Category: Crypto Investment

Why We’re Skipping Coinbase and Prefer Voyager Digital: Overview of Crypto Trading 

Posted on by io-fund

Voyager Digital is a smaller cap that gives investors exposure to the Bitcoin and crypto trading trend at a reasonable valuation. The company offers zero commissions and more coins than its competitors, including the rumored $100 billion market cap Coinbase that is going public soon, Kraken and Gemini. The stock is listed on the OTC market, which is higher risk than the Nasdaq as these stocks tend to be thinly traded.  

Voyager is a zero-commission competitor to Robinhood, and due to many PR mishaps, has opened a door for Voyager to become a replacement for customers who seek fewer politics around their crypto trading app.

Voyager also comes with the added benefit of offering 9% interest on stable coins as the company is a consortium for stable coins, including USD Coin (USDC) and Tether’s USDT, which have surpassed $7 billion in circulation.  As such, it provides exposure to decentralized coins like Bitcoin and stable coins based on the fiat system.

Although I am personally in favor of decentralized crypto and not stable coins, Big Tech and the Fed are likely to put immense pressure on adopting stable coins. Voyager allows investors exposure to both at a market cap of $2.18 billion, at time of writing. You can read my Facebook Libra article here where I am especially against this company entering the stable coin market.

Below we explain what makes Voyager a compelling investment, including what it does, how it makes money, valuation, catalysts, management, and potential risks.

Voyager: Zero Commissions, More Coins

As longtime crypto investors, we know all too well the issues around Coinbase and the other sites. The primary issue is the commissions that Coinbase charges, which are exorbitant to say the least. To make a $5000 trade on Coinbase, you will be charged about $80 in commissions. This isn’t competitive in an environment where stocks are traded at $0.

Voyager does not charge commissions on crypto trades and offers 9% interest on stable coins. One thing to note is that Voyager does not offer insurance like Gemini, and that our fund does not hold large amounts of crypto on trading platforms. Instead, we store crypto in cold storage wallets and use trading platforms for trading only. We discuss how Voyager makes money below, the differences in crypto platforms and how investors typically store their crypto below.

The fallout with Robinhood over GameStop has created an influx of customers for Voyager. Total revenue growth between December and February was over 1000% from $1.7 million to $20 million in monthly revenue.

Please note, my readers often ask me about the volatility of crypto and my answer to this is that crypto promises to be some of my most volatile investments. Stocks and crypto prices can drop 60% or more – and this has happened since my official coverage on bitcoin when it was priced at $12,000 and saw $4,000 before finding a base. You can read my past coverage here on Bitcoin in the summer of 2019.

Financial Overview

Although Coinbase was first to market, there is plenty of room for competitors to disrupt the company’s non-existent customer service and excessive commissions. For those who don’t trade crypto, you might be surprised to know that after paying such high fees, you are given no customer service whatsoever. The I/O Fund prefers Gemini as a commission-based platform as there is insurance offered to offset the cost of commissions.  

Voyager is FDIC-insured. However, the crypto held with Voyager is not insured. Gemini, which operates as a trust, has private insurance. Like us, crypto investors generally store their assets on a cold storage crypto wallet, which means it is not connected to the internet. In the event there is no insurance, the risk to cold storage wallets is minimal.

Significant Growth from Robinhood Tailwinds

Crypto investors are a tightknit community and we think word-of-mouth will grow nicely in this niche as it actively looks for new platforms. In December, the company reported $1.7 million in revenue and has grown to $8.5 million in January of 2021.

The company reported $2.5 million in revenue from Feb. 1 to Feb. 4—which we predicted could lead to $17 million in revenue in February. The company exceeded this and reported $20 million in revenue for February.

robinhood tailwinds growth rate data

Assets under management (AUM) grew from $230 million in December to $800 million by early February. Total assets under management by the end of February was $1.7 billion.

Trades per day averaged more than 30,000 for the month ending Jan. 31, up from approximately 6,500 in Dec. of 2020, representing 450% growth in daily trade volume. By early February, daily trades averaged 60,000 trades per day or nearly 1000% growth. In the March earnings report, the company reported a total of 70,000 trades in February.

In January, the value of customer trades increased over 500% to $840 million, up from $150 million in December of 2020. Over twelve months, the overall number of trades increased from 8,500 trades in December of 2019 to 1 million trades in January of 2021, an increase of 117,000%. This number may be irrelevant as most of this is priced in right now, yet we think it's important to look at the ongoing strength before the Robinhood issues.

Basic users grew from 150,000 in December to 440,000 by early February. The company reported 605,000 verified users at the end of February.

Here is the full statement from Steve Ehrlich, cofounder and CEO of Voyager, regarding the Robinhood catalyst and what investors can expect moving forward:

"While we believe our recent business metrics reflect the growing interest in the cryptocurrency ecosystem and long-term benefits of our business model, the unprecedented external events over the past week, including decisions made by competitive products, have brought significant upside to our metrics.

While we don't expect a repeat of the unprecedented external events of the past few weeks that have catalyzed the recent growth, we anticipate continued meaningful growth in our business, including from the pipeline of approximately 80,000 customers who have signed up and that we are presently onboarding.

We remain focused on executing our long-term business plan and expect Voyager will continue to grow the business in a more traditional pattern throughout the balance of 2021. To support this growth, we anticipate increased expenditures to materially increase our employee headcount during this period, while also growing our technology architecture stack in the near-term to accommodate significantly more users."

The company closed a private placement of $46 million on January 21st, 2021.

Voyager has seen 75%+ sequential quarter growth with increasing operating margins in 2020. Per the Investors Presentation, Voyager had a previous goal of reaching $20 billion AUM based on $500 million AUM as of Q1 2021 (this was achieved at nearly 3X the company’s original goal with currently $1.7 billion AUM). The company believes it can achieve 90% CAGR on number of funded accounts and 35% CAGR on average account size.

The company also states it takes $35 to acquire an account, and the company makes $30 per account in monthly revenue—which is excellent unit economics. Customer acquisition costs have averaged from $20 to low $30s per new account, according to Stifel Research.

In contrast, monthly revenue per account has accelerated from $40 per month at the calendar end of 2020 to $80 per month in C2021. A catalog of research reports are available from various funds and analysts covering the company, which is fairly extensive coverage considering the company's small market cap.

Voyager is a strong choice for alternative coins, as the app allows you to trade many tokens that Coinbase or Kraken does not support. For example, Voyager offers Dogecoin, a meme coin pushed by Elon Musk. It also offers interest on Bitcoin, Ethereum, Polkadot, and Chainlink.

Voyager sees its diversification across revenue streams as a way to minimize volatility. The revenue streams include listing fees, interest revenue, alternative coins and major coins.

Quarterly Financials
Voyager reported Fiscal Q2 2021 results March 1 for the period ending Dec. 31. The company had $3.56 million in revenue with $2.06 million in fees and interest income of $1.51 million. There was a net and comprehensive loss of $9 million.

Voyager expects to continue bringing new products to The Voyager platform, according to the report. In 2021 and beyond, executives anticipate adding debit cards, credit cards, stock trading, and the ability to trade on margin. Voyager will also look to grow internationally by expanding into Canada and Europe. 

Fiscal Q1 2021 results were reported on November 30th for the period ending September 30th. The company had $2 million with $1.6 million in fees and interest income of $400,000. There was a net and comprehensive loss of $3.97 million or ($0.04) EPS.

The company had cash and cash equivalents of $7.48 million and debt of $1.12 million at the last earnings report, which includes a PPP loan. There was an update for fiscal Q2 2021 on January 5th with quarterly revenue expected to reach $3.5 million.

Voyager also completed a private placement during the quarter, which increases gross proceeds raised during fiscal 2021 to C$13.8 million. It completed the acquisition of LGO, SAS, an AMF regulated entity that provides Voyager with a fully licensed European entity to accelerate its European strategy.

How does Voyager Make Money?
Voyager’s revenue is not dependent on commissions or fees. The company plans to introduce a debit card, credit card, margin, loans, and advisory products over the next year or so. Right now, the business model creates revenue in two specific ways:

1. Smart Order Routing: When you place an order to buy or sell a cryptocurrency, Voyager provides a listed price that you accept. It then connects your order to 12 exchanges. Unlike securities, which by law must have the same price across all domestic exchanges, cryptocurrencies are priced at variable levels. In other words, the same coin can be listed at two different prices at the exact same time.

Voyager uses your order to capitalize on this inefficiency by performing an arbitrage across various exchanges. The profits from such a move would typically surpass any commission or fee, allowing Voyager to provide exceptional pricing. Voyager will thus share the profits from this arbitrage with you in an attempt to execute your order at a lower price than you agreed to.

This business model will likely remain profitable until regulations change or there is too much competition in the arbitrage. Changes to the process would appear in the margins.

 2. Voyager operates like a bank. In their terms and conditions, Voyager very clearly states “We will lend, sell, pledge, rehypothecate, assign, invest, use, commingle or otherwise dispose of funds and cryptocurrency assets to counterparties, and we will use our commercial best efforts to prevent losses.”

 If you receive a loan from a bank, the loan is used by the bank as collateral for other investments. This creates multiple derivatives on a single asset. This is similar to Robinhood in that the users take on counterparty risk. Should Voyager become insolvent, you will need to stand in line behind other creditors to receive your money back.

 For taking on this risk, Voyager offers significant yield in a yield-starved economy. Like a bank, a minimal deposit must be kept to receive this interest payment, which can be as high as 9%. As part of this program, it may take up to 7 days for you to withdraw any crypto from your account. Voyager Digital is engaging in fractional lending practices, which banks have been doing for centuries.

 However, Voyager is not considered a bank or a broker-dealer. It does not provide FDIC or SPIC insurance for your cryptofor your crypto if there is a run on the bank, or if something occurs that would prevent them from meeting obligations. To conclude, FDIC insurance applies to the cash you hold at Voyager, but there is no insurance for the crypto held there. We discuss the differences in crypto trading platforms below.

Catalysts: Stablecoins and Global Expansion
Last March, Voyager acquired Circle Internet Financial’s trading app, which provided an additional 40,000 clients. The acquisition strengthens Voyager in offering the USDC stable coin that has $7 billion in circulation. Circle is backed by Goldman Sachs and is the founder of the consortium for USDC. The USDC coin allows global transfer of dollars at an instant and for a very low transaction cost.

The stable coin is part of a consortium that is also sponsored by Baidu, IDG Capital and Bitmain with participation on trading apps, such as Voyager and Coinbase. The supply of USDC has grown by 41% since the start of 2020. A recently announced acquisition of France-based digital asset exchange LGOUY expands Voyager Digital’s reach into Europe. Similarly, the firm is targeting to grow its footprint in Canada. We believe this global expansion should further boost Voyager's platform in terms of customers and revenue.

Valuation  

When we first covered Voyager on our premium site in January, the company was trading at a forward P/S of 100. We knew the revenue was growing substantially and the company would catch up to its valuation quickly. This is one reason that we think following people who understand tech growth is essential as Voyager is now reporting $20 million in revenue for the month of February alone. This places Voyager’s valuation at a forward P/S of 10 if we assume $200 million in revenue this year based off February and January numbers.

Compare this to Coinbase, a company expected to open at a $100 billion valuation, per a private auction as reported by Bloomberg. The company’s revenue in 2020 was $1.14 billion, up from $482 million in 2019 for 136% growth. If we generously assume similar growth in 2021, the revenue will be between $2.5 billion and $3 billion. Therefore, even if Coinbase can continue this high level of growth, the company will trade at a 30 forward P/S or higher.

Given these numbers and the likelihood Voyager will surprise to the upside from February’s revenue, we think the valuation on Voyager is more attractive at this time. This comes with risk as Voyager is on the thinly traded OTC markets. However, Coinbase is pursuing a direct listing and these have not performed well historically with both Spotify and Slack trading well below their opening DPO price for nearly two years after listing.

Coinbase has 2.8 million monthly transacting users and 43 million verified users. Assets under management are at $90 billion, per the S-1 filing.

Management

We personally do not see any red flags among management, which can often be the case in smaller cap companies.

CEO Stephen Ehrlich has experience running brokerages and financial companies. He was the CEO of E-Trade Professional Trading arm before it was bought by Lightspeed, and was then the CEO of Lightspeed Financial, CEO of PennTrade, and CEO of Tradier. Oscar Salazar is a Co-founder and he was early in Uber as the CTO.

The one issue that I do see is that they are involved in another company called Pager, a digital health startup. I prefer a founding team with one focus.

Major Differences in Crypto Trading Platforms plus Risks …

Since then, most major exchanges like Coinbase and Gemini have become custodians, which addresses the security risks. Coinbase, for example, keeps 98% of cryptocurrencies held in cold storage, where it is stored securely offline. The remaining 2%, which are held in hot storage, comes with insurance.

Gemini takes these security features a step further. Being classified as a trust, Gemini adheres to strict fiduciary capital reserve and cybersecurity standards by one of the toughest financial regulators, the New York Department of Financial Services.

The company also secured the SOC for Service Organizations Type 1 examination, which is typically reserved for the most stringently run financial services or technology firms. A SOC 2 review from an independent, third-party like Deloitte validates that Gemini is holding itself to high security, availability and confidentiality standards. Because of these additional measures, Gemini has become a favorite exchange/custodian for intuitional investors.

Voyager Digital was hacked as recently as December of 2020, but no customer data or assets were lost as the company shut down its systems when the vulnerability was detected.

As mentioned above, cryptocurrencies do not come with FDIC or SPIC insurance. FDIC protects depositors from banks becoming insolvent, providing guaranteed insurance of up to $250,000. The SPIC protects investors from a broker-dealer going bankrupt, providing insurance up to $500,000 in the unlikely occurrence of a broker-dealer becoming insolvent.

Counterparty risk is a reality for any crypto investor holding their coins at an exchange/custodian. If a custodian does not segregate coins and provide unique private keys that the company cannot access, the risk remains that an investor could lose a portion of their coins in the event of insolvency.

This happened to BitGrail in 2019, an Italian exchange. The courts declared that because all crypto deposits were directed towards the primary address of the exchange, and were not segregated, it was impossible to determine the coins' ownership. Thus, the remaining coins were used to pay off creditors, wiping out most of the individual investors using that exchange.

To be clear, we don't think this will happen with Voyager but are providing a 360-degree view of the risks. We think the crypto landscape has become much more secure since Mt. Gox and BitGrail, and these old stigmas prevent many investors from participating in this sweeping trend.

Coinbase, for example, clearly states that they do not segregate coins and control all private keys. In their terms and conditions, the company states that "Coinbase may use shared blockchain addresses, controlled by Coinbase, to hold Digital Currencies held on behalf of customers and/or held on behalf of Coinbase."

On the other hand, Gemini does segregate coins and states that not even the founders, CEO or president can access coins held in cold storage. They are further in the process of securing privately backed FDIC-like insurance for further protection and safeguards in the unlikely case of insolvency.

Please note, Voyager Digital is a thinly traded over-the-counter (OTC) stock. The OTC markets come with higher risk as there are no central brokers compared to stocks traded on the Nasdaq. As a small cap OTC stock tied to crypto moves, Voyager promises to be a roller-coaster ride.  

Conclusion

Coinbase also now has a competitor (Voyager) undercutting them on commissions and on the breadth of tokens. For most crypto investors, the process of holding tokens securely in cold storage is easy enough, and therefore, Voyager Digital is likely to be very popular despite the lack of insurance on crypto.

In our opinion, Voyager is a serious competitor to Coinbase – and most certainly to Robinhood. For our goals and desired gains in the I/O fund, we will take the 10 forward P/S on a company growing rapidly rather than an overpriced DPO at a much higher valuation.

Eventually, Voyager’s growth will settle but we think the value proposition of undercutting Coinbase on commissions will continue to help the app take market share in the word-of-mouth community of crypto traders.

Gemini does well for the high-dollar crypto investors, but this is not the same crowd as Voyager Digital. We see Voyager Digital as a competitor to Robinhood and Coinbase at an attractive market cap. We like the management and the diversification with stablecoins, as the Fed and Big Tech are likely to support stablecoins as time goes on. Therefore, Voyager offers exposure to both and has global expansion on the horizon.

Beth Kindig and the I/O Fund currently owns shares of Voyager. This is not financial advice. Please consult with your financial advisor in regards to any stocks you buy.

Follow me on Twitter. Check out my website or some of my other work here.Twitter. Check out my website or some of my other work here.

What’s Next for Bitcoin? Levels to Watch

Posted on by io-fund

With many popular stay-at-home stocks pulling back on heavy volume and Bitcoin testing $50,000, investors are wondering what’s in store for the world’s most popular cryptocurrency. While some traders have been—and still are—calling for a crash in Bitcoin, we see no reason to sell out just yet.

View webinar here:

Is This the Top?  

After reaching a new all-time high of $58,300 over the weekend, Bitcoin is currently trading just under $49,000.

The downward move came on the heels of a warning by U.S. Treasury Secretary Janet Yellen that Bitcoin is an “extremely inefficient” way to conduct monetary transactions, and a tweet by Tesla CEO Elon Musk that the price seems high.

Bitcoin is still up more than 80% this year, and we’re long since $7,753 for a more than 580% gain in our I/O Fund, which is invested in the most important tech microtrends.

Currently we are monitoring the $53,000 to $56,000 region for Bitcoin, which the digital coin is trying to clear. This is an area we will likely begin to start taking small gains to reduce the percentage allocation of Bitcoin in our portfolio.

If Bitcoin can clear this level, the next level of interest is $70,000/$80,000, which will be the zone at which we will continue to monitor closey. If Bitcoin can clear this region, the next level up will be $100,000 to $108,000.

We believe that between $53,000 to $56,000, and the $70,000/$80,000 region, Bitcoin should make a local top. When stocks or crypto reach these levels, we re-assess to determine if we will buy more, hold or sell in our fund. 

We’re Up 580% in Bitcoin! What’s Next?

Bitcoin is one of our largest holding at just under 8% of our I/O Fund.

In August 2019, when Bitcoin was trading at around $10,000—well below the 2017 high of nearly $20,000—Beth predicted that global unrest would help establish the digital currency as a safe haven for institutional and retail investors, pushing the market value to $1 trillion.

At the time, it was a contrarian call. But Beth’s analysis proved correct when Bitcoin’s total market value surpassed $1 trillion on Feb. 19.

We purchased Bitcoin in mid-March at around $7,750 and sent an alert to our premium subscribers. We alerted premium subscribers for additional entries at around $10,000, $11,000, $12,000, $20,000, and $49,000.

Our deep experience in technical analysis, as well as Beth’s conviction in her fundamental analysis that institutional investors, economic uncertainty, and mobile payments would push the price higher gave us the confidence to average up in Bitcoin as the trend continued along our projected path.

When Bitcoin was breaking out around $7,000 earlier this year, it was insane to predict Bitcoin would reach over $50,000. But that is what the technicals were suggesting at the time and this is what we published for our premium readers.

Is Bitcoin Due for a Pullback?

Remember when analysts and investors called for a top in Bitcoin at around $32,500? Instead of a top, we predicted a relatively mild pullback. We monitored $28,000 for a shallow pullback and $22,000 for a deeper pullback.

Over the long term, we believe there are a lot more gains to be made in Bitcoin.

In the short to intermediate timeframe we are due for a pullback, which we will view as a buying opportunity and alert premium subscribers. Until we see clear divergences at key technical levels, we plan to hold. However, once we start seeing signs of weakness at key levels, we often take gains and notify our subscribers.

Want to learn more about Bitcoin? Download our free e-book. To receive in-depth analysis on popular technology stocks, and alerts for key entries and exits, subscribe at research.beth.technology.free e-book. To receive in-depth analysis on popular technology stocks, and alerts for key entries and exits, subscribe at research.beth.technology.

My Early Bitcoin Bull Analysis

Posted on by io-fund

I first recommended Bitcoin to my free newsletter readers in June of 2019. Although I was already a proponent of Bitcoin (enough even to attend conferences), I knew it was time to bring the Bitcoin thesis to my readers in the public markets. I was hesitant because it was bold at the time to cover Bitcoin fundamentally for stock investors.

In August of 2019, my technical analyst – Knox Ridley — urged me to release a full-length PDF on the premium site with my target market caps so he could start guiding entries. He was adamant we needed to start guiding entry points because his technicals showed a solid long-term outlook.

In celebration of Bitcoin’s rally, we are releasing the premium PDF below and all other research. We are also going to start publicly releasing entries for Bitcoin (see below).

Here’s why you should read the PDF: we are coming up on the first target market cap listed in the report and we have a few market cap targets to go. I’m not saying target price because my analysis, in this case, was tied to market cap. Bitcoin’s price only seems exhorbitant but when tied to market cap — less so. You will find these market caps in the report from August of 2019.

Knox has guided eight entries into Bitcoin on our premium site since we covered the asset 18 months ago. His last entry published only a month ago is already up 86%. His first entry is up 393%. This is invaluable because it always feels like Bitcoin is too high (or too scary!) and yet it finds its legs and rallies again.

Knox is going to start releasing Bitcoin entries and exits for free on his Twitter account. For one, you’ll see how incredibly good he is, especially at Bitcoin because he has been tracking it daily for about two years. Secondly, you’ll be able to gauge the undulations of the crypto market and perhaps feel more confident by following whether Knox plans to enter again or not.

This is the value proposition we offer. After we pick the stocks and enter them, we do not leave people to fend for themselves. We continually find new entries at higher prices with our own money so people can gain confidence in entering tech growth stocks at higher levels (when warranted). How many Bitcoin bulls help you find new entries after they’ve secured low entry points? That’s exactly what Knox does. 

Please note — my free newsletter subscribers have gotten Bitcoin coverage since June of 2019 since it was priced at $11,146 or +244%. Our lowest entry on the premium site is at $7563 or +393% and our most recent entry was only a month ago and is up 86%. Even if you missed the coverage in 2019 – I covered it again in June 2020 for my free newsletter subscribers with “Why I’m Stacking Satoshis” when bitcoin was priced at $9304 or up +313% – You can see that despite sideways and even downward movement, I remained bullish and vocalized this.

My goal is to make sure you know that I try to bring really solid opportunities to my free newsletter readers as a tech analyst. My ideas are never recycled — and most of the time — I’m early to a fault.

The point being, I look forward to doing more of the same for you in 2021. Thanks for all of your support this year – I truly appreciate your readership.

I hope you enjoy the weekend!

Follow Knox on Twitter here

Bitcoin: Full-Length Premium PDF Analysis

This PDF will help guide entry and predicts that 2020 will be an important year, and thus to establish a bitcoin position in 2019. Below is background information on why the newly-launched Lightning Network is key to bitcoin’s success – something that has not been widely discussed. We also cover the halving of bitcoin to occur in 2020 (and how this affects price), and the potential market cap for bitcoin to help put our price target in perspective.

Sample Technical Analysis from August 13th by Knox Ridley

A more detailed report on bitcoin will follow in the coming weeks. In summary, we see BTC trading to $60,000 plus in the coming years. The fundamental thesis supports the price action on this move, and we will publish this for you in mid-September. The question is – will we have a major retrace before this move, or will we breakout from here, leaving these levels behind?

Bitcoin 3-Part Series

1. Will Bitcoin Make a Good Investment? Part 1: Institutional Adoption

The largest bitcoin conference in the world took place last month in San Francisco with many early pioneers discussing why bitcoin has made a good investment for them and why bitcoin investments will do well long-term. You can view highlights from the Bitcoin conference here.

2. Will Bitcoin Make a Good Investment? Phase 2: Economic Uncertainty

In the previous analysis, we discussed one primary reason that bitcoin will make a good long-term investment, as the price is likely to go up and stabilize once institutions gain SEC-regulated access. Fidelity and the NYSE-founded Bakkt are two examples of platforms that will influence the first phase of bitcoin’s broader adoption. These two platforms have not yet launched, but a new supply-and-demand dynamic will occur when institutional investors can access cryptocurrencies.

3. Is Bitcoin a Good Investment? Phase 3: Bitcoin Mobile Payments

Institutional adoption of bitcoin and economic uncertainty are two phases previously discussed in this series that evaluates if bitcoin will make a good investment. Finding the right entry price is critical for a buy and hold strategy as there is unusual volatility in this asset. Trading bitcoin may be successful for some; however, this series predicts that holding bitcoin until the technology matures is the better option – all of which is dependent on the right entry price for this volatile, yet high-potential asset

Why I’m Stacking Satoshis

Last July, I began covering bitcoin. The premise was based on three phases for widespread adoption: institutional adoption, global economic uncertainty, and mobile payments. With Square’s cash app reporting fifty percent of its payments being made in bitcoin, or $178 million, it’s time to revisit why bitcoin is a transformative technology that is often misunderstood. Square’s report was for the period between October 1st and December 31st, which represented an increase of 50 percent over the prior two quarters.

Highlights from 2019 Bitcoin Conference

Last week, the world’s largest bitcoin conference took place in San Francisco. Despite bitcoin holding a $200 billion market cap in Q2 2019, cryptocurrency conferences receive less press than tech conferences from companies with comparable market caps, such as Oracle World, Dream Force or even Oktane, a conference by a company with a fraction of the market cap that receives ample press coverage.

Why I’m Stacking Satoshis

Posted on by io-fund

Last July, I began covering bitcoin. The premise was based on three phases for widespread adoption: institutional adoption, global economic uncertainty, and mobile payments.

With Square’s cash app reporting fifty percent of its payments being made in bitcoin, or $178 million, it’s time to revisit why bitcoin is a transformative technology that is often misunderstood. Square’s report was for the period between October 1st and December 31st, which represented an increase of 50 percent over the prior two quarters.

Perhaps the more critical point to understand about bitcoin is that its purpose is not to polarize opinions on fiat currency. This is not a political election where you must choose a side. Rather bitcoin solves critical issues with digital trust and the fees associated with financial transactions. Therefore, it can coexist with fiat currency while having a unique purpose.

In January, I covered a string of mergers and acquisitions across fintech, such as Visa-Plaid, Mastercard-Nets & Vocalink, Fidelity-Worldpay and Fiserv-First Data. The problem with these acquisitions is there’s little benefit to customers and merchants. Digitization in finance is built atop age-old infrastructure and ignores the most obvious area in need of disruption: transaction fees.

Peer-to-peer payment apps on the market, such as Venmo, continue to charge merchants 2.9% plus a 30-cent transaction fee. Square charges 2.6% plus 10 cents per transaction. Therefore, the real value to consumers and merchants from fintech has yet to be seen. Last year alone, retailers paid $108 billion in electronic-payment costs — fiat currency can’t solve this issue.

Fiat currency also does not solve security issues as centralized systems do not inherently ensure digital trust. The Association of Certified Fraud Examiners reported a 42% frequency of fraud across small businesses costing an average of 5% of gross revenues. Credit card fraud is at $30 billion per year. Although Mastercard and Visa invest heavily in artificial intelligence for fraud detection, this is not necessary with a decentralized system that uses the network to verify identity.

Apple, Google, Microsoft and Amazon reached market caps of $1 trillion because their products scale to global populations and are required on a daily basis. Bitcoin not only scales to the global population but it also protects their livelihood – a necessity rather than a convenience.

At its current price of $10,000, the market cap of bitcoin is at $250 billion. Meanwhile, Bitcoin offers the most secure network in the world and is capable of reducing fees of $100 billion annually. This is in addition to automating our financial system, which can’t be done without a decentralized blockchain solution. The fact bitcoin hedges against inflation is a bonus, but is not the primary benefit of bitcoin.

Bitcoin V. Baby Boomers

Bitcoin is supported by some of the brightest minds in technology. By far, the most successful investors in technology believe bitcoin is a viable form of currency. Venture capital firms such as Khosla Ventures, Union Square Ventures, Lightspeed, and A16Z have been funding bitcoin projects for some time (circa 2013 and 2014). In an editorial written in 2014, Marc Andreessen put it aptly that there could not be a bigger divide between how technologists feel about bitcoin and how the rest of the world sees bitcoin. He argued that the ongoing movement by researchers and developers to bring this technology to the market will eventually win out over the public’s unwarranted bias.

One of bitcoin’s hurdles is multigenerational adoption. To date, bitcoin is predominantly a retail dominated asset. Charlie Munger and Warren Buffett both criticized bitcoin as worthless. In fact, Buffett went so far as to claim bitcoin is “probably rat poison squared.”

Furthermore, in 2018, Bill Gates spoke about how the anonymity of bitcoin will be used to promote terrorism. This became a reality in 2019 when it was discovered that North Korea partially funded their missile programs by acquiring bitcoins from cyber-attacks they enacted on crypto exchanges. 

The issue with listening to Warren Buffet, Charlie Munger and Bill Gates is they are not legendary tech investors. For the most part, Buffet and Munger invest in very large cap tech companies who are well past the stage of incubation. They are looking for safe, value bets with consistent cash flows. Early stage and disruptive tech could not be further from their investment goals.

Despite being a famous tech CEO, Bill Gates is a conservative investor who has done very little in the tech startup world. His top holdings are Berkshire Hathaway, Waste Management, Canadian National Railway Company, Caterpillar and Wal-mart.

Point being, the aforementioned venture capitalists have strong track records in identifying seed stage technology that disrupts industries.

There are a few traditional investors who have begun to embrace bitcoin. Paul Tudor Jones recently announced he has 1% of his fund in bitcoin and will grow to be 2% of his fund. He recently stated bitcoin may be the best performer: “When I think of bitcoin, look at it as one tiny part of a portfolio. It may end up being the best performer of all of them, I kind of think it might be,” he said. “But I’m very conservative. I’m going to keep a tiny percent of my assets in it and that’s it. It has not stood the test of time, for instance, the way gold has.”

Jaimie Dimon of JP Morgan has stated bitcoin “could be internal, could be commercial, it could one day be consumer.” In May, JP Morgan signed its first cryptocurrency exchange customers, Coinbase and Gemini. The bank will provide U.S. users with deposits and withdrawals via wire transfer.

To help institutional adoption, many custody solutions were introduced to the market recently. The word “custody” refers to a third-party provider of storage and security services for cryptocurrencies. In the first five months, six new custodians entered the market while a number of existing crypto custody providers have announced new features.

Vault storage is a popular method which keeps the majority of the crypto in offline storage with a minority in online storage. Custody solutions safeguard cryptocurrency, and go beyond private keys or wallets, which are subject to hacks or the misplacement of hard disk storage. These services are aimed at institutions and hedge funds, and incorporate a combination of storage online for liquidity and storage that is disconnected from the internet.

There has been some M&A in the crypto custodian market, as well, and exchanges such as Coinbase, Gemini and itBit have launched custody solutions. Upcoming modifications to the Glacier Protocol will also strengthen high-security offline storage for bitcoin for storage of over $100,000 (although notably is not for institutional use at this time).

You can read more here: Will Bitcoin Make a Good Investment? Part 1: Institutional Adoption

Economic Uncertainty: Look Beyond the United States

In addition to the benefits of decentralization for security purposes and to reduce the intermediary fees involved with transfers, bitcoin is also more attractive than many foreign currencies. For instance, even when Bitcoin lost value from $19,000 to $3,000, it still out-performed the inflation of Venezuela’s currency. On the flip side, when bitcoin rises in value from $5,000 to $11,000, it allows global populations to hold an appreciating asset.

Japan is an excellent case study for an economy that has struggled due to quantitative easing. As of 2018, the Japanese debt-to-GDP ratio is at an all-time high at 254% due to nearly 15 years of quantitative easing. Government debt to GDP in Japan averaged 137.4% from 1980 to 2017. Consequently, Japan is a thriving bitcoin market.

Over 3.5 million people in Japan trade cryptocurrency with the vast majority (84%) between the ages of 20 and 40. The trading volume in Japan rose from $22 million in March of 2014 to $97 billion in March of 2017. 

Perhaps more important than any specific geography supporting bitcoin adoption is to consider the Millennial demographic. Bitcoin and cryptocurrencies have been in existence for most of the Millennial generation’s adult life, having launched in 2008, and when this generation ages another decade, crypto and crypto wallets will be frictionless. Edelman Research published a study of 1,000 millennials with over $100,000 in income and found 25% own cryptocurrency.

You can read more here: Will Bitcoin Make a Good Investment? Phase 2: Economic Uncertainty

Retailers on Board

Paying for daily goods with a mobile wallet, tied to crypto, will become effortless in the years to come. One of the leading startups right now is Flexa’s SPEDN, which is linked to fifteen retailers, such as Whole Foods, Barnes and Noble, Nordstrom, Petco, Ulta Beauty, Lowe’s and Bed, Bath and Beyond. Several other online retailers accept bitcoin, as well, including brands such as Expedia, Hotels.com, Virgin Mobile, AT&T, etcetera.

JP Morgan has also built out its own blockchain settlement service with the dollar-backed JPM Coin. Centralized coins, such as Facebook’s Libra and JPM Coin, sound good in theory but coins do not hedge against inflation and are not scarce assets. They function like cashless digital transactions made through online platforms. AliPay functions similarly (although not encrypted) and was launched in 2004 and now serves 5% of the world’s population.

Starbucks, Apple and Google also allow digital transactions without the need for cash or credit cards. Centralized crypto coins have little benefit over a mobile app payment, and may be more cumbersome as the fiat currencies the crypto is based on will have to be exchanged, whereas with Starbucks, Apple Pay and Google Pay, no conversion to a “crypto coin” has to occur.

You can read more here: Is Bitcoin a Good Investment? Phase 3: Bitcoin Mobile Payments

CONCLUSION:

Too many critics misunderstand how development around Bitcoin, Ethereum and blockchain protocols improves the fiat system by removing unnecessary costs. Most recently, the Lightning Network has helped mobile payments.

Bitcoin: 2019 Analysis

Posted on by io-fund

This PDF will help guide entry and predicts that 2020 will be an important year, and thus to establish a bitcoin position in 2019. Below is background information on why the newly-launched Lightning Network is key to bitcoin’s success – something that has not been widely discussed. We also cover the halving of bitcoin to occur in 2020 (and how this affects price), and the potential market cap for bitcoin to help put our price target in perspective.  

 

197b8b43-ad29-447b-a1fc-8eabe54277e5_Bitcoin-Premium-Analysis+%281%29.pdf

Bitcoin: 2019 Analysis

INTRODUCTION:

Bitcoin has been covered on my free blog to make the following points:

•       SEC-regulated institutional trading is on the horizon

•       Global unrest will help establish bitcoin as a safe haven 

•       The Bitcoin protocol is too important for the development of all cryptocurrencies for the United States to take direct action against the token and/or protocol. If the United States wants a Fed coin, preventing further development on bitcoin would be counterintuitive.   

My previous series provides a good base for understanding the potential for bitcoin. 

This PDF will help guide entry and predicts that 2020 will be an important year, and thus to establish a bitcoin position in 2019. Below is background information on why the newly-launched Lightning Network is key to bitcoin’s success – something that has not been widely discussed. We also cover the halving of bitcoin to occur in 2020 (and how this affects price), and the potential market cap for bitcoin to help put our price target in perspective.   

SECTION 1: August 2019  Update         

Since writing on bitcoin in July, Bakkt has made progress and is slated to launch bitcoin futures on September 23rd. Here is an excerpt from my original coverage on what Bakkt is and why it’s important to track:

“Jeff Sprecher, the Chairman of Intercontinental Exchange (ICE) and Founder of the New York Stock Exchange (NYSE) and many other exchanges internationally, aims to create a federally-regulated crypto ecosystem. The consortium includes Microsoft, Starbucks and the Boston Consulting Group, who are working together to help leverage ICE’s trading infrastructure and to cater to retail investors, institutional investors, and consumers. This could help baby boomers put their 401K into bitcoin, and pave the way for bitcoin-backed ETFs or mutual funds.

Bakkt plans to launch its physically-settled bitcoin futures products for testing in July, according to the company’s blog post. At the core of Bakkt is the custody of digital assets for institutional clients. The first solution will be physical-delivery bitcoin futures traded on a federally regulated exchange and clearing house. 

The trades will happen on ICE Futures US (IFUS) and will be cleared on ICE Clear US (ICUS). Bakkt will provide regulated custody as the company has filed with the New York Department of Financial Services for approval to become a trust company and to serve as a Qualified Custodian for digital assets.”

Bakkt will also store bitcoin for institutional investors as an in-house custody solution with insurance of $125 million, which has been another missing piece for institutional interest. 

Notably, Starbucks’ payment app has more users than Google Pay or Apple Pay, which paints a bright future for Bakkt to open up a separate arm for digital payments in the future. 

China’s yuan also made news recently as China was accused of being “a currency manipulator.” Bitcoin’s price went up during the volatility and the economic uncertainty around foreign currencies (and perhaps someday, the dollar) was proven to be a catalyst for bitcoin. We saw more evidence that crypto, which is a non-sovereign, and highly secure digital store of value, will likely be leveraged during future recessions.

SECTION. 2. Lightning Network & Market Cap    

2A. Lightning Network      

Perhaps the only thing more turbulent than bitcoin’s price is the acceptance of bitcoin as a payment currency. During the most recent bitcoin selloff in Q3 2018, bitcoin payment volume dropped 80% from a high of $427 million to a low of $96 million, according to a survey of 17 bitcoin payment processors. 

To help stability, bitcoin payments need to be faster and cheaper. The lightning network was recently launched to address the issue around how many transactions per second the bitcoin network can handle. Prior to the lightning network, bitcoin was capable of processing about 7 transactions per second. This creates a serious lag, and transaction fees are prohibitive for frequent payments. Visa, for instance, processes about 24,000 transactions per second with a peak capacity of up to 50,000 transactions per second.

The Lightning Network is a “Layer 2” payment protocol that operates on top of cryptocurrency blockchains, and enables fast transactions. The users of the Lightning Network dedicate a funding transaction to the base blockchain, known as Layer 1.

Instead of keeping a record of every single transaction that occurs, the Lightning Network enables users to log records only when a payment channel between two parties is closed. This two parties to create a multi-signature wallet and conduct numerous transactions outside of the main blockchain and record them as a single balance when the payment channel is closed. 

Once the Lightning Network is more built out, you will be able to pay people you are connected to without setting up dedicated channels. This network will be used for small transactions that don’t require the security of the bitcoin network. Large transfers that require decentralized security will continue to take place on the original layer.

The final iteration for the Lightning Network will be the cross-chain atomic swaps, which will exchange crypto tokens between different blockchains without the need for a crypto currency exchange. 

Benefits  of  the Lightning  Network:                            

•       Transactions will take place on the Lightning Network channels and outside of the blockchain:

•       Fees will be minimal to non-existent for small payments like coffee, dinner, and local stores. 

•       Quick transactions no matter how busy the network is. The transactions will be instantaneous and able to keep pace with Visa, MasterCard and Paypal. 

•       Cross-chain atomic swaps will eliminate the need for separate crypto exchanges. The first tests of crossblockchain transactions functioned well and this is currently undergoing more testing.

•       The Lightning Network can reach 1 million transactions per second. 

As of now, the Lightning Network is very new to the market with the first white paper published in 2016 and interoperable test transactions performed in late 2017. By 2018, The Lightning Network concept was endorsed by Jack Dorsey of Square and Twitter, and the network had a growth rate of about 15%. The number of nodes increased from 1,500 to 3,000 and the number of channels increased from 4,000 to 11,000.  

The concept of the Lightning Network (LN) has been proven, however, the technology is undergoing development and not ready for deployment yet. Bitcoin’s transaction fees could rise, causing the cost of LN to rise. For instance, if one billion people use LN, the fees will rise to cover the scale. 

Additionally, the funds must be stored online, which is considered to be less secure than off-line cold storage. There’s also the potential for Fraudulent Channel Close, which occurs when one party closes the channel and pockets the funds while the other party is offline. 

The remaining hurdles that the Lightning Network must overcome will likely be solved through the pool of developers working on the network. This phase, when bitcoin moves beyond being an investment and becomes a currency used for transactions, will greatly increase its value and market cap. 

2B. Bitcoin’s Potential Market Cap    

It’s hard not to miss the headlines that predict bitcoin will reach $100,000 or $250,000. These numbers are hardly fathomable considering bitcoin was worth less than $1 about a decade ago. The problem with these headlines is that the growth may seem appalling (to anyone not invested), but the market cap projected by 6-figure bitcoin values is in line with what bitcoin is setting out to achieve. 

•       Priced at around $10,000, bitcoin has a market cap of $200 billion, or the size of Oracle or Salesforce. 

•       Priced at $50,000, bitcoin will have the market cap of Apple, Microsoft, Amazon and Google. 

•       Priced at $250,000, and bitcoin will have the market cap of gold, a safe haven asset that protects against inflation and economic uncertainty. 

My prediction is that once the Lightning Network is built out, bitcoin will surpass the market cap of Apple, Google, Microsoft and Amazon to reach a minimum of $50,000 per token. This is because the protocol solves critical needs for global populations, including the reduction of financial fees for 7 billion people, and offers a need to store money during times of inflation. 

Bitcoin is based on the most secure network in the world, and this solves a very real need for the financial system – which cannot be automated without a decentralized blockchain solution. Technically speaking, bitcoin is also the world’s most secure financial network. The transfers eliminate 3% in processing fees and hedges against inflation. This can, and should be, worth as much as a search engine, enterprise software, a social media network, warehouse fulfillment (AMZN) or iPhone hardware. 

Apple, Google, Microsoft and Amazon reached market caps of $1 trillion because their products scale to global populations and are required on a daily basis. Bitcoin not only scales to the global population but it also protects their livelihood – a necessity rather than a convenience. In fact, we see populations who are not necessarily tech savvy most enthusiastic about bitcoin, and this is a strong signal that it will scale beyond the reach of $1 trillion market cap.  

Once bitcoin hits our target price, we will take some gains while remaining invested through a minimum of 2025 until digital payments are popularized.

SECTION 3. Bitcoin’s Halving        

This is a preliminary report on bitcoin halving. A blog update will be released in Q4 2019.

Bitcoin is limited algorithmically to 21 million bitcoins, which makes it a deflationary asset instead of an inflationary asset. Every ten minutes, a “block” of bitcoin is added to the blockchain. Miners are rewarded with bitcoin and the new distribution of bitcoin is known as a “block reward.” The block reward in the beginning of bitcoin’s existence was 50 BTC. Now it is 12.5 BTC. This was due to bitcoin halving which occurs every four years and will continue until the last bitcoin is mined until approximately 2140. 

To date, 17.6 million bitcoin have been created, representing 84% of the total supply.

In May 2020, bitcoin will go through another halving and the block reward for miners will decrease from 12.5 to 6.25. This will be the third halving event in the network’s history. One of the main purposes of halving is to preserve the economic principle of scarcity for bitcoin, which with a peer-to-peer financial network, reinforces bitcoin’s potential.

According to recent surveys, 32% of bitcoins in circulation have remained in the same wallets since July 2016, and therefore, this is new territory for many holders of bitcoin. Historically, the last two halvings produced returns of 81x from the first halving and 3x from the second halving in the one-year period that followed. 

The trick to bitcoin halving, historically, is that the price becomes extremely volatile. We saw from the first halving that bitcoin went from $11 to $1,100 and back down to $220. The second halving went from $230 to $20,000 and back down to $4,000.  extremely volatile. We saw from the first halving that bitcoin went from $11 to $1,100 and back down to $220. The second halving went from $230 to $20,000 and back down to $4,000. 

Prudent investors will recognize the potential here as the new support levels that follow halving are much higher than prior support levels. 

CONCLUSION:     

If you’ve read this far, then the question on your mind is likely entry. This is by far the most important question for bitcoin (rather than the viability). This is due to the painful volatility of cryptocurrencies. Even with Bakkt’s announcement, bitcoin met resistance in the high $10Ks and dropped back down to support to the low $10Ks in the matter of a couple of days.

As you’ll see below, putting a very small amount into bitcoin now is good insurance (10-20% of your position). We believe there is a high probability that bitcoin’s price will retreat one more time, and this will the final opportunity for reasonable entry (80-90% of position). This scenario comes from scouring many technical analysts on this topic and being very diligent in our scenario recommendations. 

We realize we could be wrong and bitcoin could rally – which is why some insurance keeps you in the digital asset. If you are concerned this could be the case, consider buying 20%-25% insurance now.

Recommended     Reading:             

Bitcoin Futures & Custody: Bakkt’s differentiated Approach

Lightning Network: Wikipedia 

The Next Bitcoin Halving – Grayscale Insights 

SECTION 3: Technical Analysis       

Provided by Knox Ridley

BITCOIN UPDATE:     

Bitcoin is currently in a correction off its June high around $13,880. The price is currently below the volume weighted moving average, which is anchored to the June high, noted above in black. This tells us that the bears are in control for now, and will remain so until broken. However, the 200-day simple moving average is in purple, and tells us that the long-term bull market for bitcoin is still in-tact and healthy.    

Typically, during the first retrace off the first initial push into a new bull market, I’ll target the 50%-61.8% retrace of the initial move higher as entry.  However, based on the strength of this bull market, I’ve moved my target between $8500-$7700. When we hit this target, we will update you on the probability of a 50% retrace to $6,600, although right now, the probability of hitting this retrace and the $6,000 support is lower than it was in June/July due to the bullish activity.

Finally, Bitcoin is currently trading in a corrective wedge, which is highlighted in the dotted blue lines.  There are 2 possibilities for this move, which are shown with the green and red arrows.  Simply put, either Bitcoin has bottomed, breaking through the wedge and initiating a new uptrend, or it breaks-down below the wedge testing support along the way.

Internal Strength:     

Before we get into the likely scenarios of Bitcoin, I’d like to highlight the strength of this uptrend for context.  The Relative Strength Index is my favorite measurement for the strength of the current price trend.  

I highlighted two increasing trends in the RSI, which coincide with the 2 most recent uptrends in Bitcoin’s price.  You’ll notice the first dotted red line in 2017. The RSI followed this trend until it diverged from the increasing price, signaling weakness, and then broke the trend line. The price immediately broke through the 40 line on the RSI, which initiated the internals into bearish momentum. Through-out the recent bear market, the RSI mostly stayed below 50.  

Today, we have a similar uptrend, highlighted by the second red dotted line.  The price broke through this trend, signaling the current retrace we are still in.  However, instead of breaking the 40 line, the RSI has respected this support level, which is showing that the buying pressure for Bitcoin, though not in a bullish stance, is also not entirely bearish either.  This is signaling strength within this correction.  If we break the 40 line and then go through the 30 line, it will be worth noting. 

Entry Scenarios:   

First, it’s crucial that you adhere to proper position sizing with an asset like Bitcoin. It is extremely volatile asset.  Proper position sizing is crucial, and should lean to the lower end of a portfolio allocation. Because of our conviction in the long-term growth of Bitcoin, we suggest layering your investment starting at today’s prices.  Possibly, 10-20% of your Bitcoin allocation in today, and based on how shallow the current correction is, we will add into support or momentum at key levels.  

Scenario 1: Bitcoin continues lower.  If Bitcoin breaks the $9040-$9,000 support, which is in black on the chart, we will likely see it trade between $8500 – $7700.  There is an open gap around $8500, which, once closed, will likely act as support.  Below this gap, you’ll see a long-term price cluster around $8195 (shown in black).   When you factor in the 38.2% retrace around $7700 as the next level of support, we will have exceptionally strong support between this region. Once again, I think the likelihood that we fall to the 50% retrace around $6600 is unlikely in this uptrend. However, if we do break the long-term price cluster around 6000 (also highlighted in black), I’ll target the 61.8% retrace around $5500.  

For now, I added to my position at $9,000 and look to be a heavy buyer sub-$8000.  However, anything is possible with Bitcoin, which is why we will want to wait for a renewed uptrend to initiate the full position.  Save the bulk of your allocation for when we get a strong bounce off major support levels, followed by a 5-wave impulsive move.  That will signal an end to the correction.  

Scenario 2: Bitcoin breaks-out higher.  If we see a move above $13,880, it would signal that the correction is likely complete, and we are now entering the next leg higher. Remember, we are attempting to get Bitcoin at a reasonable price for a long-term holding.  

We want to be in Bitcoin before the fundamental thesis Beth outlined with Lightning Network and potential market cap becomes a popular view.  So, we don’t want to over think an entry, while at the same time respecting the volatility of this asset and the likelihood of a pullback. 

Technical Analysis is all about probabilities, and it is a snapshot of where we are today.  This can change, which is why we recommend a circuit breaker in the form of a stop.  If your stop. is triggered, look to re-enter in a new uptrend.  However, because of the volatility of Bitcoin, and until we are definitely in the next leg up, I will likely use a deviating stop based on price action and support, which will move up with the price of Bitcoin.  

Blog updates will be provided as we go along.

The Big Picture         

It’s undeniable that Bitcoin (BTCUSD) is in a renewed uptrend.  Earlier this year, Bitcoin found major support around $3,125, and began to make higher highs and higher lows for the first time in over a year.  Even though Bitcoin is a relatively new asset that inherently lacks many of the valuation methods commonly used in security analysis, it still adheres to the laws of human sentiment, which is evident within the decade long price action in Bitcoin.

That being said, Bitcoin’s price over the last 3 years experienced a global focus that road the waves of extreme sentiment in both directions.  The historic bull run and the bear market that followed, succinctly aligned with Fibonacci ratios, typically used in Elliott Wave Theory.  We can thus extrapolate an on-going wave structure, which aligns with these important ratios in order to gauge an approximation of the likely price action going forward.  Because of this, I will lean on Elliott Wave Theory to gauge a long-term framework for Bitcoin’s likely path. 

Once we have a Wave 2 in place, we can then find our Fibonacci extensions as a likely target for future moves.  The red number on the graph above are not random.  They assume a correction to the 31.8% retrace around $7800.  From here, the math takes us to a minimum of $65,000-$75,000 region, with the likelihood of extending higher.  

Elliott Wave Theory is just one tool amongst many used to gauge likely targets, but based on the data we have today, this is a high probability path. Not only does the product research line up, but so do the technical, which is always exciting to see. 

I want to put this graph in front of you so that you can get an idea what we are after.Entry is crucial, but in light of where we both see Bitcoin going, we don’t want to over complicate it too much, and simply want to invest in this opportunity.

Please note: The I/O Fund conducts research and draws conclusions for the Fund’s positions. We then share that information with our readers. This is not a guarantee of a stock’s performance. Please consult your personal financial advisor before buying any stock in the companies mentioned in this analysis.

Chainlink: 2019 Analysis

Posted on by io-fund

At the peak of the crypto boom, there were over 1,600 alternative crypto currencies available. CoinMarketCap currently tracks 900 altcoins. These altcoins compete for 30% of the cryptocurrency’s combined market cap with Bitcoin claiming two-thirds. However, the losses altcoin incurred during the crypto winter were much deeper than Bitcoin, with the third most-popular altcoin losing 92 percent of its value and other altcoins losing close to 100 percent of value.

Therefore, to recommend an altcoin is a precarious proposition. However, there is one alt-coin which does not function like the others and fills a much-needed gap in the technological advancement of the blockchain middleware stack – especially as the value extends beyond the realm of currency with the ability to automate trusted computing across computer networks, people and machines.

17629485-f317-4e36-a4c5-3d30f2696253_Chainlink-Premium-Report.pdf

Chainlink: 2019 Analysis

INTRODUCTION  

At the peak of the crypto boom, there were over 1,600 alternative crypto currencies available. CoinMarketCap currently tracks 900 altcoins. These altcoins compete for 30% of the cryptocurrency’s combined market cap with Bitcoin claiming two-thirds. However, the losses altcoin incurred during the crypto winter were much deeper than Bitcoin, with the third most-popular altcoin losing 92 percent of its value and other altcoins losing close to 100 percent of value.

Bitcoin has the majority of cryptocurrency’s market cap. Source: CoinMarketCap

Therefore, to recommend an altcoin is a precarious proposition. However, there is one alt-coin which does not function like the others and fills a much-needed gap in the technological advancement of the blockchain middleware stack – especially as the value extends beyond the realm of currency with the ability to automate trusted computing across computer networks, people and machines. 

SECTION 1: What are Smart Contracts?  

Smart contracts are a more advanced use of blockchain where an exchange between two parties is automated based on conditional provisions. These self-executing contracts are written into lines of code, and the agreements contained exist across a distributed, decentralized blockchain network. 

Trusted transactions are necessary beyond virtual currency. Smart contracts enable collateral for agreements that can be carried out without the need for a central authority. Derivatives trading is an example of a contract that uses computer networks and complex term structures. 

Smart contracts offer a more complete use for blockchain. First discussed in 1996 by Nick Szabo, some claim that smart contracts are the real use case for blockchain as they aim to automate financial transactions, and in the future, can automate machines. 

Financial contracts are omnipresent, and they specify inputs, logic and outputs. Digital contracts are everywhere around you; such as credit card payments, wages (Paypal, Venmo, your employment wages), when paying for an Uber, buying on Amazon, paying Netflix – and on a grander scale, bond payments. 

As Framework Ventures points out in the explanation of why the firm invested in Chainlink, there is high overhead costs due to intermediaries, counterparty risk and potential for fraud.[1] Transactions costs are currently pervasive, they limit output, and are unnecessary with the use of blockchain. 

1.1 The Problem that Smart Contracts Solve 

Centralized oracles are high risk. Automated payments, often up to trillions of dollars’ worth, such as with bond payments, could rely on data that is hacked. This would result in billions of dollars erroneously paid. This is why institutions have not adopted centralized smart contracts – they are able to be tampered with.

Decentralized oracles, such as Chainlink, use reputation scoring to set up and maintain data feeds. This is accomplished with multiple data inputs for smart contract products. Rather than calling data from an API, the smart contract puts the data request “up for bid” on a blockchain marketplace. Several data providers respond and bid with a data reply. Therefore, if a single data source has been hacked/tampered with, there is an effect on data powering the smart contract. 

There are many uses for smart contracts to occur between people and humans, even though it requires a bit of foresight to understand this need. Stealing autonomous cars, for instance, will be challenging with smart contracts as the access control will be verified over blockchain. Land titles, birth certificates, degrees, hospital records, deliveries by autonomous vehicles, accessing digital content, paying landlords or bills, purchasing real estate and purchasing insurance are all ways that smart contracts can be used.  

From a technology perspective, the world is only now getting comfortable with the infrastructure layer of blockchain technology. Chainlink is middleware and this is more advanced stage of blockchain and the use of cryptography for trusted computing and transactions. 

The middleware stage will include tools built on top of core protocols, like Ethereum or Bitcoin’s blockchain, to enable decentralized applications. We will also enter a world where over 25 billion machines must communicate in a trusted manner, and this will be yet another, more advanced stage for blockchain to register and verify the communication and digital transactions across machines.  

1.2 Ethereum Network – Beyond Coins

Ethereum is a platform that was created for creating smart contracts. “Turing-complete” is the term for supporting broader computational instructions. The smart contract code facilitates, verifies and enforces the performance of an agreement or transaction, with decentralized automation as the end result. 

Although smart contracts on the blockchain are self-verifying and self-executing, they lack connectivity from data feeds and APIs that are external to the blockchain. The full potential of blockchain to decrease transaction costs is not being utilized. 

Without Chainlink, Ethereum’s smart contract utility is confined to currency tokens as data cannot be directly fetched from off the blockchain. The only secure input that can power smart contracts is data that exists on the Ethereum blockchain, which is token inflows/outflows.

Chainlink was built for Ethereum but there will be support for all leading contract networks in future development. The system is able to be upgraded across various components as advances are made across smart contract middleware and blockchain infrastructure.

1.3 Are Tokens Necessary? 

In order for a smart contract on a blockchain to use a Chainlink node, a payment will need to be made in the form of a LINK token. The prices will be set by node operators based on demand for off-chain resources that Chainlink provides, and the supply of similar resources. 

The purpose of the LINK token is to pay Chainlink Node operators for the retrieval of data from off-chain data feeds, the formatting of data into blockchain readable formats, off-chain computation, and uptime guarantees they provide as operators. It is a small payment for the data services.

For instance, the token may compensate parties who provide the data by responding to the data requests. Or the token may compensate a banking network like SWIFT for processing the payment after the smart contract is triggered. LINK tokens help to maintain the reputation system for payment oracles/data providers. 

It also penalizes inaccurate or incomplete data by taking tokens away from an oracle and distributes the tokens to accurate participants. Please see below for a competitor who does not require a token for smart contracts.

SECTION 2: FUNDAMENTALS              

2.1 Addressable Market         

Addressable market and potential value for middleware is hard to determine although having an early investment with the right entry price is likely to pay off. Framework Ventures, which has a large holding in Chainlink, believes middleware blockchain technology will have a market size equal to the blockchain platforms, such as Ethereum, as both will be critical for the majority of blockchain applications. 

The distinction between the coin and the middleware is important to note. Typically, using the middleware can occur without necessarily using the coin. Reasons for using the token are indicated above in the section “Token vs. Token-less.” Middleware that does not require a coin is a risk to Chainlink, although Chainlink has a substantial lead and most transactions today require some form of earnest payment or transaction fee. 

The total addressable market for a service like Chainlink is not able to be determined today. We have a glimpse into the market as the application of securities settlement can save up to $7.5 billion per year in actual costs savings from automation. This is only one piece to the addressable market for Chainlink. Data-fetching from off the blockchain will be a larger addressable market, for instance. See below in partnerships for more information.

Framework Ventures estimates the LINK token will be used for data input/output for over 300M messages per year, and will be processing around 820K transactions a day. This is more than Ethereum at 600K transactions per day or Ripple at 200K transactions per day. Again, financial transactions are only one piece to the addressable market as the problem Chainlink solves is fetching data from off the blockchain to be used on the blockchain. 

For application developers, Chainlink is likely to be their first choice for flexibility and agnostic purposes (not tied to one protocal), and developers can often create the tipping point for platform adoption. Chainlink’s value is likely to come from the startup ecosystem as the middleware is blockchain-agnostic. 

Chainlink works across the Ethereum blockchain, Hyperledger ecosystem, and the SWIFT banking system. It is the only protocol that enables Ethereum smart contracts to pay out in Bitcoin and provides an advantage to businesses on Hyperledger or Bitcoin protocols. This is also a major advantage over Ripple which is confined to the Ripple protocol. (These are not direct competitors as Chainlink will be fetching data off the blockchain, but helps to put into perspective its capabilities and potential market size).

2.2 Competitors           

Token-less oracles do exist, however, the customization that these token-less oracles provide comes at the cost of development time. There is also less incentive for participating oracles that may not be compensated for providing accurate data. 

Competing token oracles, such as Streamr, may be able to take some market share as savvy data providers can realize more profits by accepting multiple tokens. Chainlink’s vision is to own the enterprise-grade partnership market with relationships, such as Swift, and focusing on consumer-grade partnerships second. We’ve also seen some evidence that Chainlink is favored by data corporations, such as Google and Oracle (more on this below).  

Chainlink is moving quickly right now and if Google and Oracle deem Chainlink the preferred altcoin for offblockchain data integration, then it’s positioning will be hard to shake.

2.3 Partnerships for Future Growth        

Altcoins are an all or nothing gamble and validation from other companies is essential for picking the one or two winners out of the crowd. Chainlink is distinct due to its larger partnerships. 

•       Google announced a partnership with Chainlink to help place BigQuery data onto the Ethereum blockchain using a Chainlink oracle smart contract. As Google states, the possible applications are “innumerable” with a few having “high and immediately utility,” such as prediction marketplaces, futures contracts and transaction privacy.

•       In June, Oracle announced at the CloudEXPO conference a partnership to “co-develop Chainlinks with 50 qualified startups to prepare them to sell their data to Oracle’s 430,000 customers in 175 countries on the Oracle Blockchain Platform.” 

•       Chainlink advertises a partnership with SWIFT on its website and in a published case study. Notably, I cannot find any announcement on SWIFT’s end, and this is likely a proof of concept for now. If the partnership is fully implemented, Chainlink will not only enable SWIFT to process smart contracts, but it’s possible SWIFT will enable other external smart contracts to settle through fiat on its network by means of a Chainlink/SWIFT oracle. 

See Recommended Reading below for more information on partnerships. 

2.4: Internet of Things for Future Growth        

Internet of Things, or IoT, has become a common term for machines communicating with machines in an automated method. Smart things is another term for IoT connections. For instance, in the smart home, you have a smart refrigerator, a smart thermostat, and a smart door lock. 

Perhaps the most forward-thinking IoT device will be the fully autonomous smart car, with many critical sensors communicating with one another through data gateways. For instance, the data from a street light will be sent to the sensor on your vehicle for a red light, and this will trigger the vehicle to brake. 

Financial transactions will be the first iteration of smart contracts, however, the internet of things will connect 25 billion machines and this will help smart contracts reach critical mass and full-fledged adoption as a means of securing these connections. However, for this to be realized, data external to the blockchain is required for smart contracts to be verified and executed. 

The automation of trusted computing across machines and people will take time to fully realize and these examples will extend beyond the financial sector. 

2.5 Recommended Reading: White Paper

The founders of Chainlink wrote a whitepaper on September 4th, 2017. Authored by Steve Ellis, Ari Juels and Sergey Nazarov, the team has expanded to include a strong team across crypto, trusted data, finance and security. The founder of DocuSign is on the advisory board, which should help solidify some of the use cases noted in this report.  The whitepaper is worth a read as it lays out the problem that Chainlink solves, which is that blockchain protocols do not support native communication with external systems. The solution that provides access to external systems is called an “oracle,” and these oracles need to be decentralized in order to be secure and tamper proof. Centralized smart contracts can be altered, terminated or even deleted by a privileged party.

“Chainlink offers a decentralized oracle network. Decentralized oracle networks achieve trusted computing for digital agreements, which is important for both human-powered digital agreements and machine-powered digital agreements.”

Example use cases for Chainlink that are provided in the whitepaper include:

•       Securities smart contracts for bonds, interest rate derivatives and other market information  reported via API

•       Insurance smart contracts will require information for liability issues, including if doors  were locked, or flights ran on time.

•       Trade finance smart contracts will need GPS data about shipments, data from supply  chain ERP systems, etc.

Notably, the company is located in the Cayman Islands, likely to escape paying income tax. I prefer companies that are based in the country where they are breaking ground.       

Additional Reading:           

Chainlink whitepaper

FrameWork Ventures: Our Investment in Chainlink

Google in Blockchain

Smart Contracts with SWIFT 

SECTION 3: Technical Analysis       

Provided by Knox Ridley

LINK’s Recent Price  Action:         

Chainlink is currently trading in a downtrend from its June 29th high, making lower highs and lower lows (highlighted in yellow).   The question is: have we bottomed and are in the beginning stages of a new uptrend or is this the midpoint of the downtrend with more to come?  

Chainlink has found strong support at the $1.9 region, where it has tested that region 3 times this year.  It’s currently trading in a tight range between the $1.95 region, which has been a major price cluster for Chainlink (highlighted with the red band), and $2.9 resistance region (highlighted in yellow).  It has tested each region twice, and each time failed to break through.  

Internal Strength:     

In a downtrend, I will often look at the RSI to gauge the internal strength of the momentum.  What I’m usually looking for is positive divergence while in a downtrend – for instance, ideally RSI would be making higher lows while Chainlink would be making lower lows – but this is not happening right now. I look for this because it is a reliable sign that selling pressure is waning, and usually follows a reversal.  

If the RSI is at or below the downward extreme 0, we can usually expect, at the very least, a short-term bounce.  We are not seeing this now.  In fact, the RSI is comfortably below the 50 and 40 line and trending with the price action.  In other words, Chainlink’s price is showing a stable balance between buyers and sellers. 

Conclusion:

Remember that we are dealing with an alt-coin within the crypto space.  You should expect low volume and volatile moves.  Small position sizing to begin with and wide stops are crucial.  We believe in the long-term potential of Chainlink in the smart contracts space, and believe it is worth a lotto ticket.

Scenario       1:  Chainlink finds increased buying pressure, breaks out above the $2.9 resistance, and continues in an upward movement.  

Scenario       2: It is likely that Chainlink will make one more attempt in the coming weeks at support by first breaking the upward trend line and then testing the $1.9 support region.  If it breaks support, we will likely see it find support around either the 50% retrace, around $1.7, or the 61.8% retrace, around $1.25.  This region is highlighted in the green box.  

Chainlink is currently in a correction after starting a powerful uptrend earlier this year, which is similar to all cryptocurrencies.  I believe the body of evidence supports scenario 2, where Chainlink breaks $1.95.  We will look to buy our first tranche at $2/$1.95, and then the remainder based on the velocity and structure of its price action below this region. However, if Chainlink breaks the $2.9 region, we will shift to scenario 1 as the more likely scenario, and begin our position into the momentum with tight stops.  We will offer updates as we progress. 

Please note: the fundamental analysis on Chainlink is early and negative price volatility would be welcomed.

August 13th: Bitcoin Technical Update

Posted on by io-fund

Bitcoin Insurance

A more detailed report on bitcoin will follow in the coming weeks. In summary, we see BTC trading to $60,000 plus in the coming years. The fundamental thesis supports the price action on this move, and we will publish this for you in mid-September. The question is – will we have a major retrace before this move, or will we breakout from here, leaving these levels behind? 

BTC’s price has been relatively stable over the last couple weeks, trading within a very tight range.  If you look at the blue lines in the chart, you’ll notice that BTC is coming to the point of a trading pattern known as a wedge. A wedge is a defined trading range that tightens to a point, where price builds up momentum before it makes a decision to break out or break down.

Scenarios:

  • My primary count has BTC breaking down to the $9,600 support region and then retracing to $8,000-$7,000, which coincides with the .382% retrace.
  • My secondary count is that BTC breaks out from here, reaching new highs above $13,875.
  • $4800 is the must-hold point for this bull market

Taking out insurance and allocating 20% of your BTC position today at current prices is something to consider, and planning to add to the position depending on if the price breaks up or breaks down.  You can add the remaining 80% in tranches depending on if we break out or break down.

I’m personally holding BTC with a 40% stop, and viewing $4800 as the must hold point for this bull market. This would be a welcomed and final pullback, although appears to be more elusive.   as the price has remained steady for an extended period. Please only allocate a small portion of your portfolio to BTC.  This is highly speculative and very volatile. 

Please note: The I/O Fund conducts research and draws conclusions for the Fund’s positions. We then share that information with our readers. This is not a guarantee of a stock’s performance. Please consult your personal financial advisor before buying any stock in the companies mentioned in this analysis.

Is Bitcoin a Good Investment? Phase 3: Bitcoin Mobile Payments

Posted on by io-fund

Institutional adoption of bitcoin and economic uncertainty are two phases previously discussed in this series that evaluates if bitcoin will make a good investment. Finding the right entry price is critical for a buy and hold strategy as there is unusual volatility in this asset. Trading bitcoin may be successful for some; however, this series predicts that holding bitcoin until the technology matures is the better option – all of which is dependent on the right entry price for this volatile, yet high-potential asset

Bitcoin is not trading at support levels and there will likely be a better entry later this year. Also, this is a mix of tech analysis and my opinions; not financial advice

The third phase that will contribute to bitcoin’s potential as an investment will be the adoption of crypto wallets and crypto payment transactions. Today, bitcoin is a speculative play. The tipping point will occur when bitcoin is used for transactions. Psychologically, bitcoin will have a permanent place in society when this occurs, and the value of bitcoin will reflect this due to the limited supply of the coin.

Bitcoin and Free Markets

Bitcoin’s ultimate opportunity will be reached when the coin provides seamless and low-cost digital transactions. Opponents to bitcoin believe central banks and governments will create obstacles that cryptocurrency cannot overcome. However, the free market is already moving towards capitalizing on bitcoin as many corporations do not want to miss out on this opportunity.

As discussed, Starbucks is partnering  with Bakkt, and this will create a payment gateway for the security-backed exchange. Keep in mind, Starbucks’ payment app has more users than Google Pay or Apple Pay

Several more online retailers are currently accepting bitcoin payments, such as:

  • Wikipedia accepts donations in bitcoin
  • Expedia accepts bitcoin through Coinbase
  • KFC accepts bitcoin through BitPay
  • Overstock accepts bitcoin through Coinbase
  • Subway branches (where available) accepts bitcoin as a payment
  • Virgin Mobile and Virgin Airlines accepts bitcoin for space travel
  • CheapAir accepts bitcoin through Coinbase
  • Purse.io allows you to shop on Amazon and pay with bitcoin
  • Hotels.com will reward you with micro-amounts of bitcoin for booking through the site

Notably, AT&T became the first major U.S. mobile carrier to let customers pay in bitcoin through a third-party service provider.

There are important distinctions between bitcoin and digital transactions. Knowing the difference between AliPay, Venmo, Apple Pay, Facebook’s Libra, JP Morgan’s JPM Coin – and why bitcoin is not like any of these options is critical to understand. This has been covered in the previous articles in this series, Part 1: Institutions, and Part 2: Economic Uncertainty. Here is a side-by-side comparison that summarizes key differences:

Source: UMN.edu

Emerging Payment Options

Paying for daily goods with a mobile wallet, tied to crypto, will become effortless in the years to come. One of the leading startups right now is Flexa’s SPEDN, which is linked to fifteen retailers, such as Whole Foods, Barnes and Noble, Nordstrom, Petco, Ulta Beauty, Lowe’s and Bed, Bath and Beyond.

The app integrates existing point-of-sale with blockchain technologies and simplifies the payment settlement process for the merchant while allowing Ether, Bitcoin, Bitcoin Cash and the Gemini dollar payments. As Gemini’s CEO Tyler Winklevoss stated, “This technology shifts cryptocurrency from investment and speculation toward real usability.”

There will be many startups offering to bridge the gap between crypto’s current lack of flexibility and the broader world of crypto users who want to pay with an alternative form of currency. The barrier to entry is relatively low, requiring a team of software developers, compared to 5G or autonomous vehicles, which require entirely new infrastructure or complex robotic systems.

Thus, the number of startups in this space is likely to swell. Whatever friction exists for crypto payments, technically speaking, will be solved in short order over the next few years.

As stated, larger corporations and the free market are driving the supply forward. To interrupt this process, via the Federal Reserve, the IRS, or control from other central banks, will require direct action against free markets – and, essentially, capitalism. In addition, stopping the advancement of technology around blockchain will severely hinder a free market economy as blockchain transactions reduce intermediary fees, that in turn, lowers debt and improves savings for the financial system and all of its participants.

Blockchain and cryptocurrencies also assist banking with a much more secure, decentralized system. Too many critics misunderstand how development around Bitcoin, Ethereum and blockchain protocols improves the fiat system by removing unnecessary costs. The token, bitcoin, may compete with fiat currencies, but development around the token is essential right now for an economy to run on blockchain in the future (even if the bitcoin blockchain is not the one adopted).

The countries that do adopt blockchain, and some form of cryptocurrency, will be superior technologically speaking, and the United States is very unlikely to halt this progress by attacking Bitcoin – a token and a protocol that is laying the groundwork for economic efficiency. 

The more likely response from the federal government will be a centralized, regulated token that competes with bitcoin (while allowing bitcoin to run its course). There is room for both, and to repeat this point, development around bitcoin will cut the path for any centralized tokens. The Federal government cannot hinder development around bitcoin while expecting to have a federal cryptocurrency in the future; this would be counterproductive.

Despite the likelihood of a centralized domestic token, my prediction is that bitcoin’s value will persist due to its global potential, as covered in my previous articles in this series.

Recommended Reading:

Will Bitcoin Make a Good Investment? Phase 2: Economic Uncertainty
Will Bitcoin Make a Good Investment? Part 1: Institutional Adoption

Paid subscribers to my Research Services will receive the following additional information:

  • Scenarios for when to enter the asset and build a buy and hold strategy.
  • Why I timed my analysis to Q2/Q3 2019 (and not 2018 or 2020) – from a fundamental standpoint.
  • The one alt-coin that I am watching closely and has potential for a 1000% return along with recommendations timed for the next (and perhaps final) pullback for this alt-coin.

Will Bitcoin Make a Good Investment? Phase 2: Economic Uncertainty

Posted on by io-fund

In the previous analysis, we discussed one primary reason that bitcoin will make a good long-term investment, as the price is likely to go up and stabilize once institutions gain SEC-regulated access. Fidelity and the NYSE-founded Bakkt are two examples of platforms that will influence the first phase of bitcoin’s broader adoption. These two platforms have not yet launched, but a new supply-and-demand dynamic will occur when institutional investors can access cryptocurrencies.

The next phase for bitcoin stability and price support will hinge on the eroding trust in fiat currencies – both globally and also from younger generations who are digital natives with good reason to seek alternatives outside of the fiat system.

Global Unrest Sees Bitcoin as Alternative to Fiat Currency

Economists have discussed the effects of going off the gold standard during Nixon’s presidency ad nauseum, yet this has been a futile conversation in the past as there has been no alternate method of transacting other than centralized cash. Gold and precious metals are hard to transport and cannot be used to transact daily in the modern age, despite having a store of value. 

Globally, bitcoin is more attractive than many foreign currencies. Venezuela, for instance, is going through a period of hyperinflation with a cup of coffee costing 2,800 bolivars up from 0.75 bolivars less than a year ago, representing an increase of 373,233%, according to Bloomberg data. Essential goods such as toilet paper and medicine are very expensive, and many Venezuelans are fleeing the country.

Bitcoin has emerged as a solid alternative to Venezuelan bolivars. Even when Bitcoin loses value from $19,000 to $3,000, it’s still out-performing the inflation of Venezuela’s currency. On the flip side, when bitcoin rises in value from $5,000 to $11,000 in one month, it allows global populations to hold an appreciating asset. Despite market volatility, bitcoin makes Venezuelans money, offers them accessible protection, and they are able to escape an autocratic regime.

Although many consider countries with the most dominant GDPs as the countries who set the world’s stage for economic conditions, the emerging markets play an important role as the unrest in these regions can lead to disruption.

In South Africa, the number of new users trading bitcoin rose 671% from January to the end of November in 2018. South Africa, Ghana, and Nigeria are among the top five countries searching for bitcoin according to Google Trends.

Currently, the United States is at debt levels that amount to 78 percent of gross domestic product (GDP) compared to 35 percent of GDP in 2007. This debt-to-GDP ratio could reach 144 percent of GDP by 2049 due to decreased tax revenue and increased spending, especially on health care.

During World War II, the debt-to-GDP ratio was 106 percent, however, we are currently at all-time highs during a decade that is absent of a World War.  The United States is unlikely to see hyperinflation to the level of Venezuela (at least let’s hope not), however, trust in fiat currencies will erode as debt continues to climb.

Japan is an excellent case study for an economy that is struggling due to quantitative easing. As of 2018, the Japanese debt-to-GDP ratio is at an all-time high at 254% due to nearly 15 years of quantitative easing. Government debt to GDP in Japan averaged 137.4% from 1980 to 2017.

Easy money policies from Japan’s central bank harmed domestic asset returns by suppressing local interest rates. Ranking as the world’s third largest economy, Japan resorted to negative interest rates in 2016. In April of 2016, it was reported that a “Japanese bank buying 5-Year U.S. Treasuries with perfectly hedged currency and duration risk would (lose) 0.9% a year.”

Consequently, Japan is a thriving bitcoin market. Over 3.5 million people in Japan trade cryptocurrency with the vast majority (84%) between the ages of 20 and 40. The trading volume in Japan rose from $22 million in March of 2014 to $97 billion in March of 2017. Trading on margins, credit and futures rose from $2 million in 2014 to $543 billion in 2017.

For Millennials, Bitcoin is a Good Investment

Student debt weighs heavily on Millennials in the United States. This digital-native generation faces $1.5 trillion in student debt, rising from 3.5% of gross domestic product in 2006 to 7.5% of gross domestic product in 2016.

Rising interest rates plus booming college prices that outpace inflation has affected the age range that is most likely to use bitcoin, compounding the attractiveness of alternative forms of financial trust for this generation. To not invest in bitcoin would be to bet against Millennials seeking decentralization despite being negatively impacted by the current fiat system and record debt levels.

Source: Wikipedia

Bitcoin and cryptocurrencies have been in existence for most of the Millennial generation’s adult life, having launched in 2008, and when this generation ages another decade, crypto and crypto wallets will be frictionless. Edelman Research published a study of 1,000 millennials with over $100,000 in income and found 25% own cryptocurrency. In addition, another one-third are interested in owning or using cryptocurrency.

According to Avivah Litan, a Gartner vice president, millennials don’t trust banks and the established financial system. “Millennials generally understand cybersecurity issues more than their elder counterparts and many of them trust blockchain data security more than the banks’ security,” Litan said.

Bitcoin was introduced during the last financial crisis of 2008. The next global financial crisis will be phase two for bitcoin’s proliferation. Many critics believe bitcoin will need to seek permission from central banks. Quite the opposite is true. The populations that are negatively impacted by the financial system are the ones driving this forward, and to attempt to contain every geographic unrest, every student in debt, or every libertarian across the globe through regulation will prove nearly impossible.

In the next article of this 3-part analysis, “Will Bitcoin Make a Good Investment,” I discuss how the free market is also contributing to the adoption of bitcoin with many corporations on board. The free market will add to the momentum of institutional trading and economic unrest.

Also Read: Will Bitcoin Make a Good Investment?

Centralized Crypto Investments vs. Decentralized

Many of those on the sidelines of bitcoin are predicting the decentralized coin will lose ground to centralized crypto, such as Facebook’s Libra and JP Morgan’s JPM Coin, which have the backing of centralized financial systems. However, centralized currencies negate some of the primary benefits of decentralized cryptocurrencies and anyone confusing the two will miss out on opportunities around crypto.

For one, centralized coins (Libra, JPM Coin) do not hedge against inflation and are not scarce assets. They function like cashless digital transactions made through online platforms. AliPay functions similarly (although not encrypted) and was launched in 2004 and now serves 5% of the world’s population.

Starbucks, Apple and Google also allow digital transactions without the need for cash or credit cards. Centralized crypto coins have little benefit over a mobile app payment, and may be more cumbersome as the fiat currencies the crypto is based on will have to be exchanged, whereas with Starbucks, Apple Pay and Google Pay, no conversion to a “crypto coin” has to occur.

To put it simply, there is very little benefit to transacting on a blockchain if the crypto is based off fiat currency. Seamless transactions through mobile apps may be more convenient for consumers.

The value that Libra or JP Morgan’s coin provides is lower transfer fees from companies such as Western Union or Paypal, which take a significant-enough percentage of around 5% of the amount being transferred. This is not a big enough demand to justify the launch of new coins, however, as Moneygram has announced a partnership with the cryptocurrency, Ripple, to lower the speed of transfers and fees. In other words, wire transfer companies can easily partner with cryptocurrencies rather than non-financial companies launching entirely new payment networks (like Libra).

Centralized crypto will also act to erode privacy for citizens as every transaction will be tracked and easily mined for transaction history.

The difference between centralized and decentralized cryptocurrency is not lost on bitcoin enthusiasts or the citizens of struggling economies. These parties are seeking a safe haven that is not tied to the central banks, and therefore, it’s doubtful a centralized cryptocurrency will have much of an impact on the long-term potential of bitcoin.

Exploiting the lack of knowledge around the word “cryptocurrency” will be rampant in the coming years as blockchain infiltrates the financial sector. Corporate public relations firms frequently use tactics such as over-generalizing technology terms or exaggerating deployments.  We’ve seen this occur around autonomous vehicles on timing for deployments (promised for many years now) as well as the various levels of autonomy (if a human is in the car; the term is driver-assisted – yet autonomous is used instead).

The parties who are launching centralized cryptocurrencies, such as Facebook and Chase Bank, are not in the business of making crypto investors’ money. Their goal is to lock people into their platform and to collect data on every purchase a consumer makes. This will not make for a good asset, although you are free to buy the company’s stock.

Institutions will not trade Libra or JPM Coin as this would be the equivalent of trading dollars (except with the extra work of converting it on an exchange). Countries with economic uncertainty will not see centralized coins as a safe haven, and thus a crypto boom in Japan, South Korea or Venuzuela will not contribute to the adoption of centralized coins.

Facebook’s Libra will help to normalize crypto, however, for the general population. As pointed out at a recent bitcoin conference, Libra can potentially be a positive thing for introducing crypto wallets to the 2+ billion users across Facebook apps. Normalizing the concept of carrying crypto and transacting in crypto, even if there is little success for the Libra currency, will help accomplish the third and final phase for bitcoin: digital transactions. Follow me for part 3 of this series where I discuss the third phase for mass adoption of bitcoin: digital transactions.

Also Read: Highlights from Bitcoin Conference 2019

Conclusion:

This analysis is not saying bitcoin won’t experience volatility with the introduction of institutional trading, as global economic uncertainty grows, or as the younger generations seek alternatives beyond the debts they are inheriting. Over the next few years, bitcoin will be very volatile as the new technology strives for hockey-stick growth.

With that said, Bitcoin’s support level will rise over time, and therefore a strategic entry is important to withstand volatility and hold the asset over the next 5-10 years. The next article in this series will look at the third phase for bitcoin, which will include the tipping point for digital payments, as well as how the free market is propelling bitcoin forward.