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Quarterly Review Q2 2018: Wall Street Is Getting Ready

Wall Street Is Getting Ready

“The total market cap of cryptocurrencies was around USD 400bn, around a quarter of that of gold as store of wealth (gold bars, coins and physical gold ETFs all together amount to USD 1.5tn). And monthly trading volumes of the three largest cryptocurrencies by market capitalization (Bitcoin, Ethereum and Ripple) have increased sharply in recent months, from around USD 5bn in early 2017 to USD 550bn in December. This represents around half of the monthly trading volume of gold futures of USD 1.1tn, as of January 18 aggregate volumes were higher, reaching around USD 680bn.”

J.P. Morgan Perspectives 2018

The Bitcoin price is plummeting and looking for a floor. Meanwhile big players on Wall Street are working on their grand entrance. At the forefront of this: Goldman Sachs.

What to do if you are stationed in the middle of nowhere surrounded by super computers? Exactly, you mine cryptocurrencies. This happened in a Russian government research center in Sarov, a secluded city 400km east of Moscow, the seat of the Russian nuclear program. The first Soviet atomic bomb was built here in 1949. And now researchers have been caught using the strongest computers the Russian state has to offer to mine cryptocurrencies.

This came to light through a press statement by the authorities in February of this year. Apparently, this is becoming a common occurrence in companies with good IT infrastructure. However, maybe the researchers just took a statement from Vladimir Putin during his visit to Sarov in 2014 a bit more literal than expected. At said meeting with young scientists, President Vladimir Putin praised the Russians’ spirit of resourcefulness, saying, “When life sets us certain challenges, we are forced to tackle them one way or another and we do.” As a side note, the Russian authorities neither informed us which coins had been mined nor did they shed any light on what had happened to them in the meantime. [1] It is however not only Russian civil servants or the population of inflation-riddled countries such as Venezuela, who have discovered cryptocurrencies and are using them for their own gain. Recently military investigators uncovered a drug ring at the US-Navy academy in Annapolis, Maryland. Ten officers in training had been supplying their comrades with cocaine, LSD and ketamine. They had apparently bought the drugs on the Dark Net and paid for them with Bitcoin. The management of the academy ordered a spontaneous drug test for all 4500 recruits, the results of which were never made public. [2]

The Bitcoin Price is Plummeting

In our first report in 2018, we predicted a spell of crypto winter. Our technical analysis of the crash in January 2018 goes to show that a hard plummet right down to USD 2,500 is very possible. Other (especially pessimistic) analysis corresponds with this evaluation. Many are looking at the charts of the crash after 2013 for some sense of direction in which Bitcoin could go now. Especially bleak outlooks have been published since analysts saw a “Death Cross” in the charts in mid-March.[3] Others, such as the crypto hedge fund “Pantera Capital Management” assume that we have already reached the rock bottom price of Bitcoin at USD 6,500, and we will therefore soon witness an upwards trend again.[4] While we are finishing this report, prices are dropping again, then shooting up because of good news, then dropping again. Where do we go next? That is the age-old question – in hindsight we are always smarter. The markets are unpredictable and the crypto market is especially volatile.

A study by the Warwick Business School showed that trades on the crypto market are made on a purely emotional basis instead of being based on fundamental analysis.[5] The survey covered trade data from April 2016 up to September 2017, and the results do make sense.

 The crypto market is still dominated by small investors who don’t have the knowledge or data for a technical or fundamental analysis. On top of this, Bitcoin and Co. are still so relatively new that there is a real lack of accepted official data for an unbiased assessment. It is however noticeable that over the past few months more and more central bankers have had a closer look at Bitcoin – and in the process, have confirmed Bitcoin’s role as a currency[6] as well as the fact that Bitcoin does indeed have value. One central bank economist sees the fundamental price (based on mining costs) at USD 1,800.[7]

The debate is however still ongoing. The author of the Warwick survey, Daniele Bianchi, has a similar view. “It’s not like with normal currencies, in which the productivity of a country influences the price. Instead, they have similarities to investments in shares of a high-tech company.” This phenomenon can be seen time and time again and economists are now discovering the new field of crypto economics. The puppet masters behind the various tokens try and create different incentive systems to pull in more investors. These tokens therefore almost turn into shares of the company or project at hand. At least they are traded like shares. An important factor in the price drop over the past few months has been the so-called Tokyo Whale. This is the nickname for the bankruptcy trustee of the now extinct exchange Mt. Gox. The hack and subsequent collapse of which lead to the bear market of 2014 and onwards.[8] It is the Tokyo Whale’s job to sell the rest of Mt Gox’ Bitcoins as profitably as possible. In total, he will unleash 200,000 Bitcoins to the market.[9] This will obviously not happen in one go, but according to media reports the trustee Nobuaki Kobayashi has trickled Bitcoins into the market worth USD 400 million since September 2017.

By the beginning of February, he must have sold roughly 40,000 Bitcoins. What followed was a temporary recovery until Kobayashi moved 16,000 Bitcoins onto an exchange ready for the presumable subsequent sale. The community follows his wallets closely, as the game only ends when all 200,000 Bitcoins from Mt. Gox have been turned into “real” money.[10]

Which Altcoins Will Survive?

All these elements together make for an extremely volatile market. The least volatile cryptocurrency, measured by standard deviation of returns, in this market is Bitcoin. However, altcoins such as Ethereum and Ripple are also becoming increasingly popular on the market. Market sentiment in June 2018 first showed signs of desperation, maybe even despair – in social media as well as in various forums. We are sure we will only start a new bull market once the weak hands have been swept out of the market. Investors which only joined the game during the ICO Boom of 2017 should be aware that although Bitcoin has survived such a “crypto winter” before, the majority of Altcoins however have not been put through the same test of time.

The analysts from Goldman Sachs categorically warn against holding on to Altcoins in a bear market. In a report dating back to February of this year, Goldman analyst Steve Strongin, suggests that a large percentage of existing Altcoins could completely disappear and could be replaced by a small number of robust cryptocurrencies which lead the way to a new upward turn. “The high correlation between the different cryptocurrencies worries me”, Strongin said. “Because of the lack of intrinsic value, the currencies that don’t survive will most likely trade to zero.”[11]

Like others before him, Strongin draws parallels between the Blockchain market and the Dot Com Bubble. Only a few of the hottest stocks from the late 1990s have survived. Those that did however, became huge. “Will the cryptocurrencies of today turn into the Amazons or Googles of tomorrow or will they end like the many now non-existent search engines? Just because we are in a speculative bubble doesn’t mean the price for the few surviving ones can’t rise again. At the same time this means that many won’t ever reach their all-time highs ever again.”

It is true that such gloomy prophecies regarding Bitcoin have turned out to be wrong time and time again.[12] But then again, we have been in good company when we have warned against the ICO Mania. This is why we must say the Goldman analyst could be right. A handful of projects could survive in the long-term, but many are facing the end before we leave this valley of death. The Godfather of cryptocurrencies Bitcoin has proven its stability before. While small investors are at home licking their wounds from the market downturn, the big boys are finally here to step into the ring. This is probably the most important trend of 2018, and we call it the “Goldman-Effect”. The second trend comes as a direct result of the first: the regulators are finding themselves under more and more pressure because institutional investors need legal security before they can enter the market.

The Goldman-Effect

The boss of Goldman Sachs, Lloyd Blankfein, earned lots of criticism in 2009, when he was quoted saying his bank was doing “God’s work” in an interview with London Times. He added that his bank had a social role: “We help companies grow. Growing companies create standards and jobs. We have a social responsibility.”[13]

Early Bitcoin adopters and purists may note like to hear this, but Goldman is doing a lot for the legitimization and growth of the crypto sector. The investment bank, which has always thought of itself better than the competition, wants to be the first to get in on the new opportunity. The analyst from Goldman took a closer look at Bitcoin back in the summer of 2017. And now this. At the beginning of May, in a carefully choreographed article in the New York Times, it was made public news that “Goldman Sachs will be entering the trading floor of Bitcoin”.[14]

The new trading desk will initially be part of the department for foreign currency. It will be led by the 38-year-old Justin Schmidt. In 2017, he had only left the hedge fund Seven Eight Capital to trade Bitcoin and other crypto assets by himself. The reasoning behind the decision, which are described in the New York Times article, paint a very interesting picture of the growing popularity of Bitcoin on Wall Street. “It resonates with us when a client says, ‘I want to hold Bitcoin or Bitcoin futures because I think it is an alternate store of value”, says Rana Yared, a senior of Schmidt’s at Goldman. “Bitcoin is not a scam”, she goes on “But it is also not a currency. Clients want to hold cryptocurrency as a sort of precious natural resource, similar to gold.”

It was possible for Goldman to get in on the action through the implementation of futures and other derivates. However, the Goldman bankers aren’t the only ones buying up Bitcoin-Futures. The daily trading volume of the CME Futures in Chicago have risen by 250% since the initiation in December 2017.[15] There is still room to grow. According to Reuters one fifth of the big banks want to enter the Bitcoin trade by the end of 2018.[16] As of now, it is still prohibited for institutional investors to buy Bitcoin outside of regulated fund vehicles, trackers, futures, and trusts. They are however getting prepared for when the day comes that this will be possible, and they are putting real thought into how one can directly buy Bitcoin and store them securely for clients.

Et tu, J.P. Morgan?

One of them could be J.P. Morgan. This is highly interesting as J.P. Morgan’s CEO Jamie Dimon is a known Bitcoin skeptic. He has after all called Bitcoin a scam.[17] He went as far as to say he would fire any employee who touches the stuff. The comments didn’t age well. In May, just a mere few months after Dimon’s last outburst, the U-turn was made official: J.P. Morgan is working on its own crypto strategy.[18]

They created a new position for exactly this purpose and found the 29-year-old Oliver Harris to fill it. Up until then he was responsible for J.P. Morgans Fintech-Program. J.P. Morgan seems to be still be a few steps behind the competition as direct trading with cryptocurrencies or even derivatives are as of yet, not on the horizon.[19]

Daniel Pinto, co-president of J.P. Morgan, separately told CNBC on Wednesday that the Wall Street giant was now “looking into that space”. “Cryptocurrencies are real, but not in the current form,” he said.[20] We are left wanting further explanations by Dimon’s potential successor. But when Dimon revised his statement regarding Bitcoin and even noted that there was a viable future for the Blockchain technology, one could have known the bank was about to announce their official move towards the sector.

Dimon is not the only one to change his mind when it comes to Bitcoin. The currency speculator George Soros had claimed just six months ago at the economics forum in Davos that Bitcoin was only interesting for a dictator wanting to keep some money safe on the side. A very lopsided view of things given that the technology actually allows the small man on the street to keep money away from a dictators as it is happening in Venezuela. Soros has changed his mind anyway. In April he gave the green light to his fund, which has USD 26 billion in assets under management to invest in Bitcoin.[21]

Rock and Coins

And yet another big name from the finance world has arrived: Venrock, the Venture Capital arm of the Rockefeller family (Ven stands for Venture, Rock for Rockefeller). Two of the most successful early investments of the company include Intel and Apple. Now they are heading into the crypto sector. In stark contrast to George Soros, Partner of Venrock David Packman doesn’t hold back his enthusiasm regarding the new industry. More specifically, Venrock has a partnership agreement with CoinFund, a company based in Brooklyn.[22]

CoinFund supports Start-ups which base their business model on the Blockchain technology. Both companies have invested in YouNow, an app for live video streaming which had planned an ICO last year. Yet another client of CoinFund is the Canadian Chat-app Kik, which already completed its ICO.[23] David Packman from Venrock commented on his company’s entrance onto the crypto scene, that they are in it for the long haul: “There are many cryptocurrency traders. There are many cryptocurrency hedge funds. This is different. For us it looks more like Venture Capital.”[24]

Venrock is not alone in its mission to infiltrate the market. Despite the consistent popularity of ICOs more and more, Venture Capital firms are looking for a way into the game. In just the first three months of this year Blockchain companies have been able to pull in a combined investment of USD 400 million.[25] It is doubtful though that many of these are actual long-term investments like Venrock’s are meant to be. It seems to be the norm that investors buy in the Pre-Sale-Phase of an ICO since the value of their equity already rises through the ICO itself.[26]

The ICO-Bubble Continues

As a comparison: Blockchain companies have had an influx of over USD 3 Billion via ICOs just this year. It comes at little surprise that many of the investors, no matter if they bought in the Pre-Sale-Phase or during the actual ICO, get rid of their shares quite quickly. Roughly half of all ICO funded projects have already failed.[27] Many of these companies only exist on paper – the so called White Paper.

This investment boom is compared time and time again with the Dot Com Bubble. Many big players within the scene, like Ethereum founder Vitalik Buterin, have called out for caution in regard to an ICO Bubble. In our past reports, we have not only given the subject much room but have also warned against a too flippant approach when investing via ICOs. Especially, since regulation bodies are also highly alarmed. The question if a coin which is financed via ICO is in fact a security, and should be regulated as such, puts this process very much in the legal grey zone. The US authorities have already convened on this subject, more specifically looking at the sector’s giants Ethereum and Ripple.

A story which broke in the Wall Street Journal claiming there had been a meeting of regulatory authorities back in April caused for confusion and panic on the market.[28] It is unclear to this day if said meeting actually ever happened. What we however did find out in the course of the coverage of this story is that Ethereum and similar products have gained a huge fan base in the Tech-sector. Defenders of the crypto world are organizing themselves in Silicon Valley – once again driven mainly by Venture-Capital-investors. This new lobby wants to persuade the regulatory bodies to at least not classify already existing and successful projects such as Ethereum as mere securities. Initially founded via ICO, Ethereum’s structure is now completely decentralized, they argue. And their voice seems to be heard. In a speech on June 15, the SECs point man on crypto, William Hinman, stated, that Bitcoin and Ethereum are in fact not to be treated as securities. However, he did not comment on Ripple.[29]

A Scam is a Scam – Even on the Blockchain

The US regulatory board SEC has also started to act based on the existing rules.[30] A scam is a scam – even on the Blockchain. The founders of the cryptocurrency Centra were arrested in April. The charge: Their ICO had criminal intent and they relieved their investors of USD 32 million. Centra was supposed to be a crypto credit card and work together with Visa and Mastercard – at least that was what was advertised.

According to SEC, the company Centra never had a business agreement with either of the credit card providers. One of the two apparent imposters was caught just before leaving the country. “We allege that Centra sold investors on the promise of new digital technologies by using a sophisticated marketing campaign to spin a web of lies about their supposed partnerships with legitimate businesses”, Stephanie Avakian, co-director of the SEC’s Division of Enforcement, said in a statement Monday. “As the complaint alleges, these and other claims were simply false.”[31]

Centra was not the first case to be looked into by the SEC. The AriseBank case, who’s ICO was also stopped, involved more than USD 500 million. The Centra case is so juicy marketing wise because the famous boxer Floyd Mayweather had publicly endorsed the ICO.

To educate investors, the SEC went as far as to create its own fake ICO as a honeytrap. They even wrote a White Paper full of the specific Blockchain language for the fake project “Howeycoins”.[32] “Howeycoins” set out to disrupt the global tourist industry. The website looked like many others of which ICO investors have seen plenty, it even included the famous count down timer to indicate when the bonus phase of the ICO was to kick off.

Whoever clicked on “invest” ended up on the website of the US regulatory authority. This site also included a list of “red flags” to look out for and avoid. For example, ICOs with celebrity endorsements should rather be avoided instead of gravitated towards. This whole ploy was largely more successful than any official warning the SEC had issued up until then and shows that even regulators have a sense of humour.

Authorities are also looking into potential price manipulation. The US Department of Justice has opened a new investigation in regard to illegal practices.[33] This includes spoofing or strategically placed buy and sell orders used to manipulate the market, which are deleted before being activated. Also, the act of “wash trading”, the manipulation of prices through a participant who completes his own orders. The Billionaires Mike Novogratz and Cameron Winklevoss have both whole heartedly supported the supervisory authorities’ attempts in the field of cryptocurrencies. “Weeding out the bad actors is a good thing, not a bad thing for the health of the market,” Novogratz, said in a telephone interview. “Plenty of exchanges have these inflated volume numbers to create some sense of excitement around coins,” he said, citing his own experience trying to trade.[34]

One thing is for sure: the big players want in on the action. But only in areas where the rules are clear and above board can they actually also play. This has led to a behind-the-scenes race of the big names. It is not about investing now, it is about being the best prepared player when the time has come, the dust has settled and the rules are clear. This creates more pressure on the authorities to come up with rules which give investors and consumers legal security, but also don’t jeopardize this new sector.

For this report, we have especially highlighted the role of the US authorities as they have been extremely proactive here. It should be noted that almost all countries are currently asking the same question: How can we regulate without strangling the Bitcoin sector? This means there is not only a race to regulate between states, but also between national governments and the international organizations. At the moment one can say the governments are leading the way.

In some EU countries, such as Austria and Germany, there will be obligatory rules regarding ICOs soon. An overall EU law is currently not on the agenda.[35] Although, the fifth know-your-customer and anti-money laundering directive is expected to include specific provisions for cryptocurrencies. As predicted in the last report, the attempts of the G20 have also been without results so far. However, even the managing director of the IMF, Christine Lagarde, has said that something is needed. Regulating the sector is unavoidable, she said, but a balanced approach would be commendable.[36]

You Can Buy an Exchange

Other participants are also preparing for the days with more transparent rules in the land of Bitcoin. The Intercontinental Exchange (ICE), the mother company of the New York stock exchange, publicly announced to be working on a Bitcoin trading tool at the same time the New York Times article about Goldman Sachs broke. The technology exchange Nasdaq also seems to be well underway in this direction. Nasdaq CEO Adena Friedman is quoted saying just in April of this year “There is no doubt that Nasdaq will consider becoming an exchange for digital cryptocurrencies.” That same day, Nasdaq announced a cooperation with the American Bitcoin exchange Gemini. According to some sources, the second largest exchange of the US could start trading Bitcoin as early as October 2018.[37]

These plans correspond perfectly with Goldmans and others plans. The big institutional players obviously need big, regulated exchanges in order to start trading. Goldman can’t just open a Binance account.

However, there is another way. You can simply buy an exchange. The investment bank itself didn’t do so, but the start-up Circle which is supported financially by Goldman did. At the end of February, Circle acquired the popular crypto exchange Poloniex.[38] The “NYT” journalist Nathaniel Popper got his hands on internal presentations which explain the motivation behind this takeover: Circle wants to keep Poloniex as an independent exchange, however they are looking to work very closely with the SEC. The goal: Circle wants to make Poloniex the first regulated crypto exchange in the USA.[39]

The slides read as follows: “By becoming the first regulated Crypto Exchange will enable Circle to list and provide a platform for all forms of emerging crypto tokens, including tokens that would be deemed securities. We believe the market for security-like tokens will continue to expand, creating demand for this market infrastructure. Circle (and evidently Goldman) are obviously preparing for a world in which regulated securities can be traded on the Blockchain as a token. The plan goes on: Circle wants to introduce a cryptocurrency which is bound to the Dollar. A Crypto-Dollar by a company which is covered by Goldman Sachs would be a complete and utter game changer. The issue of regulation is completely open in this aspect as well.

We assume that the race for the Bitcoin infrastructure has only just begun. That every step is a step into a legal grey zone still discourages many institutional players. Some, such as the huge investment manager Vanguard, are steering clear of the sector all together. In May, CEO Tim Buckley went as far as saying: “You will never see a Bitcoin fund from us. We stay away from assets which don’t have a sound basic economic value and don’t generate income or cash flow.”[40]

Conflict of Generations

Similar to Warren Buffett, who misses no opportunity to hate on Bitcoin, companies such as Vanguard have no interest in making Bitcoin sound too interesting as an investment. They want their clients to continue to put their money in traditional investment opportunities. There is more behind this all than the mere discussion and discourse about the Blockchain technology. It is a generation conflict. Millennials, people aged between 18 and 39, are deeply influenced by the last financial crisis. This coincides with the fact that this is the generation which grew up with internet access. A whole row of studies show that Millennials are the most likely to be interested in crypto assets.[41]

The combination of technological trust and wariness towards the financial system is a dangerous one for providers of legacy investment products. It is to be expected that established players such as Buffet and Vanguard will be become more and more outspoken against Bitcoin. Others such as Goldman have already decided to go a more proactive route and be first in line when it comes to institutions embracing the new sector. And others like J.P. Morgan have proven that they can and must change their thinking.

Without a doubt, the economic success of the partially dubious crypto exchanges must have drawn the attention of the big players to the sector itself. The top 10 exchanges generate roughly USD 3 million in fees per day. Just the top two, Binance and OKEx, have a daily trading volume of approximately USD 1.7 billion. “The exchanges and transaction processors are the biggest winners in the space because they’re allowing people to transact and participate in this burgeoning sector,” said Gil Luria, an equity analyst at D.A. Davidson & Co, who reviewed the methodology for the revenue estimates. “There’s a big business there and it would not surprise me if they’re making hundreds of millions of dollars in revenue and possibly even billions a year.”[42]

Of course, at the moment it is still unclear if the crypto exchanges of today will even be around tomorrow. The current market leader Binance is just over a year old. If established players such as Nasdaq really set their sights on these markets, they will subsequently also be able to pull in a lot of investors. This is however in the distant future. There are still a few battles to be fought – also in the generational conflict of the exchanges.

One player deserves special attention: Coinbase. Subject of many chats within crypto forums is the speculation of which coin will next be released on the Coinbase platform. The “standard” app for Bitcoin newbies has more than 20 million clients – more than the traditional US investment management firm Charles Schwab. The US company is currently expanding in many directions simultaneously. The Coinbase app is available in 32 different countries and has additionally initiated a crypto fund. The fund is currently only available for US investors and only if they decide to invest at least half a million USD. The name of the new venture speaks volumes of where this ride will take us: Coinbase Asset Management.[43]

Coinbase has its own exchange, Gdax, which will soon be relaunched as “Coinbase Pro”. Additionally, Coinbase recently purchased Paradex. This “decentralized” exchange not only takes care of the storage of tokens of their customers, but also allows users to directly trade with each other. Speculators say the purchase of Paradex is paving the way for Ethereum based ERC20 tokens to be launched on the Coinbase exchange. Currently the app only offers four cryptocurrencies: Bitcoin, Ethereum, Litecoin and Bitcoin Cash.[44] Ethereum Classic could also be added soon.

Last but not least, Coinbase has also entered the Venture Capital sector and has initiated their own incubator fund for start-ups in the crypto sector. “It could be possible that we start investing in companies that look a lot like competition for Coinbase. We have a long-term perspective and believe that different approaches are healthy and viable”, Coinbase stated on their blog.

Bitcoin Has Become Mainstream

Predictions are always tricky. But the abundance of activity within the Bitcoin sector since the crash of January 2018 goes to show that cryptocurrencies are far from dead. It is however still most probable that only a few of the Boom phase projects will survive in the long run. The overall dominance of Bitcoin is not in danger at the moment.

The infrastructure side of things promises to be very active in the coming months. We will stay tuned. New players such as Binance are attacking companies like Coinbase. In addition, there is a continuously growing list of newcomers: from Goldman all the way to start-ups like Revolut or exchanges such as Nasdaq. Within the crypto market itself, there are of course also many promising projects. While the market is still recovering from the ICO Bubble, new coins which aren’t based on the classic Blockchain are gaining traction. One example is the Iota project which is already pretty popular in Europe, and is investigated in length in next chapter of this report.

Bitcoin and the crypto sector have become mainstream. We won’t find out what this all really means until we have finally come out the other side of this valley of doom. As with most things in life, in hindsight we will be wiser as to where the real bottom of the Bitcoin price in 2018 was and if we have already seen it or not.

[1] See “Russia Busts Crypto Miners at Secret Nuclear Weapons Lab,” Stepan Kravchenko, Bloomberg, February 9, 2018.

[2] See “Naval Academy Rocked by Drug Scandal; Ring Bought Cocaine With Bitcoin,” Tyler Durden, Zero Hedge, February.

[3] See “Bitcoin’s ‘Death Cross’ Looms as Strategist Eyes $2,800 Level,” Todd White and Eddie van der Walt, Bloomberg, March 16, 2018.

[4] See “Crypto Hedge Fund Says Bitcoin Has Bottomed Out,” Camila Russo, Bloomberg, April 12, 2018.

[5] See “The Fundamentals Driving Crypto Trading? There Aren’t Any,” Julie Segal, Institutional Investor, May 24, 2018.

[6] See “A Short Introduction to the World of Cryptocurrencies,” Aleksander Berentsen and Fabian Schär, Federal Reserve Bank of St. Louis Review, 2018, 100(1), pp. 1-16.

[7] See “Making Sense of Bitcoin Price Levels,” Joost van der Burgt, Federal Reserve Bank of San Francisco, April 2018.

[8] See “Inside The Bizarre Upside-Down Bankruptcy of Mt. Gox,” Adrianne Jeffries, The Verge, March 22, 2018.

[9] See “Mt. Gox Trustee Sold Half a Billion Dollars Worth of Bitcoin and Bitcoin Cash,” Trustnodes, March 7, 2018.

[10] See “Bitcoin’s Tokyo Whale Sold $400 Million and He’s Not Done Yet,” Go Onomitsu, Bloomberg, March 7, 2018.

[11] See “Get Ready to See Most Cryptocurrencies Hit Zero, Goldman Says,” Kana Nishizawa, Bloomberg, February 7, 2018.

[12] See “Bitcoin Obituaries,” 99Bitcoins, 2018.

[13] See “Blankfein Says He’s Just Doing ‘God’s Work’,” Dealbook, The New York Times, November 9, 2009.

[14] See “Goldman Sachs to Open a Bitcoin Trading Operation,” Nathanial Popper, The New York Times, May 2, 2018.

[15] See “The CME recorded an all time record volume of its 5-lot BTC futures yesterday,” Jon Najarian, Investitute, April 26, 2018.

[16] See “One in five financial institutions consider cryptocurrency trading, says survey,” Reuters, April 24, 2018.

[17] See “Jamie Dimon Slams Bitcoin as a ‘Fraud’,” Hugh Son, Hannah Levitt and Brian Louis, Bloomberg, September 12, 2017.

[18] See “JPMorgan launches crypto strategy months after Dimon ‘fraud’ warning,” Paul Clarke, Financial News London, May 17, 2018.

[19] See “JPMorgan has asked 29-year-old highflier to draw up a cryptocurrency strategy,” Oscar Williams-Grut, Business Insider Deutschland, May 17, 2018.

[20] See “JPMorgan’s Wall Street chief talk China, bitcoin, Amazon, and is preparing for an inevitable big downturn in stocks,” Hugh Son, CNBC, May 16, 2018.

[21] See “George Soros Prepares to Trade Cryptocurrencies,” Alastair Marsh, Saijel Kishan and Katherine Burton, Bloomberg, April 6, 2018.

[22] See “It Started With the Rockefellers: Now it’s Takin on Crypto,” Robert Hackett, Fortune, April 6, 2018.

[23] See “VC Firm With Rockefeller Roots Turns to Crypto Startup,” Olga Kharif, Bloomberg, April 25, 2018.

[24] See “Rockefeller’s VC Arm Venrock Partners With Coinfund, Exec Highlights Focus On Long Term,” Molly J. Zuckerman, CoinTelegraph, April 8, 2018.

[25] See “Blochain-Startups haben dieses Jahr bereits mehr Investment bekommen als 2017,” Jakob Steinschaden, Fortune, April 6, 2018.

[26] See “Venture Capital Surges Into Crypto Startups,” Olga Kharif and Camila Russo, Bloomberg, March 26, 2018.

[27] See “46% of Last Year’s ICOs Have Failed Already,” Kai Sedgwick, Bitcoin.com, February 23, 2018.

[28] See “World’s Second Most Valuable Cryptocurrency Under Regulatory Scrutiny,” Dave Michaels and Paul Vigna, The Wall Street Journal, March 1, 2018.

[29] See “Bitcoin and ether are not securities, but some initial coin offerings may be, SEC official says. “ Bob Pisani, CNBC, June 18, 2018.

[30] See “The SEC Is Finally Cracking Down On ICOS,” Tyler Durden, Zero Hedge, March 1, 2018.

[31] See “Founders of cryptocurrency backed by Floyd Mayweather charged with fraud by SEC,” Arjun Kharpal, CNBC, April 3, 2018.

[32] See “ICO Howeycoins,” Investor.gov, 2018.

[33] See “U.S. Launches Criminal Probe into Bitcoin Price Manipulation,” Matt Robinson and Tom Schoenberg, Bloomberg, May 24, 2018.

[34] See “Probe into Bitcoin Price Manipulation Probably ‘A Good Thing’, Novogratz Says,” Camila Russo, Bloomberg, May 24, 2018.

[35] See “ICOs: EU-Kommission plant in naher Zukunft keine einheitliche Regulierung,” Bastian Kellhofer, Trending Topics, March 9, 2018.

[36] See “An Even-handed Approach to Crypto-Assets,” Christine Lagarde, IMF Blog, April 16, 2018.

[37] See “Nasdaq May Launch Bitcoin Trading in October 2018,” Marko Vidrih, Medium, April 27, 2018.

[38] See “Circle Acquire Poloniex,” Sean Neville and Jeremy Allaire, Circle, February 26, 2018.

[39] See tweet by Nathanial Popper on Twitter, February 26, 2018.

[40] See “Vanguard chief: You will never see a bitcoin fund from us,” Thomas Franck, CNBC, January 22, 2018.

[41] See “A bitcoin bubble made in millennial heaven,” Financial Times, 2018.

[42] See “Crypto Exchanges Are Raking in Billions of Dollars,” Camila Russo, Bloomberg, March 5, 2018.

[43] See “The SPY of Crypto? Coinbase Launches Cryptocurrency Index Fund,” Tyler Durden, Zero Hedge, March 6, 2018.

[44] See “Coinbase acquires cryptocurrency trading platform Paradex,” Anna Irrera, CNBC, May 23, 2018.

Bubble or Hyperdeflation?

Bubble or Hyperdeflation

Since December, Bitcoin’s price dropped 69 % from a high of $19,224 to a low of $5,920 in early February.[1] The last time Bitcoin’s price plummeted this much was after the 2013 rally when it reached $1,000 per coin for the first time. During a 411-day correction, Bitcoin’s price dropped 87% from $1,163 on November 30, 2013 to $152 on January 14, 2015. The general narrative in the media is that the current downward spiral is the bursting of the bubble; however, the fundamentals of the technology have not changed since December. This article explains what a bubble is, why some senior market analysts believe that Bitcoin is a bubble, and why they may be right if Bitcoin does not become widely adopted as a store of value or medium of exchange.

What is a Financial Bubble?

Prior to the 20th century, bubbles were few and far between. The Dutch tulip mania in the 1630s, the British South Sea Bubble of the 1710s, and the French Mississippi Company of the 1710s are the most commonly cited examples of early bubbles. In recent times, the term “bubble” has been applied to collapses of several financial asset classes, including the 1930s stock market crash, the 1980s Japanese real estate market deflation, the 1990s Asian financial market collapse, the Internet stock bubble, and the 2000s housing crisis, amongst others. The commonly used definition of a bubble is “a surge in asset prices unwarranted by the fundamentals of the asset” and an “eventually burst, causing prices to precipitously decline before stabilizing at more reasonable levels”.[2] For a familiar reference point, large tech-company stocks shrank up to 86 %, while other companies went out of business entirely during the “Internet bubble”.[3]

Two Explanations for Bubbles

1. The greater fool theory follows from Keynes’ beauty contest interpretation of stock markets.

Overly optimistic investors by overvalued assets hoping to sell them to even more overly optimistic investors in order to generate profit. The party comes to an end, when the greatest fool is left with no one to sell the overvalued asset to. The greatest fool takes the greatest loss as the financialcvalue of the asset contracts.

2. The herd mentality follows from the investment wisdom that the best predictor of tomorrow’s price is today’s price.

If cryptocurrencies are following an uptrend, and have for several years, why should the trend reverse tomorrow? However, as all financial market participants eventually learn, what goes up must go down. When enough investors begin to believe that the fundamentals of the asset do not justify the price, the bubble deflates and investors who bought in at the top, burden the loss.

A burgeoning body of academic literature has developed around the topic of causes, impacts, and indicators of bubbles. Sociologists and behavioral economists have proposed several explanations for bubbles, including the greater fool theory and herd mentality. Economic theory holds that bubbles are a recurrent and damaging feature of our financial system[4]; however, a quantitative test for determining if an asset’s price is a bubble does not exist. According to economist Dr. Jean-Paul Rodrigue, a bubble has four phases beginning with an increase in the value of an asset. Smart investors who understand the value of the technology begin building positions.

In the second phase, institutional money enters the market, and the smart money investors reinforce their positions. In the third phase, the media gets involved, and everyone starts to say that the latest guests to the party are “unsophisticated”. At this point, the smart investors and institutional investors cash out and realize their gains. The final phase is marked by a collapse in the asset’s price because investors lose confidence in the fundamentals of the asset.[5] Rodrigue’s theory is similar to the Dow theory which is the basis of technical analysis. Even though this description is strongly simplified, it may serve as a guideline for the evolution of a typical financial bubble.


Phases of the Typical Bubble

Institutional money has not moved into cryptocurrencies yet. Therefore, one could argue the
cryptocurrency market is either still in the smart investor phase or the cryptocurrency market
skipped the institutional investor phase and is the second bull trap. Source: Dr. Jean-Paul

The Top 5 Reasons Analysts Call Bitcoin a Bubble

Increasingly used as synonym for tulips and the tulip mania of the 1630s, Bitcoin’s long-term sustainability is garnering serious doubts. The CEO of J.P. Morgan Chase, Jamie Dimon, called Bitcoin a fraud when Bitcoin reached $4,000 in September of last year.[6] Recently, Paul Krugman claimed that Bitcoin is a larger bubble than the 2008 housing crisis.[7] The 100,000 percent increase in Bitcoin’s value over the past five years is considered to be unwarranted exuberance because of five main reasons.

1.) Chart Looks Like a Bubble

In 2017, Bitcoin’s price rose from approximately $1,000 to $20,000. However, Bitcoin’s performance over the past three months looks like a deflating bubble. Economists Eng-Tuck Cheah and John Fry analyzed empirical data on Bitcoin’s price fluctuations and found that a bubble could explain 48.7% of Bitcoin’s price movement.[8] Similar results were found by MacDonell (2014) and Garcia et al. (2014). The following chart shows the most recent price collapse that has revitalized the bubble argument on social media.


Bitcoin’s Recent Run-up and Correction

2.) Bitcoin Has No Use Cases

Bitcoin’s original purpose was to be a medium of exchange unbacked by government. However, critics claim that a new monetary system cannot be created out of thin air by a few cryptographers in Palo Alto. This argument consists of two main parts: first, Bitcoin does not have any use case outside of being a medium of exchange; second, Bitcoin is not a tangible commodity.

The proponents of the first argument claim that fiat currencies such as the U.S. dollar and the euro have value because the government backs them and because you can pay your taxes in them. Similarly, gold has value because it can be used in industrial applications. Following this logic, Bitcoin has no value because it cannot be used to pay taxes in most jurisdictions and it has no physical applications. The second argument follows from Austrian Economics and Ludwig von Mises’ regression theorem. The regression theorem states that the purchasing power of fiat today can be traced back to purchasing power of fiat yesterday which can eventually be traced back to when fiat was convertible for gold and other commodities.[9]

The theory holds that the purchasing power of money can be regressed to a time when money was not used as money but as a commodity. Gold’s original purchasing power was established on the free market through the forces of supply and demand because gold could be directly used as jewelry. Since Bitcoin is digital, some analysts argue that Bitcoin’s purchasing power is backed by nothing. Instead, speculation is the main reason the price keeps going up. According to this logic, the price will plummet when speculators stop speculating because Bitcoin is not legal tender, and it has no industrial demand to support its price on
the market.

3.) Bitcoin Has the Highest Volatility of Any Asset Class

Bitcoin’s original purpose was to be an electronic cash system. Critics claim that Bitcoin is too volatile to be a store of value or a unit of account, and therefore, Bitcoin is a bubble. Volatility is generally measured by calculating the standard deviation of the asset’s return. The Bitcoin Volatility Index tracks Bitcoin’s price fluctuations. As shown in the next chart, Bitcoin’s rolling 30-day volatility has been over 6 % during the past month. At the same time gold and the S&P 500’s rolling 30-day volatility was 1 %. More volatility means more risk. According to this statistic, Bitcoin is a significantly riskier asset than gold or the S&P 500. Bitcoin has a 30 % correction every quarter, while the S&P 500 has had 12 corrections of 30 % or higher since its inception in 1929.[10] The main point is that Bitcoin’s volatility makes it poor money, and if it is poor money, then why does it have value?


30-Day Rolling Volatility of Bitcoin, Gold, and the S&P 500 from 2013–2018

4.) The Supply is Unlimited

Another prominent reason why Bitcoin is called a bubble is because the supply of cryptocurrencies is unlimited. The open-source and digital nature of Bitcoin enables thousands of new cryptocurrencies to be created for free. As the Crypto Concepts chapter on software forks explains, 19 hard forks of Bitcoin were created, and some of them had an impact on Bitcoin’s price. In addition to hard forks, new tokens can be created on the Ethereum blockchain with only 66 lines of code, and all 66 lines of code can be copy-pasted from online sources. There are even YouTube tutorials on how to create new cryptocurrencies in under six minutes. In 2017, over 472 new cryptocurrencies were launched. According to this argument, the demand for cryptocurrencies is larger than the supply. However, since the demand is finite, and the supply is theoretically infinite, the bubble will eventually collapse, and investors will lose billions of dollars.

5.) An Even Better Technology Will Replace Bitcoin

Bitcoin has only been around since 2009, and the technology has evolved from being a free and fast payment system to an expensive and slow payment system. Critics of Bitcoin claim that if it does not implode because of other factors, Bitcoin will be replaced by a cryptocurrency with superior technological features. Specifically, Bitcoin will be replaced by a cryptocurrency that does not require billions of dollars in electricity and mining hardware per year.[11] Also, post-blockchain technologies such as Hashgraph and IOTA are the talk of all blockchain conferences and meet-ups because they promise to solve the Bitcoin scaling problem. The smartest minds in the world are working on better blockchains because the reward for creating a cryptocurrency better than Bitcoin is astronomical. As fast cars replaced slow horse buggies and sleek iPhones replaced Nokia bricks, the adage goes that Bitcoin is a bubble because it will not be around forever.

The Asset Bubble Checklist

The asset’s price skyrockets.

Bitcoin’s price rose by 1,900% in 2017. Over the past five years, Bitcoin had a 100,000% return on investment.

Everyone is talking about the asset.

Even the American singer Katy Perry sported cryptocurrency logos on her nails to show enthusiasm for what some investors call a new asset class.

When people quit their day jobs to become investors in the asset.

Thousands of young people are quitting their job in hopes of becoming #CryptoRich. The South Korean 23-year-old Eoh Kyong-hoon left math for Bitcoin, “I no longer want to become a math teacher… I’ve studied this industry [cryptocurrencies] for more than ten hours a day over months, and I became pretty sure that this is my future.”

Investors are taking on debt to purchase the asset.

“We’ve seen mortgages being taken out to buy bitcoin. … People do credit cards, equity lines.” – Joseph Borg, President of the North American Securities Administrators Association.

The Root Cause of Financial Bubbles

In the past 20 years, we have experienced the dot-com bubble, the housing bubble, and now stock and bond markets are close to their all-time highs. Some skeptics are calling the current economy the “Everything Bubble” because every asset class is hitting an all-time high. Around the world, markets have entered unchartered territory. In the U.S, the Dow Jones Industrial Average reached 26,000 for the first time in history. The Case-Shiller Real Estate Index is back at its 2006 high. In Europe, trillions of euros have been poured into corporate and government bonds that have negative yields, and the UBS Swiss Real Estate Bubble Index is the highest it has been since the 1989 real estate downturn.

However, the increase in price of real estate, stocks, bonds (and cryptocurrencies) cannot be explained by a fundamental improvement in the economy. Former FED Chairman, Alan Greenspan, referred to the Dow’s 44 % increase since Trump’s election and the bond market as financial bubbles. Other critical analysts like Peter Schiff regularly point out that industrial nations do not have real productivity growth. While financial markets are roaring, the economy still seems to have severe problems.

The increase in asset prices does not match a complimentary increase in economic activity; however, another variable is highly correlated: namely, the money supply. Throughout history, excess money has been present before every single bubble.

What is Money and Why Is Excess Money a Bad Thing?

Several economists have observed that excess money is the catalyst of unsustainable financial bubbles; however, economists do not even agree on the definition of “money”. Mainstream monetary theory suggests that money is a medium of exchange, a unit of account, and a store of value. In contrast, the Austrian school of economics holds that money’s main purpose is being a medium of exchange, while unit of account and store of value are secondary.[12]

Definition of Money

We asked two economists for their definitions of money: Associate Professor of Economics at WU Vienna, Dr. Guido Schäfer, and Research Assistant Professor with the Free Market Institute at Texas Tech University, Dr. Robert Murphy.

Schäfer: To serve as money, an object must fulfil the functions of a medium of exchange, a store of value, a unit of account and of legal tender. As of now, bitcoin fulfils these functions only to such limited degrees that I do not think it can be considered as money.

Murphy: Mises argued that a money was a medium of exchange that was generally accepted within the community. This is a fuzzier criterion; the dividing line between money and non-money is not very sharp. So, I think the fair test for bitcoin and other cryptocurrencies is something like this: If we ever get to the point where the people in a community with at least 1,000 people could manage to get by only using the cryptocurrency to make purchases (like paying rent, buying groceries, paying the utility company, etc.), then it would clearly be a money.”

To reconcile the two branches of economics, one possibility is that money’s value comes can be from each of money’s functions. For example, some people demand money because they want a medium of exchange; others demand money because they want a store of value. The purpose of a medium of exchange is to exchange between two real assets; however, a medium of exchange does not necessarily need to be a store of value and vice versa. In Principals of Economics, Carl Menger argued that certain goods such as livestock, tea, and slaves functioned as a medium of

exchange, while precious metals, jewels, and pearls were used as a store of value In early agrarian societies, cattle were primarily used as a medium of exchange while wealth was accumulated in salt. In Austrian School for Investors, Taghizadegan, et al. (2014), explain how African tribal chiefs hoarded ivory before European merchants began using it as a medium of exchange.[13] Since the 1600s, gold has been kept in clearing houses and depositories as a store of value while paper certificates of deposit became the most marketable medium of exchange.

In the current financial system, the supply of money is increased via credit expansion triggered by artificially low interest rates. Due to the architecture of fiat money systems, central banks are authorized to create money out of thin air.[14] A large portion of the newly created money is channeled directly into financial assets, which raises the prices of those assets. Meanwhile, a small amount goes to entrepreneurs and small business owners who want to expand operations.[15]

In addition to indirectly raising the demand for financial assets by pumping newly printed money into financial markets, printing money debases the currency. Each newly printed dollar decreases the purchasing power of the other dollars circulating in the economy. When central banks create new money, they do not create new goods or services. Therefore, the new money can only be spent on the existing supply of goods and services. Since the demand for goods and services goes up and the supply is fixed, price inflation ensures. Due to the inflationary bias of the fiat money system the currencies are no good long-term store of value. Gold still is seen as a store of value. If one denominates paper-currencies in Gold one might get a different perspective of the long-termstability of fiat money.


Fiat Currencies in Terms of Gold (Logarithmic Scale)

Under fiat monetary systems, average Joes and Janes can no longer store their money under the mattress for safekeeping. If they do, price inflation will eat away the purchasing power of their savings by 2 % to 7 % per year based on official and unofficial calculations, respectively. Permanent money debasement discourages saving and encourages consumption spending on cars, clothing, and vacations. People who are determined to save money are forced to take on additional risk to preserve the purchasing power of their savings over time. Instead of saving their money in bank accounts, savers are forced to look for other long term stores of values like stocks, bonds, and real estate.

The main problem is that printing money is only a short-term strategy. If the purchasing power of a currency depreciates too quickly, demand for that currency decreases. In hyperinflations, demand for holding currency tends toward zero. Subsequently, the currency becomes worthless. However, increases in the money supply happen all the time. Harvard professors Kenneth Rogoff and Carmen Reinhart analyzed the past 800 years of our global financial history and found that governments always increase the money supply and that frequently governments print so much money that confidence in the money collapses.[16]

The following table shows 21 governments inflated their currency in Europe, Oceania, and North America between 1800 through 2008.


Severe Inflation in Europe, North America and Oceania from 1800 – 2008

In summary, newly created money from low interest rate policies and limited ways to save money have led to excess cash in the economy. The excess cash must go somewhere. Currently, the excess cash has found its way into stocks, bonds, real estate, collectables, and cryptocurrencies. Like all of the bubbles before, removing the excess cash will remove the bubble. If central banks raise interest rates too much, the nominal growth of financial markets will slow down or even decline.

Why Bitcoin May Not Be a Bubble

It is true that low interest policy and demand for a secure way to save are fueling part of Bitcoin’s rise in price. If central banks stop debasing the purchasing power of fiat currencies and people can return to the good old days of saving cash in their bank accounts, a large portion of Bitcoin’s appeal will vanish. In contrast, Bitcoin’s price will go much higher if fiat currencies continue to be a poor vehicle for saving. The number one reason Bitcoin may not be a bubble stems from Bitcoin’s technological qualities that make it a superior way of saving value. The upward price trend and speculation around Bitcoin stems from Bitcoin’s potential to be a global and permissionless system of managing wealth that cannot be confiscated. Like with Gold, one also gets a different perspective denominating the USD in Bitcoin. We would not expect the steep decline of the USD to continue, however the deflationary nature of Bitcoin would imply that it has more value relative to an ever inflating USD (or any other FIAT money).


USD in Terms of Bitcoin (Logarithmic Scale)

Also, the five reasons why analysts call Bitcoin a bubble can be countered. First, it is true that Bitcoin’s price fluctuates heavily; however, this does not mean that Bitcoin is not a good investment. To avoid buying at all-time highs, several investors invest a small amount of money in cryptocurrencies every month to gain exposure at an average price. This strategy is commonly referred to as cost averaging. Highly volatile assets have the advantage, that a small position of a portfolio has a reasonable impact on the overall performance. If sized correctly a saver/investor may be able to handle the volatility much better. The second argument that Bitcoin has no value because it has no use cases collapses upon closer inspection as well. The 19th century economist Carl Menger observed that value is subjective. Each individual values Bitcoin for a different reason. The market price is a surrogate of information concerning the individual preferences of consumers in society. If one Bitcoin costs $10,000, this means that a lot of people around the world value Bitcoin even though it is not a physical commodity.

The third argument that Bitcoin is the most volatile asset class is also not evidence that investors should avoid Bitcoin. Many investors specifically target volatile asset classes with active trading strategies. Fourth, any analyst or economist that says the supply of cryptocurrencies is infinite does not fully understand the technology. Creating cryptocurrencies by copying and pasting code is free and can be used to increase the supply of cryptocurrencies. However, creating a new cryptocurrency does not mean it will have a network of users. Creating a network of users requires scarce resources such as capital and labor. Although the supply of cryptocurrencies is technically unlimited, the supply of global cryptocurrency networks is limited. The final point regarding Bitcoin being replaced by a better technology is probably the strongest argument against Bitcoin. However, Bitcoin is open-source, and many developers say that Bitcoin code change the underlying code to reflect consumer preferences. If another coin, such as Bitcoin Cash, begins to overtake Bitcoin, the original Bitcoin can adopt Bitcoin Cash’s features if necessary.

Three Potential Outcomes

Bitcoin was designed to fulfill three functions of money: store of value, medium of exchange, and unit of account. Bitcoin’s inherent scarcity removes the problem of excess money and currency debasement from the financial system. The total number of units is capped at 21 million and its inflation rate is more predictable than fiat or gold. Similar to Gold, Bitcoin allows Joes and Janes to save without having their savings diluted slowly by ever increasing money supply (or quickly in the case of hyperinflation). In both cases there may well be phases, where a saver has to be willing to lose nominal purchasing power for a longer period of time. However, Bitcoin does not only enable secure saving, this technology also allows people to directly send their savings to other people without converting into fiat or any other asset. The Bitcoin network does not depend on intermediaries. Stocks, bonds, real estate, and fine art, all depend on government stability and efficient courts that uphold legal contracts. Even owning gold was outlawed in the U.S. from 1933–1974. Today, it is only possible to move $10K worth of gold out of the U.S. at once.

Given Bitcoin’s qualitative features, there are three possible outcomes for Bitcoin.

1.) Bitcoin Becomes A Store of Value

Bitcoin’s qualities of durability, portability, fungibility, divisibility, scarcity, and non-confiscatability are attracting an injection of trust from users. The nominal and real price of Bitcoin in terms of the good and services that it can purchase is increasing because more and more people are demanding it. Since the quantity is fixed, all of the fluctuations in demand directly impact the price of Bitcoin. In contrast, investors are withdrawing trust from fiat currencies. In the U.S., quantitative easing 1,2, and 3 have resulted in over $12 trillion newly printed dollars. In January, the dollar index hit its lowest point since 1987 and its lowest exchange rate with the yuan since 1994.[17]

Velocity, or how often a currency is spent, is one way to estimate a currency’s value. Gresham’s law says that overvalued money flows into circulation while undervalued money is hoarded. Named after the 16th century financier Thomas Gresham, the law states that people hold on to money that is expected to retain its value and spend money that is expected to lose its value. Thus, inflationary money changes faster than deflationary money. The next chart compares the velocity of the dollar and Bitcoin. In this graph, velocity of the dollar is the ratio of nominal GDP to the M1 money supply, velocity of Bitcoin is calculated as the ratio of Bitcoin’s transaction volume in USD to Bitcoin’s market capitalization in USD.


Historical Velocity of Bitcoin and the U.S. Dollar

When the media has negative reports concerning Bitcoin, such as China is outlawing ICOs or the electricity use is unsustainable, the perception that Bitcoin can become a global store of value is weakened, and the price drops. A crisis of confidence leads to investors pulling out their investments. Similarly, investors inject trust when there is good news about Bitcoin’s adoption such as the Lightning Network or CFTC Chairman Christopher Giancarlo’s positive comments about Bitcoin at the hearing on blockchain on February 6 of this year.

If Bitcoin is adapted as store of value in the long term, the current period of volatility may be referred to as Bitcoin’s “hyperdeflation” phase, and this is the first time in history we are experiencing this type of economic phenomena. Investors are speculating whether or not Bitcoin will become digital gold, and rightly so. Due to the inflationary design of fiat money, Bitcoin exhibits interesting properties relative to fiat money as store of value. If Bitcoin achieves this goal, the price may level out and volatility could fall drastically.

2.) Bitcoin Becomes A Store of Value and a Medium of Exchange

The original Bitcoin white paper written by Satoshi Nakamoto states that Bitcoin was intended to be an electronic cash system; however, many people believe that Bitcoin can never become global and permission less money. According to Dr. Schäfer (and several other experts), the authorities will crack down on the technology if people really started to use it. In addition to legal uncertainty, Bitcoin’s high transaction fees and network latency make it cumbersome to use as a medium of exchange. If one mistake in the receiver’s address is made, the Bitcoin are gone forever. If the Bitcoin are sent to an Ethereum address by accident, the Bitcoin are gone forever. If a coffee is bought with Bitcoin, the merchant has to wait at least ten minutes before they know if the payment was valid.

If a transaction is sent in the wrong amount, there is no way to do a chargeback or file a dispute. Given the technological problems, the majority of Bitcoin users do not use it as a medium of exchange. Our current payment system is easier to use. We already have credit cards, banks, and PayPal to facilitate our payments to merchants around the world. On the other hand, technologies such as the Lightning Network and SegWit may eventually make Bitcoin a good medium of exchange as well. If Bitcoin can scale to become a global medium of exchange, its purchasing power will increase because it will be able to serve three distinct functions: storing value, transmitting value, and ultimately being a unit of account.

We contacted two monetary economists, which have different views on this topic. The following table summarizes the views of the professors on why Bitcoin has value, and whether or not Bitcoin is a bubble.


Will Bitcoin Become Money?

3.) Bitcoin Becomes Neither and Collapses

Bitcoin’s success so far has been nothing short of a miracle. Since Bitcoin’s inception in 2009, Bitcoin has been declared “dead” hundreds of times in the media.[18] The Bitcoin network has several threats including hacking the SHA-256 encryption algorithm, being outlawed by governments, a 51 % attack, and solar flares bringing down the Internet. If Bitcoin fails to become a global store of value or medium of exchange, the value and subsequently the price of Bitcoin will fall.


The Bitcoin revolution is about having a way to store and transmit value that does not depend on central bank monetary policy, capital controls, or property rights. The reason people pump their paychecks into real estate, bonds, and stocks is not because these assets make a better medium of exchange. These assets make a better store of value than fiat currency, and Bitcoin has the technological features to become an even better store of value than these assets. If Bitcoin manages to additionally achieve worldwide adoption as a medium of exchange, the price of Bitcoin will most probably have a spectacular return going forward. If Bitcoin fails, the price will collapse, and it will go down in history as one of the largest bubbles of all time.

Eighteen years after the infamous highs of the tech-markets in the year 2000 most companies have embraced the opportunities of the Internet. Today, the Internet is definitely not referred to as a bubble. Similar to internet stocks, many of the cryptocurrencies may be gone in five years from now; however, the dream of a decentralized and private store of value has been born, and this will inspire an onslaught of technologies until the mission is complete. Diversification is a key component of building a portfolio that retains value in the long run. The major takeaway is that a little bit of gold, a little bit of cryptocurrencies, and a little bit of fiat may provide investors with a type of insurance against changes in the future. Future generations may use a combination of cryptocurrencies, commodities, and fiat currencies depending on which money serves their needs the best for each of their different goals.

We want to sincerely thank Professor Dr. Guido Schäfer, Professor Dr. Robert Murphy, and Mark Valek for contributing to this chapter. Guido Schäfer is an associate professor of economics at WU Vienna. Robert P. Murphy is a research assistant professor with the Free Market Institute at Texas Tech University. He is also a senior fellow at the Mises Institute in Auburn, Alabama. Mark Valek is a fund manager and research analyst at Incrementum AG.

[1] Bitcoin traded above $20,000 on some exchanges.

[2] “Bubble”, Investopedia, 2018, https://www.investopedia.com/terms/b/bubble.asp.

[3] Jim Edwards, “One of the kings of the ‘90s dot-com bubble now faces 20 years in prison,” Business Insider UK, Dec 6, 2016, http://www.businessinsider.com/where-are-the-kings-of-the-1990s-dot-com-bubble-bust-2016-12.

[4] Preston Teeter and Jörgen Sandberg, “Cracking the enigma of asset bubbles with narratives,” Strategic Organization 15, No. 1 (2017), http://journals.sagepub.com/doi/abs/10.1177/1476127016629880#articleCitationDownloadContainer.

[5] Jean-Paul Rodrigue, The Geography of Transport Systems. New York: Routledge, 2017. https://people.hofstra.edu/geotrans/eng/ch7en/conc7en/stages_in_a_bubble.html

[6] Jamie Dimon retracted his statement in an interview on Fox Business in early January, https://www.ft.com/content/e04e359a-e9e9-3f8e-8e2f-3f4373e5efb0.

[7] Jacqui Frank, Kara Chin and Joe Ciolli, “Paul Krugman: Bitcoin is a more obvious bubble than housing was,” Business Insider, Dec 15, 2017, http://uk.businessinsider.com/paul-krugman-says-bitcoin-is-a-bubble-2017-12?r=US&IR=T.

[8] Eng-Tuck Chea and John Fry, “Speculative Bubbles in Bitcoin markets? An empirical investigation into the fundamental value of Bitcoin,” Economic Letters 130 (May 2015), pp. 32–36, https://www.sciencedirect.com/science/article/pii/S0165176515000890.

[9] Ludwig von Mises, The Theory of Money and Credit (1912).

[10] Jake Weber, “The Bitcoin Bubble Expained in 4 Charts,” Mauldin Economics, Nov 13, 2017,


[11] Bitcoin Energy Consumption Index,” Digi Economist, 2018, https://digiconomist.net/bitcoin-energy-consumption.

[12] Ludwig von Mises, The Theory of Money and Credit (1912).

[13] Rahim Taghizadegan, Ronald Schöferle and Mark Valek, Austrian School for Investors: Austrians Investing between Inflation and Deflation. Mises Institute, 2014. https://www.amazon.com/dp/B01D2A4Z7S/ref=dp-kindle-redirect?_encoding=UTF8&btkr=1.

[14] Jörg G. Hülsmann, The Ethics of Money Production. Mises Institute, 2008.

[15] People who are unwilling or unable to take on debt do not directly receive any of the “economic stimulus”.

[16] Kenneth Rogoff and Carmen Reinhart, This Time is Different. Princeton: Princeton University Press, 2009.

[17] Peter Schiff, „Ep. 324: Obama & Yellen Strand Trump & Powell in Dodge,“ YouTube, Jan 31, 2018, https://www.youtube.com/watch?v=4NN7n3ABYx4&feature=share.

[18] “Bitcoin Obituaries: Bitcoin has dies 259 times,” 99Bitcoins, 2018, https://99bitcoins.com/obituary-stats/.

War Within Bitcoin

War Within Bitcoin

“… Bitcoin is an excellent idea. It fulfills the needs of the complex system, not because it is a cryptocurrency, but precisely because it has no owner, no authority that can decide on its fate. It is owned by the crowd, its users. And it has now a track record of several years, enough for it to be an animal in its own right.

Finally, Bitcoin will go through hick-ups (hiccups). It may fail; but then it will be easily reinvented as we now know how it works. In its present state, it may not be convenient for transactions, not good enough to buy your decaffeinated expresso macchiato at your local virtue-signaling coffee chain. It may be too volatile to be a currency, for now. But it is the first organic currency.

But its mere existence is an insurance policy that will remind governments that the last object establishment could control, namely, the currency, is no longer their monopoly. This gives us, the crowd, an insurance policy against an Orwellian future.”

Nassim Taleb

From now on, every edition of the Crypto Research Report will include a chapter dedicated solely to covering coins and tokens that are relevant for financial market participants. At the moment, the most debated coins are Bitcoin and Bitcoin Cash. In this chapter, we will review the arguments being made on both sides, and we explain the steps we are taking to hedge Bitcoin’s risks of being replaced by a better technology.

Bitcoin Cash came into existence on August 1, 2017 after a hard fork of Bitcoin.[1] Believers in Bitcoin have split into opposing fractions. Both groups believe that Bitcoin’s value comes from being a fast and affordable global payment system. The disagreement is about how to achieve that goal. One camp, the Bitcoin Cash camp, believes that Bitcoin should have bigger blocks now. Another camp believes that bigger blocks may be inevitable, but they would like to try all other options before resorting to a hard fork. This camp is researching and developing tools such as SegWit, The Lightning Network, Sharding, and Schnorr signatures. Other camps believe that big blocks will never be a feasible solution to Bitcoin’s scaling problem. To take a step back, the first section explores Bitcoin’s scalability problem. The second section compares the quantitative and qualitative characteristics of Bitcoin and Bitcoin Cash, and the final segment discusses how mining hash power may be a good proxy for sentiment in cryptocurrency markets.

a. Scaling a Blockchain

The main problem that the cryptocurrency community is debating is how to garner widespread adoption for Bitcoin. As argued in the featured article of this edition, “Bubble or Hyperdeflation?” Bitcoin’s value can be explained by being a global and permissionless store of value and payment system. However, scalability issues with the blockchain technology are hindering further Bitcoin adoption. The high transaction fees and latency on the Bitcoin network has ruined user experience. The transaction fees on the Bitcoin and Ethereum networks are currently too high to facilitate micropayments. The rise of transaction fees has pushed applications onto other more affordable blockchain protocols. For example, the nanopayment token, Satoshi Pay, uses the Stellar blockchain because their business model relies on low transaction fees.[2]

The drama began when Bitcoin developers proposed Segregated Witness (SegWit) as a solution to the scaling debate. Invented in 2015 by Bitcoin developer Pieter Wuille, SegWit reduces the amount of data required for each transaction. Since each Bitcoin block has a data limit of 1 MB, reducing the data required for each transaction means that the network can process more transactions. Segregated Witness reduces the data required for each transaction by removing data related to signatures or segregating the witness from the transaction.

On February 21, 2016, developers and firms in the cryptocurrency space came together to discuss Bitcoin’s scalability problem. In what became known as the Hong Kong Agreement, members of the Bitcoin community agreed to release Segregated Witness as a short-term solution to the scaling problem. To achieve this agreement, the proponents of Segregated Witness had to find a compromise with the so-called big blockers who wanted to scale Bitcoin by increasing the block size. The compromise was that Bitcoin’s block size would be increased once the developers had built a safe hard fork implementation. This implementation was supposed to increase Bitcoin’s block size from 1 MB to 2 MB.

As shown in Figure 11, the Bitcoin transaction fee hit a high of $55.16 on December 22, 2017. Meanwhile, Bitcoin Cash flaunted fees well below $1. Network latency, or how long it takes for a transaction to be confirmed on the network, also reached record times during January. As of now, each transaction takes approximately eight days to be confirmed on the network on average. In contrast, the average time for a Bitcoin Cash transactions confirmation is ten minutes.[3] This number can be compared to Ethereum, which takes approximately two minutes for a transaction to be confirmed in the blockchain. Given the better user experience of Bitcoin Cash, it is no wonder that Bitcoin Cash’s value relative to Bitcoin increased from 0.1 Bitcoin on August 1, 2017 to a high of 0.24 Bitcoin on December 20, 2017. Bitcoin Cash has dropped down to 0.14 Bitcoin or approximately $1,000 per coin since then.

As shown in Figure 10 Bitcoin’s market share to Bitcoin Cash has recovered a bit, but Bitcoin Cash has retained its position in the top five cryptocurrencies for several months. This could signal that market participants are not settled on the debate.

b. Bitcoin versus Bitcoin Cash

There are three main reasons why Bitcoin Cash has not toppled Bitcoin despite having lower transaction fees and confirmation times.

1.) The Proponents of Bitcoin Cash Have Conflicts of Interest

The main proponent of Bitcoin Cash is the early Bitcoin investor Roger Ver who denounced his U.S. citizenship for political reasons. Since 2011, Roger Ver has been an outspoken proponent of Bitcoin and libertarianism. Critics of Bitcoin Cash frequently point out that Roger Ver served ten months in federal prison in the U.S. However, there is plenty of evidence that Roger Ver’s interest in Bitcoin Cash is not purely financial. In 2012, Roger Ver donated money to create the Bitcoin Foundation, which supports the developers of Bitcoin. Additionally, Roger Ver has donated millions of dollars to educational charities such as the Foundation for Economic Education and Angela Keaton’s antiwar.com.

Roger Ver is a frequent guest on talk shows, and his behavior during interviews is notoriously raucous. However, Roger Ver’s profile is not the shadiest profile involved in Bitcoin Cash. Roger Ver is aligned with Jihan Wu, who is the owner of the Bitcoin mining hardware company Bitmain, and Craig Wright, who claims to be Satoshi Nakamoto.

Critics of Bitcoin Cash accuse Jihan Wu of hard-forking the Bitcoin blockchain in order to gain personal wealth. Due to a technology flaw in Bitcoin’s proof-of-work consensus algorithm, accusations have been made that Wu’s company Bitmain was able to gain a competitive advantage over other cryptocurrency miners.[4] As documented by the Bitcoin Core developer Gregory Maxwell, Bitmain may have been able to save $100 million per year. Using a patented technology called AsicBoost, Jihan Wu was able to mine block headers for candidate blocks using less electricity than other miners.

Many Bitcoin Cash supports believe that Jihan Wu was just doing business as usual. After all, savvy businessmen always find ways to cut costs. However, critics of Bitcoin Cash say that Jihan Wu spearheaded the movement to hard fork Bitcoin on August 1, 2017, because he was losing his competitive advantage over other cryptocurrency miners.

Shortly after the Hong Kong Agreement, it became apparent that not everyone in the cryptocurrency community agreed to the dictates passed down from the community members who were present at the meeting. Jihan Wu began speaking out against SegWit in favor of increasing the block size. When SegWit gained enough support in the community, Jihan Wu acted quickly to bring Bitcoin Cash into existence.

Segregated Witness removes the possibility of exploiting the AsicBoost advantage that Jihan Wu has a patent on in China. Opponents argue that miners who mine Bitcoin Cash can covertly use AsicBoost to gain an unfair advantage. Since AsicBoost is patented, Jihan Wu has a legal right to higher profits. The closed-source nature of the AsicBoost protocol can be used to centralize cryptocurrency mining even more than it is already. In Jihan Wu’s defense, he denies that his company ever used AsicBoost. Instead, he claims that he switched to Bitcoin Cash because he believes that having a larger data limit on Bitcoin blocks is the best way to scale Bitcoin.

2.) Increasing the Block Size Gives Miners an Advantage

When Bitcoin Cash did a hard fork from the Bitcoin protocol on August 1, 2017, the total amount of data that could be contained in each block increased from 1 MB to 8 MB. To put this into perspective, downloading 20 emails on to your phone requires approximately 1 MB of data. In the Bitcoin network, 1 MB of data can be processed every ten minutes, which effectively limits the number of transactions on the Bitcoin blockchain to 7 transactions per second.
For years, members in the community have been critical of this limit on the transactions. Several solutions have been proposed, including Segregated Witness, Lightning Network, and increasing the block size with a hard fork. The first two options try to solve Bitcoin’s scaling problem without a hard fork of the software.

Segregated Witness was introduced to Bitcoin on August 24, 2017, when a soft fork was released to the network. However, most Bitcoin nodes have not upgraded their version of the Bitcoin software, and therefore, Segregated Witness is only used in approximately 14 % of all Bitcoin transactions. In addition to SegWit, the Bitcoin community has been working on the Lightning Network since 2015. Invented by Joseph Poon and Thaddeus Dryja, the Lightning Network is an additional payment system that is built on top of Bitcoin. As discussed in the following section, the Lightning Network is already reducing the costs of using Bitcoin.

“3 million today. Let’s say that in two years, we have 30 million people. To maintain exactly the same level of fees as we have today, we need a block that is 10 MB in order of magnitude bigger. Five years from that, bitcoin gets really successful and we need to get 300 million people to use it. Now we need 100 MB blocks.”

Andreas Antonopoulos

Unlike SegWit and the Lightning Network, increasing the block size can lead to centralization. As explained by Andreas Antonopoulos, as the size of each block increases, the time it takes for each node to validate that block also increases.

A node cannot begin searching for a new block until they have validated the last block. Therefore, the miner who found the last block has an advantage over the other miners. Even if it only takes seconds for the other nodes to validate the latest block, these seconds could forfeit their chance of successfully finding the next block first. The miner who found that last block can directly begin mining the new block on their old block. This means that the miner who found the last block gains time instead of losing time, which makes the advantage even greater. To compound the problem, large miners are more likely to find the new block because they have a larger share of the mining network.

Critics of Bitcoin Cash argue that larger blocks result in centralization of the miners who validate the transactions. As Jameson Lopp of BitGo discussed on episode 1,064 of the Tom Woods Show, centralization of the network can decrease the security of the network for several reasons. Jameson argues that miners could form a cartel and change the rules of validation. For example, miners could decide that their profits are too low, and they could force a hard fork of the protocol that increases the total number of Bitcoins. Since only a few miners would be validating transactions, the average users of the network would not even be aware that the supply of Bitcoin changed.

In addition to forming a cartel, concentration of miners also makes the network more vulnerable to external attacks. For example, if Jihan Wu’s company and a few other Chinese miners become the main validators of the network, the Chinese government could easily shut down Bitcoin by making mining illegal. Centralization reduces a cryptocurrency’s censorship resistance. Censorship resistance is the ability for any user to make an account or send a transaction without permission. If only certain companies validate transactions, governments can encourage or force those companies to stop certain users from making accounts and sending transactions.

As discussed in the chapterBubble or Hyperdeflation, part of Bitcoin’s value comes from being a global and permissionless store of value. If Bitcoin or other cryptocurrencies become too centralized, their ability to become a global and permissionless store of value decreases. One metric that is often cited as a way to measure the centralization of a cryptocurrency is the number of nodes and the growth of nodes over time of a cryptocurrency. Currently, there are 1,043 nodes running on the Bitcoin Cash network and 10,059 nodes running on the Bitcoin network. However, this metric has limitations. Since no permission is required to run a node, one individual or company can operate several nodes. Therefore, Bitcoin may look more decentralized than Bitcoin Cash because more nodes operate the Bitcoin software, however, this number can be manipulated. A precise measure of centralization does not currently exist.

3.) The Original Bitcoin is Scaling Slowly

If users can send fast and affordable transactions over the original Bitcoin blockchain without the centralization problem of bigger blocks, Bitcoin Cash may slowly lose users. As mentioned in the previous section, the Lightning Network and Segregated Witness are both being used to scale the original Bitcoin blockchain. Currently, 429 nodes are using the Bitcoin Lightning Network and over 1,000 payment channels are open. The Austrian cryptocurrency broker, Coinfinity, successfully completed the first Lightning Network transaction using a Bitcoin Automated Teller Machine (ATM) in early February of 2018. In addition, companies such as Coinbase are implementing Segregated Witness, which will further reduce the amount of data being sent over the Bitcoin blockchain.

c. Hash Rate as a Proxy for Market Sentiment

A proxy for how much “community support” a specific cryptocurrency has is mining hash rate.[5] If a proof-of-work coin, such as Bitcoin, has more hash power than another coin, such as Bitcoin Cash, this is a sign that more people support the former. Large investors, such as exchanges, buy cryptocurrencies from miners directly to save money on exchange fees. Subsequently, miners have more information about demand than average investors. Furthermore, many miners are directly in contact with the developers of the coins that they mine. To forecast earnings and costs, miners can ask developers if and when they plan to change the coin’s mining algorithm. For example, miners who are concerned that Ethereum will switch to proof-of-stake can ask Ethereum developers when they plan to release the proof-of-stake algorithm Casper on the network. Miners use this information to decide which graphics cards to buy because specific cards are better at mining specific algorithms.

In addition to being a metric for a coin’s popularity, the hash rate measures the security of a blockchain network. Blockchains that have more hash power are more secure than blockchains with less power. This is because double spends and 51 % attacks are harder to perform on blockchains that garner larger amounts of capital investment. The website gobitcoin.io tracks the cost of attacking the Bitcoin network over time. If an adversary wanted to attack Bitcoin, they would need to invest approximately $6 billion in hardware alone. This figure does not include electricity costs or cooling. As shown in Figure 13, Bitcoin’s mining hash rate has been considerably higher than Bitcoin Cash’s, which signals that Bitcoin is more secure and more popular than Bitcoin Cash. However, the Bitcoin Cash network still has a much higher hash rate than other cryptocurrencies. This means that Bitcoin Cash is still a potential threat to Bitcoin.


Blockchains are inherently slow and expensive databases, and the cryptocurrency market is divided on how to solve these problems. What we are seeing is the free market at work. Professional and institutional investors that are willing to pay high fees are using Bitcoin, while users who are less willing to pay high fees are switching to other coins such as Dash, Ripple, and Bitcoin Cash.

 Bitcoin Cash is one way to hedge the risk that Bitcoin fails. If code errors are found in second-layer technologies such as the Lightning Network, Bitcoin’s price will be negatively impacted. However, Litecoin, Dash, and lesser-known forks of Bitcoin, such as Feathercoin, also offer a hedge against Bitcoin’s experiment with the Lightning Network and Segregated Witness. Bitcoin has a stronger hash rate than Bitcoin Cash, meaning that Bitcoin is a better store of value because it is more secure. Also, Bitcoin’s code repository on GitHub is more active than Bitcoin Cash’s, which signals that more brainpower is being contributed to solving Bitcoin’s problems. Like putting eggs in many baskets instead of one, prudent investors are diversifying their portfolio across a basket of coins.

In the next edition of the Coin Corner, we plan to focus on “post blockchain” coins such as Hashgraph, and we will cover two other money coins that have unique technological features: Monero and IOTA. If there are specific coins that you would like to have covered, please email us at Crypto@Incrementum.li.

[1] For more information on hard forks, please refer to the “Crypto Concept” chapter at the end of this report.

[2] https://medium.com/@SatoshiPay/satoshipay-partners-with-stellar-org-4288ae0baa72

[3] If a cryptocurrency user pays the highest fee to send a transaction on the Bitcoin network, the average time for that transaction to be confirmed is the same as a transaction on the Bitcoin Cash network: ten minutes.

[4] https://themerkle.com/what-is-asicboost/

[5] Adam Hayes, “What Factors Give Cryptocurrencies Their Value: An Empirical Analysis,” SSRN (March 16, 2015), https://ssrn.com/abstract=2579445.


hard fork

“A ‘hard fork’ occurs when a new rule is introduced, one that is no longer compatible with old software. If you do not join the upgraded version of the blockchain, you do not get access to the new system’s user base and transactional traffic. Think PlayStation 3 and PlayStation 4: In a hard fork, you cannot play PS3 games on PS4 and you cannot play PS4 games on PS3. Should a soft fork take place, sticking with the PlayStation analogy, you would be able to play PS3 games on the PS4 (but not PS4 games on PS3).”

Credit Suisse, Blockchain 2.0

In 2017, several famous forks of Bitcoin were launched including Bitcoin Cash and Bitcoin Gold. More than $44 billion of market value was created via forks last year.[1] This trend will most likely continue during 2018 because forking an existing cryptocurrency is an easy way to create a new cryptocurrency. First, ICOs are illegal in several countries; however, hard forks are not. Second, forking an existing coin automatically gives the new coin a network of users: everyone who held the old coin now has access to the new coin. This eliminates the obstacle of building a network of users from scratch. Finally, forking an old coin can have lower development and marketing costs compared to creating a completely new coin.

What is a fork?

A “fork” in the context of software development describes the creation of a branch of a program that represents a different version. The concept itself is nothing new in the world of software, as it has been around since the 1980s. The first documented fork was MIT’s Lisp Machine OS in 1981.[2] In open-source projects, anyone is allowed to “fork off” a version of existing code. Forks are used when no clear agreement could be established in a developer community, and consequently, community members split off and create altered software code.

So why have forks become such a big deal in the world of cryptocurrency lately? Given the high interest in speculation of blockchain protocols such as Bitcoin, a fork has quickly become much more than just a technical term, as it also has huge financial implication for investors and speculators in cryptocurrencies. Before we assess these implications, let’s take a brief look at what types of forks can be distinguished.

What Types of Forks are There?

1.) Unplanned Forks

Unplanned forks, or consensus splits, occur every time two miners find new blocks at the same time. However, this type of fork is not permanent because the longest chain rule resolves the discrepancy automatically. As soon as the next block gets mined, the longest chain represents the valid one and the other chain is abandoned. Thus, this type of fork does not impact cryptocurrency prices.

2.) Planned Forks

Planned forks activate at a certain block time and are usually announced by the developers of a blockchain protocol. This type of fork only happens if developers intentionally change the code to update the rules of a protocol. Here, two types of protocol upgrades can be distinguished.

a) Soft Fork

A soft fork is a voluntary way to upgrade a software where participants who do not upgrade merely risk out on missing new functionalities. This type of fork is considered to be “forward-compatible” from the viewpoint of existing nodes. In the case of a blockchain soft fork, this means that old nodes will still recognize the new blocks as valid after the update. Thus, old nodes can in principle still use the same blockchain without performing the upgrade. Note that if a soft fork is coordinated by miners, it’s called a “miner-activated soft fork” (MASF), whereas if a soft fork is coordinated by owners of full nodes without the support of miners, it is called a “user-activated soft fork” (USAF).

A prominent example of a soft fork is BIP141, better known as Segregated Witness, which was activated in August 2017 when the majority of miners switched to the new version of the Bitcoin protocol. As can be expected for a soft fork, due to backwards-compatibility transfers between new “Segwit” addresses and old addresses are possible.

b) Hard Fork

A hard fork is the more extreme type of a fork because it is incompatible with previous software, and thus updating becomes necessary for all participants. In the case of a blockchain hard fork, a permanent divergence in the blockchain is caused by non-upgraded nodes not following new consensus rules. Depending on the willingness of blockchain participants to upgrade their nodes accordingly upon the proposal of either the miners (MAHF) or the users (UAHF), two results are possible:

i.) In the case that some nodes do not update and enough support for old chain remains, two competing blockchains result. A well-known example of a hard fork where the old chain remains to be supported to this day is Ethereum, which was hard forked in 2016 after the leading developers of the Ethereum protocol decided to alter the code in an emergency response to the successful attack on “the DAO”. The members of the community who ran full nodes and opposed the hard fork refused to upgrade their nodes. Thus, the old chain still exists to this day under the name Ethereum Classic.

ii) Most of the time, however, all participants support the new chain and move along with upgrading their nodes. In this case, the old chain simply dies off. A recent example is the Ethereum Byzantium hard fork in late 2017, which went through smoothly without any complications and the old Ethereum chain simply ceased to exist.

   c) Spin-off Coins

Aside from forks originated for the purpose of upgrading a blockchain protocol to improve it, the open-source nature of many protocols allows any developer to clone it, add a few new features and release it under a new name. Some well-known examples of spin-off coins based on the Bitcoin codebase are Litecoin, Peercoin, Namecoin and Dogecoin. In 2017 alone, 19 Bitcoin forks were released in total.[3] In many cases, these forks are used as a quick way to capitalize on the public’s familiarity with Bitcoin. In 2017, more capital flowed into new cryptocurrency forks than ICOs. There even exists a website promoting the automated generation of a Bitcoin fork. Thus, some people speculate that more Bitcoin forks will be seen in 2018.

What Implications Do Forks Have For Cryptocurrency Investors?

Forks do not only have technical implications but also affect the price of a cryptocurrency being forked in multiple ways. While unplanned forks (consensus splits) usually do not impact the price at all and the price impact of soft forks is usually limited, it is hard forks that result in two competing blockchains that are most relevant for investors. When a coin is hard-forked, the holders of the original cryptocurrency are automatically entitled to the coins on the new blockchain. This occurs because the private keys that control an address on the original blockchain also control an address on the new forked blockchain. Hence, investors have exposure to the original cryptocurrency and the new hard forked cryptocurrency, which presents an opportunity to profit from the fork. The value of the new coin that results from the fork can be sold. Market participants discount the future value of this coin and bid up the price of the original coin before the fork happens.

As the strategy of buying a cryptocurrency before a fork and selling the new coins after the fork spreads, prices will rise even earlier, as traders try to buy the original coin before others. As a result, the price of a cryptocurrency usually rises before a fork takes place and drops once the fork has occurred. If the hard fork is cancelled, the price of the original chain drops because the discounted future value of the hard-forked coin is zero (see Figure 15).


While forks are a long-standing way to upgrade software protocols without forcing everyone to participate in the upgrade, there are real risks and opportunities for investors. On the plus side, the possibility of forks keeps development teams in check and might prevent rash, hasted decisions. Additionally, forks represent a possibility to create new coins in jurisdictions where ICOs are banned by law, such as China. On the negative side, a large number of spin-off coins may dilute the initial idea of a protocol and split the joint efforts of the community further. One thing is for sure: we are going to see more forks in 2018.

[1] Blockchain Research Institute, tweet on Twitter, Feb 10, 2018, https://mobile.twitter.com/GeniaMiinko/status/962393176769167362.

[2] “MIT Lisp Machine License Signed,” press release, Oct 1, 1980, http://www.textfiles.com/bitsavers/pdf/symbolics/LM2/MIT_Lisp_Machine_License_Signed_Press_Release_Oct1980.pdf.

[3] Olga Kharif, “Bitcoin May Split 50 Times in 2018 as Forking Craze Mounts,” Bloomberg, Jan 23, 2018, https://www.bloomberg.com/news/articles/2018-01-23/bitcoin-may-split-50-times-in-2018-as-forking-craze-accelerates.

Technical Analysis: Is a Crypto Winter About to Start?

Is a Crypto Winter About to Start

After an epic rise from $162 up to $19,886 in just over two years, the price of Bitcoin fell by nearly 70 % between December 17, 2017 and February 6, 2018, to under $6,000. Alternative cryptocurrencies (altcoins) came under tremendous pressure too and some of them lost 80–90 % of their recently achieved all-time highs. Meanwhile, at least Bitcoin was able to recover some of those losses and has reached $11,300 again. Early cryptocurrency investors are still sitting on very comfortable gains, but investors who started during the last two to three months have underwater positions. They are only hoping that Bitcoin & Co. will recover as soon as possible.

“Hodl”– Easier Said Than Done

It is yet to be seen if this relatively new group of mostly inexperienced market participants will be able to follow the well-known battle slogan “hodl”. To cryptocurrency investors, hodl is the strategy of simply holding all purchased coins and tokens through any correction, trusting that the crypto and blockchain technology is still at the very beginning of its development and that in the medium to long term much higher prices are to be expected.

Although this approach has worked extremely well over the last nine years, this strategy must be seriously questioned in light of the current bloodbath and the possibility of another two-year “crypto-winter”. Ultimately, many roads lead to Rome, and every investor or trader has to decide for himself or herself which strategy suits them best.

The pain from the enormous volatility of cryptocurrencies and the incredible patience required by the hodl strategy is simply not for everyone. Here an investor’s psyche is challenged to the utmost: especially if they follow the market closely and regularly. If they look at prices just once every few months, the hodl strategy will naturally be much easier.

Latent Danger of a Bubble Speaks Against the Hodl Strategy

If one considers the possibility that Bitcoin is a bubble, the hodl strategy becomes questionable. Investors who experienced the Internet bubble at the end of the 1990s know that the classic “buy-and-hold” strategy will eventually stop working. An investor could be right for many years, but if they missed a sale during the highs in 2000/2001, they lost their entire investment. Most of the Internet stock highflyers went straight into bankruptcy. A similar fate soon or later will probably impend to most of the altcoin bag holders. In this regard, the hodl strategy must be viewed critically and should at least be accompanied with appropriate risk management.

Trading in the Short to Medium Time Frame

Another approach to making money with cryptocurrencies is short-to-medium-term trading (day trading / swing trading). Using the help of classical chart analysis, cryptocurrencies can be screened for possible entry and exit signals. Of course, here too, many roads lead to Rome, meaning to success. Every trader has his or her personal favorite indicator or setup, and he or she has an appropriate time window and their own risk management approach. It is therefore not possible to come up with a successful strategy for everyone. However, the crypto market is based on the same laws and principles as all other markets. The crypto market is not as distorted by intervention as other markets, such as the bond market, which is heavily manipulated by central bank quantitative easing. Since there is less distortion, many technical analysis strategies and indicators work better because prices are surrogates of real information about market participants. All in all, trading in the crypto market also involves consistent risk and money management and above all a professional approach. Investors who treat their trading as a business will naturally be more successful.


Bitcoin Has Had 16 Days With Losses Greater Than 20% During the Past 8 Years

Source: Coindesk.com, Incrementum AG

The Vast Majority is Losing Money

As the crypto market has seen a clear uptrend over the last two years, all traders should have made good profits. Anyone who has not managed to make money in these markets must seriously ask him or herself if trading is the right occupation. The bottom line is that the crypto market will run the same way as any other market in the medium to long term: an estimated 90 % of traders paying in and only 10 % of traders making consistent profits. For longer-term investors, this ratio improves slightly to around 80 % losers and 20% winners.

The Future is Uncertain

Why does Pareto’s 80/20 rule apply to investors? Quite simply, nobody knows the future, and trading and investing is about psychology. Ultimately, everyone pokes around in the dark: some with more experience and discipline, others completely overwhelmed by their emotions, a third group is an unclear mix of both, a fourth group, the so-called greenhorns (especially active in the crypto sector), and finally and unfortunately, a certain number of criminals or fraudsters!

12 Questions to Check If You Are Investing Responsibly

  1. How well does the trader know him or herself?
  2. How disciplined is he or she?
  3. How exactly did they do their homework and their preparations?
  4. Are they acting emotional or rational?
  5. Are they immediately convinced by exaggerated promises of profits?
  6. Do they take losses personally?
  7. Can they accept losses as part of trading & investing or are they dwelling over their losses forever?
  8. How much do they think they can predict markets with extensive fundamental analysis or sophisticated charting?
  9. Is the trader ready to learn from their mistakes?
  10. Do they take responsibility for their results?
  11. Has the trader accurately calculated the risk before buying?
  12. Are they really aware that no one knows the future? No guru, no famous stock market letter writer, no central banker and no politician…

Know Thyself!

Therefore the ancient Greek aphorism “Know thyself!” applies to any participant in the crypto market as well as in all other markets and of course in life in general. Anyone who made a conscious investment decision must also have a plan to exit. Whether this is based on technical signals, fundamentals, sentiment data, or a mixture is ultimately everyone’s personal decision.

However, there is an important difference in the crypto market. Many “millennials” believe that cryptocurrencies will replace our fiat money system. They are convinced that they do not need to exit because they will be able to directly spend their cryptocurrencies one day. As seductive and idealistic as it may sound, the victory of decentralization is not sure yet! In any case, the established financial system will certainly not give up its power and its control without massive resistance. Therefore, a partial exit into other asset classes may be part of a prudent strategy if an investor’s portfolio becomes too heavily concentrated in crypto assets.

Sentiment Analysis – the Discipline of Kings

Sentiment analysis sheds a questionable light on cryptocurrencies because the mood of the crypto market continues to be extremely optimistic, if not idealistic. For market participants interested in the medium to long-term timeframe, sentiment analysis is probably the supreme discipline. Anyone who understands mass psychology can determine highs and the turning points of long-term trends with amazing accuracy. Ultimately, market prices are created by constantly fluctuating perceptions of market participants. Subsequently, there can never be an objective or fair price of an asset. If a financial asset is heavily discussed in the mainstream press, it can be assumed with great certainty that everybody is invested in it already and that there will be no more new buyers. Therefore, it would be advisable to do the opposite of the masses once such signals appear.


Source: CNBC.

The problem, however, lies in the relatively small number of crystal clear signals. For example, the front-page of the German newspaper Bild showcased gold bars during the top of the gold rally in August of 2011. Regarding Bitcoin, the online edition of the Süddeutsche Zeitung reported Bitcoin’s colossal price gains exactly two days before its 2013 high on November 28, 2013. As everybody knows, Bitcoin crashed from $1,156 to $162 in the following months and disappeared for two years into a crypto winter. However, sometimes the signals can be accurate. On December 17. 2017, CNBC delivered a perfect sell signal with their headline: Analyst who predicted Bitcoin’s rising now sees it hitting $300,000–$400,000.

Crypto Sentiment is Hard to Grasp

In addition to the famous front-page indicator, there are of course many other approaches to measure the mood among market participants. In the young crypto market, there is no established sentiment data available. Futures on Bitcoin have been trading for only two months with relatively manageable volume. As a result, traditional sentiment data such as put-call ratios, Sentix, and sentiment surveys are not available to the extent that investors are familiar with from other markets. The website sentimenttrader.com provides a well-functioning sentiment indicator called Bitcoin Optix. Here, an automated algorithm compares Bitcoin’s expected future volatility with the current price behavior and the discount of a Bitcoin ETF in relation to its NAV. Recently, the sentiment indicator reported an extremely pessimistic sentiment, but this has strongly recovered over the last couple of days.


The latest sentiment data clearly shows that the early February recovery in Bitcoin brought sentiment back to very optimistic levels.

Source: Sentimentrader.com.

Alternative sentiment indicators are also of interest in the crypto sector. Twitter tweets, Reddit posts, the size of a telegram group, or simply the contents of YouTube comments can be helpful for gauging the market’s mood. For example, investors can find numerous comments that expect an asset’s price to rise to the moon very shortly below any YouTube video about finance, gold, or crypto. As a true contrarian, that should give you something to think about.


Right after the launch of Bitcoin Futures trading in December, Bitcoin lost 70%.

Source: Midas Touch Consulting/Tradingview

Currently, only major financial and economic news portals have added a new crypto section; however, more data analysis and reporting are needed because new trading opportunities via Contracts for Difference (CFDs) and Bitcoin futures are available. For example, data on Bitcoin Futures are available in the U.S. Although futures exchanges were originally created primarily to hedge future fluctuations in market prices (for example, agriculture producers), hedge funds and private traders use futures markets to profit from price fluctuations. Since all of the futures markets in the USA are regulated, the Commodity Futures Trading Commission (CFTC) publishes the current positions of traders every Friday. This information is completely new to the unregulated crypto market and should become very helpful and valuable in the medium term. In the short term, however, only a very thin data series is available so that comparisons and classifications of the current positions have to be treated with caution.


Commitment of Traders (CoT) for Bitcoin

The CoT Report shows that hedge funds are largely short while amateurs are mostly long. Source: CFTC

Based on the current CoT report for Bitcoin Futures, it is obvious that traditional funds (asset managers / institutional investors) are not heavily invested in Bitcoin. Similarly, there is virtually no position of hedgers (intermediary dealers). This is because there are not many securitized products available on Bitcoin, which would have to be hedged via the derivatives market.

In contrast, the “leveraged funds” (hedge funds etc.) have significantly expanded their short positions in recent weeks, which means that they occupy 50.2 % of the open interest. The “other reportables” (dealers with systematic trading approaches and high volume) show more or less balanced positions. Finally, the small speculators continue to be massively long, representing 48.5 % of all open interest.

The large short position held by hedge funds and at the same time the strong bullish position of small speculators rather point towards further falling prices. It is also noticeable that the correction in December began pretty much on the day when Bitcoin Futures started to trade. However, an obvious causality is not easy to detect.

Bitcoin Technical Analysis

After such a brutal crash, it always makes sense to take a look at the big picture. Otherwise the short-term high volatility may cause investors to lose sight of the larger trends in the market. On the weekly chart, Bitcoin’s long-term uptrend is still intact. Basically, the price for one Bitcoin has returned back to where it was trading at the end of November. So far, the sharp correction ended just below the typical 61.8% – Fibonacci retracement. If the overall correction continues, the next lower retracement level (76.4 %) would be around $4,818. This level coincides with the intermediate high at $5,000 from last September. Therefore, technically it is still possible that the price of Bitcoin could fall towards $4,500 – $5,000 in the coming months. This assumption is also confirmed by the fact that Bitcoin temporarily dipped below its green uptrend channel. Despite the fast recovery and the move back into the channel, the general support of this uptrend channel has been weakened.


The weekly chart for Bitcoin still has an uptrend intact.

Source: Midas Touch Consulting, Tradingview​

In the “worst case” scenario, one target of the correction could be another significantly lower uptrend line (currently around $2,075). The lower Bollinger Band ($3,236) also offers a lot of space and will need much more time to reach current price levels above $11,000. A very encouraging signal, however, is the new buy signal that comes from the slow stochastic oscillator. After reaching its oversold zone this indicator now has turned and would have a lot room to move higher.

On the Bitcoin daily chart, the recovery, which began just two weeks ago, has already made up well over a third of the previous correction, and has now reached the classic 38.2 % Fibonacci retracement around.


On the daily chart Bitcoin’s recovery is very overbought. Prices above $12,200 are bullish, any move below $8,000 is very bearish!

Source: Midas Touch Consulting, Tradingview

$11,300. Bitcoin’s price trajectory for the next couple of months will most likely be determined at this important resistance zone. If Bitcoin prices can breakout above $11,300, bulls will be back in charge and should quickly push prices towards $14,500. If the bulls instead fail at this first Fibonacci retracement, it would be a clear sign of weakness. In that case, everything will depend on the support zone around $8,000. The crypto markets are either facing a winter or the beginning of the next rally.

Using a slightly more complex Fibonacci projection consisting of the first down wave from $19,889 to $10,700, and the bounce back up to approximately $17,200, the 1.236 % extension would be at $5,891 and the 1.382 % extension at $4,550. The first extension was already reached when Bitcoin hit a low at $6,000. The 1.382% extension confirms further downside potential towards $4,500 to $5,000. Given the strongly overbought situation on the daily chart, a pullback is getting more and more likely in short term.

Despite the strong recovery, one should realistically assume that the crypto market is not out of the woods yet. The correction that begun two months ago may take a few more months, if not a year or two, or even longer. Bitcoin could possibly fall back to about $5,000 and theoretically correct as low as $2,500. For most of the altcoins this would mean dramatic losses again. Only a move above $12,200 and especially above $14,500 will increase the odds that the correction is over, and Bitcoin is on the way to new all-time highs.


Facing the ongoing crypto euphoria, it cannot be ruled out that Bitcoin and the crypto sector are already in a corrective winter cycle. The future is unknown, but this young asset class will likely experience further correction. In addition to the described blind idealism, the rather bearish CoT data and the questionable technical picture do not yet speak for a rapid rebound or rallies to new all-time highs. However, cryptocurrencies and the blockchain technology will not disappear. On the contrary, after a hard and possibly bitter winter, Bitcoin prices beyond $50,000 and $100,000 are certainly possible in the coming decade. If Bitcoin prices move above $12,200 and $14,500 in the short term, reconsideration of the bearish outlook is expected.


ThisTrader Joke: The markets may be crashing but I sleep like baby at night: every hour, I wake up and cry. is the heading

Source: singularityissonear on Reddit

Incrementum Insights: How Will Cryptocurrencies Change Finance?

How Will Cryptocurrencies Change Finance

“Virtual currencies mark a paradigm shift in how we think about payments, traditional financial processes, and engaging in economic activity. Ignoring these developments will not make them go away, nor is it a responsible regulatory response. The evolution of these assets, their volatility, and the interest they attract from a rising global millennial population demand serious examination.”

Commodity and Futures Trading Commission Chair Christopher Giancarlo

We want to sincerely thank Stefan Kremeth for contributing to this chapter. Stefan Kremeth is the CEO of Incrementum AG in Liechtenstein. Prior to joining Incrementum, Stefan worked for UBS, Sal. Oppenheim, and Lombard Odier. Mr. Kremeth is also the writer of Stefan’s Weekly, a weekly newsletter that covers practical questions concerning equities, commodities, and pension systems, amongst other financial topics.

In this chapter, the CEO of Incrementum Stefan M. Kremeth shares his experience with cryptocurrencies and the blockchain technology. Coming from a financial background, Kremeth finds the crypto space to be faster and more inclusive. In this interview, we discuss some of the misconceptions about cryptocurrencies and what role he sees for his firm in this space.

Can you tell us a little bit about Incrementum and about yourself?

I cofounded Incrementum AG, a wealth management firm, in 2013. Today, the partners of the company expanded to encompass Ronald Stöferle, Mark Valek, and Dr. Christian Schärer.

My career in finance began when I was a young man. After completing an apprenticeship at UBS, I worked for UBS in various countries. After some time, I switched employers and eventually held executive positions in two private banks. Parallel to this, I attended the Swiss Banking School and I acquired an executive MBA in international asset management from the University of Liechtenstein. After which I continued my studies at Durham University in England. I am currently a part-time doctoral student in the business school at Durham.

How is the crypto space different from the traditional finance space?

It is very different. First of all, everything is quicker and faster. Costs have been minimized. A broader part of the population can access financial services in the crypto space compared to traditional banking. People who normally would not have access to capital or banking facilities can have access to financial services via Internet.

In my opinion, this “inclusive” aspect of the blockchain technology is revolutionary. Capital market transactions can become easier, quicker, cheaper, and available on a global scale thanks to the blockchain technology.

Do you see any common misconceptions about cryptocurrencies and blockchains?

Yes, actually. There is the misconception that intangible assets do not have value. However, this is not true: some cryptocurrencies are backed by tangible assets, some provide access to potential earnings, and some provide access to a network.

We can look at this argument the other way around as well. If I am wrong, and it is the case that intangible assets have no value, then this would apply to a lot of other asset classes as well. For example, fiat currencies are mostly intangible. Although fiat currencies are backed by a government that can tax income, that does not make fiat currencies tangible in my opinion.

However, I think we are the very beginning of the blockchain revolution. At Incrementum, we believe that a lot of the cryptocurrencies that we see today are going to disappear in the short to mid-term. There is potential for some to stay, and for some to stay for a long time. If cryptocurrencies stay around, I am convinced that regulators will regulate cryptocurrencies like every other investment, which they should do in order to level the playing field for all financial assets.

The technology will stay. If a young person has a fantastic idea but is sitting somewhere in Bangladesh with limited access to financial markets, the blockchain technology enables him or her to tap into the global capital market. With an Internet connection, he or she can find people who are willing to fund their idea in exchange for virtual tokens. The blockchain helps people make businesses, and I find this fantastic.

I am not a conspiracy theorist, but historic events, regulations, and high capital requirements restrict market access to newcomers. The blockchain technology can reduce the barriers to capital and financial services, such as lending, borrowing, and saving.

Do you see a role for Incrementum in the crypto space? Incrementum has the Crypto Research Report, but do you have any other products in the pipeline?

Yes, since we see a future for the blockchain technologies and cryptocurrencies, we are working on crypto-related products. As you mentioned, we produce a quarterly research report on cryptocurrencies called the Crypto Research Report. We decided to do a Crypto Research Report because we wanted to build-up our own base of knowledge on the topic. Second of all, we want to inform a broader audience about what is actually happening in this space. The report is unbiased and informative. We never give investment advice. Our other report, In Gold We Trust, has become an industry standard for gold market participants. Like In Gold We Trust, we hope that the Crypto Research Report becomes a go-to guide for financial market participants interested in the blockchain technology.

Also, we have seen demand in the market for a crypto fund. Not everyone wants to open wallets at exchanges that have limited history or no history. A lot of people want to have consolidated reports on their assets for tax and regulatory reasons. We believe that a regulated product that stores a diversified portfolio of cryptocurrencies will be interesting for investors. Of course these investors must know that cryptocurrencies are very volatile. However, a company that is regulated by financial market authorities, has transparent accounting, and a good reputation can help investors enter this market with the appropriate risk management. Together with a custodian bank and a fund administrator, we have filed a proposal at the Liechtenstein Financial Market Authorities for a license for a multi-currency crypto currency fund and have received approval some days ago!

You mentioned that the Crypto Research Report does not give investment advice. Why is that?

There are various reasons. First, a neutral and informative report can be used by a much wider audience, which will increase our brand exposure worldwide. We want to signal that Incrementum is ahead of the curve by informing readers about the market. If our report is well done, it has the potential to become the standard for crypto research in the entire industry. Second, there is a regulatory reason. We do not want to find ourselves in a situation where our readers take investment decisions solely based on our report. As a wealth-management firm, our readers could come after us if they lose money because of our advice. Incrementum is working with academics at the University of Liechtenstein to bolster the Crypto Research Report’s scientific rigor and relevance; however, we make the academic research easy for everyone to understand.

If the report is free, how does the report contribute to Incrementum’s bottom line?

Thanks to the neutrality of the report, we are able to find sponsors such as Bank Vontobel, who benefit from cryptocurrency research and increased brand recognition in the cryptocurrency space. We like to have sponsors from various business fields, and our sponsors can advertise services such as fund custodianship, cryptocurrency exchanges, and cryptocurrency trackers. We are looking for more sponsors, and we encourage prospective firms to contact us if they are interested.

10 Facts About Max Tertinegg, the CEO of Coinfinity

10 Facts About Max Tertinegg, the CEO of Coinfinity

“The open-source nature of public blockchain protocols, combined with intrinsic mechanisms to break down monopoly effects, mean that the vast majority of this economic surplus will accrue to users. While tens or perhaps hundreds of billions of dollars of value will also likely accrue to the cryptoassets underlying these protocols and therefore to investors in them, this potential value will be fragmented across many different protocols and is generally insufficient in relation to current valuations to offer a long-term investor attractive returns relative to the inherent risks. The one key exception is the potential for a cryptoasset to emerge as a dominant, non-sovereign monetary store of value, which could be worth many trillions of dollars.”

John Pfeffer

We want to sincerely thank Max Tertinegg for contributing to this chapter. Max Tertinegg is the CEO and founder of Coinfinity. Coinfinity is one of the largest cryptocurrency brokerages in Austria. Recently, Coinfinity was the first company to successfully complete a transaction using the Lightning Network on a Bitcoin Automated Teller Machine. In addition to managing Coinfinity, Max is a Bitcoin activist and musician.

This chapter features a sneak peek into the life of the CEO of Coinfinity and advisor to the Crypto Research Report, Max Tertinegg.

1.) How did you get into the crypto space?

I heard about Bitcoin in 2011 in a Podcast and was fascinated by the idea of a non-governmental form of money. To be honest, I thought about Bitcoin as just a purely idealistic concept without any real-word relevance and did not expect it to grow that fast. But here we are now …

2.) What does your business do?

We are a cryptocurrency broker, helping people buying and selling Bitcoin and other cryptocurrencies. Also, we consult on the topic of blockchain technology.

3.) What is the competitive advantage your company has over other firms in your industry?

We focus on customer service and try to help people getting into this new space safely and with caution.

4.) As a crypto broker, what is the most challenging part of your job?

Keeping up with the enormous pace – the crypto scene is developing very, very fast.

5.) Some investors claim that high-frequency trading and intermediary markets exist for cryptocurrencies. Do you think that exchanges manipulate prices on a small scale so that limit orders are executed, which generates handsome transaction fees for the exchange?

I’m pretty sure that crypto markets are manipulated by one player or another. But I guess that’s the case in any market without too much regulation and is something that can’t be avoided.

6.) What is the biggest opportunity for young entrepreneurs who want to make a successful business in the crypto space?

Having a mindset advantage over other players in the market who still think that crypto is just a fad that will go away at some point.

7.) What is the biggest threat to the crypto space?

Internal risk (technological and political obstacles, e.g., the block size debate) and external threats like over-regulation or potential prohibition of cryptocurrencies. But I’m pretty optimistic that all these threats won’t stop Bitcoin and other cryptocurrencies.

8.) Where will the sector be at the end of 2018?

Many banks and traditional financial players will be active in the space. We won’t have mainstream adoption yet, but cryptocurrency users will be in the hundreds of millions.

9.) Where will the sector be at the end of 2025?

It will be ubiquitous – like the Internet today.

10.) Do you mind telling us what coins you like most at the moment?

Bitcoin and Ardor.

11.) During your career as a crypto broker, what were the strangest and the funniest things that happened? Please give us a story.

People have to fill in their Bitcoin address on our web platform when buying Bitcoins from us. It was a funny moment when a customer in our office tried to put in his postal address and then complained that the form won’t accept it.

Quarterly Review Q1 2018: Ikarus Edition


“In 1924 John Maynard Keynes stated that an excellent economist has to possess a unique combination of gifts. He had to be a mathematician, historian, statesman and philosopher. In regard to Bitcoin, this list needs to also include several more traits. An excellent crypto-economist should also be a software, hardware and blockchain specialist on top of the above. Faced with these almost insurmountable intellectual hurdles it is easy to see why traditional economists have a hard time joining in the discussion.”

Jochen Möbert, Deutsche Bank

Bitcoin flew too close to the sun. Now the eyes of the world are upon the crypto market. With all the consequences that follow. Argentina is the land of tango, steak, and inflation. From one day to the next it can happen that those delicious empanadas cost an unsuspecting tourist 30 to 40 percent more. Locals are accustomed to getting a new menu with every pizza delivery due to higher prices. Many have long since renounced the Peso, which is abused again and again by the government and central bank for public financing. Major purchases are paid for in U.S. dollars. In the countryside, there are even a few communities that organize trade amongst themselves, completely without the use of state money.

Of all places, in 2018 this is the country where the most powerful people on the planet will discuss regulations for Bitcoin and other cryptocurrencies, as Argentina will be hosting the G20. Apparently, the topic is already on the agenda for the meeting in March – according to U.S. Treasury Secretary Steven Mnuchin. He is not alone: the French Finance Minister Bruno Le Maire and the German government have declared Bitcoin a top priority for G20.[1]

The issue at the G20 will of course not be if the deflationary Bitcoin as an actual viable alternative to the broken system of fiat currencies. Rather, the discussion will focus on the looming triple threat: terrorists, money launders, and criminals – all of whom have apparently discovered Bitcoin for their illegal businesses.

Will these discussions lead to anything? Multiple press releases and declarations will most likely be published and cause some disruptions on the cryptocurrency market. However, no one really believes this could kick-start a global set of rules. Even on the off-chance that two states as opposed as China and Japan could come to a consensus, there are countless smaller countries that aren’t going to be part of the discussion at all.

To a certain degree it would be preferable if states would and could control the abuse of cryptocurrencies – and we are not talking about terrorists or money launderers here. The price explosion over the last months of 2017 has given way to an immense wave of criminal activity, scams and hacks. The dip in the market back in January 2018 just caused for the list of distressing occurrences we were collecting for this report to grow at an uncontrollable speed.

Let’s back up and go back to the beginning. There is much more going on in this sector than the call for regulations on the one hand and the surge of illegal profiteers on the other. The new boom has made room for many a promising project of the second and third blockchain generation. The blockchain has not only made it into the mainstream but is also slowly seeping into daily life. More and more existing companies are taking a closer look at the blockchain technology.

We are well aware that the title “In Case You Were Sleeping” is slightly mean. The developments in this field are running at such a speed that even the most attentive spectator is likely to miss a good deal of the action. In this chapter we will try and eradicate the white noise and block out the useless information circulating out there in the Internet and in the media. We will break it down to the most essential pieces so that our readers are better informed. This chapter will consist of four areas which shaped the market in the last months of the year 2017 and the beginning of 2018 :

  • Bubble & Crash
  • Hacks & Scams
  • Reaction & Regulation
  • Adoption & Trends

a. Bubble & Crash

It all happened as it always has. Bitcoin reached an all-time high and then predictably it fell again. All common stages of the classic bubble were accounted for: euphoria, infatuation, denial, fear, desperation. When Bitcoin fell under $7000 and the market capitalization of the whole sector halved, the funeral preparations by nay-sayers were already underway. The fact that cryptocurrencies have already survived five such bubbles, as the brilliant analysis by Michael B. Casey shows, is dutifully ignored by said grave diggers.[2] Figures 1 and 2 show Bitcoin’s largest rallies and drawdowns since 2010.

In general, we are talking about old-school economists who said it from the start: Bitcoin is a scam. On February 2, Nouriel Roubini took the cake by claiming we are witnessing “the largest bubble in the history of mankind” because Bitcoin had lost 60% of its worth.[3]  Uber-Keynesian Paul Krugman could hardly contain his joy over the Bitcoin crash – he even created a new word for it: “cryptofreude” alluding to the German word “Schadenfreude” (i.e. to revel in someone else’s pain).

According to Roubini and Krugman Bitcoin will fall to zero and the whole crypto sector will simply dissolve. Of course, this may happen. However, we are still baffled by these economists who so profusely claim to know it better than anybody else. Especially considering that Bitcoin has seen five bubbles, crashes, and recoveries. Each time gaining in worth – which actually speaks in favor of Bitcoin.

Roubini and Krugman can end up being right, Bitcoin could drop to zero and then disappear. If this should be the case and Bitcoin is already a thing of the past at the time of publication, please accept our sincerest apologies for our harsh tone of voice. Nonetheless, if history has taught us anything it is that mainstream economists such as Roubini and Krugman have a very hard time grasping the matter of Bitcoin. Strangely enough, both do not let an opportunity pass to voice their opinions in the media on a matter they do not seem to understand.

Jochen Möbert from Deutsche Bank explained the predicament of economists as follows: “In 1924 John Maynard Keynes stated that an excellent economist has to possess a unique combination of gifts. He had to be a mathematician, historian, statesman and philosopher. In regard to Bitcoin, this list needs to also include several more traits. An excellent crypto-economist should also be a software, hardware and blockchain specialist on top of the above. Faced with these almost unsurmountable intellectual hurdles it is easy to see why traditional economists have a hard time joining in the discussion.

All’s well that ends well? Not so fast. Möbert also criticizes the other side: “Bitcoin enthusiasts tend to simplify the topic at hand and predict a complete market absorption and completely ignore the negatives of Bitcoin in comparison with conventional currencies and the traditional banking business. They underestimate how many people are actually scared off by a global, decentralized technology outside the legal sphere.”

We could not agree more; however, in Nouriel Roubini’s defense one should add: He recognized the potential for a scam epidemic in the blockchain sphere and rightly so, criticizes it. The problem is, Roubini is convinced that the whole thing is a scam, one huge Ponzi scheme. Even Jamie Dimon, CEO of JP Morgan, has called Bitcoin a scam.[4]

We strongly disagree: This initial scam phase is part of the Wild West stage of any new unregulated market, and Bitcoin and the blockchain have simply a maturing process ahead of them to weed out the bad seeds. In this respect, the crash of the past months is to a certain extent desirable because it is cleansing the market of criminal, half-baked ideas. That is how free market economy works. But it might be a tall order to expect mainstream economists to recall this after more than a decade of bail-outs and quantitative easing.

In our first report we already predicted that it may come to an ICO mania, which in turn would cause a bubble and the inevitable crash. As did many others. Even the founder of Ethereum, Vitalik Buterin, warned of the bubble.[5]  Based on current analysis we can also expect it not to have been the last ICO-bubble.

In actual fact larger companies are looking into generating money via ICOs. Some may all the same be more in the category of “marketing-stunt” as the proposed revival of Kodak via an ICO. Others, such as the chat-app “Telegram” that apparently wants to raise up to a billion dollars, should be taken more seriously. Clearly exemplified by the sheer number of self-proclaimed Ethereum-successors (like NEO, EOS or Cardano) we can safely say the ICO craze has not yet reached its peak. These so-called platform coins will probably be the true winners of 2018, but more on that later.

b. Hacks & Scams

No one can deny that the crypto market has a dark side. The dark web itself would not be able to function the way it does without Bitcoin (and privacy coins such as Monero). Hacks and scams have been part of the deal of getting into cryptocurrencies from the very beginning. The rise of Ethereum and the aforementioned ICO boom together with the general growth of the market cap in the last months of 2017 as a whole have increased these dubious developments immensely. As prices began to fall, so did some of the dubious projects. The following chapter will highlight only a few of the possible problems which one is confronted with in the crypto sector.

Hackers Steal Half a Billion – is North Korea to Blame?

In a hack targeting the cryptocurrency NEM, which has great similarities with the hack against the Bitcoin exchange Mt. Gox a few years ago, more than $500 million were stolen in February. Once again it hit a Japanese exchange: Coincheck. It was the same mistake as with the Bitcoin heist at Mt. Gox: Coincheck had stored NEM reserves in a “hot-wallet”, i.e. in an account with connections to the Internet.

Usually exchanges store these reserves in “cold-wallets”, out of reach of prying hacker hands. Although this can be considered the largest crypto theft of all time, amazingly enough the exchange survived the hack. They also stated that they plan to reimburse the affected clients. The plot twist: The South Korean secret police voiced the suspicion that North Korea is to blame for the hack.[6]

Confido and Bitconnect: Gone With the Wind

Bitcoin has already infiltrated our daily usage of language. Without hesitation we talk of blockchains, ICOs and we even say “hodl” when we mean hold. One of the more undesirable words of the new vocabulary is “exit scam”. It describes exactly what we think when we hear the term. It is a scam in which a lot of money is collected, and the initiator then bags it all and makes a run for it.

Once the term was only used for shady exchanges that eventually took off with their investor’s money. Since the ICO boom, new versions of the old trick have arisen: in comes Confido. This coin was distributed via ICO at the beginning of November 2017. We will spare our readers from having to read about the details of the apparent “business model” of the coin. The ICO raised a total amount of $375,000 dollars. This money then quickly vanished together with the founders. On November 14, 2017, the coin was worth $1,20, it subsequently crashed to 2 cents. The website, blogposts, and all social media channels of Confido: deleted.[7]

The prize for the most dramatic exit, however, still goes to Bitconnect. Without exaggeration, this is probably the biggest rip-off the crypto market has seen so far. Bitconnect promised its investors ridiculous returns. All they had to do was invest their Bitcoins in Bitconnect. The extent of the whole story is not known, but the Bitconnect token had a market cap of more than 2.5 billion when the whole operation came crashing down. At the height of the game the value was more than $400, after the crash it was merely $5.[8]

Sadly, frauds like these have become commonplace on the crypto market. Similar scams in Spain and in Austria have recently been discovered.[9]  The simple fact that these Ponzi schemes do fall apart as soon as the price begins to sink is not further noteworthy, they always do in the end. What sets Bitconnect apart, however, is the sheer volume of the whole operation. Plenty of Bitconnect advocates actively posted on YouTube and in turn gained more followers and investors. Unfortunately, the end of Bitconnect, whose founders are still unknown, has not lead to the end of YouTube scammers, nor to the improvement of the YouTube crypto content. But this in itself would be worth a whole chapter.

What else?

Sadly, if they are not careful, investors can also lose money due to minor hacks. These hacks or scams sometimes do not make it into the media, as they are almost seen as part of the deal. Here is a minor example: Hackers targeted the Blackwallet website and stole $400,000 worth of XLM. A similar case occurred to the Monero wallet mymonero.com in which a hacker managed to get away with money in the form of Monero in mid-December.[10]

This story never broke out of the Monero-Reddit thread into the wider view of the public, as seemingly only a small portion of investors were damaged. Both cases seem to be based on skillful phishing tactics which enabled the hackers to gain access to the DNS servers. Worst of all, it is almost unavoidable for users to become victim of such attacks.

Users of the popular exchange Etherdelta had to learn this the hard way when more than 300 ETH – at the time worth $250,000 were plundered from the site.[11]

Iota users who used an online seed-generator when creating their wallet would also come to regret this later: Iota coins in the total worth of almost $4 million were silently removed from the wallets of these users in January. The way in was via the online seed generator.[12]  Needless to say, such heists occur predominantly when the prices are high and there is much to gain. We therefore expect to see a pick-up of fraudulent activity as soon as the bull market resumes in full.

c. Reaction & Regulation

Even if you tried to follow the news regarding various plans and statements for regulations of cryptocurrencies by different states and government authorities 24/7, you would still be bound to miss half of it. It has become the fashion of the day for politicians and jurisdictions to try to understand the phenomenon that is the blockchain, and they are desperately trying to keep up with it and its consequences. This has given way to a mass of attempts to create a regulatory framework on the go. Everyone is confronted with the same problem. In a very good paper concerning this issue, Jochen Möbert from Deutsche Bank highlights one core obstacle. “Attempts for a regulatory framework are faced with the complication that a global, decentralized currency has many alternatives.”

As previously mentioned, discussions have reached the highest levels of government and will be a topic at the G20 summit. Möbert is skeptical if these talks can be constructive: “The implementation of international regulations, for example on G20 level, is all the more illusory as different attitudes of governments world-wide towards regulatory needs in this sector are already apparent. For example, Canada and Japan are obviously aiming for a more Bitcoin-friendly regulatory framework.”

Japan is a noteworthy exception in several regards.[13] Bitcoin is a legal payment method, and the general public seem to not have few if any reservations regarding the cryptocurrency. A different analyst from Deutsche Bank even suggested that (at one point at least) almost 40 % of the total crypto volume came from Japan.[14]

Other Bitcoin-friendly countries are small and well known within the international finance sector. We are of course talking about Switzerland and Singapore. The latter, which is extremely popular for companies wanting to initiate an ICO, has already expressed in quite clear terms that they do not intend to ban the trade of cryptocurrencies. As the Deputy Primeminister Tharman Shanmugaratnam puts it: “This is an experiment. It is still too early to say if cryptocurrencies will prevail.”[15]

Switzerland is very keen to show how open it is towards Bitcoin and the blockchain. The area of Zug has unofficially been named “Cryptovalley”, and in some places you can even pay your taxes via Bitcoin – this is rarely taken advantage of, but it is a statement. The Swiss Finance Minister Johann Schneider-Anmann has made such a case for cryptocurrencies that the Crypto Finance Conference in St. Moritz felt the need to give him an award for his efforts. His reasoning for his positive approach towards cryptocurrencies reads as follows “Innovations have helped this country achieve greatness. We have now finally reached an innovative moment in the finance world. Cryptocurrencies are part of the fourth Industrial Revolution. We are merely looking to see what new possibilities it can bring.”[16]  Russia’s Sberbank is also betting on Switzerland as their location in regard to cryptocurrencies.[17]

Until recently, Austria had a finance minister who was and proud fan of Blockchain, Harald Mahrer.[18] He even initiated the “Blockchain Roadmap Austria”. However, after the last elections he stepped down, and since then nobody else seems responsible for the matter. A positive development and sign that the topic may still be taken seriously is the founding of the Institute for Cryptoeconomics at the University for Economics in Vienna.

Like in many other European countries, the Austrian government is waiting on directive from the European Union on how to proceed regarding any regulations. The Union itself has so far only taken one vital step. That is to include crypto dealers and exchanges to the money laundering regulations. This means the same “know-your-customer” (KYC) which apply to banks also apply to the crypto market.[1]  Interestingly enough, back in 2015 the European Court of Justice already ruled that sales tax should not apply to Bitcoin.

Nonetheless, the question still arises on a regular basis. We believe, so far, Europe seems to be doing quite well in matters of the crypto market. This observation is further supported by the fact that no European measure has led to disruptions, panic, or huge falls in the market, as they were always well foreseeable and in good measure.

A further European country – outside the EU – which has a made a name for itself on the Bitcoin-friendly side of things is Iceland. Many Bitcoin mining farms are to be found there due to fortunate weather conditions and cheap power supply.

China, on the other hand, has opted for a less friendly and more chaotic approach. Not a day goes by in which the West is safe from dreadful news from the Yellow Dragon. The meme “China bans Bitcoin” has reached cult status in the scene. Peking has in part started to tackle one topic after the next since the second half of 2017. First, they forbade ICOs, then all exchanges were expelled from the People’s Republic, lastly even Miners, that had sprouted in China due to very low energy prices, were silently asked to leave. A complete ban on crypto trading lies in the air, as even the “Great Firewall”, China’s prime Internet censorship tool, was used to deny Chinese users access to international market platforms.[20] [21] [22]

This strict approach has many a reason: Firstly, China has an authoritarian government. Just because the country opens itself up to capitalism, does not mean that it was ever part of the plan to give billions of Chinese economic freedom and independence – at least not without the “protection” of the yuan. There is also a great worry that assets will slowly but surely make their way out of the country and most probably to the United States of America. Russia, also under authoritarian rule, has similar issues. The main difference being the Chinese hunger for and joy in gambling.

The same goes for South Korea where the Bitcoin mania has reached a pinnacle unheard of on these shores. The government has also introduced regulations in the vain hope to cut back the hype. Even though western media has reported the ban of exchanges, this has yet to be realized.[23]  The crypto bug has reached all levels of the nation. Civil servants and politicians have been caught having used insider information of the government’s steps to profit from certain crypto trades based on this knowledge.[24]

India’s finance minister Arun Jaitley apparently called for a ban on Bitcoin and caused a ripple through the crypto market. India’s Bitcoin industry and western media reacted turbulently until his statement was corrected as he had actually said in a speech that Bitcoin cannot be accepted as a legal method of payment. This may not be praise and support, but it is also far off from a ban. India has set up a research team to look into the subject in more depth.[25]

The USA have done the same, under the name Task Force. U.S. authorities are having a hard time dealing with the topic of Bitcoin. Nonetheless, a hearing of the managers of CTFT and SEC at the beginning of February was largely welcomed by the community. The authorities of course used this chance to voice criticisms and underline how necessary regulations are for the market – but generally the optimism and belief in a long-term chance of survival toward cryptocurrencies and the blockchain was surprising. Subtext: Bitcoin is here to stay. [26]

d. Adoption & Trends

Bitcoin and the crypto sector as a whole have undergone a huge surge this past year. The exchanges already had a hard time coping with all-time highs of many altcoins this past summer. The boom that was to follow in the winter months put this new and very young infrastructure for blockchain assets to the test. Many of the large, international exchanges had to halt the registration process of new customers for a couple of weeks. Others were simply not attainable in certain parts of the world. For example, the ever-popular exchange Kraken in Europe. The app Coinbase is already known for hiccups in the system when the price moves drastically in either direction.

It therefore comes as no surprise that more and more suppliers are rushing into the market hoping to pick up some crumbs of this profitable cake. Take the Asian exchange Binance, for instance. A mere few months old and already it is classified as a top league player. And this trend shows no sign of stopping. More established providers, especially in the field of finance apps, have made first moves to expand into the crypto market. One of the most famous is Revolut which lets you buy Bitcoin, Ethereum, and Litecoin.[1]  It does have one major drawback though, the app does not let you store your amassed wealth of coins on a wallet. According to Revolut, their clients do not ask for this option that is why it is not offered. This is astounding because this means that next to long-term investors and the altcoin gamblers there are casual Bitcoin buyers out there who only want to profit from the price. By extension this leads to an ever-growing number of proxies for Bitcoin in the form of certificates or CFDs.

In 2017, Ethereum was a huge game changer in the world of crypto. It introduced the concept of smart contracts and ICOs into the blockchain. It did not take long for imitations and competitors to appear in the market. Antshares, now called Neo, rose to fame in the summer months and is known as “the Chinese Ethereum” as it also has smart contracts on the blockchain which in turn acts as a platform for other products and tokens. One of the founders of Ethereum set up a further competitor: Cardano; and then there is also Icon, “the Ethereum of South Korea” and last, but definitely not the least, EOS, the “Ethereum killer”.

Which of the above will be the last one standing? Will more than one or even none survive? At this moment in time nobody can really tell. For now, all we can say is that these platforms seem to be more attractive for investors than singular projects or the “old school” cryptocurrencies. It is very likely that Ethereum can use its first-mover advantage, together with technological advances and a huge community of developers, to extend its lead on the competition in 2018. A so-called flippening, in this case that Ethereum takes the first spot in the market, is well in its reach, especially as banks such as UBS and Barclays have Ethereum on their radar.[28]

Yet another player who has specialized in “simple ICOs” and has caught people’s eyes with the projects Mobius and Kik is Stellar (XLM). The chat app Kik initiated their ICO on Ethereum before they decided to swap to the Stellar blockchain. “We’ve been using Ethereum to date, and to be honest I call it the dial-up era of blockchain,” said CEO Ted Livingston. Another company betting on the Stellar blockchain with its cryptocurrency MobileCoin will be Moxie Marlinspike’s chat app Signal, the ICO is said to happen this year.

The largest ICO in the pipeline for 2018 is yet another chat app: Telegram. It is held in high regard already and the company plans to collect $1 billion with their cryptocurrency Gram. There are no official plans yet, although, there is a whitepaper circulating on the Internet. This largest ICO is, however, supposedly taking place on the “old school” Ethereum blockchain.[29]

If Kik, Signal, and Telegram as relatively small players in the social media and chat sector are already creating crypto coins, how long will it take Facebook and Co. to do the same? And if Robinhood, Revolut and Cash as small players in the finance sector are betting on cryptocurrencies, how long can your trusted old bank wait before it finally catches on?

[1] Sujha Sundararajan, “Mnuchin Calls for Crypto Regulatory Talk,“ Coindesk, Feb 2, 2018, https://www.coindesk.com/mnuchin-talk-crypto-regulation-g20-summit/.

[2] Michael B. Casey, “Speculative Bitcoin Adoption/Price Theory,” Medium, Dec 27, 2016, https://medium.com/@mcasey0827/speculative-bitcoin-adoption-price-theory-2eed48ecf7da.

[3] “US-Ökonom Roubini: ‘Die Mutter aller Blasen platzt jetzt’,” Die Presse, Feb 2, 2018, https://diepresse.com/home/wirtschaft/boerse/5365158/Bitcoin_USOekonom-Roubini_Die-Mutter-aller-Blasen-platzt-jetzt.

[4] Hugh Son, Hannah Levitt and Brian Louis, “Jamie Dimon Slams Bitcoin as a ‘Fraud’,” Bloomberg, Sep 12, 2017, https://www.bloomberg.com/news/articles/2017-09-12/jpmorgan-s-ceo-says-he-d-fire-traders-who-bet-on-fraud-bitcoin.

[5] Avi Mizrahi, “Ethereum Founder Vitalik Buterin: We are in an ICO Bubble,” Finance Magnates, Sep 11, 2017, https://www.financemagnates.com/cryptocurrency/news/ethereum-founder-vitalik-buterin-ico-bubble/.

[6] Sohee Kim, “North Korea Susptected for Hatching Coincheck Heist,” Bloomberg, Feb 6, 2018, https://www.bloomberg.com/news/articles/2018-02-06/north-korea-is-said-to-be-suspected-of-hatching-coincheck-heist.

[7] Arjun Karpal, “Cryptocurrency start-up Confido disappears with $375,000 from an ICO, and nobody can find the founders,” CNBC, Nov 21, 2017, https://www.cnbc.com/2017/11/21/confido-ico-exit-scam-founders-run-away-with-375k.html.

[8] “Cryptocurrency Market Capitalizations,” CoinMarketCap, https://coinmarketcap.com/currencies/bitconnect/

[9] Nikolaus Jilch, “Ermittlung gegen ‘Optioment’: Ein Bitcoin-Pyramidenspiel aus Österreich,” Die Presse, Jan 31, 2018, https://diepresse.com/home/wirtschaft/boerse/5363950/Ermittlungen-gegen-Optioment_Ein-BitcoinPyramidenspiel-aus.

[10] https://www.reddit.com/r/Monero/comments/7kmzkv/psa_regarding_recent_reports_of_mymonero_thefts/

[11] Stan Schroeder, “Cryptocurrency exchange EtherDelta got replaced with a fake site that steals our money,” Mashable UK, Dec 21, 2017, https://mashable.com/2017/12/21/etherdelta-hacked/#rKj9VSYqwqqJ.

[12] Avi Mizrahi, “IOTA Attacked for Subpar Wallet Security Following $4m hack,” Bitcoin.com, Jan 22, 2018, https://news.bitcoin.com/iota-attacked-for-subpar-wallet-security-following-4m-hack/.

[13] https://www.ft.com/content/b8360e86-aceb-11e7-aab9-abaa44b1e130

[14] Tyler Durden, “One Bank Believes It Found The Identity Of Who Is ‘Propping Up By The Bitcoin Market’,” Zero Hedge, Dec 14, 2017, https://www.zerohedge.com/news/2017-12-14/one-bank-believes-it-found-identity-who-propping-bitcoin-market.

[15] Lubomir Tassev, “No Strong Case to Ban Crypto Trading, Singapore Says,” Bitcoin.com, Feb 7, 2018, https://news.bitcoin.com/no-strong-case-to-ban-crypto-trading-singapore-says/.

[16] “Bundesrat über Kryptowährungen: ‘Die Schweiz soll zur Krypto-Nation werden’,” SRF, Jan 19, 2018, https://www.srf.ch/news/wirtschaft/bundesrat-ueber-kryptowaehrungen-die-schweiz-soll-zur-krypto-nation-werden.

[17] Sperbank setzt für Cyberwährungen auf die Schweiz,” Handelszeitung, Jan 30, 2018, https://www.handelszeitung.ch/invest/sperbank-setzt-fur-cyberwahrungen-auf-die-schweiz.

[18] https://futurezone.at/thema/start-ups/oesterreich-will-zentrum-fuer-blockchain-technologie-werden/288.232.922

[19] “EU: Einigung auf strengere Regeln für Bitcoin-Handelsplattformen,” Die Presse, Dec 15, 2017, https://diepresse.com/home/wirtschaft/boerse/5339451/EU_Einigung-auf-strengere-Regeln-fuer-BitcoinHandelsplattformen.

[20] Lulu Yilun Chen and Justina Lee, “Bitcoin Tumbles as PBOC Declares Itinitial Coin Offerings Illegal,” Bloomberg, Sep 4, 2017, https://www.bloomberg.com/news/articles/2017-09-04/china-central-bank-says-initial-coin-offerings-are-illegal.

[21] Chao Deng, “China Quietly Orders Closing of Bitcoin Mining Operations,” The Wall Street Journal, Jan 11, 2018, https://www.wsj.com/articles/china-quietly-orders-closing-of-bitcoin-mining-operations-1515594021.

[22] David Meyer, “China Enlists Its ‘Great Firewall’ to Block Bitcoin Websites,” Fortune, Feb 5, 2018, http://fortune.com/2018/02/05/bitcoin-china-website-ico-block-ban-firewall/.

[23] Dahee Kim and Cynthia Kim, “South Korea says no to ban cryptocurrency exchanges, uncovers $600 million illegal trades,” Reuters, Jan 31, 2018, https://www.reuters.com/article/us-southkorea-bitcoin/south-korea-says-no-plans-to-ban-cryptocurrency-exchanges-uncovers-600-million-illegal-trades-idUSKBN1FK09J.

[24] Kevin Helms, “South Korean Officials Caught Trading On Insider Knowledge of Crypto Regulations,” Bitcoin.com, Jan 18, 2018, https://news.bitcoin.com/south-korean-officials-caught-trading-on-insider-knowledge-of-crypto-regulations.

[25] Sindhuja Balaji, “India Is Not Banning Cryptocurrency, Here’s What It Is Doing Instead,” Forbes, Feb 6, 2018, https://www.forbes.com/sites/sindhujabalaji/2018/02/06/india-is-not-banning-cryptocurrency-heres-what-it-is-doing-instead.

[26] Lucinda Shen, “Bitcoin Traders Are Relieved at CFTC and SEC Cryptocurrency Senate Hearing Testimony,” Fortune, Feb 7, 2018, http://fortune.com/2018/02/06/bitcoin-price-cftc-sec-cryptocurrency-hearing/.

[27] “Am Handy tummeln sich die Banken,” Die Presse, Dec 17, 2017, https://diepresse.com/home/meingeld/aktien/5340102/Am-Handy-tummeln-sich-die-Banken.

[28] Michael de Castillo, “UBS to Launch Live Ethereum Compliance Platform,” Coindesk, Dec 11, 2017, https://www.coindesk.com/ubs-launch-live-ethereum-platform-barclays-credit-suisse.

[29] Mike Butcher & Josh Costine, “Telegram plans multi-billion dollar ICO for chat cryptocurrency,” TechCrunch, Jan 8, 2018, https://techcrunch.com/2018/01/08/telegram-open-network.

Advisory Board Meeting Q1

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Ronald Stöferle 

Hi and thanks for joining. To give you some background on our company; Incrementum was founded in 2013 in Liechtenstein and we’re currently managing five investment funds. We’ve also got a wealth management department which is led by our CEO, Stefan Kremeth, and we also have a research department that produces the “In Gold We Trust report”, which is well known all over the globe. Similar to the approach of the In Gold We Trust report, we launched the first edition of the crypto research report in December.

We’re truly looking forward to this discussion. We like to think out of the box and we are very open to the crypto space, especially since we believe in the free markets and  competing currencies.

Mark Valek 

I think we are covering two very emotional topics, gold and cryptocurrencies. Sometimes you have different opinions between people who like gold and people who like cryptos. I believe we are at the intersection. We are not only open-minded towards crypto, but we actively embrace it because it’s a huge influence on monetary affairs. If you close your eyes to the developments in the crypto scene, you won’t get the big picture. Crypto is now a part of the investment ecosystem and it will stay a part going forward.

Demelza Hays 

Wonderful. I think we should allow each of our advisers to briefly introduce themselves and explain which company they represent and how they became interested in cryptocurrencies. Stefan, why don’t you start?

Stefan Wieler 

I’m currently director of the Board of Goldmoney, former BitGold. We used to be primarily a precious metal custodian and we have a platform which allows customers to open an account the same way you would open a PayPal account and then purchase precious metals, primarily gold, but also silver, platinum and palladium, in a very efficient and cost effective way. Basically, we are a custodian and we provide a platform for you to trade. But there is no third-party risk with us because the metal is held on customer accounts. I would say the unique feature of what we offer is that you can pay using your precious metals, i.e. you can transfer within the network. You can pay via a MasterCard, et cetera, and the end goal is that you can pay everywhere with the gold directly, therefore we allow merchants to accept precious metals as a form of payment.

For context I’ll give you a bit of background on Goldmoney. The company was founded about 17 years ago by James Turk, and in the beginning they only offered custodial services. In 2014 Joshua Crump and Roy Sebag founded a company called Bitgold that developed the platform that allows Goldmoney’s current payment feature. That company did an IPO in 2015 and I was a Series A investor. I was still working for an energy hedge fund; I’ve been a commodity analyst for all my life, mostly on energy.

Shortly after the IPO, Bitgoldpurchased Goldmoney, merged the two companies and called it BitGold. From the start BitGold accepted cryptocurrencies as a form of funding your account. Clients would send us Bitcoin and Ethereum and we would sell those right away on an exchange and purchase metal for the client. And recently we started offering cryptocurrency storage on the platform. Right now we offer cold storage the same vaults we store metal and our customers seem to love it. Consequently, in the last seven weeks of 2017 we had about $22 million worth of sales. At the moment we only do Bitcoin and Ethereum, but this will change.

We are also working on a custody solution for institutional investors called Blockvault. The product allows for a full audit with an external audit company like we currently do for gold and other precious metals. For example, KPMG will be able to count the inventory of a client’s cryptocurrencies without being able to read the key, which is essential. We can store it in the same vaults we store precious metals and it will be fully insured. We should be ready by the end of the second quarter 2018 to launch this service. I’m a director on the Board of BlockVault.

Demelza Hays

Thank you. It’s interesting to hear that there are institutional grade vaults coming now for cryptocurrencies. That is really a unique selling point.

Stefan Wieler 

We are not the first to offer cold storage in a vault in Switzerland. There are other companies that are doing that in Zug. But those companies simply put a server in a vault and if your cryptocurrency is on that you can’t audit it. It’s like a memory stick. What we are working on is a way that an external auditor can audit the entire inventory. That’s the only way you can get insurance.

Demelza Hays

Let’s move on to Oliver; would you kindly introduce yourself?

Oliver Völkel 

My partner and I, Arthur Stadler, have a law firm in Vienna. We specialize in cryptocurrency and blockchain technology related fields of law. My background is banking, finance, capital markets law and I’ve done a little transaction work in the past. Somehow cryptocurrency related law fits nicely into the spectrum of legal fields that I have dealt with in the past. We are advising a big number of Austrian and international clients, and also banks, on cryptocurrency related matters. I can’t tell you much about our clients, but by way of example we have helped with initial coin offerings in Austria to establish it as a new form of financing.

Demelza Hays

Wonderful. I think it is public knowledge that you helped the first Austrian ICO HERO, isn’t that correct?

Oliver Völkel 

Yes, that’s correct.

Demelza Hays

How much did they raise?

Oliver Völkel 

They raised about US$2 million.

Demelza Hays

Okay, wonderful. I guess there are more projects in the pipeline?

Oliver Völkel

Correct. In fact there are huge projects in the pipeline from internationally well-known corporates and firms who are acting on the global stage. Very soon we will announce a new ICO that we are doing for an internationally known television company. This seems to be a new way to raise funds.

Demelza Hays

Wonderful. Thank you so much for taking time to join us today, Oliver. To conclude, Max, would you like to introduce yourself?

Max Tertinegg: 

Yes, sure. We started our company Coinfinity in 2014 and personally I’ve been involved in the crypto space since early 2011. Consequently, I’ve seen a couple of highs and lows in the crypto scene. Our company is a crypto coin broker with different sales channels. We started with the first Austrian Bitcoin ATM in our office in Graz and then expanded to around 30 ATMs all across Austria. We have a voucher project which is called Bitcoinbon where you can buy Bitcoin vouchers at about 5,000 points of sale in Austria. We have a web platform with a few tens of thousands of users where you can buy and sell cryptos. In 2018 we are focusing on developing a private banking department for high net worth individuals because we see a lot of demand for this service.

Demelza Hays

Excellent. Bitcoin Swiss, which is a brokerage in Switzerland, began with ATMs, and I found it surprising that they are applying for a bank license now in Switzerland but at the same time they sold their ATM network. I always thought it would be cool if I could have a crypto bank account and then go to a Bitcoin ATM and withdraw from my account directly. But that doesn’t exist quite yet.

Max Tertinegg:

Yes, and also just to add a note to this. There is a big problem with Bitcoin ATMs regarding banks and co-operations with banks, because banks just hate cash because cash is the tool for money laundering. Therefore, if you have cash coming in or going out of your crypto business it’s really hard to do co-operations with banks. This might be a reason why they sold the crypto ATM network.

Mark Valek: 

Are you guys applying for a bank license?

Max Tertinegg:

No, not yet, but just today I talked to Oliver about maybe getting a Zahlungsdienstleisterlizenz for Austria to do some payment processing, but not for a banking licence, not yet.

Demelza Hays

Very good. Thank you so much to all of our advisers for joining us today. I guess we can go ahead and begin the discussion. To open the board, I would like to talk about the market tanking the past month. We’ve had about a 50% decline in Bitcoin and we’ve had an even further decline in the total market cap of all the cryptocurrencies, and I would like to know if any of you have any reasons for this development.

Max Tertinegg:

I think there is one very obvious reason; the market was too overheated. There was a really big disconnection between prices and everyday usage and technology developments. What we have seen repeatedly over the last couple of years is that the market gets hyped up to a point where it’s not sustainable. I am personally very happy that we have had this correction because now we can focus more on technology and on development of coins.

Oliver Völkel

I heard a rumour that there were a couple of big exchanges in the past that were influencing the price to go up on a very unsustainable level. I have no idea if that’s true or not. I also heard a rumor that regulators had something to do with the crash due to their concerns about cryptocurrencies. However, in my opinion I don’t think that a single country’s regulator matters much for the global cryptocurrency market.

Stefan Wieler

There is one thing that is fascinating about the main cryptocurrencies; they have a very strange supply function, which you won’t find in nature. For example, let’s compare Bitcoin to a commodity because I think cryptocurrencies are commodities.

For a traditional commodity you basically deploy more capital, you put more energy in it, you put more labor and time in, and at some point in the future you’ll get more out of it. The price incentivizes you to produce more. Cryptocurrencies, for obvious reasons, don’t function that way, which makes cryptocurrencies inherently volatile. And you don’t really have a supply and demand function where the price can really impact supply at all, it can only impact demand.  

Crypto miners were making huge margins, which were not sustainable. There is nothing in our economy over the past couple of thousand years that would have had these margins. There is no margin like this that has been sustainable, unless it’s a government monopoly. I therefore think this is a very healthy correction. I don’t know what triggered the sell-off, but I think this is a sustainable business for the future, not just some pump and dump bubble thing like tulips.

Ronald Stöferle

Great thoughts. The market was obviously overheated, and I think there were various indications of that. Looking at investor behavior people were just trying to rush in as fast as they could. This is obviously a sign of an overheated market. It’s worth pointing out that  cryptocurrencies is a retail-led market. Other markets are usually led by institutions, and the institutions come in first, and retail comes in last. How do you guys see this institutional side of the equation? Are they coming late? Are they coming at all in a significant matter? I think the capacity and potential is much higher from that side.

Stefan Wieler

We talked to some of the institutional guys. I would make a distinction between traditional institutional investors and the players that are in the crypto space right now, which at this point are so big we have to consider them institutional. Look at who is holding most of the coins; it’s a very small group of people that controls the mining space and owns a lot of the assets. But I think what you are referring to is the traditional institutional guys, which from what I know, are few. I know some institutional investors that are completely private, that run their own money. I know personally that they’re actually in this space for a very, very long time but they do not invest client money in this. I think that’s something that is still missing in the space and that’s because you don’t have proper custody at the moment. That’s why these companies cannot invest in cryptocurrencies directly. They therefore invest in companies that are involved in the crypto space, for example our company. So you don’t have these traditional money managers actively investing in the space the same way they’re actively investing in the equity markets. It will be interesting to see what happens when that market develops, e.g. if it takes out some of the volatility.

Ronald Stöferle

Thanks, Stefan. Mark, Oliver, anything to add on that point?

Oliver Völkel

From a legal perspective large institutional investors, pension funds or banks, would perhaps be interested in cryptos, but they have a strict regime of capital requirements. EU requirements prevent them from investing in all sorts of assets. So from a legal perspective this could also be a reason why we don’t see much involvement of institutional investors yet, at least in the European Union.

Ronald Stöferle

Do you think, Oliver, that there would be at least some leeway for big institutions, insurance companies, pension funds etc. to have an allocation to cryptos if they are classified as a new, alternative asset class?

Oliver Völkel

The problem is not so much the legal classification of the asset class, but rather what an investment in such an asset class would entail for the capital structure of the bank, pension fund or the institutional investor. To give you a brief overview, the capital requirements regulation stipulates that you have to have a certain amount of Tier 1 or Tier 2 capital and the way you calculate how much capital you need is by multiplying your investment with the risk factor. The less risk something has, the less equity you need for an investment. If the calculation for cryptos shows that you need 100% security deposit it simply is not interesting for any institutional investors because it’s a very expensive investment. They would rather invest in something less risky and do a lot more investments, because the equity requirement is lower. I think this is the reason we don’t see much investment from banks or institutional investors.

Stefan Wieler

Currently you don’t even have hedge funds being as active as you would think, considering the potential upside and high volatility. This is not even because of regulatory reasons, but because they don’t want to. To quote somebody we talked to: “I cannot give some kid $50 million to have some data on a server somewhere in a garage in Silicon Valley”. So even hedge funds, who can do what they want with their capital, are not as invested as they want, or not invested at all, because they don’t trust the crypto space. They don’t trust this thing and they don’t trust themselves being technologically savvy enough to have it in their wallet and put it in the safe.

Demelza Hays

Excellent point. Private keys get hacked very frequently, as we saw with a cryptocurrency company in Liechtenstein called Aeternity, They were attacked during the parity hack and I think they lost approximately $20 million within a matter of seconds. Getting hacked is definitely a risk.

Ronald Stöferle

It seems that the factor preventing cryptocurrencies becoming more institutionally accepted is primarily an infrastructure problem. Would you agree with this conclusion?

Stefan Wieler

Yes, I think that’s what we’re hearing when he talks to major players. Currently they are all pointing out that infrastructure is a big issue. And obviously there’s also still a lack of a rigorous regulatory framework

Demelza Hays

The media is reporting that Bitcoin lost 50% of its value since December 2017, but it is interesting to consider that in January 2017 Bitcoin was at $1,000 and now it’s at $8,000. So we still had a 700% annual increase despite a 50% drop in the past month. And I guess another question for that topic is do you see this trend changing? What is your outlook for the first and second quarter of 2018?

Max Tertinegg:

I’m driven from a technological perspective rather than from an investor’s perspective. We recently made the first lightning transaction on a Bitcoin ATM worldwide in our Bitcoin ATM in Graz, which was really awesome to see, that you can send Bitcoin without hitting the blockchain with very low fees at a fraction of a second. This promise of a lightning network that has been floating around for the last two or three years will come into existence in the next couple of months. I think that this will be a very big factor. This development will give a much bigger usage or utility to the whole Bitcoin network because currently I would say 95% of all people who use Bitcoin are using it as a form of investment, but not as a form of payment. So the payment system character of Bitcoin hasn’t been very big. But with the dawn of the lightning network I think that we will see an explosion in cryptocurrency payments and this will on the other hand give Bitcoin a much bigger value. I’m not sure if this will happen by the end of the year but my outlook is very promising. So I think that Bitcoin easily could rise to $50,000 this year.

Ronald Stöferle

Great, Max, then just to put on my investment hat, so long Bitcoin, short Bitcoin cash?

Max Tertinegg:

Yes. Yes, definitely.

Ronald Stöferle

Okay. Thank you.

Demelza Hays

Stefan or Oliver, do you have an outlook for 2018?

Oliver Völkel

I would actually refrain from giving any outlook because I am not confident enough in my ability to predict the market. So I really can’t add to this.

Stefan Wieler

I’m glad I’m not the only one. I just don’t know. I used to work for investment banks and I had to make an oil price forecast and I always hated that part of the job because you were almost by definition wrong. But with proper analysis, you can identify what drives the price of a commodity and if you did a good job, you can – more often than not – say in which direction it will go. With Bitcoin I have absolutely no idea what is driving the price at the moment. I can see cryptocurrencies having amazing utility as it develops, but currently I would say 99.9% is for speculation, it’s really not used as a form of payment at all. And it is not used like money at all. Nobody that is not printing or not mining it can pay their employees in cryptocurrencies because your labour cost can basically go up tenfold overnight. But as it becomes a form of money I see how the utility of this thing goes up. Over the long run I think the way is clearly up, but what happens over the next quarter or two, I just don’t know. My big philosophical view is that in the end it’s an alternative form to fiat currency the same way gold is. Because I’m very bearish on the fiat currency system I believe that anything that is an alternative to fiat currency will go up in fiat currency terms over time.

Demelza Hays

Definitely. So all three of you work with cryptocurrency in your professions; are you seeing an increased interest from potential clients?

Stefan Wieler

Yes, definitely. We allow people to hold cryptocurrencies on the platform. We have only offered storage since November and it has gone absolutely through the roof. We only offer Bitcoin and Ethereum at the moment and we actually haven’t launched BlockVault yet. What we offer right now is simply cold storage in a secure vault. As I mentioned we sold about 22 million coins in the last seven weeks of 2017, we facilitated about $22 million of sales. If you scale that up to a full year it equates to about $150 million, which is already a tenth of coin base. The interest probably has come off a little bit during the sell-off, but it’s still very good. Given what happened with the price, the interest has been stellar.

Demelza Hays

Wonderful. Oliver or Max?

Oliver Völkel

What’s very interesting is that in particular German corporations are moving to Austria to do crypto business in Austria, to headquarter their businesses here and then try to go back to Germany with their services because it’s simply much easier here in Austria to do cryptocurrency related business because of the regulation and laws that apply in Austria compared to Germany. Also, we have seen a shift in the structure of who is actually trying to get advice from us because in the past couple of months we have seen a lot of private investors who have fallen for scams and who are trying to find recourse now, which is quite difficult due to the nature of cryptocurrencies, if they are gone they are usually gone. But I’ve heard from well-informed circles that the law enforcement agencies already have quite sophisticated methods of tracing cryptocurrencies. But I think this is a sign that we need to do more educational work in the public to bring closer to people the dangers that are associated with using cryptocurrencies. But for some people if they are dealing with cryptocurrencies, it doesn’t feel like real money. That’s why they spend it more loosely or they don’t really think about it that much. And also cryptocurrencies are associated with giant profits in a matter of months. The most ridiculous promises that are made online don’t actually scare people; they really believe it. I have therefore seen an increase of individual clients who have fallen for such scams. If it continues it has the potential to damage the whole effort that we put into this to make cryptocurrencies become more mainstream. I think this is something we should all work together with to try to avoid.

Demelza Hays

Yes, that’s a great point. I was thinking the other day about how the saying “10X”. 10X wasn’t really a saying before the cryptocurrency market existed. The next question that I wanted to move on to was the relationship between cryptocurrencies and gold.

Stefan Wieler

Philosophically gold and cryptocurrencies are linked, because they are an alternative to fiat currencies. Gold fulfills this role because it’s a store of value, it’s a unit of account and it’s a form of exchanging value. Gold is a better store of value than fiat currencies because fiat currency hasn’t really been a stellar store of value, at least for a long time. The idea of cryptocurrency is similar to that, moreover it is outside of the banking system and it is not controlled by a government in the sense that you cannot just print it. That said a lot of gold supporters hate cryptocurrencies and vice versa. Gold and cryptocurrencies are two different forms of money that at the moment exist side-by-side and both have a similar promise; if the fiat system completely implodes you are not going to lose your savings. But they obviously work very differently. The most important cryptocurrencies don’t have a proper supply curve like gold has, so you can’t really make more if you want more or need more. Then obviously also if you’re a speculator, cryptocurrencies are great, if you’re a speculator in gold, that actually is not really a good deal, because gold just preserves your value. So if you look at it over 100 years it just buys you roughly the same things. So you’re not really getting rich with gold at allBut if gold goes to $10,000, it’s because the USDhas collapsed.

But with cryptocurrencies, those gains were possible, so it’s a very, very different world. There has been an argument that the sell-off in gold in late December was somehow linked to the rise of cryptocurrencies, that bigger investors sold gold to buy cryptocurrencies. I cannot confirm that. I don’t think that happened at all. Now on the way down, gold hasn’t done anything at all. So gold actually caught up to probably where fair value was before the cryptocurrency sell-off started, and then during the entire sell-off it’s been almost flat. So there is really no link between the two.

Demelza Hays

Those are good points. I know a few people that realized gains in the cryptocurrency market and invested in gold in mid-December.

Stefan Wieler

Cryptocurrencies  opened up the discussion among millions of people for the first time in several generations about what money is. 2008 didn’t do the trick, and gold going from $200 to $1,800 and back to $1350 didn’t do the trick either, but cryptocurrency seems to have done the trick, that people are actually starting to think about what money actually is Once you actually start thinking about what money is you instantly lose confidence in fiat currencies. I can imagine that people who realize gains on cryptocurrencies buy gold. We’ve seen it since we started the business; people actually send us cryptocurrencies and buy gold with it. One reason might be because it might be the easiest way for them to send us money, but the other thing could also be that they just want to realize their gains, and rather than holding it on a bank account, they’re holding precious metals with us.

Ronald Stöferle

Something I loved when I found out about the cryptocurrency space was that people were actually asking the question: “what is money? What are the advantages or the disadvantages of fiat money, and what are the advantages of gold?”

I also like that people in the crypto space come from a more technical side and that they are finding out more about the monetary system. But it seemed that during the mania so many people rushed in and didn’t care about those topics at all. They were mostly buying because of rising prices, fear of missing out and so on. So I think that the discussion in the crypto space changed. I think there are major similarities between Bitcoin and gold, but there are also major differences.

If you just compare the size of gold to the crypto space, gold is well valued at roughly 7 trillion at the moment, while the cryptos’ market value is around $400 billion. I think the most important difference is first of all the liquidity, gold is traded at roughly $250 billion a day, as we all know mostly on the futures market, so it’s not physical trading or physical gold trading taking place, while Bitcoin as I’m reading now, is trading at roughly $2 billion. I’m not sure if that amount is accurate, but in a nutshell liquidity is a huge difference. And I think there’s still very little overlap with cryptocurrencies and gold on the sources of demand and supply. This is something that I told James Turk three years ago when he was on a panel at a big mining conference in Zurich. The whole gold community hated this new competition coming up. I love the fact that James Turk embraced the idea of competing currencies and actually was very open when it came to this new form of technology because money is basically a technology, nothing else.

Stefan Wieler

Liquidity is actually a very interesting question; how much of the $2 billion do you think are people basically moving cryptocurrency from one wallet to the other, i.e. it’s not really traded?

Max Tertinegg: 

Actually it’s not $2 billion, but rather around $20 billion.

Mark Valek: 

Can you elaborate on the $20 billion, how much you think is actually real and how much is just basically a number?

Max Tertinegg: 

It’s a question of what is real. So it’s more real than maybe the gold volume, because there’s no, or very little, paper Bitcoin. On the contrary there’s paper gold and real gold and currently we are in a situation where we only have real cryptocurrencies. So in that sense, it’s more real than the gold volume. But on the other hand if I have an exchange with a 0% fee, I can do 10 million a day trading volume without any cost. I therefore don’t think you can draw too many conclusions from these numbers.

Demelza Hays

I think that’s a great point. The OTC markets are estimated to be much larger than the exchange markets for cryptocurrencies. For example, Bitcoin Suisses has a prop book of approximately $3 billion and they’re settling their own trades within house and they don’t report any of the transactions to any type of data repository. The total global daily volume is much higher than what is reported on coinmarketcap.com.

Stefan Wieler

I think the point that Ronni made about liquidity is definitely valid. Gold, for now, is still a way more marketable commodity than Bitcoin, for instance. But I think it’s also quite an achievement already that it has come so far and volatility and marketability probably go hand-in-hand to some extent. My outlook is that if this monetization process continues it will lead to falling volatility and increasing marketability, or higher liquidity.

Demelza Hays

To conclude on the gold topic, we are not sure that crypto is bringing more absolute money into gold, but I think we can be sure that the median age of gold investors is decreasing.

Max Tertinegg: 

Yes, that’s a good point. I think it brings interest for a completely new generation. Anecdotally, everybody I know from my Wall Street days have Bitcoin, and some Ethereum. They all say it’s their insurance policy. And they all understand gold as well in that form. So gold used to be their insurance policy, now Bitcoin is their insurance policy. And I agree with Ronni, I think the overlap is relatively small. But this could change if you have more companies like Goldmoney, and if gold and cryptocurrencies become much more fungible, which it really isn’t at the moment at all.

Demelza Hays

That’s an excellent point. I read in the news recently that Perth Mint is looking at backing a cryptocurrency with gold, and I know there’s been a few other projects where they’ve had difficulties with custodianship, but I think it’s an interesting idea to try to make gold easier to use digitally .

Stefan Wieler

A gold-backed cryptocurrency will obviously be very different to what we have right now because with a gold-backed currency there is an element of trust, which obviously is the whole idea of cryptocurrencies; that you don’t need to trust anybody. So the minute you need somebody to store your gold, you need to trust that institution. But why would you do that? Why would you have something like a blockchain which is all about trust, but then you have to trust the company anyway to store your gold?

Ronald Stöferle

That’s a great segue to the last topic we want to discuss, which is the legal aspect and regulation. Oliver, you said from your point of view as a lawyer, it is really exciting to be in this space because you can actually influence legislation and new laws. I’d like to know if you think financial market authorities and governments underestimated the crypto space initially, but with the rapid price developments in the last couple of months they might be more open to it? I think proper regulation of the sector might turn out to be a big advantage, especially as it creates some sort of security for market paricipants. I’d love to hear your thoughts on the most recent developments, and also where you’re expecting the legal side to be a couple of months or years from now.

Oliver Völkel

What we have to keep in mind, and let me stress this point, there is really no regulation-free space. No matter where you look, there is always a law that you can apply to something. The same is true for cryptocurrencies. The fun part of doing the legal work is that you can influence legislation. People want cryptocurrencies to become more secure; I have said before, with regard to initial coin offerings, that it’s not the Wild West. There are regulations that you have to adhere to, and if you don’t, either you fall under the capital markets law which is quite severe since there’s criminal punishment looming ahead of you, but also if you’re creating just regular token, there’s legislation you have to adhere to, which would be the consumer rights directive, for example. So there is no law-free space, so to speak.

That’s my first remark. The second thing is that in early 2017 regulators were extremely interested in cryptos; they were more cooperative with giving you their legal point of view. They don’t really do that anymore, or if they do, they simply give you a short sentence and that’s it; end of discussion. So from my point of view, it has been a little bit more difficult to deal with the regulators. I have only heard in the news that Germany and France were proposing, or will be proposing, a regulation draft. I have unfortunately not had access to this draft. It’s a huge piece of legislation that could influence the whole industry.

A second piece of legislation that will pass soon is the update of the fourth anti-money laundering directive, which will for the first time include a definition of what a cryptocurrency actually is. But this piece of legislation only applies to a small area of law, or a small area of the industry, namely people who are selling, purchasing and selling cryptocurrencies, or wallet providers. These will be covered and they will also have to adhere to anti-money-laundering rules in the future. So those are the two major developments that I see in the future. And from an Austrian point of view I can give you an interesting update, which is not at the legislative level but on the executive level. The Austrian financial authorities, recently released a note to all the finance centres in Austria where they say that a price increase would fall under capital taxation, which is actually wrong and which really raises tricky questions and difficult legal questions because it puts the burden to battle any wrong decisions of the finance centre on the people

Demelza Hays

If I could just ask, in what sense is it wrong? Because I think that other countries such as Switzerland consider crypto to be subject to a capital gains tax.

Oliver Völkel

It’s certainly wrong, in Austria at least, if you are selling cryptocurrencies and you are doing this either as a private person or as a small entrepreneur, then it would fall under your regular income tax, any price increase, or any gains or any profit that you have achieved from it, and not under capital gains.

Demelza Hays

I see, okay. Yes, that’s the case in Switzerland, it’s only professional investors that go over certain thresholds. So in Austria, retail traders  have to pay that tax as well?

Oliver Völkel


Ronald Stöferle

I’d like to hear from Max, because he told me once that it was really hard to get a bank account for his company and I know that his business is really growing quickly. So I’d like to hear a bit more from Max regarding his most recent experiences regarding legislation and the legal side.

Max Tertinegg: 

I unfortunately still have to report the closing of our bank accounts. But I think this will get better once we have this fifth anti-money-laundering directive in national law, because the banks will have clear regulations. So currently people are sitting in compliance offices in banks and are not really sure what this whole crypto thing is. At the end of the day they are people responsible for the relationship with companies like us. So I don’t blame them, but it’s still hard for us to develop proper banking relationships. On the other hand, I have to say that there is a small number of very interested, mostly private, banks who actively are seeking co-operation with us. In the meantime I think we have six different working bank accounts, but we only use them for specific purposes.

There is interest from the banks but still the whole banking scene is very rough. Recently the Austrian financial market authorities sent a letter to all of the Austrian banks informing them that they should do more research into money coming from exchanges or companies like ours. I can also unfortunately report that many of our clients get their money frozen by the banks, e.g. if you want to sell 100 Bitcoins to us and you get a large amount of Euros, then you might be in the unfortunate situation that your money gets locked up for four to six weeks, until all the documentation is done. The problem is that the people in the standard banks just don’t know how to handle these cases. There is no proper expertise. I hope this will get better by the end of this year, but who knows?

Ronald Stöferle

Okay, thanks. Great. We’re getting close to the finish. Does anyone want to add anything?

Max Tertinegg: 

I wanted to congratulate you on your crypto research report, I think it’s very good.

Demelza Hays

Thank you very much, Max. We’re looking forward to a good second edition coming out in late February, early March.

Mark Valek: 

Sponsorship’s still open.

Demelza Hays

Yes, sponsorship is still open. We are looking for more sponsors to help us create better quality content and hire more thinkers and writers.  If you think of anyone or any firm that may be interested in sponsoring the report, please have them email us at [email protected]

Ronald Stöferle

Also, if you have any ideas or topics that you want analysed, call us or drop us an e-mail. We’ll be glad to discuss it. It’s a new and young product and it will evolve.

Thank you very much to everyone for attending. Have a good day.

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Introduction to the Blockchain Technology and Cryptocurrencies

Introduction to the Blockchain Technology and Cryptocurrencies

“Bitcoin gives us, for the first time, a way for one Internet user to transfer a unique piece of digital property to another Internet user, such that the transfer is guaranteed to be safe and secure, everyone knows that the transfer has taken place, and nobody can challenge the legitimacy of the transfer. The consequences of this breakthrough are hard to overstate.”

Marc Andreesen

This chapter focuses on the basics of the blockchain technology and the financial infrastructure that has developed in this space over the past eight years. Keywords such as blockchain, cryptocurrency, Bitcoin, cryptocurrency exchange, altcoin, and initial coin offering are defined.

The terms blockchain, cryptocurrency, and Bitcoin are becoming increasingly relevant for finance. In 2008, a research proposal was released on an online forum called “Bitcoin: A Peer-to-Peer Electronic Cash System” by a mysterious programmer(s) going by the pseudonym Satoshi Nakamoto. Although the basic idea of a blockchain data structure had existed for several decades, this was the first time that blockchain technology had been combined with peer-to-peer (P2P) networking, cryptography, and distributed computing. In 2009, the developer of Bitcoin released the first version of the Bitcoin software protocol. During the first few months, programmers from around the world worked on improving the software code. By the end of 2009, the Bitcoin software was robust, open-source, and free. Anyone could download the software and begin sending transactions to other people.

The foundation for the blockchain technology was laid when the first Internet was created in California in 1969. Today’s widespread adoption of the Internet enables billions of users to engage in P2P networks that share files and information.

In a similar way to the Internet, Bitcoin’s P2P software is comprised of “nodes” that broadcast information about transactions to other nodes on the network. However, simply having a P2P network would not be sufficient for building decentralized digital money. The next part of the puzzle came when cryptographers discovered asymmetric encryption in the 1970s. Asymmetric encryption fundamentally changed the way people can share private information. Today, governments, banks, insurance companies, and many other firms use encryption tools for applications such as storing sensitive customer data and enabling secure online payments.

Fast-forward a decade and the last piece of the puzzle was developed: blockchain. Up until this point, changes to digital data could not be chronologically ordered without relying on external timestamps. Although a seemingly small inconvenience, the inability to timestamp data made it possible for counterparties to change, add, and delete digital files without leaving footprints. The blockchain data structure enabled internal timestamping for the first time. From this point forward, governments and companies could digitally track every single change made to each data file.

Following these information technology discoveries, the first attempts at digital cash were made. American inventor David Chaum designed DigiCash, an electronic cash system that was based on cryptographic algorithms in 1983. In 1997, Adam Back, a British cryptographer created HashCash that used encryption tools to block email spam. In 1998, Wei Dai and Nick Szabo released b-money as well as bit gold, respectively. All failed to gain significant adoption.

Then in 2008, the creator(s) of Bitcoin combined P2P networking, asymmetric cryptography, and the blockchain data structure to create a transparent and secure global monetary system. Cryptocurrencies and the blockchain allow users to generate units of currency and transfer funds without intermediaries.

The rigor of the underlying technologies provides evidence that this is not a scam or ponzi scheme. However, the adoption of this technology depends on several factors independent of the technology itself. Government regulation and consumer preferences will play key roles in the success of the blockchain. For example, government regulation has the power to either crush or support this nascent technology. In addition to government regulation, consumer preferences are a crucial determinant of the use of blockchain-based money. If consumers prefer “sound” or commodity monies such as gold or government monies such as the euro, then the blockchain technology may not become the global decentralized money that Nakamoto had envisioned. On the other hand, not everyone has to agree on using the same currency. Instead of completely replacing the commodity and fiat monies, cryptocurrency may become a third option with unique advantages and risks.

The remainder of this chapter provides an in-depth review of the blockchain technology, cryptocurrencies, and the financial infrastructure that has developed over the past eight years. The first section on the blockchain technology lays a foundation for the economic and technical features of this data structure. The second section explains how the technologies cryptocurrency and blockchain are inherently inseparable. The third section describes the top five cryptocurrency coins in detail. The penultimate section sheds light on the terms initial coin offering and token generating event. This chapter is concluded with an overview of the financial intermediaries including exchanges and brokerages that facilitate trading markets and provide liquidity for the cryptocurrency ecosystem.

a. The Blockchain Technology

“The root problem with conventional currency is all the trust that’s required to make it work. The central bank must be trusted not to debase the currency, but the history of fiat currencies is full of breaches of that trust. Banks must be trusted to hold our money and transfer it electronically, but they lend it out in waves of credit bubbles with barely a fraction in reserve.”[1]

Satoshi Nakamoto

The blockchain technology refers to a collection of digital methods for storing identical data in multiple locations. The blockchain technology, also called the distributed ledger technology (DLT), was popularized in a white paper released in 2008 by a covert author under the name of Satoshi Nakamoto.[2] A blockchain can be thought of as a database that stores the amount of accounting units held by each user.[3] Users can receive and spend their account units, referred to as cryptocurrencies, with an encrypted password, referred to as a public-private key pair. Since 2008, over 1000 different blockchains and corresponding cryptocurrencies have been created.

A blockchain is a collection of information that is not held by one entity but rather distributed across all computers in the network known as nodes. Due to the redundancy of data storage, blockchains are enormously expensive to operate and they are slow. Each computer around the world that stores a copy of the database must agree to each change made to the database before the network can process new data entries. Despite the setbacks, blockchains harness unparalleled computing power and security, which provide users with services that cannot be provided by any other technology. The Bitcoin blockchain is an example of a peer network node data storage system that continuously grows as transactions are broadcasted and verified by the network. Storing identical data in multiple locations provides security benefits and latency drawbacks compared to storing data in one location.

In information science, the former method is referred to as distributed computing while the latter is referred to as single point of failure (SPOF) storage. A centralized database that has a SPOF can be easily hacked and sensitive data can be compromised, changed, deleted, or altered. In contrast, data stored in computers located in different geographic regions throughout the world makes an adversary’s job exponentially more difficult. Distributed computing commonly uses two fictional characters, Alice and Bob, to illustrate concrete use cases of the technology.

To understand how a basic blockchain transaction works, imagine that Alice is a customer at a coffee shop and Bob is the owner of the coffee shop who is selling Alice a nice cup of coffee. Instead of using cash, Alice wants to send one digital coin to Bob in exchange for the physical coffee that she ordered in Bob’s coffee shop. If Bob happens to have the digital coin software, also referred to as a “cryptocurrency wallet,” on his phone, Bob can easily open the software on his phone and accept a payment from Alice by scanning the QR code shown on Alice’s software on her phone. Alice will instantly see her account debited by the amount that she specified, and Bob will see his account credited with the same amount. For Alice and Bob, their work is done. Bob’s phone will get a beep sound that signifies to him that Alice’s transaction has been broadcast to the P2P network of computers around the world that are actively listening for new transactions.  The individuals or groups of individuals that operate the computers that listen to transactions are often referred to as miners. Using special hardware, miners create blocks containing a list of transactions that have been broadcasted to the network by users. Next, blocks are added one after the other in a chronological order, creating a chain, hence, the name, blockchain. Once the miners hear Alice’s transaction Bob’s wallet, they will add this transaction to a list of transactions stored in a “candidate” block. A candidate block is a block that has not been confirmed in the blockchain. Before confirming the candidate block and the transactions inside of it, the miners compute hashes until they find a desirable number that is less than a specific number set by the software protocol. In the Bitcoin protocol for example, miners must find the right “nonce”, or arbitrary number, that produces a hash lower than the difficulty target set by the software. The hash that is lower than the difficulty target becomes that specific block’s identification number. The first miner to find a hash that is lower than the given difficulty target will receive a reward and the transaction fee that Alice paid to the network when she broadcasted her payment. After approximately ten minutes, the transaction will be confirmed by all of the computers in the network, and there will be no way for Alice to complete a chargeback on the money that she sent to Bob. Although, Satoshi Nakamoto created the blockchain technology to facilitate decentralized currency, entrepreneurs are constantly innovating and creating new applications of the blockchain technology. A famous blockchain enthusiast, Vitalik Buterin, built a blockchain-based decentralized contracting platform called Ethereum in 2014. More recently, start-ups are using the blockchain technology to decentralize lending markets. For example, the German company eSports.com is accepting cryptocurrency investments to crowdfund the capital required to launch their business idea. Similar to the Internet decentralizing information, blockchain technology is decentralizing money, contracting, and capital.

b. Cryptocurrencies

The past few years have witnessed an explosive growth of Google searches and social media posts about the blockchain technology and cryptocurrency. However, people aren’t only searching for these terms. Over 600 applications were filed in the U.S. for blockchain and cryptocurrency related patents during 2016 and the beginning of 2017. Mainstream interest in cryptocurrency began in 2014, when the price of the most famous cryptocurrency, Bitcoin, soared for the first time to over 1,000 USD per Bitcoin. The exponential growth garnered worldwide attention and became the main topic at FinTech and finance conferences. Following this rally, over 400 books on the topic of cryptocurrency were released on Amazon.com. Amazon responded by creating a new book subcategory, “Digital Currencies,” which feature several best sellers.

Cryptocurrencies are a medium of exchange and store of value like currencies; however, they have no physical or digital existence. Instead, cryptocurrencies are account amounts held in a digital ledger that can be transferred to other users. The term cryptocurrency is really a misnomer because there is no such thing as a cryptocurrency with an identification number such as token number “1234567.” In fact, none of the cryptocurrency coins have unique identifiers because a cryptocurrency is not actually a coin in the traditional definition of the term. Rather, each cryptocurrency account name is linked to a certain number of cryptographic accounting units, and these accounting units have been given the name cryptocurrency.

The terms cryptocurrency and blockchain are used interchangeably due to the inability of separating these technologies. Bitcoin is the name of one cryptocurrency and blockchain. Ethereum is another. Ripple is another. There are over 1,000 different cryptocurrencies.[4] Different cryptocurrency coins use different incentive structures to encourage computer nodes around the world to listen to new incoming transactions. The first successful implementation of a blockchain and cryptocurrency was Bitcoin. However, different strategies for verifying transactions within a decentralized network have given rise to different cryptocurrencies such as Litecoin, Nxt, Monero, and Bitcoin Cash.

c. Bitcoin

“Bitcoin is the beginning of something great: a currency without a government, something necessary and imperative.”

Nassim Taleb

After attempts at making a private virtual currency had failed for 20 years, Bitcoin emerged amidst the 2008 global banking crisis. The creator of Bitcoin, unknown, was determined to create a decentralized, private, and secure way to transfer value online, which did not rely on trusting sovereign entities, central banks, or financial intermediaries.[1] After being ridiculed as money for computer nerds and a conduit for illegal activity, investors are finally beginning to take notice of Bitcoin and the underlying technology, the blockchain. During November of 2017, the price a Bitcoin breached $11,000 per coin as shown in Figure 1.

Bitcoin was the first and is still the most popular cryptocurrency and use of the blockchain technology. This system allows participants to send accounting units that store value, referred to as Bitcoin, from one user’s account to another user’s account without intermediaries. As a cryptocurrency, Bitcoin is a store of value and a medium of exchange combined in one.

Bitcoin has a fixed supply capped at 21 million and the currency’s inflation rate is programmed to decrease by half about every four years. Daily, around 1,800 Bitcoin are released onto the market. This rate will half to 900 Bitcoin per day in 2020, and then to 450 Bitcoin per day in 2024. According to estimates, Bitcoin’s last coin will be mined in the year 2140 A.D. At the time of this report, approximately 16.5 million Bitcoin have been mined. The finite supply gradually enters the market according to a mathematical algorithm that releases approximately 12.5 Bitcoin into the network’s supply of Bitcoin every ten minutes. The inflation rate therefore decreases over time according to the algorithm until every unit of the finite supply has been released into the economy.

Since Bitcoin was launched in 2009, the transactions on the network have doubled every year. Figure 2 shows that that the Bitcoin network averages hundreds of thousands of transactions every day. The Bitcoin network is gaining in popularity as a payment system because transactions of any amount can be sent at anytime of the day to any place in the world.

Although blockchain transactions do exist in physical servers, Bitcoin are not physical or even digital coins. Instead, a Bitcoin is a chain of electronic signatures that represents units on a digital ledger. Network users can trade and store these fungible accounting units by debiting the account controlled by one participant and crediting the account held by another participant. An individual that creates a Bitcoin wallet can transfer accounting units to other users by digitally signing a private key on a transaction. The combination of several innovations from distributed computing and cryptography form the basis of the Bitcoin ecosystem, including the blockchain and the Bitcoin protocol.

Satoshi Nakamoto’s invention was the first system, which effectively solved the “double-spending problem” and thereby enabled a safe peer-to-peer payment system. Double-spending is the digital version of counterfeiting fiat currency or debasing a physical commodity money, such as gold. In the aforementioned example, Alice could attempt to pay two people, Bob and Charlie using the same coin by duplicating the string of bits that represents the coin with serial number 1234567.[6] Centralized payment systems, such as PayPal, solve the double-spend problem by using a centralized mechanism of validating real transactions. In computing terminology, a centralized solution to the double-spend problem is called an example of an SPOF because if PayPal’s server is jeopardized, the entire system fails.

Instead, Bitcoin relies on the “proof-of-work” consensus mechanism to achieve decentralized consensus. Proof-of-work is an incentive structure in the Bitcoin software that rewards miners with transaction fees from users and with a pre-defined number of Bitcoin for successfully adding a block to the chain of previous transactions. The proof-of-work protocol timestamps the transactions recorded in the blockchain. The correct blockchain is always the blockchain with the longest history of proof-of-work computing. Using the simple rule to always mine on the longest blockchain ensures that miners all add transactions to the list of transactions that has received the highest amount of computing resources. Network agreement on the state of transactions eliminates the potential to double-spend the same coin without the presence of a central clearinghouse.

Bitcoin vs. Gold

The 2017 In Gold We Trust report provides a thorough introduction to the topic of Bitcoin and gold in the chapter, In Bitcoin We Trust? Due to the positive feedback and curiosity that the chapter piqued, a more in-depth analysis of these two assets is elaborated on in this section.

Originally, Bitcoin and the underlying blockchain technology were designed to replicate the characteristics of gold, which make it uniquely suited to be money. However, Bitcoin constitutes an unparalleled asset class and can be a fundamental part of wealth management from the portfolio diversification perspective. For the past eight years, Bitcoin’s daily returns have had a low to slightly negative correlation with gold. The main reason is that Bitcoin and gold have different use cases and different risks. However, from a portfolio construction point of view, one must be aware of the extremely high volatility, which this asset class exposes.

Bitcoin is entirely digital, and therefore, does not exist in a physical form like gold. Also, in contrast with gold, Bitcoin does not have industrial applications. Instead, demand for Bitcoin comes from people around the world who demand a fast, private, and appreciating asset. Like gold, Bitcoin is scarce. Throughout history, 5.6 billion ounces of gold have been mined. In comparison, 16.5 million Bitcoin have already been mined, and the inventor capped the total amount of Bitcoin at 21 million. Also, similar to gold, Bitcoin is a store of value and a medium of exchange combined in one. However, the cryptographic and digital nature of Bitcoin makes it inherently both easier to transfer and harder to find than gold.

The scatterplot in Figure 4 shows the monthly returns of gold plotted against the monthly returns of Bitcoin. The y-axis represents Bitcoin and the horizontal axis gold. During the past eight years, Bitcoin’s monthly return ranged from positive 465% in November of 2013 to negative 40% in September 2011. During the same time, gold’s volatility was much lower. Gold’s largest decrease in return of 14.5% occurred in June of 2013, while gold’s largest increase of 13.9% occurred in January of 2012. The black trend line shows that the historical monthly returns for Bitcoin and gold are primarily uncorrelated.

However, Bitcoin does not win a unanimous vote compared to gold. Unlike gold, the risks associated with Bitcoin are uncertain. Gold’s track record is 5,000 years, while Bitcoin’s is only a couple of years. The value of the Bitcoin network relies on the Internet and the geographic dispersion of computers around the world that maintain the network and history of transactions. Loss of the Internet would cripple the Bitcoin blockchain. Due to the different risk and return profiles, Bitcoin and gold constitute two distinct asset classes. A growing body of academic research increasingly suggests that a diversified portfolio should only be 1 to 2% in Bitcoin.[7]

d. Alternative Cryptocurrencies

Bitcoin’s novel combination of distributed computing, encryption, and open-source programming inspired the creation of over 1,000 cryptocurrencies. In 2011, Bitcoin was the only currency and therefore held 100% of the cryptocurrency market’s capitalization. Today, Bitcoin’s share of the cryptocurrency market has fallen to less than half. In addition to Bitcoin, cryptocurrencies such as Litecoin, Dash, Ethereum, and Bitcoin Cash are attracting traditional investors to this new digital asset class. Upon closer inspection, each of the top ten cryptocurrencies attempts to solve a different problem. Incrementum has created a cryptocurrency classification system to enhance investor proficiency of this asset class.

Our classification system has three subclasses of cryptocurrencies:

  • Money: Medium of Exchange or Store of Value
  • Infrastructure
  • General Purpose

For example, Bitcoin, Litecoin, Dash, and Bitcoin Cash are part of the money subclass because these digital tokens compete with fiat currencies such as the U.S.  dollar, euro, and renminbi. This subclass offers fast, private, and “permissionless” payments. Each of the money cryptocurrencies has a unique monetary policy. For example, the total supply of Litecoin is four times the total supply of Bitcoin. Also, Dash offers more privacy compared to Bitcoin or Bitecoin. Bitcoin cash focuses on increasing the number of transactions that can be processed per second.

In contrast, cryptocurrencies such as Ethereum, Lisk, and IOTA are infrastructure coins. Instead of competing with fiat money, the subclass of infrastructure tokens enables decentralized contracting. For example, marriage contracts, cosmetology licenses, and seal of approval certificates can be issued and publicly stored on the Ethereum network. The final subclass of cryptocurrencies includes all of the remaining cryptocurrencies. These coins solve unique problems that are not related to money or infrastructure. For example, Augur is a decentralized prediction market that is built on the Ethereum infrastructure. Another coin, TenX, is a credit card that allows users to spend cryptocurrencies where credit cards are accepted.

These three subclasses; money, infrastructure, and general purpose, make up the super class of cryptocurrency assets. In the same way that stocks are highly correlated with other stocks, the subclasses of cryptocurrencies are also highly correlated. However, the correlations between cryptocurrencies provide evidence for the cryptocurrency classification.

Each cryptocurrency has different applications and different risks, which should be considered when making investment decisions. The table below shows the correlation of the excess daily logarithmic returns between Bitcoin, Litecoin, Dash, and Ethereum. As the cross-correlation matrix shows, Bitcoin’s excess daily logarithmic return correlation with other cryptocurrencies from the money subclass is higher than with Ethereum, which is a cryptocurrency in the infrastructure subclass. This indicates that Bitcoin is competing more with Litecoin and Dash compared to Ethereum. As shown in row 2 and column 1 of the matrix, Bitcoin’s return correlation value of 0.56 with Litecoin means that Bitcoin is more correlated with Litecoin than with Dash or Ethereum. Overall, all of the cryptocurrencies are correlated positively; however, there is statistical support for a classification system based on the application of each cryptocurrency.

Incrementum focuses on the subclass of money and infrastructure cryptocurrencies. From the money subclass, the highest market capitalization coins include Bitcoin, Litecoin, Dash, and Bitcoin Cash. From the infrastructure class, Ethereum is leading the way. To provide a better understanding, a summary for each of the four alternative cryptocurrencies is available below.

 1) Bitcoin Cash

Similar to Bitcoin, Bitcoin Cash is a cryptocurrency from the money subclass. Bitcoin Cash was created on August 1, 2017 during a hard-fork[8] of the original Bitcoin cryptocurrency. With a value of approximately $1,400 per coin and 16.5 mi  llion coins in circulations, Bitcoin Cash has a market capitalization of $23 billion.

2) Litecoin

Litecoin was announced as an alternative to Bitcoin in 2011. In the cryptocurrency market, Litecoin is often referred to as “silver” and Bitcoin is referred to as “gold.” Litecoin is considered to be silver because the Litecoin network can process transactions four times faster than the Bitcoin network. Also, the total supply of Litecoin is 84 million while Bitcoin’s supply is capped at 21 million. This four-fold increase in cryptocurrency units means that the inflation rate of Litecoin is higher than Bitcoin.

3) Dash

Invented after Bitcoin and Litecoin, Dash focuses on privacy and pseudonymity. Prior to being rebranded as Dash, this cryptocurrency went by the name Darkcoin. Dash developed new methods for reducing the traceability of transactions by mixing many transactions together before sending them to the final destination. The process of mixing blurs the identity of the original sender. To increase privacy further, Dash does not have a publicly available ledger. Recently, the developers of Dash have made successful efforts to increase merchant acceptance.

4) Ethereum

Unlike Bitcoin Cash, Litecoin, and Dash, Ethereum is an infrastructure cryptocurrency that enables “smart” contracts – digital contracts that automatically execute preprogrammed agreements. Similar to the Bitcoin network, the thousands of Ethereum nodes around the world maintain the Ethereum network. The Ethereum infrastructure provides a platform where decentralized applications can be built and operated by anyone. Ethereum smart contracts operate without downtime or censorship. Smart contracts work with the Ethereum network’s native cryptocurrency referred to as ether. With approximately 94 million ethers and a price of $460 per token, Ethereum’s market capitalization is approximately $44 billion.

e. Initial Coin Offering or Token Generating Event

Currently, there are over 1,000 actively listed cryptocurrencies, and every week a few more cryptocurrencies are released to the market.[9] When a group of developers is ready to launch their new cryptocurrency, they can have an “initial coin offering” (ICO) or “token generating event (TGE)”.[10] In 2017, ICOs raised over $1.7 billion in investment capital. For example, the French developers behind the cryptocurrency Tezos raised $232 million in July of 2017. The month prior, Bancor raised $150 million. In fact, out of the 25 highest crowd-funded projects in all of history, 18 of them are blockchain companies.[11]

The term ICO is based on the term IPO, which stands for initial public offering. However, initial public offerings are fundamentally different from initial coin offerings. Therefore, what is called an ICO in the cryptocurrency world is not exactly a parallel concept to an IPO. An ICO is more of a crowdfund whereas the first day the token is launched on an exchange is the IPO because you cannot easily trade your tokens during an ICO. Instead, investors have to wait until the token is launched on an exchange. Therefore, the more fitting equivalent of a stock IPO is the first day a token is launched on an exchange. However, the comparison does not fit exactly because firms that go to IPO usually have a history and a track record for investors to research. In contrast, many of the firms going to ICO now do not have a history.

According to the PWC report, Considering an IPO (2012) firms have to pay $3.7 million to go to IPO.[12] In contrast, ICOs can cost close to nothing to conduct. Instead, the development team that performs the ICO often has “no skin in the game”. Developers and entrepreneurs, who are sometimes not even incorporated in any geographic location, can launch an ICO without involving an underwriter, receiving the appropriate green lights from regulators, or paying the costs associated with the traditional framework. Due to no barriers to entry for investors or for firms, ICOs should not have the systematic underpricing pattern that stock J. Ritter reported on IPOs in 1991.[13]

Underpricing refers to the fact that the price of a firm’s stock share is signifi cantly lower during the initial public offering compared to the closing price of the share on the first day of secondary market trading. Using data on the past 50 years, Professor Ritter has found that stock IPO prices have been 16.8% lower during the IPO on the primary market compared to the price on the secondary market at the 3-year anniversary of the IPO. This equates to approximately $125 billion being earned by IPO investors instead of going to the firms. Several explanations have been given for the cause of the underpricing. A major cause has been attributed to the conflict of interest between the investment banks that underwrite the IPO and the firm going to IPO. By artificially decreasing demand with eligibility requirements that limit investment, investment banks can secure low prices for themselves and their clients. When secondary markets open, investments banks and their clients are often able to realize instant gains because of the systematic underpricing.

The only coins that have at least three years of data provide empirical evidence that ICOs have systematic overpricing. Overpricing refers to a higher closing price on the first day the token is traded on an exchange compared to the closing price on the three-year trading anniversary of the token.

Figure 11 shows that only 5 out of the 21 ICOs in 2013 and 2014 had a positive return on the first day of trading on an exchange. These five coins were Mastercoin, Bitshares, Counterparty, Maidsafe, and Qora. The main takeaway is that most cryptocurrencies are immediately dumped on the market the moment the coins are traded on an exchange. Even the second largest market capitalization coin, Ethereum, lost 73% in value the day it was launched on an exchange. Currently, little research has been done on the cause of this phenomenon.

Figure 12 shows that the exchange adoption returns do not improve by the third-year anniversary of the coin. Only 5 out of 20 had a positive return between their opening price on the day of exchange adoption and the closing price on their third-year anniversary of being traded.[14] The five coins were Mastercoin (165%), Bitshares (984%), Maidsafe (3,262%), Storj-x (10,061%), and Nubits (2%).

However, the limited amount of data available on 2013 and 2014 means that inferences made are not statistically significant. The cryptocurrencies that went to ICO in 2013 and 2014 may not representative of the entire population of cryptocurrency ICOs. Since less than 30 coins went to ICO in total, the central limit theorem does not apply. As more data becomes available, further analysis should be applied to check the sign of the average return on ICOs and ICO three-year anniversaries.

As a final caveat, the cryptocurrency market has changed rapidly since these coins went to ICO. If a price pattern does exist and investors determine the pattern, then the pattern will change. For example, if the price always increases after the ICO then investors will try to invest during the ICO phase. If a large number of investors invest during the ICO phase in anticipation of post-ICO gains, then the ICO price may become overvalued.

f. Financial Infrastructure

As shown in Table 1, financial infrastructure is maturing in the cryptocurrency market. Private banks are beginning to offer customers cryptocurrency bank accounts. Start-up companies, such as the Tenx in Singapore, are issuing credit cards that can be filled with cryptocurrencies. Companies such as Bitcoin Suisse in Switzerland are operating cryptocurrency automatic teller machines (ATMs) that dispense Bitcoin for Swiss francs and accept Swiss francs for Bitcoin. Cryptocurrency exchanges, such as Bitfinex and Poloniex are paying interest on “cryptocurrency deposits.” Wallstreet “quants” are building algorithms for trading bots that take advantage of arbitrage opportunities on different exchanges. Large players are negotiating special pricing with cryptocurrency exchanges and miners. The cryptocurrency market even has an equivalent of the traditional underwriter. Cryptocurrency brokers and law firms offer underwriting for initial coin offerings and charge a percent of the capital raised during the ICO. Finally, legal licenses are being granted to a handful of firms that satisfy regulatory requirements. This section outlines the basics of cryptocurrency exchanges, over-the-counter markets, and brokerages.

1) Cryptocurrency Exchanges

A cryptocurrency exchange is a website where investors can buy and sell cryptocurrencies for other cryptocurrencies or for fiat money such as USD and EUR. Cryptocurrency exchanges are generating the highest revenues during the cryptocurrency boom. Coinbase, the biggest exchange in the U.S., has a valuation of over $1 billion.[15] Gemini is an exchange made by the Winklevoss Twins, who sued Mark Zuckerberg over the ownership of Facebook. However, Gemini is only open to U.S. based cryptocurrency traders. The six most important exchanges on an international basis include Kraken, Poloniex, Bitstamp, Bitfinex, and Bittrex, and GDAX owned by Coinbase.


Kraken is a cryptocurrency exchange that has its headquartered in San Francisco, California. The exchange has been in business for six years, and has the largest daily trading volume for the Bitcoin/euro pair. The exchange offers trading in several fiat currencies including USD and EUR and several cryptocurrencies including BTC, ETH, ETC, DASH, GNO, ICN, Litecoin, MLN, Monero, REP, Ripple, Zcash, and Stellar. Kraken has fees ranging from 0.05 – 0.50% per trade depending on the trader’s volume and the cryptocurrency they are trading.


Unlike Kraken, Bitstamp, and Bitfinex, Poloniex is a cryptocurrency exchange that does not allow fiat deposits and withdraws. Therefore, customers must purchase cryptocurrencies from other sellers and then deposit cryptocurrencies on the exchange before they can begin trading. Poloniex has fees ranging from 0.00% – 0.25% per trade depending on the trader’s volume and the cryptocurrency they are trading.


Bitstamp is a cryptocurrency exchange headquartered in Luxembourg. The exchange has been in business since 2011. The exchange offers trading in several fiat currencies including USD and EUR and several cryptocurrencies including BTC, ETH, LTC , and Ripple. In 2015, Bitstamp was hacked for approximately 19,000 Bitcoin, and the exchange shutdown services for one week.


Bitfinex is a cryptocurrency exchange headquartered in Hong Kong. The exchange has been in business since 2012, and the exchange has the largest daily trading volume for the Bitcoin/USD pair. The exchange offers trading in USD and several cryptocurrencies including BTC, ETH, ETC, DASH, Litecoin, Monero, IOT, Ripple, and NEO. In 2016, Bitfinex was hacked and a value of $72 million was stolen. By April of 2017, all customers had been paid back for the hack.


Bitfinex is a cryptocurrency exchange headquartered in the USA. Bittrex was founded in 2014. Like Poloniex, Bittrex is a cryptocurrency exchange that does not allow fiat deposits and withdraws. Therefore, customers must purchase cryptocurrencies from other sellers and then deposit cryptocurrencies on the exchange before they can begin trading. Bittrex has a fee of 0.25% per trade regardless of the coin or the volume being traded.


The Global Digital Asset Exchange (GDAX) is owned by Coinbase, which is registered in San Francisco, California. Coinbase has been in operation since 2012, has over 7 million registered users, and operates in 32 different countries. Coinbase is one of only three firms that has received the New York BitLicense, which entitles them to provide services to New York persons. GDAX offers BTC, ETH, and LTC. GDAX is a cryptocurrency exchange that allows USD, EUR, and GDP deposits and withdraws. GDAX has fees ranging from 0.1% – 0.25% per trade depending on the trader’s volume and the cryptocurrency they are trading.

2) Over-the-Counter Markets

Over the counter (OTC) markets in the cryptocurrency sphere refer to websites that allow buyers and sellers to make customized contracts with one another. A major reason for the popularity of OTC markets for cryptocurrencies is that personal identification is often not required. The most famous OTC markets include LocalBitcoins.com based in Finland and Bitcoin.de based in Germany. Many transactions on OTC markets include no fees. However, OTC markets also offer optional escrow services that customers can elect to pay for. For example, LocalBitcoins.com charges 1% of the amount in escrow.

3) Cryptocurrency Brokerages

In addition to cryptocurrency exchanges and 0ver-the-counter markets, the cryptocurrency ecosystem has the equivalent of traditional investment banks like Goldman Sachs. In the crypto world, brokerages are the new investment banks. They help new cryptocurrency companies launch initial coin offerings by setting up escrow accounts, clearing qualified investors, and settling trades. Brokerages charge a percentage of total revenue earned by the ICO. Brokerages also offer customized service for high-net-wealth individuals who want to gain exposure to cryptocurrencies. This service is paid for by the spread between the price that the brokerage buys or sells the cryptocurrency at on an exchange, and the price they charge the customer. The largest brokerage in Europe, Bitcoin Suisse in Zug, Switzerland has a monthly turnover of $150 million. Other brokerages include Coinfinity in Graz and BitPanda in Vienna.

Conclusion: Cryptocurrency Financial Infrastructure is Maturing

 In conclusion, cryptocurrencies and the blockchain technology are becoming everyday words. The cryptocurrency market has grown from a market capitalization of $0.00 in 2010 to over $430 billion in 2017. The absolute return of over one million percent has driven interest in this technology. The interest has attracted great minds and investors into the space. Today, the market is maturing into an efficient market with updated versions of traditional financial intermediaries. Exchanges, brokerages, derivatives, and credit cards are developing for the cryptocurrency market.

However, the impact that these technologies will have on the world is still unknown. The open-source nature of public blockchain software allows anyone to use Nakamoto’s inventions for the development of new technologies. At the same time, if governments decide that permissionless blockchains are too revolutionary, governments may try to limit further innovation.

At each step of development in the cryptocurrency market, the Crypto Research Report hopes to be your go-to-guide for critical analysis. The constantly evolving cryptocurrency space needs a reliable source for up-to-date information, and Incrementum has accepted the challenge. We wish you an informative and educational read through our inaugural report. The rest of this edition includes exclusive interviews, statistical analyses of different cryptocurrencies, and helpful insights on frequently asked questions.

Also, we invite you to look for each subsequent edition of The Crypto Research Report. Over time, the CRR aims to become a leading authority on cryptocurrency and blockchain investments for financial market participants and institutions. We look forward to understanding the investment potential of these exciting new technologies together!

We welcome your feedback: [email protected].

[1]Nakamoto, S. (2009, February 11). Bitcoin open source implementation of P2P currency.P2P foundation. The Foundation for Peer to Peer Alternatives. Retrieved from http://p2pfoundation.ning.com/forum/topics/Bitcoin-open-source

[2] Nakamoto, S. (2008). Bitcoin: A Peer-to-Peer Electronic Cash System. Retrieved from https://bitcoin.org/bitcoin.pdf

[3] Unlike normal databases, public blockchains are not owned by a central entity.

[4] Coinmarketcap.com

[5] Lo, S., & Wang, J. C. (2014). Bitcoin as Money?. Federal Reserve Bank of Boston Current Policy Perspectives, 2014(4). Retrieved from https://www.bostonfed.org/publications/current-policy-perspectives/2014/Bitcoin-as-money.aspx

[6] This is a simplification of the double-spend problem in cryptography. As previously mentioned, each Bitcoin does not have a unique serial number.

[7]  Hong, K. (2016). Bitcoin as an alternative investment vehicle. Retrieved from https://link.springer.com/content/pdf/10.1007%2Fs10799-016-0264-6.pdf and Brière, M., Oosterlinck, K. & Szafarz, A. Virtual currency, tangible return: Portfolio diversification with bitcoin. Journal of Asset Management (2015) 16: 365. Retrieved from: https://doi.org/10.1057/jam.2015.5

[8] A fork in the blockchain occurs if the protocol is been upgraded, but not all users agree on the changes. The existing chain of transactions is split into two paths. One path which follows the new, upgraded blockchain, and one path which continues along the old path.

[9] Coinmarketcap.com

[10] ICO and TGE have the same meaning. In order to make ICOs look less like IPOs, some law firms, such as MME in Zug, recommend for developers to avoid traditional finance terms that may signal to authorities that cryptocurrencies are securities. Some developers do not do an ICO. Instead, they rely on Airdrops, Hardforks, or Initial Minings.

[11] The Cover Card (2017, July 13).18 Of The Top 25 Highest-Funded Crowdfunding Projects Are Blockchain Startups. Forbes. Retrieved from https://www.forbes.com/sites/thecovercard/2017/07/13/18-of-the-top-25-highest-funded-crowdfunding-projects-are-blockchain-startups/ – 29d3359f619a

[12] Strategy& Formerly Booz & Company, & pwc. Considering an IPO? The costs of going and being public may surprise you. Retrieved from https://www.strategyand.pwc.com/media/file/Strategyand_Considering-an-IPO.pdf

[13] Ritter, J. R. (1991). The long-run performance of initial public offerings. The Journal of Finance46(1), 3–27.

[14] Ethereum had to be dropped from the analysis because only two years of trading data are available.

[15] Peterson, B. (2017, Aug. 10) Bitcoin exchange Coinbase confirms its unicorn status with $1.6 billion valuation. Business Insider. Retrieved from http://www.businessinsider.com/coinbase-now-unicorn-valuation-series-d-funding-2017-8