Fungibility, Privacy, QE & Europe

Thank you for subscribing to The State of the Crypto Newsletter. Every two weeks I provide my insights and analysis of key technological, financial and market trends in the crypto asset space.


In this edition I discuss:

  • The significance of privacy and fungibility - a growing necessity, especially for monetary assets

  • The increasing likelihood of more global QE and the effect it will have on the crypto markets

  • The changing regulatory environment

  • My personal outlook and strategy for 2019


Major Technology Trends


I would like to bring your attention to two vitally important crypto properties: privacy and fungibility. Fungibility means that all coins or tokens are interchangeable, i.e. they all appear identical.


If someone can tell that your coins were previously owned by a criminal, they might be much less likely to accept them, out of fear of regulatory crackdowns. If crypto assets are going to be used as money and currency, they absolutely must become fungible, just as paper currencies and precious metals are already.


Fungibility though is really a by-product of privacy. Privacy-enhancing technologies are essential in making a crypto asset fully fungible. Unfortunately, these are lacking in most crypto assets. This is the case of Bitcoin, Ether, Bitcoin Cash, Litecoin and most others. Only a select handful such as Monero have been able to solve this problem.


So far, fungibility has not been a major problem as most growth has been driven by speculation. However, as the market matures and these assets are used in commerce and trade, fungibility will be seen as an essential characteristic. In short, fungible crypto assets will start attracting a large premium.


Aside from Monero, Zcash and Pivx are the only other two coins that have achieved a reasonable level of fungibility. This year, I expect this to change, with Litecoin leading the charge. The Litecoin development team is working on an upgrade that will deploy cutting edge privacy-enhancing cryptography to the currency. I expect these changes to be live around Q4 of this year.


It is unlikely that we will see such changes in Bitcoin this year. However, an upgrade in 2020 could be on the cards. Bitcoin typically suffers from slow technical development and ossification - an inability to change the base protocol. A proposal called Confidential Transactions has stalled out of fears it could threaten the inflation controls, while less-extensive upgrades have taken priority, although they are incapable of achieving proper fungibility. Right now, it looks like fungibility and privacy will for now at least be relegated to auxiliary Bitcoin networks like the Lightning Network and Sidechains.


Bitcoin Cash similarly has no near-term plans to ensure fungibility at the protocol level, instead leaving it to wallet developers and additional services. The project is prioritizing scalability and more extensive functionality for now.


In terms of platform protocols, Ethereum appears to be the most dedicated to fungibility and privacy. Having already allowed the support of something called zk-SNARKs, through a previous upgrade the core research team are looking at including a far better technology called zk-STARKS into the new version of Ethereum, expected sometime in 2021.


Until now, privacy and fungibility have really only been a concern of criminals, those escaping persecution and the privacy-focused crypto community, all relatively small groups. However, this year, as institutions, central banks and other major players start to accumulate crypto, I would expect a relative divergence of those projects and assets who have or are pursuing fungibility and privacy over those who are not. Both these properties are of increasing importance and something that every project, especially those intending to be used as money, should be actively pursuing.


Financial & Market Trends


For those watching the markets, you are probably enjoying the recent upside moves. Sitting at approximately $5,050 as of today, we have seen a 60% price increase from the lows of 14th December in Bitcoin. Until the recent move higher, I was hesitant and somewhat sceptical of this breakout. Given the volumes and renewed interest worldwide, I personally believe we will not go below the December lows. However, I do expect we could see massive volatility in the weeks ahead, with the potential for a major downside move. As always, all other crypto assets are generally trending with BTC.




Global Macro


Monetary Picture


Despite the continuing strength in the US economy and equity markets, President Trump recently called on the Federal Reserve to lower interest rates and move from quantitative tightening to easing, possibly signalling the start QE4. This was then echoed this afternoon by Trump’s chief economic advisor, Larry Kudlow stating that he doesn’t foresee interest rates rising even in his lifetime. To add to this, the President is currently attempting to fill two out of the seven Fed board governors, picks likely to push this new agenda.


Similarly, in Europe, ECB head, Mario Draghi has again echoed his statement that he is prepared to use any tool to jumpstart the anaemic Eurozone economy. It seems we are setting up for another round of massive synchronised global monetary loosening by the central banks later this year. This will almost certainly push up all asset prices, including crypto assets. So long as the velocity of base currency continues to decline, central banks can avoid inflation and justify such policies.


Eurozone Troubles


At the same time, the banking, fiscal and growth issues in the Eurozone continue to worsen. With Brexit being kicked down the road again, it may well be Italy that ignites the next European crisis. The Italian coalition recently threatened to seize the gold reserves of the Italian central bank. Such a move would signal an all-out war on the bank, the ECB, Eurozone and even EU. With the current political trajectory, I expect the Northern League to call an election later this year, seize full parliamentary control and perhaps speed up this inevitable confrontation with the banking establishment.


The European banking situation is an absolute horror-show. Whether it is debt-ridden, unprofitable Italian banks, the scandal-plagued Deutsche bank or one of the myriad of French banks exposed to Italian sovereign debt, really any one of up to fifty different matches could ignite another full-blown Eurozone crisis. The one economy keeping the Eurozone afloat, namely Germany is now printing some pretty shocking numbers also. When this crisis does erupt we will likely see a rush of capital flow into the crypto markets, especially the monetary assets as citizens and institutions both seek options immune from government seizure, control and manipulation.


Mixed Chinese Signals


My gut feeling is that much of the recent price increases have been driven by east-Asia. The Chinese stock market has experienced a massive boom in 2019 (up 36%) so far and it appears that Chinese investors are significantly more bullish. I think this confidence and optimism is spilling into the crypto markets.


It should be noted though that the Chinese economy does have major problems, and has been hit severely by the US sanctions. This recent investor optimism could simply be a reaction to oversold conditions rather than a true reversal in all Chinese markets. Furthermore, the Chinese state this week announced a further intended crackdown on crypto mining farms. China’s approach to crypto has historically been bipolar, enacting and reversing policy numerous times. Personally, I am discounting any major buying support from China right now, given their incredibly unclear policy direction towards crypto assets.


Regulatory


Last week, the SEC in the US released further guidance on how they are classifying and regulating crypto assets. Specifically, it was intended to highlight which tokens they view as securities and subject to the appropriate laws. I am currently speaking to US attorneys about their interpretation of what it means, however, generally, this document was in tune with previous communications, namely that most tokens and ICOs were and still are securities.


This only applied to US-based tokens and could be reversed by upcoming bills that are under consideration in the US Congress. Unfortunately, from an American perspective, the divergence between the SEC and the CFTC’s views continues to cause confusion. This has ramifications for individuals outwith as I expect the UK, Europe and other Western nations at least to consider the overall trend of US regulators.


My Outlook & Strategy


For now, I plan to buy on major pullbacks throughout the rest of this year. Until late summer, I will be focusing mainly on monetary assets such as BTC, BCH, LTC etc. The token market still has quite a lot of maturing to do. Very few of these tokens actually have any function right now, although some are very close. I will likely be repositioning into smaller-cap, utility tokens later in the year.


I continue to be sceptical of the alternative platform protocols. By these, I am talking about competitors to Ethereum, blockchains that are intending to serve as infrastructure layers for tokens and decentralized applications as opposed to being used as money. Right now, there are very few projects I can see who are in a position to steal significant value from Ethereum. Furthermore, we have no quantify the total available market share of these platforms, making any position inherently riskier.


I hope that you found this edition useful and informative. As ever, none of this is investment advice, please do your own research!


If you know someone who could benefit from this information now or in the future, do please share it with them.

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