Bitcoin Not Going Anywhere
The Blockchain Sector @ 2022-09-21
The Blockchain Sector provides information relating to emerging financial technologies. It should not be considered financial advice. Disclaimer below.
Bitcoin Not Going Anywhere
Bitcoin has made a bit of a come back since the merge with price ETH/BTC price dropping now to around 0.07 Bitcoin dominance has also returned to just above the 40% mark.
Attention has faded in 2022 for Bitcoin, it’s price action has also been disappointing relative to the declining market. In previous cycles Bitcoin has been the asset that has outperformed and was viewed as a flight to safety.
If Bitcoin doesn't hold its value better in a bear market, it's unlikely going to outperform the crypto asset class as a whole in a bull market without a disruptive change in narrative.
However, Bitcoin does have a first mover advantage, the Satoshi story and it's the most widely traded cryptocurrency. Bitcoin is the most liquid digital asset across centralized and tradfi exchanges. It also has more institutional investment from corporations, funds and family offices. Bitcoin was seminal to everything that has been built since and no one can ever take this away.
There are a couple of directions that the Bitcoin network could take, one of them would be to become a base asset which is used for settlement of large transactions, similar to how you use bank wires today.
So if we accept that Bitcoin has limited block space and that block space is going to be in demand as a transaction layer then maybe it might cost $20 to send a Bitcoin transaction and you are never going to buy a coffee with it. This is still very valuable as an asset which you can store wealth in which is somewhat immune to the constant money printing which causes inflation and the devaluation of fiat currencies.
If this is going to be the case then Bitcoin at some point needs to start acting like an inflation hedge instead of a beta to the Nasdaq. Since the March 2020 covid crash Bitcoin has picked up a correlation to risk assets in traditional finance. Perhaps like all cryptocurrencies it is being used more currently for speculation than what it was designed to do.
The second direction Bitcoin could go is to open up the development ecosystem to attract third party developers to build on top of it. In the summer of 2017 there was a big debate about increasing the block size where the whole community was divided. This relatively minor adjustment highlighted just how difficult it had become to make changes to the Bitcoin network, to develop it further, build on top of it, and make adjustments, which could modernise and enable it to compete with emerging blockchain technologies. This set a precedent that the Bitcoin architecture is perfect as it is and it should not be changed for better or for worse.
While the lightning network has struggled for traction up until now there is also the chance this starts to gain attention as a payment system. Bitcoin was of course, originally designed to be ”A Peer-to-Peer Electronic Cash System”.
We haven’t seen mainstream adoption of the in lightning network today, there's no reason why this couldn't gain traction in the future. Or perhaps another third party network built on top of Bitcoin, which adds an application layer or a low-cost transaction layer.
For it to be truly successful I think it would need the support of the core development team and this hasn’t been forthcoming to date as they have distanced themselves from application layers that only submit a hash to be stored on-chain.
To realise it’s design concept a layer 2 network is essential because Bitcoin doesn’t come close to scaling to the levels needed and a 10 minute block time is difficult to build upon. Most countries are migrating quickly to digital payments. Pre-covid it seemed incomprehensible that we would not have paper money and coins. Now 99% of the time I'm making payments with my phone or just holding up a card to an NFC reader.
It's not a massive technological leap to cut out the two to three percent fees that credit card companies like Visa and MasterCard take and enable digital payments via public blockchain networks. Perhaps then we could see Bitcoin become viable as “A Peer-to-Peer Electronic Cash System”.
If Bitcoin just carries on acting as a risk asset with no major shift in narrative I struggle to see how it will outperform the wider market and still think the Ethereum flippening is likely at some point over the next few years.
Altcoins With Utility & Traction
Considering the severity of the bear market altcoins have been performing reasonably well, particularly ones that are considered high quality. Quality I would define as fundamental value in terms of utility and gaining traction in the sector. Essentially the projects that have found product market fit.
There are blue ships like UniSwap, Curve, Lido and while these token prices have all got REKT, it’s not as much as one would expect given the market conditions. Bitcoin dominance is actually making new lows below 40% which is unheard of in a bear market.
I don't personally believe DeFi is down and dead. For me, some of these protocols will go on to become foundation of future financial technology.
NFT trading volumes are making new lows since their incredible rise to popularity. We have seen Opensea transaction volumes fall below 10 million a day for the first time since July 2021.
The fact blue chip NFT Projects like Crypto Punks and Bored Ape Yacht Club are still finding a bid is encouraging while many small projects have simply become illiquid and now they hold no value because no one is willing to purchase them in these market conditions.
I believe that all financial assets will eventually get tokenised on a blockchain including real estate, stocks, derivatives and bonds. The simplicity that we can move tokens around offers so much value and efficiency. It is inevitable that over a long enough period regulations and legislation will eventually catch up and enable us to bring these assets on chain.
The tokenization of real world assets and #RealYield has been something we have been waiting for in the industry for a long time. We can’t go on forever playing ponzi games with governance tokens built on speculation. This is one area where I think we could see a future narrative emerge over the next five years. However, it might be decades before we see stocks from the New York Stock Exchange migrate to a permissionless blockchain, if it ever happens at all.
Regulations & Stablecoins
When speaking about legislation it’s worth mentioning central bank digital currencies (CBDC’s). There are a lot of pilots and test programs going on now across the globe with perhaps China in the drivers seat. They already have a e-CNY digital asset which is available and currently being integrated into WePay and AliPay. Now, of course this isn't being deployed on a public blockchain, it is a private network, which is managing a centralized ledger.
Russia's Vladimir Putin announced recently that he's looking at a creating a digital asset which can be used for settlements between the BRICS nations. This would be backed by a basket of currencies for the nations involved such as Roubles, Rupees Renminbi.
Third party stable coins are growing at a tremendous rate with the combined market cap exceeding $100 Billion USD. Organizations such as Tether and Circle are doing big business taking in deposits and minting ERC20 tokens. We heard yesterday that the US government are starting to take a closer look and may consider banning algo stablecoins that use their own assets as underlying collateral.
The strength of the US dollar as a global reserve asset is being attacked by trade deals between Russia and it’s BRICS allies in India and China. These partners have already agreed to settlements in local currencies.
Could a significant threat to US dollar supremacy create an environment where we could see a US CBDC emerge sooner than we think? An official US dollar stable coin which could be bridged to public blockchains would be game changing but it’s difficult to see this coming from the Biden generation. The blockchain sector needs to grow and mature substantially before it reaches the radars of politicians who may one day look at it from an opportunistic angle rather than an annoying regulatory burden.
While a US CBDC may be a long way off, the stablecoin wars are heating up in the short term. There's reason to be believed that Curve Finance might be releasing a crvUSD stable coin.
Binance recently removed USDC trading pairs from its exchange in an attempt to concentrate liquidity and utility around their own BUSD base asset.
Markets: BTC/USD
The Bitcoin chart looks like it is coming to the end of a ranging period. A break out above $21k would take it outside of the declining trend line which could see some momentum return. If this happens I think it will likely be in the next couple of weeks and a return to at least $27-29k is likely as resistance and the 200d EMA line up.
$19k is acting as support currently and is getting bought up. If this fails we head to goblin town as there’s not much between there and $12-14k.
Bitcoin is the chart to keep an eye on over the next couple of weeks in my opinon but if it breaks out then altcoins will follow as speculators and crypto twitter calls the bottom.
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Disclaimer: Not a financial advisor, not financial advice. The content I create is to document my journey and for educational and entertainment purposes only. It is not under any circumstances investment advice. I am not an investment or trading professional and am learning myself while still making plenty of mistakes along the way. Any code published is experimental and not production ready to be used for financial transactions. Do your own research and do not play with funds you do not want to lose.