Cryptocoins outlook 2018 : an analysis in the fiat paradigm
As we step into 2018, every crypto investor is left with an almost impossible question to answer: will bitcoin and other cryptocoins go higher in 2018 or are we just about to witness a crypto crash? If history has anything to tell, it would be: no reason to worry, we asked ourselves the same thing when bitcoin was at $100 or $1,000. But history also serves us the burst of the Internet bubble at the end of the 90’s and the fact that: 1. Apple and Amazon recovered pretty well in spite of a sharp temporary decline in stock price (will the same with Bitcoin?) 2. Some IPO-ed companies that had done pretty well before the bubble burst went bankrupt, leaving investors with only tears and regret (will the same happen with junk coins?). In order to get more clarity on 2018, let’s review the scenarios of cryptocoins going up or down in 2018.
I. Bearish events
1. The end of excessive cash leading to recession… and its impact on cryptocoins
The link between a global economic downturn and a decrease in cryptocoin prices is often made or feared by traditional investors. The rationale is that a new debt crisis or an unmanaged end of quantitative easing (QE) will lead the world to recession, with funds withdrawn from “exotic” investments (like cryptocoins). This would lead to bitcoins being sold to clear off other debts or losses, moving the price of Bitcoin and other altcoins down. This scenario is in my view really pessimistic as it is based on multiple assumptions that are not necessarily true:
Assumption 1: “Central banks will not answer to such a crisis by brand-new quantitative easing initiatives”. We have seen so far that central bankers take QE decisions such as interest rate decisions, seeming to ignore the extraordinary feature such a scheme should have. If you add to that some political pressure from governments, assumption #1 is far from given.
Assumption 2: “Institutional investors already have a large stake in Bitcoin”. It would need a proper investigation with a Bitcoin explorer to prove this one wrong but my understanding is that we are not at a point where major investment banks have such a share in Bitcoin that they can drag down its price in a long period of time. Current whales are parties involved for the success of Bitcoin (Satoshi, miners, Cryptoinvestment funds) that will not act recklessly. This analysis is all the truer for smaller cryptocurrencies that big institutions don’t even bother looking at for now.
Assumption 3: “Institutional investors will exit Cryptocoins in case of stock or bond market crash”. That assumption is not obvious as the share of crypto exposure of major financial institutions is still limited compared to other exposures. Therefore leaving the crypto world overnight will not help them a lot solve their issues. Why bother then, and annihilate any hope to enjoy big crypto-ROI?
Assumption 4: “Long-time crypto investors will not see in the next trough a buying potential”. As a crypto-investor, you should have got educated on the power of blockchain as a store of value, to perform P2P payments, to help bank the unbanked etc. This promise, even if not completely fulfilled today, will remain true even after a strong decrease in cryptocoin prices. There should therefore be buying powers in future crises, allowing to net any short-term fall.
Assumption 5: “The demise of Bitcoin will naturally drag down the other 1400 cryptocurrencies”. I know this one will not please Bitcoin maximalists but Bitcoin has been at the forefront of cryptocoins for years and is now the entry door for every crypto investor. Therefore its price encapsulates a lot of the overall crypto potential value. Would Litecoin or Monero or a brand new coin with its own blockchain suffer as much ? Theoretically, as less as they are actually invested in or speculated on.
All in all, I believe this scenario will not take place, the crypto market cap still being a niche (~$600bn value) compared to the overall size of stock exchanges (~$60,000 bn value). Daily crypto trading volume of ~$30bn is in the order of magnitude of global stock markets, but lagging behind the global FX market (~5,000 bn global daily volume).
2. A major geopolitical event like a war in Venezuela, a Saudi Arabia/Iran clash or new tensions between China and Japan
The demise of stock markets and increase in oil prices following such events would send us to a scenario described in I.1. As for the events themselves, they might even trigger a rise in Bitcoin in some cases.
A war. Surviving a war with your funds at pre-war value is now possible with a bitcoin address stored in a phone or on a piece of paper hidden in your underwear. Indeed, it was tested by a few geeks in the 2015–17 Venezuelan crisis and it will for sure be used by other populations in the future.
Cold war. Tensions between 2 great nations will have an impact on stock markets as well as the currencies of these 2 countries. Bitcoin is not pegged to any currency, which would leave it unharmed. Yet again war fears or economic fears will drive more people towards Bitcoin as a store of value.
North Korea. This one seems to be a bit different as North Korean plans to fight the rest of the world not only includes conventional measures but also includes trying to wreak havoc on crypto exchanges.
3. A major Exchange hack
According to the Wall Street Journal, there is suspicion that North Korea is behind the Youbit exchange hack of December 2017. What if North-Korean State-funded hackers now attack the largest South-Korean exchange Bithumb? From Mt. Gox in 2013 to Bitfinex in 2016 or Youbit now, exchange hacks have historically been big bears in the Crypto market. And the increasing value of cryptocoins will actually attract hackers increasingly.
The exchange hack is a risk I fear most. That said, with the increasing number of exchanges (and therefore lower market shares for each exchange), the increasing security measures of exchanges (cold storage, 2FA, mail authentication…) and investors getting more and more equipped with hardware wallets, a new Mt Gox seems less and less possible. Besides, the idea of a possible hack has now rooted in investors minds, and investors will (sadly) get used to it. The same process as citizens’ resilience when facing terrorist attacks: the first attack is a great trauma, the second is an outrage, the third one seems like a beginning of a series you know you will have to live with. The consequence I suspect from this process is that recovery periods of hacks will be smaller and smaller.
4. Development snag and crypto discoveries
Development snags like TheDAO will happen as the crypto world is still immature. Such a snag could lead to an immediate loss of value and potentially deter new crypto-enthusiasts. Even though the snag risk is real, it cannot be avoided as huge developments are still needed before blockchain-based use cases become mainstream.
Instead of blaming developers, investors should first understand that 1. Developers aim at building projects, not only protecting token value. That leads them to take the “risk” of releasing new projects and this is what the community is waiting for. We want them to keep the Blockchain promise, not to act according to the potential short-term harm to cryptocoin values 2. A good investor should understand the risk of his investment and act accordingly. For example, the development of the ERC-20 standard implies a potential problem for all ERC-20 tokens if there is a major security problem at the standard layer. Another Ethereum development risk for 2018 will be Casper and the switch from PoW to PoS. As an investor, you need to assess those risks and act accordingly.
Another analysis you need to make as an investor is to assess the maturity of the technology used in a cryptocoin. The “never roll your own crypto” saying should lead you to account for the additional risk of coins using new cryptographic techniques.
When I was in college in the early 70s, I devised what I believed was a brilliant encryption scheme. A simple pseudorandom number stream was added to the plaintext stream to create ciphertext. This would seemingly thwart any frequency analysis of the ciphertext, and would be uncrackable even to the most resourceful government intelligence agencies. I felt so smug about my achievement.
Years later, I discovered this same scheme in several introductory cryptography texts and tutorial papers. How nice. Other cryptographers had thought of the same scheme. Unfortunately, the scheme was presented as a simple homework assignment on how to use elementary cryptanalytic techniques to trivially crack it. So much for my brilliant scheme.
From this humbling experience I learned how easy it is to fall into a false sense of security when devising an encryption algorithm. Most people don’t realize how fiendishly difficult it is to devise an encryption algorithm that can withstand a prolonged and determined attack by a resourceful opponent.
Philip Zimmermann (PGP creator)
In that sense, Bitcoin is a safer bet for you as it deliberately uses proved cryptographic techniques.
Development snags or the risk of a double-brained cryptographer overpowering SHA-256 and solo-mining every block are real risks to consider. Those should not be overestimated but be tools leading investors to adequately balance their portfolios: 1. not invest more than you can lose in crypto 2. Always prefer proven crypto techniques for the bulk of your portfolio 3. Don’t invest too much in new crypto and unreasonably ambitious projects.
5. The Sovereign risk
One easy answer to this one is that Bitcoin will develop stronger if faced with Sovereign antagonism. And indeed in the past, that is what happened: banning Bitcoin in some countries did not harm the Bitcoin price. What’s more, anti-citizen sovereign decisions like the seizing of citizen funds in Cyprus boosted Bitcoin usage and therefore its price. But a coordinated strong regulation and taxation of Bitcoin and cryptocurrencies will leave Bitcoin only available in “crypto havens” and the P2P world (with no possible connection to the rest of the economy). This would make Bitcoin holders Crypto-outcasts that would have to discount their assets one way or another in order to actually buy goods in the rest of the economy (a house, a car, a coffee). When that happens, it will reduce the flow of new crypto-investors and therefore the value of cryptocurrencies.
Of course, anti-citizen administrations like France’s are leaders in the effort to control and/or tax the crypto-economy, with Finance Minister Lemaire trying to put a crackdown on “Bitcoin speculation” at the agenda of the next G20 summit. It is possible for us cryptoinvestors to mock him but let’s not underestimate the strength of such initiatives. They still hold the steering wheel for now.
The short-term move as a cryptoinvestor would be to shift to more private coins like Monero or Zcash or Verge but that would not solve the issue of those coins needing to find a large “acceptation network”, which will undoubtedly be more difficult with a strong sovereign defiance in 2018.
This risk will not stop the crypto-wave. But it could delay it or reduce the coin price increase of 2018 to a 2-digit number only.
II. Bullish events
1. The human community
Even though only a small percentage of cryptoinvestors has actually thought about the new world under creation with the rise of Bitcoin and other Blokchchain-based services (like storj or Basic Attention Token), it is certain that 2017 created an unprecedented crowd of new P2P/decentralization enthusiasts. This cryptocrowd is a growing crowd of ambassadors that will not only convince new enthusiasts in 2018 but also add to the current crowd of “hodlers”, ideology helping.
I walked past La Maison du Bitcoin last Friday in Paris and it was packed. Really packed. Half of the people opening Bitcoin wallets and investing some fiat, half of the people purchasing Ledger Nanos. When I entered La Maison du Bitcoin to buy a Bitcoin T-shirt or the Bitcoin comic book 2 years ago, it was a desert, its employee idle most of the time. Some Parisians friends remember me righteously that when the average Joe suggests a new juicy investment, it is a sign of a bubble, and a sign you should sell this very investment. True. But my (unproven) feeling is precisely that only the average Parisian Joe suggests to invest in Bitcoin, not all average Joes. Not the average Joes 200 miles away from capital cities. It feels like the 1998 of the Internet, not the 2001. I might be wrong but I believe that should there be an excess of Bitcoin and crypto-investment, we still haven’t witnessed the big part of it.
2. The bulk of institutional investors will only invest as of 2018
Who has created a crypt-fund so far? Almost no one. Yes, people will tell me. There is one fund in Sweden that has already started. Other ones in the US. And one was greenlighted in France last month. OK. But that does not make the majority of funds. It’s an investment power of epsilon compared to the world size of investment funds. And investment funds will get increasingly involved in 2018. When you are an investment fund manager in a context of low interest rates and stock price stagnation, you cannot durably ignore assets with rocketing prices. Whether they sell ETF or cryptocoins directly, funds will fuel the growth of the most major cryptocoins in 2018. This price rise in the biggest coins will be recycled in smaller coins and ICOs for a minimum of 6 months or even the full year.
3. New projects will unlock new market bulls
What I love about Crypto is that even though we are talking about decentralized and autonomous systems, projects success keeps being provided by large communities of HUMAN developers. And those communities are working hard. And those communities are committed to their projects. And those communities are united against bears, be it governments, hackers or cynics. New crypto-projects will be sparked in 2018. Personally, I like the promise of atomic swaps and the idea that we can fix exchanges teething issues with projects like Barterdex, the decentralized exchange. Other brilliant ideas will assemble, put together by the most dynamic community effort that I was able to witness since the rise of the Internet. They will propagate mini bulls at each corner of the world… and increase the overall value you guys feverishly check every morning on CoinMarketCap.
Conclusion
There will be risks in 2018. Governments will continue to threaten the price of cryptocoins, so much as exchange hackers and potential project snags discovered as the year unfolds. As an investor, you can try to play with those bears but it will be a difficult game as 1. they are hard to anticipate 2. you don’t want to play against Crypto, do you? But my feeling is that those bears will only be short-term, leaving “hodlers” with no scratch if they remain calm and don’t sell in the trough. In the mean time, crypto will be shared with more and more people (developers and investors) and new projects will set even higher objectives for a better new world. This crypto-promise will be neither fulfilled nor destroyed in 2018, leaving space for positive speculation for a better world. This social speculation will translate into increasing crypto-token prices, some tokens having excessive prices, but I don’t see a bubble about to explode in the short-term. I believe this will be a debate of 2019, unless Bitcoin strikes $100,000 in 2018. If it does, let’s reconsider. But for now the rise of crypto-prices suggests more the steep part of a tech development S-curve than anything else.
Trust me… or not.
