This month the world's main cryptocurrency celebrates its tenth anniversary. On October 31, 2008 on previously created domain bitcoin.org some Japanese under the name of Satoshi Nakamoto posted a document called “Bitcoin: A Peer-to-Peer Electronic Cash System”, which introduced a decentralized payment system. Customers no longer needed to use services of financial institutions to make online payments as they got the opportunity to transfer funds with the new virtual currency - Bitcoin. Since then 10 years have passed. The idea of the Japanese (or an unknown group hiding behind the Satoshi nickname) has inspired the beginning of a whole new industry that now has an impact on the entire global economy. Let's analyze what has happened with the currency itself and what prospects for its development are opening up right now.
According to coinmarketcap Bitcoin is still holding the number one spot among cryptocurrencies, never having yielded its throne since its inception. As of October 10, the total market capitalization of the currency was more than $114 bln, which exceeds the volume of the M1 money supply of national currencies of Brazil, Estonia,Thailand,Turkey and some other countries. The daily volume of transactions with Bitcoins is more than $3.7 bln, and the rate of the virtual currency has not fallen below $5,800 for almost a year now. Given that a little less than two years ago the currency rate was $800, we would call it a success, if not just one little thing - the crypto boom in the winter of 2017 and the rate of $20,000.
The reason behind the sharp growth in BTC value was the beginning of bitcoin-futures trading on the Chicago exchanges CBOE and CME. The emergence of a financial instrument, that allows to hedge the risks of changes in the price of the underlying asset - Bitcoin, was a kind of invitation to the industry for institutional investors and others, in whose countries the cryptocurrency was banned. Their massive entrance was supposed to increase the market liquidity.
However, July 24 still holds the record of the highest daily volume of bitcoin-futures, when 12,878 contracts were concluded on the CME platform for a total of 64,390 BTC (1 contract - 5 coins) or $530 mln, and on the CBOE - 7,138 contracts (1 contract - 1 BTC) worth $58.3 mln while the total market capitalization was $141.6 bln, which means that futures were able to add only 0.4% to the total market value. It is clear that the crypto community expected futures to have a bigger impact on the industry increase.
Therefore we may conclude that institutional investors are only eyeing at the crypto assets, but do not allocate massive capital in them, and the winter surge is just a successful speculation on such a huge positive news. The thing is that bitcoin-futures bear quite high risks. Despite the regulation of these financial instruments by the world's largest derivatives exchanges, the uncertainty of the general legal status of Bitcoin still constraints holders of large capital, who are not ready to even consider assets with a risk of higher than 2-5% of the total investment.
Moreover, contract terms of XBT (bitcoin-futures of the CBOE) and BTC (the CME) discourage crypto traders. Firstly, the exchanges set margin rates of 35-40%. Secondly, contracts are cash-settled, which slows down the process of transferring funds, as they pass through banks that do not work on holidays and weekends as well as exchanges. Contracts settlement can take up to two days and the funds are enrolled to the accounts of the transactions parties only after this period of time passes.
This dependence on financial intermediaries reduces the interest and thus the demand from the followers of Satoshi's ideas, which results in a small volume of bitcoin-futures trading. So the drop in the main cryptocurrency price by 70% is quite understandable.
The question whether Bitcoin will be able to regain its positions arises. Since the end of June, the rate has not fallen below $5,800, however it has not broken the mark of $8,200 either. During the last month the rate was maintained at an average of $6,500-6,700. There is strong support when the rate drops to $6,200. The market participants, especially traders who open short positions to get a quick buck, return the currency to the level of $6,400 within a few hours or a maximum of a day or two.
Currently bears are conducting the bulk of transactions while crypto investors tend to hodl. May survey made by the largest cryptocurrency exchange in South Korea Bithumb showed that 42.8% of the 2,500 respondents are investing in digital currencies for a long time and only 27% carry out short-term investments.
In our exclusive interview the Vice President of APJ technology alliances at SAP Ariba Elmar BOB noted that the consolidation phase is coming, as a result of which the volatility of the crypto market has reached its multi-month bottom, and the 30-day volatility index of BTC now stays at the level of 1.56%.
It looks like the young virtual currency industry is finally starting to mature. The CEO and co-founder of the DLT music project Erik MENDELSON believes that the low level of volatility is due to the decline in the volume of speculative operations: “In the past people who were making a lot of money in crypto, didn’t have a clue on what they were doing. They were not savvy investors, and were just buying and selling, pumping and dumping for a quick flip. A lot of these guys are gone because of the way the market is right now”.
Senior Commodity Strategist at Bloomberg Intelligence Mike MCGLONE also points out the maturing phase of the market, where "there are more participants, more derivatives, more ways of trading, hedging and arbitraging". Another reason for the rather high stability of the BTC rate is the moment of waiting. Market players are not yet ready to withdraw the coin from the above-described range, as there are no strong catalysts that could create a momentum.
The key question of today is what decision the SEC will make on bitcoin-ETF. Previously, the United States Securities and Exchange Commission has rejected nine applications from three companies: GraniteShares, ProShare, Direxion, referring to the industry high volatility and the possibility of manipulation of the market prices. However, now the SEC is ready to reconsider its decision as it discusses the pros and cons of the financial instrument with investors and offers to share comments on the rules of its regulation until October 26. The joint application by SolidX, VanEck and CBOE is the most likely to get the SEC’s approval since the agency has already received more than 1,000 comments on it.
Why is everybody waiting for the bitcoin-ETF to be approved? This exchange traded fund will buy Bitcoin and sell its shares to investors, which will eliminate the need for capital holders to store electronic coins and search for them on their own. Issuers of the bitcoin-ETF will assume responsibilities for the clients’ savings and their insurance. Investors will not have to deal with the risks of hacking attacks that are torturing crypto exchanges and wallets. Therefore, the launch of bitcoin-ETF is expected to attract institutional investors, such as investment and pension funds, which will make the market more liquid and may boost the growth of Bitcoin, and hence other altcoins.
High hopes assigned to bitcoin-ETF remind the situation with bitcoin-futures. If the new financial instrument is approved by the SEC, the hodlers, who are waiting for big positive news and the opportunity to finally generate income from their crypto investments, can create such a high volume of supply that it will exceed the demand and will not give the opportunity for the Bitcoin rate to grow significantly.
What is more, bitcoin-ETF will still be a risky asset, and not all the holders of large capital will dare to invest in it. For instance, in the application of VanEck SolidX Bitcoin Trust it is stated that the Fund's shares are not insured and are not guaranteed by the Federal Deposit Insurance Corporation (FDIC). The Fund’s insurance will not cover certain losses including the following:
· any loss, claim or damage that does not exceed the policy’s $500,000 deductible;
· loss caused or contributed by theft or any other fraudulent, dishonest or criminal acts committed by a partner, employee or director of the Sponsor (SolidX) or the Trust, controlling more than 25% of the issued share capital of the Sponsor or any of its subsidiaries;
· loss caused by an employee if an elected or appointed official of the Trust or the Sponsor (not in collusion) knows of any acts of theft, fraud or dishonesty involving amounts in excess of $5,000 by such employee prior to the Trust’s or Sponsor’s discovery of a loss caused by such acts of the employee;
· any losses caused by an employee who has access to the private keys associated with the Trust’s Bitcoin in the same circumstances stated above; · loss of the private keys associated with the Trust’s Bitcoin where such private keys are stored or being transmitted between computers or similar electronic devices that are connected to the Internet;
· any loss resulting from the network failure of the Bitcoin protocol.
In addition, the Fund's shares will include solely Bitcoin (1 share - 25 BTC), which does not correspond to one of the main characteristics and advantages of traditional ETFs, namely the ability to widely diversify their portfolios by investing in a basket of different assets. For example, the Vanguard FTSE Developed Markets ETFs contain shares of almost 2,000 companies, including Nestle, Unilever, HSBC, Samsung, Bayer, Toyota, etc.
There are doubts that there will be many investors who will have interest in the new financial instrument. For example, according to the July report of Grayscale Investments, which sell shares of the Bitcoin Investment Trust Fund, capital inflows in the Fund reached $157.04 mln since the beginning of the year. It turns out that investments in the amount of $6.04 mln are made on an average weekly basis, which means that by now the Fund has managed to attract funds of approximately $223.48 mln. Thus we may assume that the institutions, that really wanted to purchase bitcoin-assets, had already found ways to make their investments. And the volume of new capital put in bitcoin-ETF may not meet high expectations of the crypto-world.
In this regard, there are questions about how significant the growth of the crypto currency will be, and even if it will be serious, whether Bitcoin will be able to hold new positions. "Derivatives don’t need to strengthen or weaken the position of Bitcoin. The improvement of protocol and increase usage will be the only things that will strengthen the position of Bitcoin”, - said Chief Investment Officer at Arcadia Crypto Ventures Nithin EAPEN.
At the moment, the bitcoin blockchain is capable of processing from 3 to 10 transactions per second, which is negligible in comparison with the Visa payment system, that practically carries out 1,700-2,000 operations per second while theoretically the number can be up to 65,000. The XRP altcoin is superior to BTC for this indicator to 214 times. Low scalability of the protocol and therefore slow payments prevent the popularization of the digital currency as a means of payment.
Lightning Network as the technological solution to the scalability problem has been discussed for a long time now. The main idea is that not all transactions should be carried out on the blockchain as part of them can be transferred to the payment channels of the proposed network. A large number of users with open channels will create a pool of BTC liquidity. In this case, the network finds the nodes that have enough coins to make a payment and builds the shortest route through the nodes to execute a transaction.
However, in order to open channels users will have to make a pre-payment and keep the funds on the account in the future. But their volume is likely to be small as having money sitting is inefficient and unprofitable for users due to other investment opportunities missed. In turn, this leads to the illiquidity of the network itself and requires the creation of large payment channels that will be funded to fulfill payments across the network. Such hub channels make the network centralized, which contradicts the basic principle of Bitcoin and triggers criticism by many participants of the crypto community.
Recently at the Scaling Bitcoin seminar in Tokyo the co-founder of Blockstream Mark FRIEDENBACH suggested to increase the power of the bitcoin protocol by creating a soft fork called Forward Blocks, which will represent the development of another PoW algorithm in which the sharding technology will be implemented (the technology is described in detail in our article). Mr. FRIEDENBACH predicts growth of operations volume in 3584 times. This statement provoked a heated discussion. There are some that have already called Forward Blocks a provocation, seeing the technology as a threat of a temporary network attack.
The problem of increasing scalability remains unresolved, which creates very vague prospects for the development of Bitcoin. The main digital currency will have chances to be used in real-time payments, and not only as a subject of investment and speculation in case its protocol will be enhanced with a way bigger operational efficiency.