CryptoAM: The Justice Department, Coinbase, and Ashton Kutcher.

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What’s up everyone, Avi here. Today at CryptoAM, we are all communally deleting blockfolio to wean ourselves off our price checking addiction. Feel free to join us. Since you now have a ton of time on your hands, why not spend some of it inviting your friends to CryptoAM?

I know, I tell you to stop checking prices and then put them here. Sue me.

4 things you need to know:

One: The U.S Justice Department launched probe into Bitcoin price manipulation. At about 5am Eastern, Bloomberg broke one of the biggest regulatory stories of the year. In conjunction with the CFTC, the Justice department will be investigating whether people have been messing with the price of Bitcoin.

  • “The illicit tactics that the Justice Department is looking into include spoofing and wash trading… In spoofing, a trader submits a spate of orders and then cancels them once prices move in a desired direction. Wash trades involve a cheater trading with herself to give a false impression of market demand that lures other to dive in too. Coins prosecutors are examining include Bitcoin and Ether.”

  • This is new. Bitcoin has been the wild west of trading since it’s inception in 2008. Price manipulation has been perfectly legal because it’s not covered by any regulation. This move sends clear sign that this will no longer be tolerated. The time has come for people like Spoofy.

  • Be smart: It’s also great news for retail investors, who continually get the short end of the stick when it comes to trading Bitcoin. For those who’ve been around CryptoAM you know I like to caution people that Bitcoin (and crypto) is heavily manipulated by large ticket investors. This has been a clear for the past decade, and it causes huge losses for your average Joe.

  • Be smarter: This is good news for the price and fundamentals of the crypto market. With confidence that they can trade legally and against people who are playing the same game, investors will be more likely enter the markets.

  • Read the article…

Two: Coinbase acquires Paradex, a trading platform built on the (surprise!) 0x protocol. Coinbase has been on a shopping spree lately, snapping up companies left and right as they continue their march towards dominance of the crypto world. This is just the latest move cementing their position as the crypto-company to beat.

  • Be smart: There are two things you should get out of this news story.

  • First thing: Paradex is a decentralized exchange. Many people view these exchanges as the future of cryptocurrency trading. The main benefit of decentralized exchanges is allowing people to trade without ever having to give up ownership of their cryptocurrency, reducing the reliance on centralized exchanges…which have a history of getting hacked. Coinbase acquiring an Paradex is a strategic move to avoid having their core business model disrupted (which is being a centralized exchange).

  • Second thing: Paradex is built using the 0x protocol. As if we needed another reason to suspect Coinbase was interested in adding 0x to it’s platform. 0x also has a nice 30% pump after this buy was announced, showing that the market truly expects it to be listed soon. Nothing is certain, but if 0x is not one of the first few new coins on Coinbase, I would be very surprised. See. These. Hints.

  • Read more…

Three: Ashton Kutcher donates $4M in Ripple to Ellen DeGeneres. Yes you read that correctly.

  • This is pretty funny. You have two big name celebrities discussing a cryptocurrency in front of a massive audience. Ellens fanbase is large, and most likely does not have a large contingent of cryptocurrency believers. This also very positive for the space overall. Promotion of cryptocurrency to the general population and the network effects that follow should not be discounted.

  • Don’t believe me this could help? According to Tom Lee, head of FundStrat, $1 in new money added to the cryptocurrency markets adds about $25 to overall marketcap. With 300M people in the US, that means everyone needs to chuck in about $53 to get back to Decembers highs of 800B. Ya. Start calling your friends now.

  • Watch the video

Four: Iran and Russia are considering using crypto to avoid sanctions. And people say there isn’t a real use case for cryptocurrencies. Whether you agree morally or not, there’s something to be said about a product that allows you to transaction outside of the worlds financial system.

  • The original purpose of cryptocurrency and specifically Bitcoin was to reduce the peoples reliance on government. It’s interesting to see now that governments themselves are using it as a way to avoid…other governments.

  • Read on…

What I’m reading today:

For those of you who don’t know CoinCenter, they publish interesting articles about the regulatory side of cryptocurrency and blockchain. Here’s an article outlining all the reasons the U.S government should not treat all tokens as securities. It’s a good read.

The premise of the argument is that trying to impose traditional securities laws on decentralized systems wouldn’t be enforceable and would amount to a ban on interaction with that platform.

  • “There are two cases in which we believe securities treatment is reasonable, (1) promises to deliver a future token to investors and (2) tokens that represent specific contracted-for rights to profits from a developer’s efforts.”

  • However, in the case of a token that is free of any contractual promises or associated agreements between issuers and holders, classification as a security is nonsensical and certain to harm innovation. Tokens that lack these contractual promises or associated agreements are without discernible issuers. Rather, their value stems from a large number of unaffiliated persons working in the same general industry, often as competitors.”

The previous points I believe are well agreed upon, but the issue becomes sticky when there is a pre-sale involved before the actual building of a decentralized platform. For example, in the case of Ethereum, there was a token sale that raised a few million dollars before a platform was actually built. 4 years later, we now have a functioning decentralized system…but was a security at issuance?

  • “During the pre-sale there is a developer who has deliberately obligated themselves to investors by promising a future decentralized token in return for consideration… and it may be reasonable to classify the pre-sale agreement as a security, and treat the developer as an issuer. 

  • Once the developer delivers that promised token, however, that investment contract has, in effect, been liquidated…The relevant question at that point is whether the developers have, implicitly or explicitly, accepted new consideration in return for a new promise to undertake further profit-generating efforts upon which token-holders rely.

I’m not sure that I agree with this approach, and I’m not sure the government would either. If you have a developer deliver the token, it does not release them from the obligation of continuing to work on it unless delivering the token was the only thing promised. If there was any mention that a platform would be built, and the token would derive value from the platform, then the contract should still hold.

The sad fact is that it does not matter your intent, it matters how people treat the object. If the vast majority of people are buying into a sale because they are treating it as an investment in future development, then it is probably a security.

I agree wholeheartedly with CoinCenter that a blanket law saying all tokens are securities would be devastating, and I really hope for the sake of my portfolio (and yours) it doesn’t happen. That being said, I’d say that the majority of tokens on the market should be considered securities. Sucks.

Around the corner:

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Other things going on

Market Outlook:

Something I've been working on recently with one of my colleagues is a fear and greed index for cryptocurrency, similar to the one that CNN calculates here for the stock market. Keep an eye out for the full version next week, but for now let’s talk about the “momentum” component.

“Momentum” just measures trends in cryptocurrency price movement, and can indicate when things are overbought or oversold. To calculate momentum I used the spreads between a 5D and 20D exponential moving average, and normalized them to a scale of 0 -100, with zero being very oversold and 100 being very overbought. Check out the graph below.

As you can see, the February crash to 6k came with a sharp drop in the momentum indicated that price movement dropped a bit too quickly. BTC then responded with a sharp movement back to 12k at which point it was overbought again, hitting the upper bound.

Generally, hitting the upper bound over the past six months has indicated we are due for a price correction, and dropping past the lower bound has indicated the opposite.

Unfortunately, unlike the February drop it seems we are fairly priced right now. This is leading me to believe we have a tough couple of weeks ahead. Of course, this is just one indicator, so take it with a grain of salt.

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Send any question to cryptoampm@gmail.com and we’ll answer it in tomorrow’s edition of CryptoAM.

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