Update on Cryptoassets: October 16th, by Van K. Tharp, PhD

Van PhotoIn May 2018 Bloomberg announced that they had formed a cryptocurrency index, which is significant for a few reasons. First, Bloomberg only caters to institutional clients so their index is their first step to widespread institutional involvement.

Secondly, either in 2018 or early 2019 we will see ETFs for both BTC and ETH. Chances are Bloomberg’s index will form the basis for a cryptoasset index based ETF in the next two years. In that same time period, we are also going to see the SEC end its war with ICOs and end its argument that anyone raising capital with the promise of a profit is selling a security. In addition, the SEC will allow regulated exchanges for cryptoassets to open sometime in the next two years. After that, institutions will move significant assets into the cryptoasset markets and the eventual market cap will probably be in the neighborhood of 20 trillion dollars.

I’m in London now and I just heard that the British expect to take at least two years to sort out their laws and regulations around crypto assets.

In the meantime, while I haven’t heard any new information, big news should be coming out next month. November 2018 was the target for Intercontinental Exchange (ICE), which is the firm that owns the NYSE among many other exchanges to come out with its institutional platform for cryptos called Bakkt. ICE is developing Bakkt in conjunction with Microsoft and Starbucks. Institutions typically cannot hold their own assets, someone else has to hold them for them. There are also all sorts of issues around security etc. that have to be overcome.

Most institutions would love to have some exposure to cryptos because they are totally uncorrelated with other assets, such as equities. In addition, they give the potential for huge gains, which is exactly what pension funds have been looking for in their portfolios.

Now let’s take a look at the Bloomberg Index, the Bloomberg Galaxy Crypto Index. The index tracks ten major cryptoassets: Bitcoin (BTC), Bitcoin Cash (BTC), Ethereum (ETH), Ethereum Classic (ETC), Litecoin (LTC), EOS (EOS), Ripple (XRP), and three privacy coins DASH (DASH), Z-Coin (ZEC), and Monero (XRM). They started the index in May at 1000. It reached a high of 1020.73 on May 4th but the index shows a clear downtrend and it’s probably dangerous to invest in the asset class until we at least have two months of stable prices.

Here is a graph of the index to date — Last month the index was at 399.94. This month it is slightly higher at 435.01. Two straight up months might be a good buying signal. In fact the index has been fairly flat for several months.

CU Chart 1
Bitwise also has opened a HOLD 10 private index fund that you can actually invest in. The only difference between this index and the Bloomberg Index is that the Bloomberg Index holds Ethereum Classic (ETC) while Hold 10 has Stellar (XLM).
Cryptocompare also has an index of ten coins and it includes, Bitcoin, Ethereum, Ripple, Bitcoin Cash, EOS, Stellar, Dash, Cardano, and Tronix. So here Cardano and Tronix are different.

The table below shows Bitcoin, a 1st generation crypto asset, plus two second generation crypto assets ETH and NEO, and two third generation crypto assets (Iota and Skycoin). BTC is basically just a ledger whereas Ethereum and Neo both enable smart contract execution based on the ledger. Finally, IOTA and Skycoin are important because they combine smart contracts with huge scalability and zero transaction cost. Just because a crypto is third generation, however, doesn’t mean it will survive and dominate earlier cryptos. I’ve also added the prices for these coins on Jan 15, 2017 to put the current crash into perspective.

CU Chart 2
Date of the All-Time High Closes

*Dec 16, 2017 ** Jan 13, 2Sept018 ***Jan 15, 2018 **** Dec 8, 2017 ***** Dec 29, 2017

You will notice that the only coin to go down over the past two month is ETH and it’s up over last month. ETH is still a special case because of all the other coins produced on the Ethereum network that are having problems.

I have also added a second table, which includes the market cap for cryptoassets, the percentage of Bitcoin of the total market cap, the percent of market cap for the top five cryptocurrencies, and the number of cryptocurrencies listed.

CU Chart 3
* Bitcoin was as high as 90% of the market cap of all cryptos at the beginning of 2017 to as low as 32% at the top of the market. Part of the difference is that there are now nearly 2000 cryptocurrencies. SO the number keeps going up even though the market cap goes down.

** This was the peak of the crypto market in terms of market cap. Data via Tama Churchouse, Asia West Investor email on 4/11/18

The data in both of these tables comes from www.coinmarketcap.com. Coinmarketcap.com now lists 2085 cryptos, but it only gives a market cap for 1669 coins. The lowest ranking being for Harmony Coin at $259. Probably everyone reading this could afford to buy the entire supply if there is a market for it.

Notice that the market cap on October 16th has fallen over 70% since January 8th when we first started doing the crypto monthly update.

Yahoo Finance now lists prices for about 100 cryptocurrencies so I can run some of my normal studies on the data. I’m only looking at those coins for which there is at least 100 days of data — which does not include every crypto in the top 100 list by market cap. However, we have not updated the number of cryptos since we started.

CU Chart 4
This month three cryptos, including Veritaseum, from last month, have an SQN 100 over 1.0 and all the top 15 coins have positive scores. BTC, XRP, XLM, OX, and Zen (all major coins) are now positive. We are in a strong bear market for cryptos but the indices being flat for several months and all 15 top cryptos being positive is a major improvement from most of 2017.

We will have to see if this is another “dead cat bounce” or a sign of the end of the bear in the crypto market

I recently saw that Fidelity would be opening up a crypto desk for institutional investors in 2019. So this again is more news suggesting that 2019 could be a huge bull market again.

Cryptos are generally hated and big money is trying to take the market over by scaring people out. Generally, they are doing a good job because this is a very strong bear market. When the institutions believe they have sufficient control and size of the market, they will let the price rise and you can expect to see the first Bitcoin ETF. People will get excited again at that time. See the other article with this month’s update for what is really going on in the crypto universe.

In my crypto market model, I have a different listing for the top 15 and the bottom 15 cryptoassets. The table above uses Yahoo data and the table below uses coinmarketcap.com data. In the next few months, we expect to integrate this information, but for now I’ll just report both sets of data separately. However, it will probably take some time as Coinmarket cap now wants to charge $700 to use their data, so we will switch to another source.

Notice that our second listing also has all 15 coins with positive numbers. However it has one coin, ETP with a score of 2.81. This is strong bull and five more coins with SQN 100 scores over 1.0.

CU Chart 5
We have also classified the coins by type. We expect to improve in time this very preliminary version.
CU Chart 6
There are also a number of new coins that might be called stable coins, meaning they represent a Fiat currency that is fairly stable. Not enough yet that major crypto exchanges are using them, but enough that by some time in 2019, there will be an exit strategy for cryptos into stable coins that probably can be trusted…unlike Tether which has no proof that it is really backed by the US Dollar.
CU Chart 7
This month there are only two reds in the chart. Two are actually positive (yellow) and most of them are now brown. This again is a big change but by no means a bull market.

As I have said before, the blockchain is an institutional revolution, not a technological revolution. Right now institutions determine value and have all the power. Blockchain technology is likely to change all of that by allowing decentralized groups determine value. Institutions (and here I include big countries), however, will not give up there power easily. Right now, there is a conspiracy going on to keep prices down so that big institutions can accumulate as much as possible while they scare the average guy out of the market.

Bottom Line

  1. I don’t know what Bitcoin is going to do for the rest of the year. But I would guess the next Bull Market will probably start when ICE comes out with its platform for institutional investors to be able to buy cryptos. That is supposed to happen next month.
  2. I don’t like BTC because it is too slow to send, too expensive to send, and it it’s currently using up about 1.5% of the worlds electricity and this will get much worse. But I still wouldn’t be surprised to see it have a $50K plus valuation soon.
  3. I don’t know if the second and third generation crypto assets (Iota and Sky) will be the primary vehicles of the future. If they survive, I’m sure there will be lots of changes through forks.
  4. I am convinced that blockchain technology is absolutely here to stay and that the revolution taking place will be the biggest in my lifetime. It will change everything.
  5. One commentator on cryptoassets says decentralization is an absolute must for any cyptocurrency. This is true if it is to meet its long-term goals and become an institutional revolution. But remember that in the near term institutions will try to take it over and lack of decentralization will actually be a plus for them.
  6. 2018 is currently a difficult year because of lack of clarity around cryptoassets’ status. To some agencies, they are a form of security. To the IRS (and most national taxing authorities), they are property, which means a tax event occurs as soon as you sell any. For example, if you use a bitcoin debit card to buy coffee, you have just created a tax event. Cryptoassets need the $600 exclusion rule that applies to FOREX before it can become a major alternative to other currencies.
  7. In addition, while crypto projects are in their infancy and these small companies have to deal with the SEC, it will be difficult for them to explode into broad adoption. Huge legal issues hamper innovation.
  8. There will be ETFs for both BTC and ETH at some time in 2019. When that happens, their prices will explode and the crypto market in general will take off big time. Yes, the SEC has turned now numerous requests for an ETF, but it will not turn down the CBOE request that will be coming soon.
  9. I’ve offered to help my staff create their own crypto portfolio but most are reluctant to do anything. Only my personal executive assistant and one other staff member have set up one.
  10. It’s getting really close to the time to set up a crypto-asset portfolio. If ICE does come out with its platform next month that will be the start of the next bull market.
  11. Finally, many of the best traders/investors in the world became that way because of a huge edge and because they were the in the right place at the right time. Cryptoassets offer that kind of edge.
  12. We are holding a special workshop for the Super Traders at this year’s summit so that they can participate in this revolution. And I’ve lowered the requirements for them to attend.
Until November update, this is Van Tharp. That update could be exciting.

The purpose of this report is to just give you a status quo of the cryptoasset markets. It’s not meant to give recommendations or be predictive in any way.

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