Welcome friends to the second round of CryptoAM. I’m writing from the balcony on a rainy day in Los Angeles, something I was promised would never be the case when I moved out here. All I can say is: still better than DC.
3 things you need to know:
One: The Ethereum Hard Fork Constantinople is Coming
There’s been quite a lot of chat recently (and seeming confusion) around the upcoming Constantinople fork and what it means for Ethereum. The reasoning behind this excitement was the failure of Constantinople to effectively launch in January, and the following price crash that accompanied. Before discussing the effects of the Constantinople fork, I’d like to take a moment to outline why exactly Ethereum is going through these forks in the first place.
Ethereum has gone through 2 distinct stages (out of a total of 4) so far. Each stage is an “improvement” upon the last stage, and introduces more flexibility, scalability and power to the ethereum blockchain. These stages are:
Frontier <— Where Ethereum launched
Homestead <— You are here
Metropolis <— Where we are going today (at approximately 12 noon PST)
Serenity <— the “final form”
Here’s where it gets slightly confusing. These are names of specific stages (which I will now refer to as era’s), but not forks.
Frontier was the launch of Ethereum, so there was technically no fork associated with that.
About 9 months later, Ethereum experienced the “Homestead fork” which signaled the beginning of the current Homestead era.
The Metropolis Era has two forks associated with it — Byzantium (10/16/17) and Constantinople (planned for January, now pushed to today). Once these two forks are completed, we will officially be in the Metropolis Era.
Metropolis is the least game-changing Era. The exciting stuff (Like Proof of Stake, sharding, etc) comes during the Serenity era. The reason for the excitement this time is because there were last minute critical bugs discovered before the planned implementation of Constantinople in January, and so the hard fork was postponed to give developers more time to work on the software.
After the mishap, Ethereum traded down approximately ~8%. Due to this, I’d expect a small bump in Ethereum on successful completion of the fork, as it would erase some technical worries. Note that I expect an increase vs BTC, not necessarily USD. The ETH/USD rate is almost always determined by the direction of Bitcoin, which I discuss below.
Go deeper: For a full list of upgrades that are happening during the fork, you can check out this overview. To watch the fork live, you can check out this block monitor.
Two: Here’s a statistic: 2% of Ethereum is locked up in MakerDAO Contracts
According to DaiStats, almost 2% of the total Ethereum supply is locked up in MakerDAO contracts, showing that the market still has a large amount of demand for a decentralized stable coin despite the abundance of other fully collateralized options. There are two main takeaways here: Ethereum is actually quite scarce, and MakerDAO is undeniably a successful experiment. Despite the constant refrain that their are no successful dApps, it’s clear in the face of statistics that Maker has proven itself to be a useful application of Ethereum.
There were rumors of DAI breaking it’s peg, but these rumors are overblown. DAI is trading at par with the dollar except for on Coinbase Pro, where is it trading at a 1.5% discount to USDC. This price discrepancy has less to do with the DAI than with the fact people are willing to pay a premium for USDC on Coinbase because it’s the only way to easily change crypto into fiat USD without taking on price risks.
It’s likely that in a continued bear market people are going to require less leverage and would rather not lock up large amount of collateral (you need to post 150% collateral as of now). This is especially true now that there are options to earn interest on your “loan” through interesting decentralized protocols like the Dharma Protocol.
Go deeper: Read this for a great primer of the MakerDAO + DAI ecosystem
Three: Bitcoin retail investor holdings continue to grow
Retail investor interest in Bitcoin is still showing strength. According to a report from Diar, addresses holding between 1-10 Bitcoin represent 10% of circulating supply. Despite the crypto winter and the bursting of the retail hype that peaked at the end of 2017 and beginning of 2018, this segment has seen decent overall yearly growth of 6%.
Hodlers continue to Hodl. 91% of these addresses have never made an ongoing transaction, suggesting that these investors see Bitcoin as a store of value and potentially see it as an opportunity for asymmetric returns (see today's 'What I'm Reading').
Diar’s conclusion: During the same period wallets holding 100-1000 BTC actually decreased by 6%. So this either suggests two things - big money and institutions are slowly losing interest in BTC or that wealth distribution could be increasing. Despite its decentralized origins, the reality is that Bitcoin and other cryptocurrencies are highly supply centralized with the majority of coins being held by large wallets.
My conclusion: This could be for a number of reasons, spanning large wallets moving to cold storage solutions that pool assets or to exchanges, but definitely suggests that there is increasing interest from the retail crowd going into 2019. It’s entirely likely though that large institutions are going through market participants that already have large holdings, so it wouldn’t surprise me if the most accurate way to track growth was by Coinbase account with BTC >100 or GBTC, etc.
Also in the news:
Market Outlook:
Quick Take
Direction: Bitcoin spent the last 2 days wicking violently, and hitting the resistance/support levels detailed earlier this week. When BTC stabilized, it was around the 3730 level discussed, before experiencing a steady climb to 3800.
Based on the previous price action and immediate pullback after the upwards wick, I’m leaning towards a second retest of the support level and am planning accordingly by lowering alt exposure.
Despite all this price action, implied volatility on Deribit is down significantly from earlier this week suggesting the market expects more churn. In general, calls are more expensive than puts for Bitcoin (the opposite of the traditional markets), so if playing volatility I would rather sell calls.
Key Support: 3730
Key Resistance: 3850
Overall Market: Alts has been moving significant over the last 2 weeks, but with the market structure turning bearish I would rather move out of alts that have over-performed and enter into a larger BTC position.
Fear & Greed
F&G is showing neutral, but strength is on the high side, with speculation being the metric dragging down the F&G the most. This indicates that we are likely oversold, and also now in a weak alt market.
Here’s a reminder of what these criteria mean
What I’m thinking today:
The nothingness value of cryptocurrencies
Traditional financial securities like equities and bonds have constraints that help us to model risk and define value. With a bond there are predictable cash flows and a defined maturity date. Using these constraints we can reasonably value this and there in little market variation in how to do this.
Cryptocurrencies throw this out the window. They have no return and never get paid - much like a zero coupon perpetual bond. But just because they're based on nothingness doesn't necessarily mean they're worthless, on the contrary this nothingness might actually be the source of their value. The author refers to it as a rare version of an 'unconstrained security'. Let's unpack this.
You can't value Bitcoin using a discounted cashflow model or whatever else you might find in a traditional finance textbook. The lack of agreed upon valuation method is a big reason why predictions of Bitcoin range from 'Moon by end of 2k19' to 'Bitcoin is Rat Poison Squared'. It also creates another dynamic - because the market can't accurately define their value the upper bound price value is potentially being far undervalued by the market.
Unconstrained securities can have asymmetrical utility. With a small amount of initial capital it might make sense to take a shot because you can achieve a much higher nominal windfall than nearly anywhere else. The key is these extreme returns are only possible because of this nothingness and the fact that the market can't value this nothingness.
Sound like the lottery? Yes and no. Basically every gambling service is controlled by some entity that ensures that the house maxes out, the cards are institutionally stacked against you. For a cryptocurrency like Bitcoin however no one controls this. So your odds of being able to to achieve asymmetrical returns are far better than they would be with your traditional lottery or gambling services. Yes there are elements of this in crypto with pump and dump groups, but it's nothing like having everything being basically owned by one central institution (unless your crypto begins with an x and ends with a p).
Young people in cities are most attracted to cryptocurrencies. If rent prices are higher than John McAfee and I have $200 to invest, my options are pretty limited. I could invest that in equities but my dividends are likely to be pitiful compared to what I'm paying day-to-day and even if I made $1000 on the investment, there's no way I'm able to buy any significant assets with that. Why not invest that into something that could 100x (because nobody can value this thing) and isn't institutionally stacked against me. This makes cryptocurrencies valuable and interesting tools for speculation
This idea of “nothingness” is actually something that I think about quite often, and the author here does a good job of articulating my general feelings on the matter.
There are precious few items in the world that humans value just because they do. Gold, fiat, and art are some of those things. Even fiat though gets value from the state allowing you to pay taxes and buy goods in that certain currency.
Things like gold, art and Bitcoin get there value because people *agree* that they have value. There is an elegant beauty to this. Why shouldn’t humanity — now entering a digital age — have something digital to truly value?
If you’re paywalled, reply to the email and I’ll send the article. FT is well worth the subscription though, IMO.
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