By Tom Alford
The cryptocurrency market is constantly evolving and changing at a breakneck pace. This makes it particularly difficult to see too far into the future. But what are the major events you should have on your radar and how could they impact on cryptocurrency markets in 2018? We’ll jump into our top 5 events to watch in 2018.
1- The Introduction Of Conventional Currency Trading & Deposits On Crypto Exchanges
It’s no secret that the current cryptocurrency infrastructure is complicated. Have you ever tried to explain how to buy that ‘hot’ new altcoin to your friend and seen their eyes glaze over? Things get even more difficult when it comes to trading, as Bitcoin is the base currency of crypto and dominates trading pairs. In fact, it is probably impossible for cryptocurrency to go truly mainstream until it is easier for investors to get into the cryptocurrency markets.
The days of buying altcoins with Bitcoin may be numbered. On the 31st May 2018 the major cryptocurrency exchange Bittrex announced that it had signed a banking agreement to allow corporate clients to trade cryptocurrencies with conventional currency. This move should really help institutional investors get involved in the space. Institutional interest in cryptocurrency is widely reported. However, when it comes to institutions reporting tax in countries like the US, there is the problem of having to report everything in USD values. This means that a trading firm can actually lose Bitcoin whilst trading, but create tax liabilities if the crypto market has gone up in USD value. Easy access to fiat to crypto trading simply makes the cryptocurrency market more appealing to institutional investors. Needless to say, financial institutions have a lot of money to invest and this inflow of new money could see cryptocurrency prices reach all-time highs.
Expect More Cryptocurrency Exchanges To Be Accepting Fiat Deposits Very Soon
Conventional currency deposits on cryptocurrency exchanges will not be limited to institutional investors. Indeed, it appears that Coinbase will expand the range of cryptocurrencies retail investors can buy, with the introduction of Coinbase Prime.
It’s not only Coinbase that are looking to expand the range of cryptocurrencies investors can buy with fiat. New cryptocurrency exchanges like Ethos and Blockport are set to launch in 2018. Both plan to offer their users with the option of buying 100’s of cryptocurrencies with conventional currency. Blockport is set to launch in Q3 of 2018 and support over 100 cryptocurrencies and this figure is set to increase to over 200 by the end of the year. Both Ethos and Blockport will have their own cryptocurrency wallets, which means that new investors can store their cryptos in a single place.
The rise of cryptocurrency one-stop shops is set to be a major event of 2018. Indeed, centralized cryptocurrency exchanges that do not keep up and offer fiat currency deposit options are set to suffer. This will this simplify the market for new investors and make investing in cryptocurrencies more attractive. It will also help pave the way for increasing institutional investment in the space.
How Can Widespread Fiat Deposits On Crypto Exchanges Impact On Bitcoin?
This is not going to be popular with Bitcoin maximalists, but Bitcoin’s main utility right now is to buy altcoins. Right now, around 31% of the entire trading volume in the crypto market uses Bitcoin. Some may argue that Bitcoin has utility because it can be spent, but it’s hard to find a retailer that accepts Bitcoin and if you could spend it, would you really do it? Most people either treat Bitcoin as a speculative investment or use it to buy other cryptocurrencies.
Conventional currency deposits on cryptocurrency exchanges means that investors do not need to buy Bitcoin any more to purchase the altcoin they want. The rise of cryptocurrency exchanges that allow investors to buy numerous altcoins with conventional currency pretty much wipes out Bitcoin’s main use case right now. This simple change has the potential to pretty much make Bitcoin trading pairs obsolete overnight. For those that disagree, consider new investors coming into the market; are they likely to want to swap Bitcoin for altcoins or use USD?
With Bitcoin’s main use case under threat, this creates an environment where Bitcoin’s dominance as the number one cryptocurrency could be tested. In fact, it can be argued that in this environment, Ethereum has a much better use case as a trading pair. This is because most of the decentralized exchanges are built on the Ethereum blockchain. It will certainly be interesting to see if Bitcoin adapts to this new environment and if other use cases will emerge.
2 - The Ever Elusive Bitcoin ETF
For those that don’t know, an ETF stands for ‘exchange-traded fund’. They are securities that track an index or commodity and are traded openly on the stock market. A Bitcoin ETF will essentially enable institutions and retail investors to get exposure to the Bitcoin price easily.
Why is this such a big deal? Well, fund managers who manage many billions in client funds are not allowed to buy Bitcoin directly. This is why institutional money in the crypto market has been largely restricted to venture capital firms and family run offices. Cryptocurrency ETF’s open up cryptocurrency exposure to everyone participating in the stock market and that’s a lot of money that can flow into cryptocurrency.
We are a long way off it, but ETF’s pave the way for massive pools of money like pension funds to get exposure to cryptocurrency. ETF’s also give retail investors the opportunity to hold cryptocurrency in tax efficient wrappers in some countries and generally make crypto more accessible to the masses to incorporate as part of an investment portfolio.
It is perhaps not surprising that cryptocurrency ETF’s could perhaps be the event that propels cryptocurrency to a multi-trillion dollar overall market cap. However, you must be aware that although Wall Street’s entry into crypto markets sounds like only good news, the reality is that ETF’s can be used to short the market as well.
Although many commentators see Bitcoin ETF’s being a long way away, the idea that these could be rolled out in 2018 has started to get traction amongst social influencers such as Nicholas Merten:
3 - Deployment Of Custody Solutions: Paving The Way For Institutional Money
Perhaps the biggest barrier stopping institutional money freely flowing into cryptocurrency markets is the historic lack of custody solutions. What is custody? To put it simply, it is when a company holds assets that are owned by clients and not themselves. Custody is important and has many legal and regulatory controls because the people that manage client funds cannot be trusted to act ethically. The risk of someone seeing a pile of client money and stealing some is too high.
Over the years, regulators such as the SEC have prosecuted and enforced custody on financial firms. The issue for institutional money is that they need to comply with the rules or face legal action and regulatory issues. In the past, this issue of custody has prevented many interested financial firms from participating in the cryptocurrency markets.
However, things are changing and custody solutions are already being rolled out, with more set to go live in 2018. This solving of the custody problem helps pave the way for potentially billions or trillions of institutional funds to be poured into the cryptocurrency markets.
4 - G20 Cryptocurrency Regulation
After the G20 meeting in Buenos Aires earlier in the year, it was agreed that June 2018 was the soft deadline to start cryptocurrency regulatory talks and that a hard deadline was set for July. When it comes to global regulation, most countries tend to follow the rules outlined by the G20 and this is why the G20 consensus is important.
Regulatory clarity is also what institutions need to truly get involved in the cryptocurrency markets. Getting involved in cryptocurrency markets without this clarity simply puts them at regulatory risk later on and this is a position that companies want to avoid at all costs.
It is still unclear how quickly the cryptocurrency space will be regulated and in what form. The issue is that regulation done wrong can stifle the innovation happening in the cryptocurrency space. A complete lack of regulation leaves investors at risk of falling foul of scams like Bitconnect. Since cryptocurrencies have seen a fall from all-time highs in December, it appears that most cryptocurrency investors are in favor of some sort of regulation.
However, this may take longer than some people think. The reason is that the cryptocurrency space is moving so fast, that any regulation made now is likely to be out of date in a year or less. The topic of initial coin offerings was simply not being discussed a year ago and it’s a massive topic for regulators right now. It also remains to be seen if regulators truly understand cryptocurrency. The truth is that because cryptocurrency is constantly evolving, regulators are unlikely to understand what they are actually regulating. Maybe it’s better for regulators to take a back seat and see where cryptocurrency goes and how the technology develops before regulating. After all, regulators still cannot agree if cryptocurrency is money, a security, a commodity or property.
With the G20 it’s verdict on cryptocurrency could go either way. A favorable stance could see a massive rally in the overall crypto market and pave the way for institutional investors. Either way, the G20’s stance on crypto is worth monitoring in 2018 and it can significantly impact on cryptocurrency markets.
5 - The Question: Is Ethereum A Security?
Sure, we understand that The US Securities and Exchange Commission (SEC) mulling over if Ethereum should be classified as a security or not might seem a small thing. But this could be the most significant event that drives cryptocurrency markets down in 2018. To understand why, we will quickly go over Ethereum’s place in the cryptocurrency market.
Ethereum is a decentralized application developer platform and is the second biggest cryptocurrency. Ethereum basically enables application developers to build apps on top of the Ethereum blockchain. This means these apps can reap all the benefits of blockchain technology and Ethereum’s smart contracts. The platform has been exceptionally popular, with around a third of all cryptocurrency projects choosing to build on Ethereum. This means if anything negative were to happen to Ethereum, then the wider cryptocurrency market is highly likely to be affected.
What Would Happen If Ethereum Is Classified As A Security?
If SEC decides Ethereum is a security this will mean that only accredited investors will be able to trade Ethereum in the USA.
In the US the definition of an accredited investor is:
- A net worth of over $1,000,000.
- Or an income of over $200,000 per year, over the last two financial years.
The truth is that most US cryptocurrency investors will not meet the accredited investor criteria. This means the majority of the US market will be excluded from buying or selling Ethereum. Naturally, if SEC ruled that Ethereum was a security, we would expect there to be mass panic in cryptocurrency markets. It is exceptionally likely that US cryptocurrency holders would try and get out of the market as quickly as possible, out of fear of holding digital tokens they could do nothing with.
To make things worse, if Ethereum was deemed a security, it is highly likely that SEC would begin to question if every single cryptocurrency project built on Ethereum was also a security. That’s right, around a third of the cryptocurrency market could be impacted. This is why categorizing Ethereum as a security would result in not only a mass sell-ff of Ethereum, but every ERC-20 token as well.
Like it or not, what happens in the US matters. The US makes up a significant proportion of the entire cryptocurrency market. Key crypto influencers such as Suppoman have revealed that the US is their most important country in regards to viewer numbers.
What Other Impact This Have On The Crypto Market?
Ethereum being classified as a security would also affect cryptocurrency exchanges. Why is this? It’s because exchanges would all of a sudden be forced to register with SEC to allow them to trade securities. Failure to do so would result in crypto exchanges engaging in illegal securities trading. This is a huge deal and penalty is not only a huge fine but potentially a prison sentence for exchange owners.
It seems unlikely that exchange owners like the Winklevoss twins will want to take the risk and it’s likely that the Gemini exchange (owned by the Winklevi) would suspend Ethereum trading. This will just be the tip of the iceberg for exchanges because the SEC has the power to enforce the ‘disgorgement’ of unearned profits. This means:
“Disgorgement is the act of giving up something such as the profits obtained by illegal or unethical acts on demand or by legal compulsion. Court can order wrongdoers to pay back illegal profits to prevent unjust enrichment.”
If the SEC implements disgorgement, it is likely that cryptocurrency exchanges will be forced to sell a significant amount of crypto they hold to pay the bill. This mass selling is more than likely to cause a decline in overall cryptocurrency markets.
2018 is full of key events that could have a significant impact on the cryptocurrency markets. Even though the question of whether Ethereum is a security or not seems frightening, it seems unlikely that SEC would take such drastic measures. It is also worth noting that the vast majority of commentators support that idea that Ethereum is not a security in its current form.
Overall, there are more key events lined up in 2018 that are likely to positively impact cryptocurrency markets, then those that would likely lead to declines in price. We believe that the overall cryptocurrency market outlook for 2018 is positive and crypto will take great leaps forward as an investment class. Even though we are expecting more institutional investment in cryptocurrency this year, 2018 may not be the year that full-scale institutional money is poured into the cryptocurrency market. But you must remember: It’s not so much a matter of ‘if’ but ‘when’? If you want help with keeping tabs on the latest cryptocurrency events, I’ll certainly be sharing my thoughts on my blog TotalCrypto.io.
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