No one can say 2018 is off to a dull start in the cryptocurrency market. After reaching for the stars screaming “the party will never end” in early January, a funny thing happened… the party did end and the ensuing hangover was terrible.
The selloff pressed even the most die hard cryptocurrency investors to question their assumptions and investment thesis. Those that sold at the bottom had not prepared themselves mentally for that kind of volatility and flush lower. Fear gripped them and unfortunately they sold low. Remember our friends, Fear and Greed?
We have since bounced back and the outlook has improved. In this brief period of crypto calm, let’s take the time to survey the landscape and understand the current state of the cryptocurrency market.
CoinSavage always starts an analysis by asking the simple question. What does this investment have going for it (Positives) and against it (Negatives)?
Cryptocurrency Market Positives
- Improving Technicals– Bitcoin (BTC) is still the dominant asset in the cryptocurrency market, and as such its price movements usually play a leading role in the direction of other crypto assets. When Bitcoin sells off or goes higher, it usually pulls the rest of the market with it. Looking at a 1 year chart of Bitcoin, we seem to have bottomed at just under $6000 on February 6th 2018. Using Elliott Wave Theory, note the impulse wave higher (1-2-3-4-5) followed by correction wave (A-B-C).
2. Recent Regulatory News– Regulators seem to be cognizant of the threat they pose to crypto innovation through over regulation. Recent developments in the USA, South Korea, and Germany demonstrate a change in tune. See the links below.
USA – Commodities Futures Trading Commission (CFTC) Chairman Testimony at Senate Hearing on Virtual Currencies – “It strikes me that we owe it to this generation to respect their enthusiasm about virtual currencies with a thoughtful and balanced response, not a dismissive one…” February 5th 2018.
South Korea – South Korean Government Bans Officials From Crypto Holding and Trading – This is in response to supposed insider trading where Government officials may have circulated a false rumor about a potential ban in order to buy the dip.
Germany – Germany Won’t Tax You For Buying Coffee With Bitcoin – Avoids the painful taxation of individual transactions. Imagine having to figure out capital gains tax liability every time you bought a coffee with US Dollars.
3. Improving Market Infrastructure– Remember when Coinbase would crash under heavy volume? Well, that will probably happen again but it will require more traffic than before to crash. Crypto Exchanges have been on a hiring binge for engineers and customer service representatives. This will continue to make the cryptocurrency market ready for the mainstream.
Larger investment firms are also getting involved. Digital Payments company Circle purchased cryptocurrency exchange Poloniex in late February. Circle is partially owned by Goldman Sachs. This is a welcome development since it will pave the way for institutional investors to get involved in the crypto market.
4. Favorable Demographics– In 1980 only 5.7% of US households owned mutual funds. The baby boomer generation began entering its peak earnings years in 1982. By 1985, 14.7% of US households owned mutual funds. By 2016 43.6% of US households owned mutual funds (Statistics provided here). Baby Boomers in the early 1980s began to see stocks as a viable investment. Coincidentally, Echo Boomers are now beginning to enter their peak earnings years and have a much more favorable view of crypto assets than their parents (generally speaking).
To put the statistics above into perspective, Brian Sewell from the Bitcoin Academy recently stated that global adoption of cryptocurrency is 0.5% (Traders Expo New York, “Cryptocurrencies Panel”, February 26th 2018). If the global cryptocurrency adoption rate ever equaled the US household adoption rate of mutual funds, then the crypto market would see an 80 fold increase in adoption.
Cryptocurrency Market Negatives
- Tether– The smoke surrounding Tether has still not been resolved. If malfeasance has occurred then the cryptocurrency market will be affected significantly (see “Tether Might Still Be Crypto’s Ticking Time Bomb”).
2. Bitcoin Transaction Volume at Two Year Low– Using Bitcoin as the market bellwether, it is worrisome to see low transaction volumes. We need usage and velocity in the sector, slowdowns in fiat currency velocity have historically been a sign of coming recession (see “Bitcoin Transaction Volume Hits Two-Year Low, Despite Rock-Bottom Fees”).
3. Cryptos are Bearer Instruments– As long as cryptos are Bearer Instruments, then adoption and investment will suffer. The added stress and cost of keeping your asset secure is a major negative for most mainstream investors.
4. Risk Asset in a Rising Rate Environment– The cryptocurrency market has historically not been correlated to equities. Yet as cryptos become more mainstream a correlation to equities may develop. The negative consequence of a potential correlation is that risk assets historically do not perform well in a rising interest rate environment.
Four Positives to Four Negatives… Its a Tie??
No its not a tie… its never a tie. We are investors so we have to pick a side. Your decision to buy or sell comes down to how much you weight each of the Positives and Negatives listed above (and any additional you come up with on your own).
CoinSavage is long.