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Trading Tip `The Wall´ – Drop Tokens That Suffer From Overtokenization

February 18, 2018 |

Trading Tip `The Wall´ - Drop Tokens That Suffer From Overtokenization

It’s said that 90% of all startups fail, and that we should expect nothing more from ICOs. But 10% success rate is still overly optimistic for ICOs, perhaps not for the reason you may think. You’re probably aware of examples of ICO “founders” who turned out to be a bunch of made up Linkedin-profiles. You’re probably also aware of the risks that comes with sending money to people on the Internet you never met, in an asset or token impossible to freeze.

Also read: Disappearing Premiums Signal Bearish Mid-Term Outlook

Drop The Tokens That Suffer From Overtokenization

You’re probably also aware of the industry-specific risks, apart from straight up scams, which include:

  1. ICOs violating securities laws
  2. ICOs using complicated legal structures in order to avoid violating securities laws and having it back-fire
  3. ICO fundraisers using Ethereum smart contracts and imploding (this actually happened to the Ethereum co-founder himself)

In this post, I’m going to discuss a much more daunting problem that very few seem to grasp; overtokenization.

Let’s be clear: ICOs as a concept is not at all a bad way to fund the development of a new cryptocurrency. However, the ICO space today is overwhelmed by projects that are not even cryptocurrencies. ICOs have moved from covering cryptocurrencies, to apps that use an existing cryptocurrency as its platform, to regular companies doing something cryptocurrency related, to regular companies doing nothing related to cryptocurrency at all. What many ICO investors seem to forget to ask is: why exactly do these projects need to have a “token”? Somewhere along the way, everything suddenly having a token became normal, and no one barely questions it anymore. This is going to cause a huge problem in the future, and I’m going to explain why.

There are very few cryptocurrency projects that legitimately necessitate a coin or a token from a technological perspective. The known examples that do are the following: actual cryptocurrencies (e.g. Bitcoin, Litecoin, Ethereum, Bitcoin Cash, Monero), and certain protocols involving some kind of game-theoretical token usage (i.e. staking).

Trading Tip `The Wall´ - Drop The Tokens That Suffer From Overtokenization

One of the few projects from the latter category I can come to think of is Augur. Augur isn’t a cryptocurrency, but a product that uses a cryptocurrency as platform. It’s a decentralized prediction market (currently in beta-stage), consisting of as a set of smart contracts on the Ethereum blockchain. In Augur, its REP token (an ERC20) is integral to the process of resolving bets. It provides Augur with a way to financially reward and punish the actions of honest and dishonest actors, and creates incentives for a specific category of users (REP holders) to be proactive on the platform.

Augur Project

Augur perhaps isn’t a project without flaws, but what we know is that it isn’t practical to try to create Augur without a token. The token is–from the ground up–integral to the functions of the platform. The token itself is also defensible as an investment: as the popularity of the platform increases, the more revenue will there be for REP holders to earn on fees from resolving bets. I would argue that these ingredients are pretty unique to Augur (and perhaps also similar projects like Gnosis). In fact, there are an extremely limited number of cases of non-cryptocurrencies where a token is both technologically necessary and useful as an investment.

But the allure of launching a project like Augur is tantalizing; you don’t have to plan to create a whole cryptocurrency to launch an ICO, you just need a product that somehow utilizes a token that in some manner economically motivates people to hold it. If you figure out that, then you can launch an ICO too.

Because of the insane amounts of money investors poured into ICOs, every entrepreneur in the industry has quickly decided that whatever project they’re working on should probably  involve some kind of token. Because not all projects are launching a new cryptocurrency, and they do not involve game-theory or staking that necessitates a token like Augur, most projects have settled with a model where a specific token is required to utilize its services.

Trading Tip `The Wall´ - Drop The Tokens That Suffer From Overtokenization

Golem plans to build a decentralized market for computing power.

A Token-Critical Perspective

This is where the industry is running into a problem. Instead of an ecosystem of services being built around cryptocurrencies, you will now have to first purchase a specific token in order to utilize those services. Whether its storage space for rent, processing power for rent or something else, you won’t be able to pay for those things directly in your favorite cryptocurrency, you’ll have to use the specific token they’ve restricted their service to accepting, in order to raise money from you in their token sale.

This restriction severely diminishes the utility of the service they are creating. In the Golem example, its participants will be forced to accept payment in GNT rather than bitcoin for instance. It’s very unlikely that GNT is going to be as liquid as bitcoin, and therefore it is much more likely that the value of GNT will fluctuate spectacularly in comparison, which isn’t very convenient for its users. Furthermore, some sort of micro-economy will have to evolve around the GNT token, that relies on GNT tokens to purchase services later resold to the market. That opens up a whole new attack surface of the service, where the entire platform could essentially be hijacked in a coordinated act of market manipulation. This is why absurd constructs such as Bancor have appeared, in order to solve this ridiculous problem.

This doesn’t necessarily mean that Golem and the likes of it will be useless; however, there’s a very real chance that something else eventually comes along and builds a platform where computer resources can be rented in the currency of its users choosing. Such a competing platform, without the friction of being restricted to a specific token, has a very big edge on its ICO-launched competitor. In the end, while it may be true that an ICO could be the thing that gets a project off the ground that wouldn’t have otherwise, it may also be the thing that kills it.

My trading tip this week is to go through your portfolio and evaluate your investments from a token-critical perspective. Get rid of those tokens that add no benefit to the product or service they are providing, and in many cases are a down-right handicap.

What are your thoughts on market manipulation? Let us know in the comment section below!


Images via Shutterstock, Twitter.


Disclaimer: Bitcoin price articles and markets updates are intended for informational purposes only and should not to be considered as trading advice. Neither Bitcoin.com nor the author is responsible for any losses or gains, as the ultimate decision to conduct a trade is made by the reader. Always remember that only those in possession of the private keys are in control of the “money.”

The post Trading Tip `The Wall´ – Drop Tokens That Suffer From Overtokenization appeared first on Bitcoin News.

Bitcoin News

TMZ

John Wall Says Everything’s Great with Marcin Gortat

February 18, 2018 |

John Wall’s not mincing words about his relationship with his Wizards teammate, Marcin Gortat … he straight up tells us everything’s cool! We got the injured NBA star leaving Mastro’s in Bev Hills Friday night — he’s in town for All-Star Weekend…

TMZ.com

Stocks open higher on Wall Street

February 15, 2018 |

Stocks opened higher on Wall Street on Thursday after several U.S. companies reported solid results.

Cisco Systems, one of the 30 stocks in the Dow Jones industrial average, climbed 4.6% after releasing earnings that were much higher than investors were expecting.

TripAdvisor soared 11% after reporting…


L.A. Times – Business

Senators Reach Deal on Dreamers, Wall

February 15, 2018 |

A group of senators reached a bipartisan agreement Wednesday aimed at balancing Democrats’ fight to offer citizenship to young “Dreamer” immigrants with President Trump’s demands for billions to build his coveted border wall with Mexico. Though the compromise was announced by 16 senators with centrist views on the issue and…
Newser

The lure of a quick buck keeps drawing small investors to risky, esoteric Wall Street bets

February 12, 2018 |

Jamie Evans jokes that he might have a gambling problem.

When stocks slid Monday with little discernible cause, the 37-year-old used a product mirroring the VIX volatility index to bet markets would return to their recent calm. They didn’t. Instead, they went into freefall and Evans faces the loss…


L.A. Times – Business

Trading Tip `the Wall´ – Disappearing Premiums Signal Bearish Mid-Term Outlook

February 10, 2018 |

Trading Tip `The Wall´ - Bitcoin's Beta and the Bear Market

Up until now, bitcoin has largely been behaving as an uncorrelated asset. This got a lot of people excited, categorizing bitcoin as a future digital gold or a safe haven asset. The worst thing about this recent dip in price ($ 5,873, GDAX) was not the decrease in the price itself. Much more daunting for bitcoin, was that the price dip coincided with the dip of the US stock market.

Also read: Trading Tip `The Wall´ – I Was Wrong

Bitcoin and the Bear Market

Trading Tip `The Wall´ - Bitcoin's Beta and the Bear Market

This chart shows the Dow Jones Industrial Average overlaying the bitcoin price (red line). A large part of bitcoin’s value proposition to institutional investors is that bitcoin potentially carries low or negative beta. That’s finance speak for an asset having low or an inverse correlation with the market as a whole (e.g. the S&P 500).

Asset managers like assets with low or negative beta. Asset managers’ performance is constantly being measured against the stock market indices. If the assets they manage are correlated, it’s hard for them to outperform the market. That’s why it’s very important for bitcoin to not dip when the stock market does. But it did.

Why?

In December, I wrote the following:

“The perception of bitcoin as an uncorrelated asset may be the most important driver in why Wall Street wants to get in to bitcoin, but ironically, the very fact that Wall Street hasn’t gotten in yet may simultaneously be a key factor in why bitcoin still is an uncorrelated asset in the first place.”

Now let’s plot the beta (in purple) for the time period before and after bitcoin futures trading began on the CME & Cboe.

Trading Tip `The Wall´ - Bitcoin's Beta and the Bear Market

A beta of 1 means that the asset moves with the market. A beta between 0 and 1 means that the asset moves with the market, but dampened. A beta above 1 means that the asset moves with the market, but amplified. A beta of 0 means that the asset doesn’t move with the market. A negative beta means that the asset moves inversely to the market.

Looking at the graph, beta increased significantly in December, surpassing 2 in February. As a comparison, let’s look at the beta of gold, which rarely ever goes above +0.15.

Trading Tip `The Wall´ - Bitcoin's Beta and the Bear Market

Is it then safe to say that institutional investors are the reason why bitcoin dipped this week? As compelling as this theory sounds, analysis shows that this is most likely not true. The volumes of CME & Cboe are still too insignificant to move the price of bitcoin. Bitcoin is still an asset mostly held by retail investors.

I would argue that it is much too soon to make conclusions from the data at this point. Focusing on this previous week in particular, we can see that bitcoin had already been crashing for quite some time before the stock market correction occurred, and their dips coinciding could be entirely coincidental.

Trading Tip `The Wall´ - Bitcoin's Beta and the Bear Market

However, it is still a worrying development, and even if institutional investors probably are not responsible for this, there’s still been a change in demographics of the retail investors. Historically, bitcoin has been an asset mainly held by geeks interested in the technology, with little interest in the stock market. Currently, mainstream investors who speculate on the stock market might also speculate in crypto. When their stocks crash, they may sell the decentralized currency to offset their losses, or to buy the dip of the stocks they understand better and have a firmer belief in.

A second thing that gives a bearish outlook on bitcoin is that the premium of the Bitmex June futures XBTM18 disappeared completely this week. Ever since they were listed, they had been trading at a premium of several hundred dollars, indicating a bullish sentiment among traders. The futures contracts are a less liquid instruments on Bitmex primarily compelling for medium/long-term positions as they have no funding fees (as compared to their primary, perpetual instruments). The disappearance of that premium suggests that traders are no longer bullish on bitcoin in the medium term.

Trading Tip `The Wall´ - Bitcoin's Beta and the Bear Market

I am not bearish on the digital asset in the medium to long term, but I’d like to point out that while we are experiencing a bounce back to $ 9,000+, that doesn’t mean we’re out of the woods quite yet. Let’s look at a graph from the bear market of 2014:

Trading Tip `The Wall´ - Bitcoin's Beta and the Bear Market

In the weeks after the crash from $ 1,163, after which the longest bear market in bitcoin history would follow, we still experienced bounces. After dropping to $ 382, the price rebounded to a whopping $ 995 before continuing on downwards to $ 185. In today’s terms, that sort of intermittent bounce would translate into a $ 17k recovery. Naturally, you can’t compare 2014 and 2018, but this at least goes to show that you shouldn’t interpret post-crash volatility as anything more than just that; volatility.

What are your thoughts on market manipulation? Let us know in the comment section below!


Images via Shutterstock, Twitter.


Disclaimer: Bitcoin price articles and markets updates are intended for informational purposes only and should not to be considered as trading advice. Neither Bitcoin.com nor the author is responsible for any losses or gains, as the ultimate decision to conduct a trade is made by the reader. Always remember that only those in possession of the private keys are in control of the “money.”

The post Trading Tip `the Wall´ – Disappearing Premiums Signal Bearish Mid-Term Outlook appeared first on Bitcoin News.

Bitcoin News

Stocks open higher on Wall Street following tumultuous week

February 9, 2018 |

Stocks rebounded in early trading Friday as Wall Street tried to recover from another loss of more than 1,000 points in the Dow Jones industrial average the day before.

The Dow was up more than 300 points, or about 1%. The broader Standard & Poor’s 500 index and technology-focused Nasdaq composite…


L.A. Times – Business

Asian markets fall after Wall Street plunge

February 9, 2018 |

China’s stock market benchmark plunged 5.5% on Friday and other Asian markets were off sharply after the Dow Jones industrials on Wall Street plummeted more than 1,000 points, deepening a weeklong sell-off.

Asian markets followed Wall Street down after the Dow entered “correction” territory for…


L.A. Times – Business

Stocks open mixed on Wall Street

February 8, 2018 |

Stocks were mixed in the early going on Wall Street on Thursday as traders digested a batch of company earnings reports.

Twitter soared 26% after reporting its first-ever quarterly profit.

Hanesbrands sank 8.8% after its results came up short of analysts’ forecasts. The company also issued a disappointing…


L.A. Times – Business

Trading Tip `The Wall´ – I Was Wrong

February 3, 2018 |

Trading Tip `The Wall´ - I Was Wrong

Last week, I made an analysis of the bitcoin price situation. My analysis noted that while the rumors of Wall Street price manipulation was most likely false, the fear was real. Despite that, the price did not break under $ 10,000. Because my inclination towards bitcoin is bullish (based on the the positive sentiment around the Lightning Network) my conclusion was that there was a chance that we had bottomed out and would resume a recovery towards $ 13,000-14,000 in the coming weeks. I was wrong.

Also read: Trading Tip `The Wall´ – Wall Street Price Manipulation? Go Long

I Was Wrong

As you’ve probably noticed, the price dropped as low as $ 7,540 (GDAX) yesterday. My long position from $ 11,012 on Bitmex got liquidated.

When I accepted the role as trading tip columnist on Bitcoin.com, I knew that there were going to be times when I would find myself in the situation of being wrong. It is not fun to be wrong, but that is a part of reality.

Here’s the story of how I was wrong

This is the graph I posted in my article on Jan 27. I was expecting a positive breakout from that consolidation period, and entered a long position.

Trading Tip `The Wall´ - I Was Wrong

I don’t just draw triangles on charts and expect to be able to predict the future. I paid close attention to this triangle because I noticed that a lot of traders were looking at this particular triangle. When many are observing the same pattern, it triggers a behavior as if the pattern itself really did carry significance.

24 hours later on Jan 28 things were looking good. Breakout.

Trading Tip `The Wall´ - I Was Wrong

Later that day, things started turning the other way. I began dreading a fakeout (a thing which happens so commonly that it even has a page on Investopedia).

On Jan 30, the breakout had fully retraced, and we even broke below the lower trend line. We also broke under $ 10,000. No matter if you cared about TA or not, things looked bearish to most people.

Trading Tip `The Wall´ - I Was Wrong

In retrospect, this is where I should have exited my position. Things clearly weren’t going as I had anticipated. But trading is not my full-time job. I work full-time as a cryptocurrency engineer, so this happened while I was at work.

The Tether News

Tether is the Achilles heel of the cryptocurrency market. It is hands-down the most infected story of the year. While I’ll save the my full commentary on the Tether-debacle for another time (spoiler: Ari Paul’s recent tweetstorm mirrors my own thoughts almost exactly), I think it is safe to say that there’s a widespread belief within the cryptocurrency community that Tether might have single-handedly inflated the entire cryptocurrency market during 2017. Anything tangentially negative news-related to Tether is bound to cause a market reaction.

Trading Tip `The Wall´ - I Was Wrong

This graph depicts the vertex of the triangle zoomed in. 

When I read the news of the subpoena, I did not immediately jump to close my position. The news had caught me without warning, and selling the moment bad news hits the papers is how you end up selling the exact moment when everyone else is selling. My strategy is to buy the exact moment everyone else is selling.

This made the situation complex for several reasons.

  • I was already underwater on a long position from $ 11,012.
  • It is a bad time to sell at the publication of worrying headlines before getting the full story. A subpoena in and of itself is a warning sign, but does not inherently mean that there is any real issue. A later clarification may cause the price to recover instantaneously.
  • Despite there being a news story in the mainstream media about Tether, the price only dipped to around $ 9,500. That is not a very significant crash given the circumstances, so not a great time to buy either.

I chose to not exit my position until more information was available. Shortly after Bloomberg published the story, they updated their article to include the crucial piece of information that Tether had been subpoenaed on Dec 6, not last week, which made the story less worrying. That night, Bitfinex’s social account on reddit offered a pretty good explanation on what had happened, connecting the subpoena to the recent Tether hack. It was looking like a recovery was in the cards for bitcoin, but volumes were still very weak. Things were ominous.

Trading Tip `The Wall´ - I Was Wrong

The further down we dip from from our December high at $ 19,891, the more does the 2017 run-up resemble 2013, which was followed by a long bear market. In many people’s minds, the stage is set for yet another bear market to begin.

Trading Tip `The Wall´ - I Was Wrong

India banning cryptocurrencies

Then the “India is banning cryptocurrency” story broke loose. India’s finance minister Arun Jaitley made some comments during his budget speech in the Parliament on Feb 1, which Quartz interpreted as “the end of the road for cryptocurrencies in India” and that “the government will do everything to discontinue the use of bitcoin and other virtual currencies in India”.

While this was a misrepresentation of the actual comments (which only mentioned a crackdown on illegitimate activities), this story ended the last hope of a smooth recovery for the bitcoin price. I got liquidated at $ 8,300.

Trading Tip `The Wall´ - I Was Wrong

Looking ahead

I was trading in December 2013 just as I am in December 2017, and I find very few similarities between the outlook for bitcoin in these different time periods. The cryptocurrency space today is orders of magnitudes more mature than 2013. What is making me even more bullish is that mainstream speculators still seem to live under some kind of illusion that bitcoin is built on “stone-age technology that has failed to adapt” and avoid investing in bitcoin for this reason. I remain positive that the positive momentum building up around the Lightning Network can eventually serve to recapture some of that capital.

As for my trading, I mentioned in last week’s post that I had been hoping to get in some long positions in at ~$ 8k if my position from $ 11,012 got liquidated. Nothing fundamental has changed since I wrote that, and I remain more confident than ever that we are going to see a recovery to the $ 13,000-14,000 range, although it may take a bit more time to get there now than before. I’ve opened some larger, low-leverage positions from $ 8,500 which I am planning to hold long term. If you are planning to do that as well, I recommend the Bitmex futures contracts rather than the perpetual swaps as the futures contracts are completely free from rolling fees, and thus more suitable for long-term positions.

What are your thoughts on market manipulation? Let us know in the comment section below!


Images via Shutterstock, Twitter.


Disclaimer: Bitcoin price articles and markets updates are intended for informational purposes only and should not to be considered as trading advice. Neither Bitcoin.com nor the author is responsible for any losses or gains, as the ultimate decision to conduct a trade is made by the reader. Always remember that only those in possession of the private keys are in control of the “money.”

The post Trading Tip `The Wall´ – I Was Wrong appeared first on Bitcoin News.

Bitcoin News