CryptoAM: Research Backed Trading, Binance Tries Decentralization, and Blockchain in Telecom

Q: Where does an Eskimo keep his Bitcoin?

3 things you need to know:

One: Academics are starting to quantify crypto. Most in depth crypto research these days is posted in the form of Medium articles — thoroughly unvetted but often interesting. This year, we’ve seen an explosion of peer reviewed, academic papers written about investing in crypto. Last week, two Yale economists published a paper detailing two effective trading strategies that were always known, but are now quantified.

  • Momentum investing: In general, the momentum effect compares trends with their timeframes. For instance, a substantial price weekly rally (over 20%) should be taken as a sign to purchase the cryptocurrency. A trader, according to the study, should hold the asset for at least a week before selling it at a profitable margin. Similarly, extended downside momentum (again weekly) should be taken as a sign to quickly exit the market, before the risk intensifies.

  • Investor attention: The Yale study also found that an average increase in the social media queries for a crypto-asset indicated the price of the asset will increase in the coming weeks. Similarly, negative investor attention — with keywords like “bitcoin hack” — predicted a decrease in price.

    “A one-standard-deviation increase in the Twitter post count for the word “Bitcoin” yields a 2.50 percent increase in the 1-week ahead Bitcoin returns,”

  • Takeaway: Simple strategies such as momentum and social media mentions work in cryptocurrency because of inefficiencies in the market. The regular stock market has large players who price new information into stocks immediately — any deviation from market value gets arbitraged away. In crypto however, there is massive information asymmetry which leads to price discrepancies.

  • Hard for the little guy: Your average crypto trader doesn't quantify momentum, and doesn't pay close enough attention to the market to trade when momentum shifts. The same person likely does not monitor social media/have algorithms that tell him whats going on. Since retail traders are the majority of volume, this leads to opportunity for technical & sophisticated investors.

  • Read more…

Two: Binance tries on decentralization. Binance is planning to launch a new public blockchain for the purposes of developing the Binance Chain, a platform to transfer and trade different crypto assets without a centralized operator. This week, CEO Changpeng Zhao provided the first demonstration of the Binance Decentralized Exchange and the Binance Chain.

  • Be smart: Binance understands that decentralization is the future, and that over the next 3-5 years we will see massive improvements in the usability and performance of decentralized exchanges. They are the only major exchange to be at the testing and demoing stage, showing they’re far ahead the competition.

  • All about the $$$: Since decentralized exchanges don’t generate revenue, Binance needs to figure out a way to monetize. They are planning to integrate their own BNB token to run as the fuel for the platform, which would theoretically drive up the demand for BNB, and therefore the price. Their ultimate aim is to build an ecosystem around the BNB token, and have it be the main driver of value for Binance in the years to come.

  • Read more…

Three: Shinhan Bank, South Korea’s second largest, has entered an agreement with a market-leading telecom provider, KT Corp to develop a blockchain based telecom platform for digital vouchers.

  • Skin in the game: Shinhan bank has long been a bullish actor in the South Korean cryptocurrency space, lauding blockchain technology as a ‘core component’ of future banking systems. In accordance with their proclamations, the bank created a dedicated blockchain research wing under their digital strategy arm, and they were among the first South Korean financial institutions to support cryptocurrency exchanges. The bank also is working on a blockchain-based system for financial services such as wires and forex trading.

  • 1 + 1 > 2: 2018 has been the best year yet for infrastructure growth, with some developments such as Bakkt, ETF proposals and major companies building out blockchain arms. With two market-leading South Korean giants teaming up to create a blockchain platform, one plus one is greater than two, as I expect this to prompt other Korean firms into developing similar infrastructure. What the market needs is for first-movers to enter and prove out novel ideas, as more risk-averse players will be willing to adopt and improve upon ideas that have already been executed with some success in the real world.

  • Read more…

Also in the news:

What I’m reading today:

A Guide to 99% Fault Tolerant Consensus 

"We’ve heard for a long time that it’s possible to achieve consensus with 50% fault tolerance in a synchronous network (if an attacker has more than 50%, they can perform a “51% attack”, and there’s an analogue of this for any algorithm of this type). But did you know that if you add even more assumptions (specifically, you require observers to also be actively watching the consensus, and not just downloading its output after the fact), you can increase fault tolerance all the way to 99%?"

For those interesting in the game theory behind consensus mechanism, this post by Vitalik is pretty fascinating. The tl;dr of the whole thing is:

  1. 33% fault tolerance is achievable if all nodes (verifiers) downloading and checking all messages but not necessarily all at the same time (n)

  2. 50% fault tolerance is achievable by all nodes (verifiers) downloading and checking all messages received at the same time (n)

  3. You can achieve 99% fault tolerance by having the verifiers watch the consensus happening, download and check all messages at the same time.

  4. Math is cool, blog post is cool.

Around the corner:

Market Outlook:

Quick Take

We bounced to 6.55k like predicted, and rejected the 6.6k level a few hours later. The rejection off 6.55k and failure to close the daily above that resistance leads me to believe there will be further breakdown.

Key Resistance: 6540 Resistance, 6250 support. A break above resistance will most likely lead to a test of 6.8k and a break below support will be likely lead us to 5.8k. Buying the resistance and selling the support is a good idea, as the market has been overly reflexive of late — trends are strong.

Based on the charts I’m looking for a breakdown to the 6.33k level first before continued dump or a bounce. If we bounce off 6.33k I’ll have buys laddered up to 6.4k. If we break down past 6.33k I’ll be shorting down to 6.1k.

1h timeframe

Fear & Greed

According to fear and greed, we may be overbought, which is why I believe a breakdown is coming. Longs outnumber shorts by a large number, and we could see flash dump if stops get triggered.

Here’s a reminder of what these criteria mean

Overall Picture

It’s more likely than not we saw a local top at 8.5k. We saw a EMA cross 4 days ago which signals the bears have taken control once again. I’ll be looking for a bullish EMA crossover before I’m convinced of any trend reversal. We’re in a downtrend until 8.5k breaks, and therefore you should be more cautious going long than short.

On Balance Volume has declined significantly, and is at it’s lowest level of 2018. This could indicate a slowing down of selling, but what’s more likely is some sideways action coming soon.

1D timeframe

A: …in a cold wallet ;)

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