2019 Yearly Market Report ∙ The Year Ahead

Last year, we started our year ahead forecast with the front page of The Times, from January 3rd, 2009. Its headline on the consequences of the last decade’s financial crisis was referenced by Satoshi Nakamoto in Bitcoin’s genesis block. Ten years on and, despite the economic relief, it’s as telling as ever. Because even if traditional financial markets saw their worst year in a decade, investors are getting anxious about the flimsiness of the economy — especially now that expansionary monetary policies are being reversed. While North American stocks reached a record level, how healthy can the underlying market be if Manhattan’s real estate sector saw its worst year since the crisis? And with increasing political woes in the European Union, declining growth in Asia, and Apple’s revenues decreasing, what can this global anxiety turn into?

 

Last year, we also foresaw three areas of clash for 2018. How did they play out? And what might be their impact in the year ahead?

The Bitcoin Civil War

• Bitcoin Cash was unable to overthrow the original Bitcoin.
• But amid its own internal strife, it ended up being key to the bears — throwing Bitcoin below $6k in November.
• In 2019, its impact will be low.

Late blockchain advantage

• Ethereum’s flippening was one of the key narratives of early 2018.
• But the ‘alts party’ quickly came to an end as ether flew too close to the sun — or to the moon.
• This impact will still be relevant.

Initial regulatory offerings

• Regulatory fear, uncertainty, and doubt, first rattled the Korean markets in the beginning of 2018.
• Soon, US regulators became leaders in this space.
• This impact will continue to be very high in the year ahead.

Curiously, The Times on January 3rd, 2019, also had an eerily similar headline. Now that new challenges are threatening the stability of the financial system, is Bitcoin still suited to address them? Or are new players in a better position to decentralise finance? And is decentralisation even worth pursuing? If so, what are the requirements for it to be desired by the public? As usual, everyone is panicking about the short-term. The dynamic nature of society will likely ensure that current financial fears are addressed by central banks around the world. Whatever uncertainty this year might bring, will provide the perfect playground to test emerging technologies ready to accommodate the next big downturn. So, to better understand how this can play out, let’s have look at the key ingredients necessary to fuel such resiliency and adoption.

But 2019 is not only about Bitcoin’s ten-year anniversary. It’s about resilience and adoption. And, for that, it needs three key ingredients.

Maturing technology

• Good old Lightning network
• Constantinople and peace
• Brave new projects
• To the stablecoin

New market forces

• The delayed Bakkt
• The denied ETFs
• The mighty pension funds
• The hedge funds

Reasonable regulation

• ICOs
• STOs
• Taxes
• And other RTRs

1. Maturing technology

What important things are being built and can such technology foster adoption?

 

GOOD OLD LIGHTNING NETWORK

The lightning network is a scaling solution originally conceptualised for Bitcoin back in 2015. In 2018, we saw its first implementation trials and we can expect 2019 to be the year where it achieves wide adoption. In brief, it works as an extra layer that settles transactions outside the blockchain. This allows for instant, scalable payments at a near-zero cost. And Bitcoin is not the only protocol that can use it. What’s key now is the development of better user interfaces for its dissemination. Meanwhile, keep following its increasing capacity and number of available nodes here.

CONSTANTINOPLE AND PEACE

Constantinople, Ethereum’s most important hard fork since 2017, is around the corner. It will officially kick-in at block number 7,080,000. At the current average block time, that should be around 7 AM UTC of January 16th. It will activate five Ethereum Improvement Proposals. The most popular of which refers to the reduction of its block rewards, which will effectively reduce the supply of ether. This is being perceived as bullish and price has been acting accordingly over the past few weeks. Learn more about each of the proposals here and watch out for a possible dump — if past hard forks indicate anything.

BRAVE NEW PROJECTS

Last December, Dogecoin saw more than 3.5 times more transactions than Bitcoin Cash. And even if these projects continue to be widely talked about in 2019, we expect a lot of activity coming up from these players and more: • Facebook’s stablecoin, due to the social giant’s scale • Telegram’s TON, due to the messaging platform’s reach • CryptoKitties, due to the collectibles’ viral memories • XRP, EOS, XLM, and LTC, due to their contender status • Aragon, due to its focus on decentralised organisations • Decred, due to its focus on decentralised governance • Handshake, Hashgraph, and Algorand, just due to hype

 

TO THE STABLECOIN

In addition to Facebook’s project, which deserves a special mention due to its high profile, 2019 will continue to see plenty of new stablecoin projects. While last year these were coming out of a cryptic treasure chest, now it will be make or break time. In particular for decentralised projects which rely on algorithms to back their stability, but also for major current players, like Tether. Meanwhile, private and central banks are increasingly showing more interest and developing sophisticated prototypes of new stablecoins. These will likely aim to facilitate commerce or speed-up remittances.

IN SUMMARY

Imagine if Facebook launches its supposed stablecoin on WhatsApp, the popular messaging app. Or, if it doesn’t, consider the chance of Telegram stealing its India user base in case its well-funded TON blockchain succeeds? Even if Bitcoin and Ethereum’s scaling solutions remain within the cryptosphere’s niche focus — especially considering that both will likely only reach full speed in 2020 — the year ahead will surely be exciting and full of brave new projects and boring, but necessary, stablecoins. But does maturing technology equate to careful design centred on users’ real needs? Additionally, we can see surprising moves from less obvious players. Square, the US fintech scale-up is a possible culprit given Jack Dorsey, its CEO, is quite interested in crypto and has launched a series of initiatives and investments within and outside Square. Outside the world of centralised technology, 2019 will also clarify which of the exuberant projects — born out of 2017’s bull run — stand the first test of time. From Token Curated Registries to governance tokens, how large is the space for niche use cases that don’t appeal to anyone but only to very curious and disconnected developers?

2. New market forces

Can new markets and new players renew demand for cryptoassets and halt the bears?

 

THE DELAYED BAKKT

Bakkt was deemed the new saviour of the crypto doldrums, but the global cryptoasset platform that will also offer Bitcoin futures, ended up facing more hurdles than it anticipated. This exchange — which is owned by ICE, the parent company of the New York Stock Exchange, and partnered with Microsoft and Starbucks — has already postponed its December 2018 launch date to January 24th. But, on the last day of the year, it announced it expects further regulatory-induced delays and will clarify its launch timeline over the coming weeks. On the bright side, it also declared that it has just raised a $182 million initial funding round from 12 partners.

THE DENIED ETFs

In 2018, Exchange Traded Funds became synonymous with hope. The approval of such a fund — which would track the price of bitcoin, hold physical Bitcoin — which in this case means digital, due to the nature of the asset — and be available to traditional investors in the US market and beyond — is consensually seen as one of the most bullish developments the crypto market could see. At the moment, the most solid proposal put forth is awaiting review by the US SEC — the VanEck/SolidX Bitcoin Trust. The final deadline is February 27th, but our favourite sources believe a rejection is the most likely scenario for now. Then, new proposals will likely be put forward and we might have to wait another year for good news.

THE MIGHTY PENSION FUNDS

If 2018 was the year endowment funds first achieved significant exposure to cryptoassets — when Yale’s multibillion dollar fund allocated a small percentage of it into a couple of cryptocurrency funds managed by Paradigm and Andreessen Horowitz — then the year ahead might be the one where pension funds follow suit. Several financial analysts are arguing for such funds to consider a small allocation into this space. Both as a hedge to other assets and as a way to place a bet into the not-that-remote possibility Bitcoin becomes the de facto digital gold of the XXI century. Bring them on!

THE HEDGE FUNDS

If 2018 was the year where crypto-focused hedge fund capitalists capitulated, 2019 will likely be one of survival. While venture capitalists are used to waiting, hedge fund investors thrive on sprints. But running from bears is exhausting and depletes investors’ patience faster than fund managers would like. But, in spite of the many stories about the closure of hedge funds over the past months, and as long as this space’s volatility continues to be as juicy as it is, on the minds of the average investor the crypto markets will continue to attract many a fund.

IN SUMMARY

New markets and new players are here. But, at the same time, these participants understand the current field is a more exclusive one. There’s no space for useless tokens and no tolerance for fraud. But even if last year everyone applauded the shunning of scammers and shillers, it still isn’t clear if the emergence of this new healthier class of investors will be enough to turn the crypto market tides. Additionally, are these sophisticated players going to outwit retail investors and drive the fun away from the cryptic wild west? Or are their interests aligned?

3. Reasonable regulation

Now that the cryptoassets’ regulatory grace period has been halted, what next?

ICOs

We’ve covered Initial Coin Offerings in last week’s year in review. But the key question that we failed to answer is what can happen to this fundraising method in 2019? Well, to a certain extent, 2018 already dictated its nearterm future, at least market-wise. But, in addition to the lack of investors’ interest in them, regulators will surely keep dissecting every single suspect. We would even go so far as to argue that as soon as ICOs are back, one can confidently believe the bear market is over. Until then, watch out for high-profile projects being targeted by regulators around the world, but especially in the US, where securities laws are the most stringent.

STOs

Security Token Offerings have been hailed as the next big thing in the cryptosphere. But how revolutionary is the tokenisation of a security? To some extent, not that much. But, depending on the market, it can improve liquidity and cater to unmet needs. A particular example here is that of large real estate projects for which funding is convoluted due to the long periods of time necessary to recover the large amounts invested. But, by tokenising that source of money, investors can easily sell their project-backed tokens when needed, without having to rely on the complex network of financial intermediaries most securities are based on.

TAXES

In addition to the above key themes, it’s also useful to keep an eye out for improved privacy features that might be added to popular blockchains. These can diminish the advantage of privacy-focused projects, which are typically marginalised by regulators as they can enable tax dodging and money laundering. Meanwhile, on the other side of the fence, look out for signs of adoption from governments which allow companies to pay their taxes in cryptocurrency. The latest popular example is Overstock.com. Or almost. The state of Ohio is only using Bitpay to convert Bitcoin into dollars

OTHER RTRs

All-around the world, governments are writing “Token Taxonomy” acts, frameworks for accounting for ICOs, and regulating cryptoassets in more or less permissive ways. As long as these are Reasonable Token Regulations, the cryptosphere shall benefit. And as long as some jurisdictions are able to offer support for global companies — like Switzerland — legitimate companies will find a safe haven to incorporate. The key question of 2019 in this regard is whether comprehensive global regulations to be set by the G20 might force some countries, like Malta, to bow to a coherent, standardised regulatory and fiscal framework.

IN SUMMARY

Expect fines and refunds from all ICOs that the US regulators can reach. Cheer the hype of the STO, but remember that an STO done right is a subtle innovation that won’t change society as we know it — unless regulators allow it. And that an STO done wrong is just a disguised ICO. Additionally, note the ultimate form of monetary legitimacy is for a currency to be accepted as an official means to pay taxes. Even if for the moment politicians in Ohio are only accepting US companies to convert their dues from bitcoin to dollars, the situation might start to change in other jurisdictions.

“Be your own bank.”

“Decentralise everything.”

These two memes are popular on social media and messaging groups. But while crying them might seem empowering, who is truly capable of safeguarding the custody of their savings? And why do we place trust on centralised parties to efficiently manage so many aspects of our lives? Our motto has always been to help you capitalise on your curiosity. And while curiosity runs wild on wishful thinking, capitalisation works best when it’s compounded with daily learnings. Think critically and invest thinking about the money you can lose, not the money you can win. Stay solvent and profit from your mistakes!