Happy Friday all! Zac here writing from a bustling Mexico City, and Avi from sunny Boca Raton.
Fact of the day - only 35% of Mexicans over 15 have a bank account. Hell of an opportunity for crypto companies or traditional fintechs. Have a great weekend!
Three things you need to know:
One: Paradigm introduces crypto options block trading
Yesterday marked a big step towards mainstream adoption for the cryptocurrency derivatives market. Paradigm, an up-and-coming messaging application for cryptocurrency traders, announced a partnership with Deribit that will allow large traders to discuss and settle options transactions through their messaging platform.
Over the last year, many institutions have entered the derivatives space and have quickly found there is often thin depth on orderbooks. This forced institutions into private chat rooms on applications like Skype, Telegram, etc that were used to discuss and place trades.
These trades did not come without risk. When they were negotiated, one counterparty would have to go to Deribit and place an open trade on the order book. If the opposing counterparty wasn’t fast enough, it was entirely possible that they wouldn’t be able to executive the trade — as someone else would eat up the offer.
Paradigm solves this issue completely by allowing two counterparties to discuss, agree and settle transactions entirely through their messaging application. This should bring significant comfort to large counterparties and will help drive forward adoption.
Why this matters: Derivatives volumes have been growing exponentially over the last year, and many new firms are entering the area as they bet on continued growth. Institutional tooling is paramount to success, especially in an industry as complicated as cryptocurrency derivatives. Your average retail trader will likely not put forth too much volume (at least, not yet!) so catering to the institutional crowd is necessary for success.
Directional ideas: If you (like me) believe that the coming derivatives space will explode, then it may be a good idea to look at offerings in the traditional derivatives space and figure out how they may apply to crypto.
Two: Who actually uses Bitcoin in Gaza
I love myself a story about crypto being used to help ordinary people (innocent people) with limited access to the traditional financial system. Absolutely love it. I also love when things are put into context so people can see the bigger picture.
These two great things combined yesterday with a great Coindesk piece on how Bitcoin is being used in Gaza.
The background to my joy: Earlier this week the New York Times released a piece on how terrorist networks have been increasingly using Bitcoin and other cryptocurrencies to help finance themselves, having been cut off from traditional financial networks. In particular the article centered on Hamas, a terrorist organization that is the de-facto government of Gaza, and how it was using crypto to fund terrorism. Not good, and a bad look generally for this industry.
Then we got some context. Terrorists groups are alleged to have collected tens of thousands of dollars from Bitcoin donations. However sources connected to Coindesk then went on to discuss civilian usage of Bitcoin:
“There are some offices that now do $5 million to $6 million a month,” freelance web developer and Gaza-based bitcoiner Ismael Al-Safadi told CoinDesk about local money changers. “I’ve seen an office send 100 BTC in one [transaction]. … There are also a lot of small clients. They send $200 or $1,000.”
Why civilians are using Bitcoin: Palestine is largely cut off from international payment services such as PayPal. For many freelancers then, crypto payments are one of the few ways they can get paid by international clients. Other uses include remittances from family abroad, where citizens in Palestine receive crypto and then exchange it for fiat through local peer-to-peer groups.
Reality check: In all likelihood the overall volume of crypto transactions in Palestine is low, and being proud that civilians use BTC more than terrorists is a rather low bar. However this story is important because a) people’s lives are genuinely being improved through using crypto and b) there’s still a stubborn mainstream narrative that crypto and illicit activity are closely linked. Consider this golden oldie chart:
Next time you hear someone complain that Bitcoin is only used for illicit transactions, please gently slap them across the face until they understand that on best estimates, only around 1-2% of the economic value is used for illicit activity.
Three: Litecoin’s warning — the dangers of halvings
Litecoin had its block reward cut in half on August 5th. In general, people love to speculate on the effects that a halving could have on the ecosystem (well, mostly the price) of an asset.
Litecoin provided a nice case study in the potential effects of a halving. Price (in Bitcoin terms) peaked in April 2019, and saw a resurgence to highs in June 2019 (about 4 and 2 months before the halving respectively). Litecoin was one of the only altcoins to post positive returns vs Bitcoin in 2019, showing that a halving could be priced in as a positive event for price. This of course makes sense, as with halvings come supply reductions.
For larger assets such as Bitcoin, the market is more likely to effectively price in such events as the broader market (and especially those driving price) tend to know about halvings & the subsequent supply reduction far in advance. I’m less bullish on the impact of halvings on Bitcoin than I am on Bitcoin-clones such as Litecoin and BCH, for this reason.
This event also had a large impact on the Litecoin mining ecosystem. According to reporting from Coindesk:
Litecoin’s mining difficulty – a coded-in measure of how hard it is to solve the mathematical puzzles used to write blocks on the network – has dropped from 15.93 million on Aug. 4, one day before the halving, to 11.40 million on Aug. 22, based on data from mining pool BTC.com. The hashing power on the network has also fallen by 28 percent.
Litecoin’s mining difficulty is designed to automatically adjust every 2,016 blocks, approximately every 4 days, to ensure the block-producing interval remains about 2.5 minutes based on the average hashing power in the current cycle.
The 28 percent difficulty drop means the current level is the lowest since April 29. BTC.com’s data estimates that difficulty will continue to decline by another four percent at the next adjustment date, which is due in three days.
The 4-day average hashing power on the litecoin network has also declined from 456 terahash per second (TH/s) recorded on Aug. 4 to 326 TH/s on Aug. 22 at 23:54 UTC, when the latest difficulty adjustment occurred – a 28 percent drop.
Basically in short — mining is dropping off a cliff. Profitability for LTC miners was cut in half by this recent reduction meaning that a large portion of LTC miners (about a quarter from the data) were no longer profitable.
Why this matters: The reduction in hash power belies one of the major problems of halving events — the further centralization of mining. The lower the block reward, the more economics of scale are rewarded. This means that mining power becomes increasingly concentrated with large players. Let’s look at why this matters:
Halvings actually present one of the greatest game theory issues for assets like Bitcoin with a fixed supply. Will the network be able to sustain attack when block rewards are effectively zero? Will transactions fees be enough to support the network? The more money miners make while mining Bitcoin, the more secure Bitcoin is from a 51% attack. If block rewards go to zero and transactions fees don’t increase meaningfully, then we’ve run into an issue.
My general take on this is no — by the time 2140 rolls around Bitcoin’s supply schedule will need to increase in order to be game theoretically sound. This of course, hinges on the argument that BTC will be used as a store of value (i.e — not transacted with frequently). Based on the current “slow but secure” structure of Bitcoin, this seems like the most powerful narrative and therefore I am inclined to believe that in the (far off) future Bitcoin will need to extend block rewards.
Also in the news:
Direction: It didn’t take long for price to redirect bear. We flushed a significant amount of leverage down and broke the 10k barrier once again. We’re still stuck in the 9k - 13k range — a large range with lots of trading opportunity but a range nonetheless.
You can see on the 1hr chart provided above where you could have found a potential short opportunity. We’ve seen consecutive lower highs.
I’m personally going long above 10.9 and going short below 10.2. In this particular range, I believe there will be follow through to either side, as this is a completely momentum driven market. Paying attention to the slowing down of momentums, MA’s and large prints will do you well in this market.
Key Support: 10.2, 9.8
Key Resistance: 10.7
What I’m thinking today:
Hey all! We have a special guest post today from one of our favorite crypto analysts, Aditya Das of Brave New Coin.
He’s written a great long form research report on the state of Ethereum and what the upcoming hard fork could mean. You can check out the report linked here.
For those who want a tl;dr, a quick summary by Aditya follows:
Ethereum is at a crossroads. In its current state, it has failed to provide working solutions for enterprise customers and faces the twin threats of a multitude of competitors and growing impatience from investors and developers alike. In an attempt to address these concerns the project is scheduled to make two major network updates in the next six months.
The first of these, Istanbul, is a hard fork set to occur in October 2019 that will complete the Metropolis stage of Ethereum development (on the Ethereum 1.0 chain). The second and far more ambitious update, Ethereum Serenity is scheduled to begin in January 2020. The Serenity update will launch an entirely new blockchain with fresh core features like database sharding and a proof-of-stake consensus.
Istanbul implements major fixes to the Ethereum 1.0 network like a change away from the ETHash hashing algorithm to the newly created Progressive PoW algorithm. The time of the update has surprised some because of its closeness to the launch of ETH 2.0 and Serenity. Factors like Serenity’s extended release roadmap, and the number of stakeholders who are still dependant on ETH 1.0 (existing PoW miners & Dapp projects already deployed on the existing chain), have pushed core developers into a position where 2 chains will likely be worked on concurrently for at least the next 5 years.
This will likely mean Ethereum in the medium term will run with 2 chains, possibly with 2 separate Ether’s, each with its own distinct development communities and solution features.
Highly recommended to check out the report!
If you ❤️ our newsletter, tell your friends about us!
Nothing written in CryptoAM is legal or investment advice and should not be taken as such. CryptoAM does not make any guarantee or other promise as to any results that may be obtained from using our content. No one should make any investment decision without first consulting his or her own financial advisor and conducting his or her own research and due diligence.