to 22.5 million users per exchange. For the eight biggest exchanges, a number of 180 million (22.5 x 8) users would come up. Adding the assumption that most users are registered on several exchanges, this number seems to be too big. The correct answer probably lies between 35 to 70 million users.

Having a look at different surveys, about 5–8% of US-American adults own cryptocurrencies (Statista Global Consumer Survey, Finder.com). There are countries like Turkey which have more users and countries like Japan that have fewer. Also, according to the survey, Spain has a higher level of cryptocurrency users when compared to other western European countries. In Spain, 10% of adults own cryptocurrencies.

A final estimate of the total number of users could be done with the following experiment. There are about 4.3 billion people with access to internet, therefore being possible crypto owners. Let’s subtract 1.5 billion because of legislative restriction (i. e. China, Pakistan, and others). The following table shows the number of potential cryptocurrency users depending on the world’s population.

Table 1: Estimating the World’s Population of Crypto Users

Source: CryptoResearch.Report

According to the CEO of Binance, CZ, the number of accounts from a country on Binance correlates positively with the GDP per capita (high GDP – more accounts).

Figure 1: Percentage of Cryptocurrency Users per Country

Source: Statista.com, CryptoResearch.Report

Forecasting Adoption with Historical Data on the Growth in the Active Addresses

Another approach is to count the number of wallets. According to BitInfoCharts, there are currently more than 43 million Bitcoin addresses. If we use this as a proxy and take Bitcoin dominance into consideration, which is currently at 67 % (CoinMarketCap), we can assume that there must be about 64 million addresses 43 / 0.67) for Bitcoin and all Altcoins. Some users may have both, bitcoins and altcoins; therefore, there may be roughly about 37 to 52 million cryptocurrency users.

Most studies adopt an S-curve beginning on when the network is launched. There are several different possible curves for cryptocurrency adoption, such as S-curve and linear. Other curve options include exponential and log. All of the following curve assumptions can be seen on the following graph.

Figure 2: Adoption Curves for Network Use

Source: CryptoResearch.Report

After fitting the daily data of wallet use with a non-zero balance, use of Bitcoin as a medium of exchange appears to be following a linear curve or an S-curve and currently has approximately 600,000 active users per day.

Figure 3: Bitcoin’s Adoption Curve is Assumed to be an S-Curve

Source: Blockchain.info, CryptoResearch.Report

From behavioral economics, many variables impact adoption, such as path dependency, network effects, superior technology, market salience, and ambiguity aversion held by investors and users. Adoption is difficult to measure because once a metric becomes standardized, cryptocurrency developers and investors try to game that metric or trick that metric in order to manipulate the market.

Scenarios

To improve the robustness of the adoption rate analysis, several scenarios can be calculated for the adoption rate of each cryptocurrency for their respective TAMs. This report assumes three different scenarios:

  • Bearish
    • a. Cryptocurrency will only takeover 1 % of the entire target addressable market.
    • b. The cryptocurrency will take two years to achieve 10 % of the 1 % adoption.
    • c. The number of years that the cryptocurrency will take to achieve 90 % of the 1 % adoption will be seven.
  • Modest
    • a. Cryptocurrency will only takeover 10 % of the entire target addressable market.
    • b. The cryptocurrency will take two years to achieve 10 % of the 1 % adoption.
    • c. The number of years that the cryptocurrency will take to achieve 90 % of the 1 % adoption will be five.
  • Bullish
    • a. Cryptocurrency will only takeover 20 % of the entire target addressable market.
    • b. The cryptocurrency will take two years to achieve 20 % of the 1 % adoption.
    • c. The number of years that the cryptocurrency will take to achieve 90 % of the 1 % adoption will be five.

Discount Rate

A dollar today is worth more than a dollar a year from now. Stock valuation models, such as the discounted cash flow model, can use discounts rates of 10–50% per year based on the risk of the industry and the company. Take the future current value and discount it back to the present. Taking the value of $7.45 and discounting it back 10 years at a rate of 40% yields a rational market value of $0.26. The calculation is $7.45 / (1.40¹⁰). An alternative approach is to discount each period utility value and use the weighted average by applying larger weights to periods that are closer. The Satis Report argues that discounting isn’t required for the TAM analysis; however, most reports incorporate a discount rate. Chris Burniske uses rates between 30% and 40%. The 2015 Wedbush Securities report uses a discount rate of 40%. In this report, we apply 30%; however, additional research on the property discount rate of each coin to reflect distinct risk profiles is needed.

Winner Takes All

Since this analysis is investigating five coins instead of just one, an additional assumption is required.

Many of the coins in the top five are competing with each other to become global ledgers for storing and trading digital assets. Therefore, one assumption to make is whether or not there will be a winner take all or an oligopoly of cryptoassets for each main use case. Several studies assume each protocol is an isolated economy to simplify calculations. However, the cryptocurrency market is one of the most competitive markets in the world. The cryptocurrency market has less regulatory barriers to entry and switching costs between cryptocurrencies are low. This assumption is relevant for adoption rate, scenario probability, and discount rate.

One could argue that the winning protocols of these digital resources will become global standards, and global standards are typically “winner takes most” scenarios. Therefore, this report makes the following assumptions:

  • Bitcoin will beat Ethereum, Bitcoin Cash, and Litecoin in the currency coin group.
    • This is reflected in the “discount rate”. Bitcoin is assumed to have a discount rate of 30%, while Bitcoin Cash and Litecoin are assumed to have a discount rate of 50%.
  • Ethereum will beat Stellar in the utility coin group.
    • This is reflected in the “discount rate.” Ethereum is assumed to have a discount rate of 30%. Stellar is assumed to have a discount rate of 50%.

These assumptions are based on current technology and regulatory strengths that Bitcoin and Ethereum have. The hash rate dedicated to Bitcoin is magnitudes larger than any other cryptocurrency. Finally, Bitcoin’s decentralized nature has prompted SEC officials to unofficially consider Bitcoin to not be a security. This provides some regulatory protection for Bitcoin that may hinder new blockchain start-ups. However, Bitcoin Cash and Litecoin also have advantages. Both coins offer faster confirmation times and lower transaction fees compared to Bitcoin, and they are sufficiently decentralized with large networks of investors and Bitcoin Cash has many developers working on protocol upgrades. Instead of a winner-takes-all during the next ten years, an oligopoly of payment coins is likely to remain in place. Plus, several investors use naïve 1/n strategies to invest in cryptocurrencies and, therefore, invest equally in the top currency coins in order to reduce risk and capture the market.

Valuation Results

Looking into all the variables and addressable markets, we have come up with a utility price estimate for each of the examined cryptocurrencies. It is worth nothing that each of those estimates is done on a non-discounted basis and with either bearish or moderate market penetration assumptions.

Table 2: Equation of Exchange Forecast of Crypto Asset Prices

Source: CryptoResearch.Report

It is worth noting that, as of the time of writing this report, the total crypto market cap (all currencies, not just the 5 listed above) sits at $256 billion. In the meantime, the TAM of all the potential markets as discussed above, is in excess of $188 trillion, which makes the current crypto penetration across those markets 0.136%.

As seen by the charts above, we believe that Bitcoin is still at the very start of its adoption curve. The price of $7,200 at the end of 2019 suggests that Bitcoin has penetrated less than 0.44% of its total addressable markets. If this penetration manages to reach 10%, its non-discounted utility price should reach nearly $400,000.

After we have now analysed and defined the most important variables and terms related to the absolute valuation approach, we are able to make a final conclusion in next week’s article. There we will also discuss whether the approach provides a sufficient explanation for the price development in recent years, or whether Buterin and Samani were right after all.

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