Bitcoin is a decentralized cryptocurrency – a form of value transfer that is unstoppable, uncensorable and cannot be confiscation. Bitcoin transactions can be sent around the world freely, unhindered by arbitrary currency controls.
It has been an explosive week for the crypto market, as most cryptos see double-digit gains for the first time since the FTX contagion started in November 2022. This rally was led by Bitcoin (BTC) and Ethereum (ETH), which surpassed the $21,000 and $1,590 mark respectively. It is important to understand what factors are causing these uptrends, so that we, as investors, can recognize and capitalize on these patterns.
Why is Bitcoin (BTC) Pumping in January 2023?
Over the past week, Bitcoin has seen large numbers of purchases with robust trading volume. According to Glassnode, the exchange outflow volume of BTC has hit an early year-to-date high, with nearly $300 million worth of withdrawn BTC moving into crypto wallets. Moreover, most of these withdrawals were made in large installments ranging from $1 million to $10 million of BTC. This is corroborated by on-chain aggregator Santiment, where Bitcoin whales have been loading up their wallets with a lot of BTC, suggesting institutional action.
đ A definitive explanation on why #crypto prices have bounced:
Across the broader crypto market, more than $1.3 billion of crypto assets in short positions were liquidated over the past 8 days, according to data sourced from Coinglass. Additionally, more than 200,000 traders were liquidated, with the most significant liquidation being a $6.84 million short position against Bitcoin, contributing to the surging price movement in the crypto market.
Apart from market activities within the space, there are other macroeconomic conditions that contribute to Bitcoinâs pump.
Inflation Slowing Down According to U.S. Consumer Price Index (CPI)
The price surges in the crypto market also reflects the marketâs expectations that inflation is cooling ahead of the release of the U.S. Consumer Price Index (CPI) data. Bitcoin began the week trading at $17,207 and has since seen an upward trajectory, with the CPI report meeting market expectations indicating that inflation in the U.S. economy is slowing. Other equities markets have also responded positively as a result.
Investors are now anticipating comments from the Federal Reserve which should hint at future policy, including the size of interest rate hikes. The Federal Open Market Committee (FOMC) meeting will be held between January 31 and February 1. According to CME FedWatch Tool, the committee is currently expected to yield a hike of 25 basis points istead of the previous 50 basis points.
Now, the prevailing narrative is that U.S. inflation has peaked in 2022, which means softer rate hikes going forward. This stimulates all economic activities including in speculative markets, but with the crypto industry, any surprises could spark additional volatility.
Bitcoin Halving Event in 2024
Another factor contributing to Bitcoinâs pump this month is the upcoming Bitcoin halving event in 2024, in which Bitcoin rewards to miners are cut in half. This event occurs after every 210,000 blocks are created, which is roughly every four years. Around next year, minerâs payout will be reduced from 6.25 BTC to 3.125 BTC.
Historically, halving events have been seen as a positive sign for Bitcoinâs price, as it helps to contract the supply of BTC. This is due to the fact that Bitcoin has a fixed supply, and the halving event directly relates to Bitcoinâs deflationary tendency, driving its price up as a result of supply and demand mechanisms. According to Coindesk, we can see from Bitcoinâs halving history, the events have always been able to establish long-term bullish drivers for Bitcoinâs price.
Correlation with the U.S. Dollar Index (DXY)
Another factor contributing to Bitcoinâs price movement is its relationship with the U.S. Dollar Index (DXY). The crypto market generally correlates negatively to the DXY due to the purchasing power of fiat currencies. When the DXY declines, investor sentiment for riskier assets such as crypto tends to increase. This year, the DXY dropped to seven-month lows, momentum has slowed as it is beginning to retract. Typically when this happens, it is followed by Bitcoin price moving in the opposite direction.
The concept of the âFlippeningâ has been increasingly gaining traction in the crypto space. It refers to the hypothetical moment when Ethereum (ETH) surpasses Bitcoin (BTC) as the most valuable cryptocurrency by market capitalization. The Flippening is important because it would signify a major shift in the overall direction of the crypto landscape, signalling a change in investor sentiment and adoption patterns.
https://www.youtube.com/watch?v=0lQ8bz9QRBo
While the Flippening is not set in stone, there are compelling data that indicate it is coming, and sooner than you think⌠Hereâs why:
The Case for Bitcoin
Being the worldâs first cryptocurrency, Bitcoin has maintained its throne on the crypto market since its genesis block in 2009. It is often considered as the safest digital store of value by investors, with its limited supply structure similar to the scarcity of gold, hence its nickname âdigital gold.â As such, Bitcoin is usually the primary choice of cryptocurrency for financial institutions looking to get involved. As far as mainstream adoption goes, Bitcoin has led the way so far.
However, Bitcoinâs Proof-of-Work (PoW) consensus model is highly energy-intensive, sparking criticisms of the networkâs impact on the environment. Additionally, the usage of Bitcoin is only limited to exchanging and storing value. This is where Ethereum has much more to offer.
The Case for Ethereum
As the second most valuable cryptocurrency, Ethereum is designed to be used as the foundation of a decentralized, blockchain-based internet â an idea that is become known as Web3. Apart from exchanging and storing value, Ethereum introduced smart contract functionalities that allows developers to do all kinds of innovative and creative things on the network. This brought about a proliferation of financial products that have enabled a much broader range of investors.
Ethereum earned its nickname âdigital oilâ because it is a utility-based asset like oil, fuel or gas, and its value is largely dictated by supply and demand mechanisms. Similar to how the worldâs global supply chain is fueled by crude oil, Ethereum lays at the heart of the Decentralized Finance (DeFi) space as well as GameFi and Non-Fungible Token (NFT) market. And as the Web3 landscape progresses, demand will increase as more and more people are recognizing the potential of a decentralized internet. It is only a matter of time when Web2 evolves to Web3, and Ethereum is at the centre of that.
Do âEthereum Killersâ Hinder the Flippening?
It is worth noting that Ethereum faces competition from other prominent layer-1 blockchains such as Aptos, Cardano, Solana, BNB Chain, Polkadot, and Avalanche. There is a trending âEthereum Killerâ narrative in which user adoption will be distributed amongst these blockchains instead of focusing on Ethereum only. However, most of these blockchains in fact depend on Ethereum, as one way or another they are associated with the networkâs smart contract. As shown in the image below by Cryptowatch, all of the top layer-1 blockchains are closely correlated with Ethereumâs price action.
Comparing Market Share between Bitcoin and Ethereum
As of 11th January 2023, Ethereumâs market share increased by 3% among global crypto assets, signalling its dominance on the rise. According to Coinmarketcap, Ethereumâs market dominance is at 19%, valued at around $856 billion. On another note, Coingeckoâs metrics were slightly different, indicating Ethereumâs dominance at 18.3%. But both aggregation websites show that Bitcoinâs market dominance is decreasing, from 40% to 38%.
It is unclear whether this trend will continue, but according to data sourced from Blockchain Center, the Flippening has been on an uptrend since July 2021. And we are nearly halfway for it to happen. It is also worth noting that Ethereum came closest to the Flippening in 2017, when Bitcoinâs market dominanceâs dropped by 40.6% and Ethereum took over 32% of the market amidst the situation.
In reference to the data provided by Blockchain Center, there are also other metrics apart from market cap that determines the Flippening. As of now, Bitcoin is still by far superior in trading volume, which is a crucial metric for adoption usage. However, Ethereum has Bitcoin beat in active addresses, transaction count and volume, and total USD transaction fees.
Outperformance of Ethereum will be primarily driven by the strength of its post-Merge fundamentals. The upcoming Shanghai Upgrade will significantly reduce the risk and opportunity cost of staking ETH, which is likely to attract participation from more crypto users.
Key Takeaway
Despite Ethereumâs increasing adoption and market dominance, Bitcoin still reigns supreme in the crypto space. In fact, Bitcoin saw significant adoption in 2021-2022 from retail and institutional investors, public companies, and even countries. As of now, El Savador and the Central African Republic (CAR) have adopted Bitcoin as a legal currency. This is a monumental step towards mainstream adoption.
But that is not to say the Flippening will never happen â it is certainly a possibility. After all, both Bitcoin and Ethereum have different visions. Bitcoin aims to become the global reserve currency, whereas Ethereum aims to become the infrastructure of a global digital economy. The Technology Acceptance Model (TAM) applies to both assets, but it all comes down to supply and demand mechanisms. If demand in digital money is higher, then Bitcoin dominates. But if demand in utility-based asset in building out a decentralized ecosystem is higher, then Ethereum is generally favored.
Prices of Bitcoin (BTC) reached an all-time high of over USD$19k in December 2017 and there is a lot of discussion and speculation on what triggers the price and when this âbull runâ will happen again. So we took a look at the Bull or Bear factors which may point to an imminent bull run in 2020?
“Bull run” incoming? (8:00 onwards)
Bitcoin bull market factors/reasons?
PayPal Announcement
The PayPal announcement of supporting crypto transactions for their customers has come as a huge boost of positivity to the crypto space, especially in the West. With a humongous user and merchant base, the crypto community hopes for better adoption through the payment platform.
But is the Paypal announcement really a good thing? Check out Cryptonauts’ take in their video “Crypto Comes to Paypal! Good or Bad?” to find out more:
Crypto Comes to Paypal! Good or Bad?
Institutional investors coming into crypto?
Major investments from publicly traded companies like MicroStrategy and Square Inc has also led the Bitcoin price to fly high. However, the institutional investors might have aggregated the bull rally, but it is not the main reason. From our research and actually speaking to people in the frontlines, such as over the counter trading desks like Genesis Block, there are more institutional investors registered for crypto accounts. However, they are still waiting for the right opportunities to buy in.
US election uncertainty
Many see the US Presidential Elections as very polarising, particularly due to the vastly differing stances of the 2 candidates. So right now the whole world is waiting to see the outcome and how it will affect the markets generally. We also found that whether people think Trump or Biden winning is actually good for the markets (and their rationale for this) differs depending on which region they are from.
To really get a feel of the sentiment towards the US elections, we sometimes look at FTX Exchange’s US 2020 Elections contracts because the non-US investors in these contracts are really “putting their money where their mouth is”.
Though there is also some viewpoints being put forward that whether Trump or Biden wins is still going to be good for crypto.
Covid-19 pandemic
As discussed by many, the pandemic created a huge gap in the countryâs economy, but Bitcoin and the crypto world remained less affected. Many investors were attracted to Bitcoin as they felt it as an asset which they can rely upon. And with people are stuck at home all day, some may look into trading to pass the time.
Bitcoin bear market factors/reasons?
On the other side, there may be reasons or red flags that will make people bearish: –
The People’s Daily have also published an article on 3rd November 2020 authored by Shan Zhiguang, Chairman of the Blockchain Service Network (BSN) which has further worried Chinese cryptocurrency enthusiasts (see the translation posted by Matthew Graham). The article states that a person may be charged with money laundering if: (1) someone buys cryptocurrencies using RMB and sells the cryptocurrencies for any foreign currency; or (2) uses any foreign currency to purchase cryptocurrencies outside of China, and subsequently sells the cryptocurrencies for RMB. This is irrespective of how many intermediate transactions were involved. A Chinese citizen may also be charged with money laundering if they knowingly sell the cryptocurrencies they hold to someone so as to assist them to illegally move funds in or out of China.
Yet the article states that any Chinese citizen that sells any cryptocurrency in exchange for any fiat currency must declare personal income tax to the authorities if the transaction results in a profit. Anyone who fails to do this could be charged with tax evasion.
Bear reasons already factored into prices?
Rumors or discussions leaning towards a bear market have already been circulating for a while in the crypto discussion groups. For example, reasons some people may feel bearish over the Paypal or DCEP news have already been discussed repeatedly in this space. Considering there is no new news on this right now, any negativity would have already been factored into the current price of Bitcoin or cryptocurrencies.
No new blood (at least not like in 2017 anyway)
Back in 2017 there were a lot of newcomers, we observed this when we see just how many people were eagerly asking relatively beginner questions. We do not really see this yet and so it seems that the cryptocurrencies adoption rate in 2020 is much slower vs 2017.
Don’t get us wrong, there are newcomers. We already saw lots of people buying Bitcoin using the ATMs inside Genesis Block (because they take more money). But there are no crazy lines of people with suitcases outside Genesis Block waiting for them to open like in 2017. This insanity was mostly caused by the “Kimchi premium”, where prices of Bitcoin in Korea were much higher than in Hong Kong. So what we saw were Koreans flying into Hong Kong with large amounts of cash in the morning, buying Bitcoin at Genesis Block, and catching a flight back to Korea in the evening.
Another surprising indicator are sales for Ledger cryptocurrency hardware wallets using our affiliate code. We definitely noticed a significant uptick in sales recently, but definitely not as much as in 2017.
Decentralised Finance (DeFi) and Yield Farming bubble
A couple of months before, the crypto space became familiar with the term DeFi where many Bitcoiners turned into Yield Farmers. The promotions of DeFi and Yield Farming projects have definitely escalated as of late, to the point where some promotions and people urging others to go “all in” can be quite aggressive. This is a concerning sign because it makes you wonder if they are desperately trying to get you to buy so they can sell.
Scam projects/ rug pulls
The immense rally of the DeFi space led to the initiation of many scam projects or “rug pulls”. Some of them just crashed hours after launch with developers or hackers running away with people’s funds. Cointelegraph had also recently interviewed me for an article on this topic of Escalating DeFi scams tarnishing the crypto yield farming market niche.
Confusion within Asia?
Regulatory clarity is important in any region. China has been pushing the message that Bitcoin and Ethereum are two of the best assets on national television. Yet as we have seen earlier in this article, cracking down and closing cryptocurrency associated accounts, taking in the founder of OKEx for investigation and the recent article from the People’s Daily on how dealing with cryptocurrencies may constitute a crime may cause confusion amongst the public. Ultimately this confusion may also adversely affect the crypto space.
Disclaimer: Cryptocurrency trading involves significant risks and may result in the loss of your capital. You should carefully consider whether trading cryptocurrencies is right for you in light of your financial condition and ability to bear financial risks. Cryptocurrency prices are highly volatile and can fluctuate widely in a short period of time. As such, trading cryptocurrencies may not be suitable for everyone. Additionally, storing cryptocurrencies on a centralized exchange carries inherent risks, including the potential for loss due to hacking, exchange collapse, or other security breaches. We strongly advise that you seek independent professional advice before engaging in any cryptocurrency trading activities and carefully consider the security measures in place when choosing or storing your cryptocurrencies on a cryptocurrency exchange.
Binance is tackling to issue of proving where user funds are by using the third-party auditor Mazars, a leading Hong Kong-based auditing firm, to prove independently that user funds held by the exchange are safe and “untouched”. This is particularly important as users are demanding to know that funds are safe (or “SAFU”) and that they can trust the exchange to keep holding their funds. Auditing centralized exchanges help to ensure that they are compliant with applicable laws and regulations, as well as industry best practices. This helps to protect users from fraud, manipulation, and other malicious activities.
Binance BTC Reserves are Fully Backed
Mazars, an international audit, tax, and advisory firm, has confirmed that Binance has more than enough Bitcoin (BTC) to cover all customer deposits. The report verified a 101% collateralization ratio on 575,742 BTC in net customer deposits as first published on their proof-of-reserves system on November 25. All assets included customers’ spot, options, margin, futures, funding, loan and earn accounts for BTC and wrapped BTC circulating on the Bitcoin, Ethereum, BNB Chain, and BSC blockchains.
To ensure customersâ assets are not being lent out or stolen without permission, Binance implemented a Merkle Tree proof-of-reserves system that allows customers to independently verify the safety of their assets.
Binance Merkle Tree Proof-of-Reserves (Source: Binance)
Binance Securely Controls Custodial Wallets
Mazars has also asked Binance to perform transactions at specific times to prove that the wallets were actually under Binance’s control. This clarifies the situation in late November when Binance moved 127,351 BTC to an unknown wallet. According to the report, Mazars used Etherscan and BSCscan to check that the wallets indeed belong to Binance.
Moreover, Mazars reviewed the scripts that Binance uses to extract the total net deposits, making sure there was no duplicated or rigged user IDs. This confirms that Binance’s Merkle tree is built with open source script developed by Silver Sixpence.
What This Means for Investors
Binance is the world’s largest crypto exchange by trading volume, and is arguably the most used platform for all crypto users. After the collapse of FTX, Binance CEO Changpeng Zhao (CZ) was jokingly hailed as the “savior” of crypto, doing everything he can to repair the industry. However, Binance itself is no exception to scrutiny as a result of FTX’s collapse. People need to know what centralized exchanges are doing with their money.
Binance’s audit has cleared up a lot of doubt, restoring confidence in the exchange. However, there are still two issues raised by the crypto community:
A Step in the right direction
Overall, auditing centralized exchanges are essential for protecting users and ensuring that exchanges are operating in a safe and secure manner. By conducting regular audits, exchanges can help to ensure that their customers are protected and that they are getting the best possible service. Binance has also provided on-chain proof of funds using “Merkle” Proofs in November of 2022. This means that Binance has taken efforts to prove that both Fiat and Crypto deposits in their custody are safe.
FAQ
Is Mazars a reliable auditing firm?
While most of the community praises Binance’s initiative, several Crypto Twitter users expressed concerns that Mazars is not one of the “Big Four” accounting firms: Deloitte, Ernst & Young (EY), PricewaterhouseCoopers (PwC), and KPMG. For the longest time, audits made by any one of the Big Four is the gold standard, and any other firms are deemed not “credible” enough. This is reasonable enough seeing as FTX was in fact audited by smaller accounting firms. But that might not be the case for Mazars. Founded in 1945, Mazars is one of Europe’s largest audit and accounting firms with global presence. In fact, Mazars was a longtime accountacy firm for former president Donald Trump. But after finding out Trump’s business filings were not adding up, Mazars cut ties with his business. Given their track record, it is safe to say that Mazars is reliable as they conduct due diligence on any business.
Binance audit only accounts for BTC reserves
The audit only focuses on BTC assets for now. As of now, Binance does not have a proof-of-reserves system for other cryptocurrencies. But at the end of the day, this is a big step towards a more transparent ecosystem. Let’s hope there will be more developments in the coming weeks.
On Feb 24, on the same date Anton Drexler founded what would become the Nazi Party, Russian President Vladimir Putin ordered a full-scale invasion of Ukraine. As Moscowâs bombs dropped on the countryâs major cities, the nationâs Minister of Digital Transformation Alex Bornyakov fled its capital city of Kyiv.
Check our our video discussing the implications of the invasion of Ukraine on cryptocurrency:
Ukraine Invasion: Implications for cryptocurrency?
âWe start to accept donations in meme coin. Now even meme can support our army and save lives from Russian invaders,â said Fedorov on March 2.
Doge Army
According to data tracked by the blockchain analytics firm, Elliptic, the majority of donations to Ukraine have been paid in Ether and Bitcoin, but donors have also sent the PolkaDot cryptocurrency as well as stablecoins like Tether.
âWeâre watching history being made in real-time here,â says Braintrust Network co-founder Adam Jackson.
According to Crypto for Ukraine, over US$100 million in cryptocurrencies have been donated to Ukraine. The number is currently growing. Of the donations, nearly 40% were in Ethereum, followed by 31.51% in Bitcoin.
Bornyakov thinks that in times like the current crisis, response time is crucial.
âThe National Bank of Ukraine created a fiat fund, but with the time and speed of a regular banking system, it was impossible to finance important things for the army. Crypto plays a role to get this flexibility when we really needed to respond quickly to deliver the army with its required supply,â Bornyakov said.
Cryptocurrencies offer much faster transaction times, but not all businesses accept them as payment, according to Bornyakov. Currently, the government converts the donated crypto assets into dollars or euros through Ukrainian exchange Kuna, which it has partnered with to also custody the funds.Â
This helps reduce the friction arising when crypto donation funds are used to acquire goods for the military in order to fight off Russian forces.
Some firms do in fact accept crypto, but for those who do not, cryptocurrencies are sent via the exchange into the conventional banking system for payment.
Ettore Rosetti, the digital, marketing and innovation lead advisor for NGO Save the Children said that the group is seeing millions of USD in pledges in crypto projects. The humanitarian group has accepted crypto contributions since 2014, but the range is more varied now, accounting for the expansion of the crypto world.
âYouâre crowd-sourcing a humanitarian effort in real-time,â said Jackson.
âWhatâs fascinating about the emerging currency types are NFTs. Weâre getting inquiries from artists wanting to create an NFT to benefit Save The Childrenâs response in Ukraine,â said Rosetti.
NFTs created and sold to raise funds for the Ukrainian war effort
Indeed, Crypto Punk NFTs worth USD200,000 form part of the contributions to Ukraineâs national crypto aid fund opened on Feb 26. And Russian protest punk band Pussy Riotâs co-founder ââNadya Tolokonnikova organised an auction fundraiser to sell an NFT of the Ukrainian flag for USD7mil.
Amid the geopolitical and economic turmoil that has come about due to the Russia-Ukraine crisis, a sense of a real impact being made seems to stand out. Never in the history of the highly linked phenomena of war and economics have we seen the impact of ordinary citizens come about so quickly.Â
Now, Ukraine ranks 4th in the world in crypto adoption, according to research firm Chain Analysis.
In Putinâs Russia, Crypto Exchange You
Meanwhile in Russia, a report on ABC11 states that as Visa and Mastercard suspended their services and sanctions on the economy began to take effect, many are turning to cryptocurrency as well.
Ordinary Russians are now using crypto as a lifeline as their currency collapses under the brunt of geopolitical economic reprisal, according to Coinbase Global CEO Brian Armstrong.
âMany of them likely oppose what their country is doing, and a ban would hurt them, too,â wrote Armstrong over Twitter just before midnight on March 3.
âIf the US government decides to impose a ban, we will, of course, follow those laws,â added Armstrong.
âShould a coffee shop in Paris refuse to serve a Russian customer? Or take their wallet while theyâre at it? The answer to that is no,â he wrote in a blog post. âWe are not going to unilaterally freeze millions of innocent usersâ accounts.â
One issue driving the push towards crypto sanctions on Russian users is that nations are wary of the nationâs oligarchs and Putinâs real resource of power might use it to evade sanctions. As it stands, steps had already been taken by these oligarchs to secure their wealth amid threats from the US and its allies, particularly a US task force created for this specific purpose announced by US leader Joe Biden on Feb 27.
On February 28, superyachts owned by Russian billionaires linked to President Vladimir Putin were on the move as the United States and its allies prepared further sanctions on their property following the invasion of Ukraine.
However, US Treasury deputy secretary counselor Todd Conklin has suggested crypto canât be used to fully circumvent the sting of sanctions, given its practical limitations.
âCrypto is traceable, transparent. If someone is sending Putin Bitcoin from outside of Russia to evade US sanctions, then chances are they had to buy that bitcoin at an exchange and that exchange has their name,â added Jackson.
âWhile technically it could be used to avoid sanctions, itâs not a great way to do it,â he adds.
And as every transaction of the blockchain is transparent and public, cryptocurrency exchanges can use the information to trace the source of the funds to see if it is coming from blacklisted or sanctioned sources. In turn, the exchanges can also identify and block sanctioned persons from even opening an account.
US Financial Crimes Enforcement Network acting director Him Das said in a statement on Monday that the agency had ânot seen widespread evasion of our sanctionsâ via cryptocurrency.
As it stands, analysts say wealthy and well-connected Russians often have a web of front companies through which they sift funds and crypto might not form a large part of this web.
According to The Washington Post, Trump-era Treasury Department assistant secretary Marshall Billingslea said that âthe oligarchs have so many well-heeled accountants and complicit bankers around the world, they donât really need to go that way. And if theyâre investing in sound sanctions advisers, theyâre being warned that some of these blockchain currencies like Bitcoin are not nearly as opaque as they might have thought,â somewhat reflecting what Jackson said above.
Large-scale avoidance of sanctions by say, turning fiat into cryptocurrency would prove difficult. For example, if an oligarch wanted to convert $1 billion dollars into cryptocurrency, they would find it very difficult since there is insufficient liquidity in the market to convert such a large sum. The oligarch would have to use multiple exchanges which would make the process extremely inefficient.
But avoiding sanctions using crypto could happen at a smaller scale over a longer period of time. As Investors.com states, Iran and North Korea offer some shady guidance to the world of discreet digital asset fundraising.
Crypto and blockchain analysis firm Elliptic found that Iran has used Bitcoin mining to bypass US embargoes, using Bitcoins their computers mined to pay for imports that would have otherwise been sanctioned. North Korea meanwhile employed hackers to steal some USD400mil in assets from cryptocurrency platforms last year, according to the research firm Chainalysis.
Russiaâs embargoed but wealthy persons of interest could also channel divert money through smaller crypto exchanges that seem legitimate but have dubious compliance protocols under closer scrutiny. These exchanges might even be cooperating with the person of interest or their groupâs money-laundering or ransomware schemes. The US last year sanctioned two exchanges on allegations of facilitating ransomware transactions.
Ironically, the failure to prevent Russian oligarchs from using crypto to squirrel away their millions around the world might force tighter regulations on cryptocurrencies themselves, putting proponents of crypto as a fair and balanced force for economic good, particularly during the Ukrainian conflict, in a bit of a moral dilemma.  Â
As Forex.com global head Matt Weller was quoted at Investors.com said: âThose are the main two competing factors: The ideological-utilitarian perspective on the benefits of crypto assets versus the financialized investment component. Those are sort of pushing in opposite directions.â
One situation that really highlights a potential irony in this dilemma is Pussy Riot co-founder ââNadya Tolokonnikova. That she is trying to help Ukraine as a protest against Putin seems to fit in the current zeitgeist of the conflict. But as Russian, imposing sanctions against Russian crypto to help Ukraine would stop her from raising money for Ukraine.
As the saying goes, the road to hell is paved with good intentions.
Those Are Blood Money
For Ukraine, they donât have a choice in deciding how to balance the scales of this dilemma between economic fairness and moral-geopolitical good. As far as they are concerned, blind-but-fair adherence to cryptoâs anonymous invisible hand of the market means their people will die.
Bornyakovâs ministry has started to reach out to major exchanges to not work with Russia for the time being because as he puts it: âThey use this money to kill civilian people, to invade a free country without any reason. We inform those exchanges with official letters, with calls, where we can reach to stop work with Russia. Because those are blood money and in many cases come from corruption.â
According to the minister, some exchanges have stopped while others have limited their activity with Russia, and some working with Russia have been blocked, indicated by their complaints on social media.
Outside of the US raising sanctions, the most likely situation to happen in the next few months is that certain high-risk exchanges that donât comply with regulations, at least in the United States, will be sanctioned by the Treasury Department in the near future, according to digital asset risk assessment firm TRM Labsâ legal and government department leader Ari Redbord.
âBecause there is no central controller who can impose their morals on its user, crypto can be used to crowdfund for the Ukrainian army or help Russia evade sanctions,â said Ellipticâs chief scientist and co-founder Tom Robinson to The Washington Post.
âNo one can really prevent it from being used in either way.â
According to Investors.com, TRM Labs recently identified 340 crypto businesses with strong Russian connections that it considers high risk such as lesser-known over-the-counter trading desks.
Worldâs First Cryptowar
Since Sun Tzu wrote the Art of War, the economics of defence has been widely discussed by both governments and private businesses alike. That it is now cryptoâs turn to take up arms or rescue the helpless should surprise nobody.Â
But for a virtual asset so decentralised and antithetical to concerns of the state, the speed at which it has been applied to wartime has to a degree taken many state actors by surprise.
Both The Washington Post and Vox agree to some degree that war has pushed the utility of crypto to such a degree that the unique circumstances of war have made crypto itself a part of it.
According to the Vox article, âWhat we do know is that bitcoin and other cryptocurrencies are now a real factor in global economies and in conflicts.â Meanwhile, The Washington Post has straight-up dubbed the Russia-Ukraine conflict âthe worldâs first crypto warâ.
What this conflict will do for the futures of individual cryptocurrencies is frankly anybodyâs guess. But one thing we do know is that due to its unique attributes of speed and stealth, some of the most desirable attributes for any other tool or weapon, cryptoâs role in the war is here to stay.
Crypto becomes an invaluable asset to Ukrainian refugees
Cryptocurrencies have been immensely valuable to Ukrainian refugees. As Russian attacks have destroyed critical infrastructure, many Ukrainians are finding it hard to withdraw cash from ATM machines. Therefore, many Ukrainian refugees are relying on digital currencies sent from relatives abroad in order to purchase goods and services. All that is needed for them to access their cryptocurrency wallets is a mobile phone and internet access, which is being provided by the thousands of Starlink satellite internet dishes provided by Elon Muskâs SpaceX.
Bitcoin (BTC) is by far the best-known digital asset with the largest trade volume.
Bitcoin is both a currency and a technology. At its core, Bitcoin is peer to peer electronic money with one express objective. The objective is to replace the intermediation and trust vested on centralised financial institutions. It aims to be a replacement for traditional fiat currency and an innovative settlement layer for processing transactions without requiring a third party.
To learn more about Bitcoin and how to get started with cryptocurrencies, check out our beginner’s guide series.
Beginner’s guide to Bitcoin and cryptocurrencies
Bitcoin is Decentralized
Before Bitcoin was invented, the only way to use money digitally, it was through an intermediary, like a Bank or PayPal. Even then, the money used was still government issued and controlled currency. However, Bitcoin changed all that by creating a decentralized form of currency that individuals could trade directly without the need for an intermediary. Instead of trusting a centralized bank to process transactions, we would trust a Protocol that is run by different individuals all over the world.
Each Bitcoin transaction is validated and confirmed by the entire Bitcoin network. There is no single point of failure, so the system is virtually impossible to shut down, manipulate, or control.
Main Features of Bitcoin
Decentralized control: There is no authority that controls Bitcoin. All transactions are visible on a public ledger called the blockchain.
Bitcoin is a store of value: You can use Bitcoin to purchase goods and services.
Security: Bitcoin has never been hacked.
Open source: the Bitcoin source code is publicly available and community members can update it.
Public: All transactions are visible on the Bitcoin blockchain.
Pseudonymous: You can use a pseudonymous identity to make Bitcoin transactions. It is not truly anonymous because the transaction addresses are visible on the public chain.
Limited supply: Bitcoin has a limited and predictable supply.
How do Bitcoin transactions work? How do you earn Bitcoin?
The Bitcoin network is essentially a decentralized public ledger that relies on the combined computing power of its community. Bitcoin works as follows:
Bitcoin transactions are unconfirmed until they are updated on the bitcoin transaction ledger. This is called the blockchain. This is a decentralised public ledger, i.e. everyone can update it and no one person controls this ledger.
People can help update this ledger by using specialised computers. The computers will generate random numbers. The aim is to generate the correct answer to the mathematical problem generated by the system.
The computer that guesses the solution gets to decide which of the pending bitcoin transactions will be grouped together into a block.
The block and the answer to the mathematical problem is sent to the bitcoin network. This is a network of computers.
The bitcoin network will check if the answer is correct. If it is, they will update their copies of the bitcoin transaction ledger with the block you had created. The process is then repeated. Hence the name “Blockchain“.
The computer which guessed the correct number receives an award of Bitcoins and the transaction fees for the transactions in the block.
This process is called mining. This is because you mine (earn) Bitcoins by helping update the bitcoin transaction ledger.
Bitcoin mining farm
What is the halving in Bitcoin mining?
The Bitcoin halving is an important concept for Bitcoin miners. When Bitcoin was first mined, miners were rewarded 50 BTC for generating the correct answer to the mathematical problem. Every 210,000 blocks which occur around every 4 years, this reward is cut in half. (locals.md) This is known as the Bitcoin halving.
The last Bitcoin halving occurred on 11th May 2020 at around 3:00p.m. EST. Following this halving, the block reward was reduced to 6.25 BTC. The next halving is therefore expected to be in 2024 when the block rewards will be cut down to 3.125 BTC.
Bitcoin owners store their coins using wallets. You do not actually hold your Bitcoins, rather you hold a private key that allows you to access your Bitcoin address i.e. your public key.
Click here to learn more about private keys and public keys.
Online wallets: Run on a cloud server and so can be accessed by multiple computers. Most common online wallets are cryptocurrency exchanges. Check out our review of the top exchanges.
Paper wallets: A printout which contains your public and private keys. Though the most rudimentary, it is the safest method of keeping your cryptocurrencies safe.
Desktop wallets: They are downloaded and installed onto your computer.
Who is Satoshi Nakamoto
It is the invention of a “Satoshi Nakamoto” in 2008 as a decentralised virtual currency that runs on blockchain technology. We still do not know the true identity(ies) of Satoshi Nakamoto, though there are people who claim to be him.
What’s the future of Bitcoin?
Bitcoin is getting more adoption for payments across the world. At the moment, many stores and merchants accept payment in Bitcoin. The list of merchants are increasing by the day.
Bitcoin is even usable with some credit and debit cards.
However, Bitcoin is not as easily scalable as most other subsequent coins. Accordingly, a future where Bitcoin replaces traditional currency is highly unlikely.
However, Bitcoin will remain an excellent Store of Value (SOV). This is because of its immutability and periodic price appreciation. That said, the question of regulatory policies across the world may be the actual obstacle to Bitcoinâs long-term success.
Can Bitcoin disappear?
Despite what some naysayers will say about Bitcoin having no value or being a scam, Bitcoin cannot and will not disappear. Bitcoin is widely accepted as a value accept and can be converted into fiat currencies. There are also many places that accept Bitcoin as a form of payment such as Home Depot, Microsoft, and Virgin Airlines.
Bitcoin is also decentralized (i.e. not held by any central authority). This means that no single person or entity can confiscate your Bitcoins or shut Bitcoin down.
What will happen after all 21 million Bitcoins are mined?
The total supply of Bitcoin is capped at 21 million and it is expected that all 21 million Bitcoins will be mined in around 2140. When this happens, Bitcoin mining fees will disappear. Bitcoin miners instead will only earn income from transaction processing fees instead of both block rewards and transaction fees.
BTC price predictions once the last Bitcoin is mined?
In an interview with Cointelegraph, Mohamed El Masri, Founder of mining solutions provider PermianChain predicts that BTC would be worth US$430,500 once the last Bitcoin is mined.
El Masri also feels positive that Bitcoin miners will still be able to profit from Bitcoin mining despite all of them being mined. This is despite the fact that by then, Bitcoin miners can only earn transaction fees as a source of income. His positivity stems from the fact that transaction fees will still generate almost US$3 billion a year at his predicted BTC price. This is because Bitcoin miners will still be a necessary part of supporting the Bitcoin infrastructure operating at any cost.
All financial markets experience different cycles and market conditions. Since crypto asset prices also go through prolonged periods of bullish and bearish movements, the crypto market is no exception. The most dreaded market phase for crypto traders and investors is a declining or bearish phase, especially one that sustains itself for a long time.
General sentiments regarding the crypto and other financial markets are bleak during these periods, making many investors and crypto enthusiasts understandably worried. However, many traders still find ways to make money during unfavourable market conditions. To earn when the market is down, it is important to understand the concept of a bear market.
Check out our video comparing the crypto bear market in 2018 vs 2022, and how you can still profit during this period of downward price trends:
Table of Contents
What Is a Crypto Bear Market?
A bear or bearish market is a prolonged period characterized by falling prices of at least 20% across major crypto assets. Individual crypto assets may also be in a bear market if they experience a decline of 20% or more over an extended period. A bear market may occur due to widespread pessimism and negative market sentiment, as well as other internal or external factors. Additionally, a weak or slowing economy, pandemics, wars, and geopolitical crises are also characteristics that may cause a bear market.
7 Ways to Make Money and Profit in a Crypto Bear Market
Even when the market is in an overall downtrend, the blockchain and DeFi sector offers various ways for crypto traders and investors to still emerge profitable and victorious. Here are a few lucrative options that crypto investors and traders can utilize to make money and remain afloat in a bearish market phase.
Yield Farming
Yield Farming is a cryptocurrency investment method that allows investors to earn interest and rewards on their crypto assets. With yield farming, investors lend their crypto assets to DeFi platforms that hold these assets in a liquidity pool for a specified period. These pools provide liquidity to decentralized finance platforms that use the funds and ensure that the depositors earn some interest over time.
For those who are new, check out our video on the top yield farming mistakes all newbies make:
Crypto Staking
Staking is the process of earning rewards by locking up funds on a blockchain. Although similar to yield farming, this process does not use tokens for loans. Instead, Proof-of-Stake (PoS) blockchains use staking to validate transactions on their networks.
Users who stake more tokens get higher priority to validate transactions and earn more funds. Earnings from asset staking vary between platforms and depend on the governance community in each case. Before getting involved in yield farming or staking, always do your own research and make sure the returns are sustainable, as many times, there are ludicrous and unsustainable offerings that result in users losing all of their funds.
Crypto Savings and Crypto Lending
Savings and lending are good ways to make passive income from crypto during a bear market. These methods involve storing assets on a platform to earn simple interest on the deposits. Traders should remember that potential earnings mainly depend on the amount stored. Again, do your own research before allocating any capital to these types of platforms.
Forks and Airdrops
Altcoin forks and airdrops are also effective ways to make money in a bear market. A fork happens when users vote to diverge a blockchain and form another due to a material disagreement. This process leads to an airdrop where holders of the old token get the new tokens to participate in the forked blockchain. Depending on the value of the forked token, users can earn quite a bit by simply holding newly acquired tokens. (Modafinil)
Margin Trading
One of the most common ways to make money in a down-trending market is margin trading. This method is simply the process of trading crypto assets with funds from brokers. Margin trading allows users to trade with more money than they have in their accounts, thereby increasing potential profit. Although margin trading is an effective way to earn in a bear market, this method is only recommended to experienced crypto traders, as you can lose the entirety of your initial capital if the market moves in the opposite direction of your call.
Analyze Smaller DeFi Projects
A new DeFi project may have a low valuation after launch, but show huge promise in the long run. Crypto enthusiasts who take the time to analyze and research these projects can likely find and profit from the right ones. Even in a bear market, crypto investors who get in early enough tend to make gains from the increase in the asset prices of these crypto projects.
Dollar-Cost Averaging
One of the most effective ways to thrive in a bear market is to buy the dip. With dollar-cost averaging, investors buy assets at consistent intervals and properly observe market conditions before reinvesting. Since the cryptocurrency market’s volatility is unpredictable, it is nearly impossible to predict the lowest point before a reversal. Hence, dollar-cost averaging helps investors maximize profits by allowing them to buy at low points before the market becomes bullish. You lower your risk by lowering your potential downside and upside, but also allocating capital in a way where you will not only hit peaks and troughs.
Next Steps
Any crypto market condition has potential for profitability if you know how to play it right. The above strategies can help even novice crypto traders earn when the market is bearish. However, traders should note that their preferred strategy should depend on their risk tolerance and portfolio size. Traders should also learn to study the market to ensure that the chosen method will be effective at a particular time.
The crypto market, together with stock markets and the global economy in general, have been experiencing a significant drawdown for the past 6 months, leading to a confluence of factors ranging from high inflation, rate hikes, supply chain issues, energy crisis, to geopolitical instability. This combination packs a powerful punch for any risk-on markets, such as stocks and crypto, forcing retail and institutional investors to exit their capital from markets during these uncertain times.
With Bitcoin currently at $20k, down 70% from its $69k ATH, and the total altcoin marketcap being down 72% from its ATH, it is hard to deny that we’ve entered a bear market. But one question remains â is this anything like the bear market of 2018 and will it last equally as long as the previous one? Let’s dissect the situation and understand if this time is truly different, or if this is just a small bump in the road before an accelerated bull market.
Check out our video comparing the crypto bear market now (2022) and in 2018- and more importantly, how to STILL make money during this downturn:
2018 Bear Market
2017 saw the first true mass influx of retail interest into the crypto space. Bitcoin saw a rapid increase in price, everyone’s friend and grandma were kickstarting their own ICOs to attract funds, and regular companies added the blockchain keyword to their names to increase their share prices. 2017 was the wild west, as there was even less regulation than currently, and the space was rife with opportunists spawning scam projects to extract money from ignorant first-time crypto investors.
But, as with any bubble, it eventually pops. The crypto space was heavily overheated, with investors throwing money at everything that moved, doing minimal to no due diligence, just to get on the crypto hype train. Come 2018, things were starting to cool down and people were beginning to feel the pain. In less than 6 months after the peak ICO craze, over 90% of all the projects were already dead, with many more to go down with them in the rest of the 18-month long bear market.
At the peak of the market, a lot of FUD (fear, uncertainty and doubt) was beginning to circulate. Fear of regulation due to the prevalence of scams, and with China/Korea considering banning cryptocurrencies, things were not looking great for the crypto space. Right around the peak of the market, the Chicago Mercantile Exchange (CME) launched their Bitcoin futures product, which allowed institutional investors to get their hands dirty with Bitcoin. And, naturally, they did just that. With all of the FUD circulating and the market waiting to release a lot of pressure, institutions began shorting the market, creating an enormous sell pressure that brought BTC down to $7k, which kept grinding down to $3k till mid-2019.
2022 Bear Market
After Covid-19 hit, the market experienced a tiny two-month recession. As everyone was locked inside, demand dropped and supply shrunk as well. But once central banks began printing more money to help businesses and people via stimulus checks, many found themselves with a lot of extra cash and no way to spend it, so they turned to investing. After the March crash, the rest of 2020 saw the crypto market boom, calling it the “DeFi summer”, with BTC increasing in price by 400% by the end of the year. After that, it just kept on going. 2021 was the year of the NFTs and Metaverse, i.e. GameFi, with numerous projects sprouting up to capture some of the value amid all the hype.
After reaching its peak in November 2021, the crypto market has kept on steadily grinding down. Those who had called the peak in November aptly understood that the markets were overheated, inflation was starting to get out of hand, and the only way for governments to keep that under control was to begin quantitative tightening through rate hikes. Unfortunately, many were still in denial about the onset of the bear market way into April, which has resulted in a lot of people holding bags that might or might not recover.
Now the path forward seems clear. The US Federal Reserve’s hawkish monetary policy is causing markets a lot of necessary and unavoidable pain. Because the money printing since Covid-19 has been at such an unprecedented level, the Fed is finding it hard to slow down the inflation without causing a lot of damage. The result currently is a looming recession at the same time as inflation is still running rampant and driving up the prices of everything, all the while people’s incomes are stagnating and their expenses increasing.
When is the Next Bull Cycle?
At the moment, there are no clear signs of central banks reeling in their hawkish monetary policies. It might possibly take at least several months if not until the end of the year for the dust to settle, the bottom to come in, and for us to be ready for the next bull cycle once the Fed eases monetary restrictions. Continued geopolitical turbulence aside, the next bull cycle will certainly come, but it’s difficult to say what will be the narratives driving the rapid market expansion this time.
The two most touted bull market catalysts are the long-awaited Bitcoin spot ETF and the Ethereum Merge, which will cause the Ethereum network to transition from its wasteful Proof-of-Work mechanism to Proof-of-Stake. However, as is common in life and in markets, the most obvious things tend not to be the ones to catalyze huge changes. Markets are irrational, and a confluence of new narratives that will be born only in 6 months might very well end up triggering the next bull run.
How to Still Make Money During the Crypto Bear Market?
With great pain come great opportunities, and this bear market is no exception. This is the time for learning, accumulating, and paying attention to the market. In our latest video about the current bear market, we outline a few strategies that you can use as an investor to maximize upside potential come next bull run:
1) Dollar cost averaging (DCA) into your investments – instead of trying to catch the generational bottom and investing your whole capital in one go, better invest 20% of your capital at a time during a longer time period, so that way you are more likely to get a great average entry price and reap the profits in the future.
2) Doing lots of research – fundamental analysis of projects is the best way to ensure you invest in projects that have a real potential, and this is the time to be doing just that. Many projects will die during this bear market, so it’s important to source trustworthy information and be critical of everything in order to position yourself properly during the next stage of growth.
3) Diversify your portfolio – as we’ve seen in the past months, there’s no such thing as too big to fail in the crypto space. Instead of going all-in on one project, spreading risk across several projects will ensure your capital is better protected from a few bad investments.
4) Shorting the market – this should not be practiced by anyone who doesn’t have experience trading, as without proper risk management things can get pretty ugly very fast. During a downtrend, a way to make money is by shorting an asset, which essentially means you’re betting on an asset to go down in value.
Of course, none of this is financial advice, and we implore our readers to do their own research and never invest more than they are willing to lose. It’s a highly volatile market and not for the faint of heart.
One major question all new cryptocurrency investors ask is how to actually spend their cryptocurrencies. Unfortunately, cryptocurrency is just not as widely accepted as fiat currencies. Cryptocurrencies are also subject to huge price fluctuations and volatility. Therefore, to âlock inâ the price of your cryptocurrencies and as a springboard to cashing out crypto to fiat, many have converted their cryptocurrencies to stablecoins instead. This allows one to keep their dollar-pegged coins in exchanges or cold/hot wallets, so when the moment to jump back into the bull run comes, they can do so within minutes without having to deal with fiat on-ramps. Alternatively, to easily convert their stablecoins to fiat currencies for spending.Â
Most have considered stablecoins to be a safe means of preserving their capital without experiencing volatility and having to leave the crypto ecosystem. After all, theyâre⌠stable, right?
In most cases, they have been, but the most recent collapse of one of the largest and well-respected stablecoins, terraUSD (UST), and other less known ones, like neutrino USD (USDN) and DEI, has led people to question the stability of all stablecoins. But is this warranted? Isnât there a bit more nuance to the mechanisms by which a coin retains its dollar or other fiat currency peg, each with their own risks and advantages?
Although a seemingly straightforward idea, stablecoins can be quite tricky to unpack and analyze, especially when talking about non-collateralized algorithmic stablecoins, which sound too good to be true, and in some cases, are. With this in mind, letâs take a look at stablecoins, what kinds are out there, how well they are doing, and what makes them tick.
Check out our latest video- Stablecoins: Are they safe? ($UST, $USDT, $USDC, $BUSD)
Stablecoins: Are they safe? ($UST, $USDT, $USDC, $BUSD)
Stablecoins â What Are They and How Are They Different?
Stablecoins are cryptocurrencies that are pegged 1:1 to the value of a fiat currency, meaning that, for example, every 1 USDT (USD Tether, the biggest market cap stablecoin) is worth 1 US Dollar. There are numerous stablecoins in circulation, with different coins having different mechanisms for collateralizing their stablecoins.
The most commonly used feature to categorize stablecoins is by looking at how each of them backs their tokens, e.g. their collateral/reserves. By doing that, we can focus on using more narrow criteria for evaluating and comparing stablecoins based on the risks and advantages that stem from the chosen collateralization mechanism. Broadly speaking, there are three main types of stablecoins: Fiat-collaterized stablecoins, crypto-collaterized stablecoins and algorithmic stablecoins.Â
Fiat-collateralized Stablecoins
By far the most popular type, fiat-collateralized stablecoins occupy the top 3 spots (USDT, USDC, BUSD) among stablecoins by market cap, accounting for roughly 94% of the total ~$155 billion stablecoin supply.
Their working principle is the most straightforward to understand. Each of these coins is backed by a combination of real USD cash reserves, US Treasury Bills, and commercial papers (liquid short-term debt issued by companies).
Crypto-collateralized Stablecoins
Similar to fiat-backed stablecoins, crypto-backed stablecoins use cryptocurrencies as collateral, and smart contracts and, typically, governance tokens to monitor price stability. Due to the volatile nature of cryptocurrencies, crypto-backed stablecoins are over-collateralized (150% for DAI, for example) to account for periods in the market when prices of the collateral assets keep going down. Learn more about DAI.
Compared to fiat-backed stablecoins, theyâve witnessed a much slower rate of adoption. However, based on data, it does seem that they are slowly starting to gain momentum and dominance over the past years, as people begin to develop trust in the previously experimental mechanisms, which is to be expected.
There are also hybrid collateral tokens such as Reserve Tokens (RSV) that are backed by both digital and fiat assets.
By far the most technically complex and technologically least mature, algorithmic stablecoins rely on on-chain algorithms to handle changes in supply and demand between the stablecoins and their sister tokens that back them by burning and minting them in both directions through a process called seigniorage, to maintain a dollar peg. This, however, only works while there isnât a strong downward pressure on the peg that keeps stressing the mechanism, which can lead to a downward death spiral during which both tokens keep losing value as users keep panic selling at the same time as the algorithm tries to stabilize the price. Although not fully collapsed, neutrinoUSD and its Waves protocol have been experiencing extreme turbulence for the better part of two months, making users lose confidence in its stability, especially as its working mechanism is very similar to that of UST.
On the less extreme side of algo-stables lie hybrid stablecoins, or fractional-algorithmic stablecoins, such as FRAX, which is partly backed by collateral, and partly algorithmically by adjusting the collateral based on the deviation of FRAX from the $1 peg.
Learn more with our Ultimate Guide to Algorithmic Stablecoins:
https://www.youtube.com/watch?v=hdmotWPNVdQ
Criteria for Comparing Stablecoins
Decentralization
The impact of regional regulations can be a risk many would not find appealing. Itâs completely reasonable to expect that the industry would be capable of creating largely decentralized stablecoins that are collateralized by one or more decentralized cryptocurrencies, and governed by a DAO. Such is the nature of MakerDAO and its DAI stablecoin, which has shown its peg strength throughout this year and especially during the most recent catastrophic UST collapse. There is a small caveat, however.Â
The largest crypto-asset backed stablecoin with a $6.5 billion market cap, DAI, is still heavily backed by the second largest market cap stablecoin, USDC, which itself is backed by fiat reserves, calling into question whether it truly is as decentralized as it purports itself to be. The reality is not as grim as it might seem. Even though USDC and USDP (another fiat-backed stablecoin) comprise 28.1% of the total DAI collateral, ETH and WBTC (Wrapped BTC) boast an impressive 58.6% collateral, tipping the collateralization balance in favour of decentralized digital currencies instead of centralized stablecoins. In addition, the Maker platform with the MKR and DAI tokens, together with all of its smart contracts, lives on the Ethereum blockchain, making it truly trustless and decentralized, even if a good portion of the collateral is not.
On the other hand, the decentralization of all stablecoins might not be necessary, or even desirable, as properly regulated stablecoins almost by definition require a legal entity or a consortium of entities with exposure to major governmental bodies (especially in the US) to be behind the stablecoins, so that there is little doubt about who is responsible for ensuring a full fiat backing of their stablecoins. However, this would imply heavy centralization of control over the stablecoin supply and the general mechanisms for issuance, governance, and, crucially, potential censorship.Â
A centralized stablecoin is a double-edged sword. On one hand, it gives unprecedented power over a vast supply of stablecoins that a decentralization-focused industry heavily relies on to do daily business. On the other hand, it allows for companies like Binance, who are behind the popular BUSD stablecoin, to prioritize user safety and regulatory compliance, giving users peace of mind about the safety of their assets.
Thus, a strong argument can be made to safely onboard millions of new users through reasonably regulated stablecoins. Itâs important for this industry to appreciate the need to offer a wide range of stablecoin alternatives, from centralized to decentralized, for users with different risk appetites and technical competencies in order to accelerate crypto adoption worldwide.
Compliance & Transparency
Closely tied with the level of decentralization of a stablecoin, regulatory compliance and transparency are absolutely crucial for companies who are backing their coins with cash reserves, and who desire to find strong and growing support by institutions, companies, and investors looking to enter the space, but who have been apprehensive to do so due to concerns about a potential inability to redeem their tokens for dollars.
Itâs important to note that regulatory compliance is largely a concern for stablecoins operated by corporations, as they are the ones operating mostly behind closed doors, with most of the details about their inner workings, decisions, and collateralization mechanisms being hidden from the end-users and legislators. In such situations, it is more than reasonable to expect a regulatory body to force at least some oversight over how exactly these companies are operating their stablecoins and whether they do possess the collateral they claim to have.
The same canât be said about open-source, decentralized governance-powered, blockchain-native, crypto asset-backed, and over-collateralized stablecoins that are being operated completely out in the open, with every decision, piece of code, and capital relocation in smart contract escrow accounts being registered on-chain. For coins such as DAI, compliance and transparency are baked into the protocol, and it can be reasonably argued that the necessity for any kind of regulatory oversight is moot, as the community and the free market cryptoeconomic pressures have organically grown a robust and freely auditable stablecoin thatâs fully backed by digital currencies.
For fiat-backed currencies, the two large-cap extremes in the range of transparency and compliance are BUSD and USDT. While BUSD has been extensively cooperating with the New York State Department of Financial Services (NYFDS), and showing that every BUSD is backed by an equivalent amount of cash, USDT has been under significant scrutiny over the past years regarding its executives and the USDT backing. These allegations, combined with the lack of transparency by Tether, have made many worry whether USDT is a house of cards about to crumble as the Chinese real estate bubble begins to pop.
Financial Sustainability
In addition to the existential risks posed by the type of collateral chosen for stablecoin reserves, another source of risk that can be analyzed for a project is its cashflow. Changes in the cashflow of a protocol can offer clues about the health of the ecosystem and its ability to withstand market shocks.
Understanding how a stablecoin protocol spends and, most importantly, earns its money, is key to making predictions about the long term sustainability of such projects. Without proper long term revenue models, protocols are left to come up with highly appealing but unsustainable practices such as incredibly high yields on stablecoin deposits (such as UST had) or very low to non-existent trading fees to make it appealing for users to use that stablecoin as their dominant medium of exchange. These kinds of practices sooner or later come back to bite them in the ass, as there is a very high probability that the high yields and low fees are paid for not from organic revenues, but rather from alternative revenue sources (as is the case for Binance), or from projectâs treasury/VC investment money, in hopes that they would be able to subsidize the attractive rates for long enough to reach a critical mass of users to then eventually either lower the yields and increase the fees, or simply keep running a ponzi-like operation for as long as possible.
Risks are High, always DYOR (Do Your Own Research)
If something in crypto sounds too good to be true, it very likely is. The most recent example of this was the Anchor Protocolâs 19.5% yield for UST deposits, which shouldâve been a huge red flag, and yet many, many individuals chose to deposit their life savings into a supposedly stable UST in hopes of an unsustainably high APY.
For a $50 billion project to go down to virtually nothing in a matter of weeks is nothing short of astonishing, and should serve us all as a warning to do our due diligence thoroughly, and ask uncomfortable questions, even if the whole market seems to be fully on-board with a project.Â
As the saying goes, âFollow the money.â If a protocol is promising unbelievable returns, if the company behind a stablecoin year after year refuses to prove their fiat reserves, and if a algorithmic stablecoin seems to have a fishy peg stabilizing mechanism that can only work in an up-only environment, then you should exercise caution. And as with everything, whether it be cryptocurrencies or stocks etc, ask yourself if you have really fully done your research and never put in more money than you can afford to lose.Â
Cryptocurrency has endured something of a rocky ride since its inception more than 12 years ago when Bitcoin first entered the commercial marketplace. Whilst Bitcoin was initially given a bad reputation for its involvement in the Darkweb and other illicit activities, it has since evolved to lead a burgeoning and viable marketplace. This is reflected by the market capitalization of Bitcoin (and indeed cryptocurrencies as a whole), which currently sits at an impressive $117.81 billion and continues to dominate the marketplace (despite declining from a peak of $237.62 billion during a price surge in 2017).
Of course, this market cap also hints at the volatile nature of cryptocurrency trading, and in this respect, it has a great deal in common with the forex market. But how will crypto evolve and expand the forex market in the near-term?
What is Cryptocurrency?
Letâs start with the basics; as cryptocurrency represents a digital asset class that is based on the ground-breaking Bitcoin technology.
As for blockchain itself, this is a complex and far-reaching technology that has applications in a raft of industries from healthcare to the supply chain, and it essentially serves as a decentralised system in which different types of transactions can be recorded in an immutable and transparent manner.
These transactions, which may be made in a number of different cryptocurrencies, can also be maintained and accessed across several devices that may be linked within a peer-to-peer network.
As weâve already said, there are now a wide and diverse range of cryptocurrencies in the market, many of which have evolved as viable assets in their own right.
Aside from Bitcoin, weâve also seen the emergence of broader and more practical digital currencies such as Ethereum and Ripple. The former has a great deal in common with Bitcoin, although many consider it to be a faster and more secure asset that can also underpin so-called digital smart contracts.
In the case of Ripple, this also underpins a wider (and ultimately transparent) payment system that is benefitting from sustained demand at present. So, although this is a centralized cryptocurrency, it boasts a far greater purpose which boosts its underlying value and creates a more stable foundation from the perspective of investors.
How Will Crypto Impact on the Forex Market?
As cryptocurrency has benefitted from sustained market growth and the introduction of some (albeit relatively small) regulations, it has become increasingly popular across the globe.
It has even broken down barriers in the Asia-Pacific region, the Hong Kong authorities recently approved the regionâs first approved cryptocurrency fund. This was backed by Venture Smart Asia and set an initial 12-month target fund of $100 million, while thereâs also the promise of more funds being launched in the near-term.
Such funds will allow for the trading of crypto tokens as individual assets, and this draws a clear parallel with the globally popular forex market. In this respect, there can be little doubt that the emergence of these currencies will diversify and develop the forex market further, increasing the range of assets available to traders and the level of volatility that exists within the space.
This was borne out recently when a raft of cryptocurrencies lost the cumulative sum of $21 billion in market capitalization following the decline in oil prices and wider currency values.
This trend is far from unprecedented too, with Bitcoin having enjoyed a historic price run from $900 to a staggering $20,000 in 2017 (only to lose more than 50% of these gains by June the following year).
Beyond this, the wider integration of blockchain into the forex market could change the way in which trades are recorded, potentially minimizing the risk of fraudulent activity and market manipulation over time.
