[header date=”16 November 2018″]Volatility returns to the crypto markets, Ripple keeps its sights on replacing SWIFT, and the IMF considers the end of cash.[/header]
What you need to know—and why
The global crypto market retreats. Just as the price of bitcoin finally seemed to stabilize, a market-wide plunge dispelled us of that notion. Bitcoin fell by 12% to a one-year low of around $5,500 on Wednesday. Meanwhile, ether dropped nearly 16% and XRP declined by about 14%, according to CoinMarketCap. Even worse was bitcoin cash (BCH), which erased 19% from its market cap as owners braced for a hard fork which split the coin into two new tokens. Some market watchers pointed out there is a significant risk premium for bitcoin traded on exchanges that won’t redeem the token for US dollars, but instead will only pay out USDT, a cryptocurrency pegged to the US dollar. Bitcoin on exchanges like Bitfinex is priced almost $200 higher than on exchanges accepting dollars because of uncertainty about whether Tether (the company behind USDT) has the reserves to back the digital token.
[takeaway]The midweek turmoil reminds us that crypto markets remain plenty volatile, and the prevailing pull on crypto prices this year has been more down than up. Be careful out there. ↘️[/takeaway]
A storm brews in the South Pacific. Hilda Heine, president of the Marshall Islands, barely escaped a no-confidence vote brought about in part because of her support for the Sovereign, a proposed national cryptocurrency that would be treated as legal tender alongside the US dollar. The Nikkei Asian Review reports that eight Marshallese senators accused Heine of “tarnishing the reputation of the country” with the crypto plan.
[takeaway]For those eager to see a national cryptocurrency in action, the tiny Marshall Islands remains the best bet for that dubious distinction. If the Sovereign somehow makes it off the ground, Neema, the crypto company behind it, could profit handsomely. It’s unclear, though, whether Marshall Islanders want or need the coin. At this stage, it’s fair to wonder whether the Sovereign’s supporters care about the good of the Marshallese people or are looking to make a quick buck. ↘️[/takeaway]
Ripple CEO denies rumors of partnership with SWIFT. Ripple has long proposed an XRP-based alternative to correspondent banking—the systems by which banks conduct business overseas—which is often carried out through SWIFT, an organization with more than 11,000 member institutions. Ripple CEO Brad Garlinghouse told Bloomberg that speculation of a link-up with the network was unfounded, and sounded like he was ready to compete instead. “SWIFT said not that long ago they didn’t see blockchain as a solution to correspondent banking,” he said. “We’ve got well over 100 of their customers saying they disagree.”
[takeaway]Ripple aims to address an important need: Smaller and mid-size financial institutions—which lack correspondent banking relationships—face obstacles like disadvantageous exchange rates when they try to join existing partnerships. Ripple’s messaging system (called xCurrent), which provides exchange rates for international transfers in real time, seems like a viable—and perhaps even sensible—solution. But questions remain about how Ripple’s XRP and the xRapid platform fit into the picture. ➡️[/takeaway]
Nvidia is reckoning with a crypto hangover. The chip designer posted sales this week that came in below forecasts and reported revenue projections that were nearly $1 billion short of what analysts expected for its upcoming quarter. The California company, whose graphics cards are popular for crypto mining, said it had a glut of inventory as crypto sales dry up. Shares dropped nearly 17% on the news. “The crypto hangover lasted longer than we expected,” CEO Jensen Huang said in a conference call.
[takeaway]The digital-asset economy is showing signs of retrenching. Bitcoin prices may be approaching, or even have fallen below, levels that are unprofitable for miners. If they cut back production, it follows that reduced crypto supply could help support prices—eventually. ↘️[/takeaway]
Narendra Modi made an astute blockchain joke. The Indian prime minister said the best way for startups to raise money is to say they’re working on blockchain. He’s right: Entrepreneurs in the sector have raised more than $10 million in India this year, which compares with the industry’s $17.8 million haul over the past five years. Even as the technology has found applications in finance, farming, and land registry, some startups have slapped the term onto their pitch deck just to raise money.
[takeaway] The blockchain-slidedeck trick is well know in other markets, too. As the crypto frenzy evaporates, the pretenders can expect to be revealed. ↗️[/takeaway]
[supplemental headline=”Chart interlude”]
Wednesday (Nov. 14) was bitcoin’s 11th-worst day in 2018.
[img src=”https://cms.qz.com/wp-content/uploads/2018/11/Bitcoin-largest-one-day-declines-2018.png”]
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[/supplemental]
Crypto meets finance
The IMF says money is in the midst of a historic turning point. As payments become increasingly cashless and electronic, central banks should consider issuing their own digital form of money, according to a speech by Christine Lagarde, managing director of the International Monetary Fund. This would differ from the digital money you pay with via a card or your phone. Central bank digital money would be more like an electronic form of the cash in your wallet now—issued by the lender of last resort (the central bank) instead of a commercial bank. Policymakers in Sweden, China, Canada, and Uruguay are researching the idea. Lagarde said it could boost financial inclusion, security and consumer protection, and, notably, privacy, which is something commercial banks can’t provide when it comes to digital payments. (For more about this discussion read this.)
[takeaway]Physical cash is still the state of the art for payment privacy, but it’s going out of style as payment cards and mobile wallets take over. Lagarde seems open to the idea of some payment privacy—identities could be obscured from commercial parties, for example. Full anonymity is a non-starter for her, as it is for other policymakers. Private crypto coins with higher levels of anonymity could become increasingly important to privacy-minded consumers as paper money usage recedes. ↗️[/takeaway]
[supplemental headline=”Reasonable doubt”]
A central banker opines. John Lewis, research manager for the Bank of England, penned a detailed, multi-pronged rebuke of cryptocurrencies on the central bank’s blog. “They are hard to scale, are expensive to store, cumbersome to maintain, tricky for holders to liquidate, almost worthless in theory, and boxed in by their anonymity,” he wrote. “And if newer cryptocurrencies ever emerge to solve these problems, that’s additional downside news for the value of existing ones.”
In his “seven deadly paradoxes,” Lewis explained that cryptocurrencies do not benefit from network effects because the greater the number of users, the slower the network. Furthermore, storage costs associated with maintaining a distributed ledger may be “crippling” and the development incentives (like increasing transactions per block) are misaligned between the mining community and a cryptocurrency’s users. As if these complaints weren’t enough, Lewis also levied criticisms of the obvious centralization of most cryptocurrencies, the absence of intrinsic value (by and large, cryptos are non-productive goods), and the dilemmas posed by anonymity.
[/supplemental]
Regulatory watch
Thai regulators sound the alarm about Q Exchange. Thailand’s Securities and Exchange Commission cautioned users of the unlicensed cryptocurrency trading platform that they might not be protected by the regulator. The recently formed exchange could be in violation of a royal decree published in May to regulate crypto assets, it noted. Thai news outlet Lokwannee previously reported that Q Exchange planned to launch its own coin, Q Token. At the time of writing, however, neither Q Exchange nor Q Token appear on CoinMarketCap‘s database of cryptos.
[takeaway] Around the world, regulators are clamping down on the crypto exchange free-for-all. For operators that play fast and loose with the rules, winter is coming. ↗️[/takeaway]
[supplemental headline=”Hacks, scams, and capers”]
Crimes of desperation end in a prison term. Joseph Kim, a 24-year-old cryptocurrency trader who worked for Consolidated Trading LLC in Chicago, has been sentenced to 15 months in prison for his alleged theft (and subsequent loss) of more than $1 million worth of cryptocurrencies. Kim originally misappropriated the firm’s funds to cover his personal trading losses, and was fired for it. That didn’t deter him, because he solicited more than $500,000 from individuals to continue trading cryptocurrencies, telling backers he voluntarily left Consolidated to strike out on his own. But even as Kim sought to repay his former firm, he lost all of his customers’ money.
An explosive disagreement. A Swedish man reacted violently when Cryptopay—a London-based bitcoin company—refused to reset the password to his account. The man, Jermu Michael Salonen, sent the firm a homemade bomb, which fortunately didn’t harm anyone when it was opened several months later. Salonen has been sentenced to six years in prison.
A Chinese school principal was fired for using school’s electricity for crypto mining. After investing in a cryptocurrency miner, principal Lei Hua realized he could cut costs by using electricity in his school’s computer room. When teachers inquired about the mysterious whirring noise (miners aren’t silent, especially when you run eight of them), Hua attributed it to noisy air conditioning and heating units. A local authority has seized Hua’s ill-gotten gains.
[/supplemental]
Crypto calendar
🗣 Nov. 27: Consensus: Invest. Hosted by CoinDesk, the one-day event in New York “will forecast the evolution of digital assets through 2019, and will focus on how digital securities, commodities, and utility tokens will drive the boom behind the alternative financial system.” SEC chairman Jay Clayton will be present for a fireside chat. Be sure to ask him when the commission will approve a bitcoin ETF.
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