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28 September 2018
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Weekly Research: September 28th, 2018

TABLE OF CONTENTS




What is Merged Mining?

Merged mining, or Auxiliary Proof-of-Work for the more technical crowd, is the process of mining two separate cryptocurrencies at the same time. Although not as popular as traditional Proof-of-Work or even Proof-of-Stake consensus algorithms, some projects have implemented merged mining to ‘piggyback’ off more secure networks as they grow.

Although he didn’t include it in the Bitcoin whitepaper, Satoshi Nakamoto outlined a rough idea of merged mining in a Bitcointalk forum in 2009. Let’s look further into how this innovative mining works, what it means for the projects that implement it, and how you can take advantage as an investor.

Satoshi

Satoshi outlining an early form of merged mining

How does Merged Mining work?

Every merged mining implementation has an auxiliary chain and a more established parent chain. To work together, both chains must share the same hashing algorithm. We’re going to examine one of the most popular merged mining pairs, Namecoin and Bitcoin, to explain the process.

In this pair, Bitcoin is the parent chain while Namecoin is the auxiliary chain piggybacking off Bitcoin’s network. Both cryptocurrencies use the SHA-256 hashing algorithm for mining.

Implementation

Parent chain developers don’t need to perform any additional work to implement merged mining. Therefore, the Bitcoin network doesn’t even need to know that Namecoin is mining along with it.

Auxiliary chains, however, need some added development to integrate merged mining. Continuing our example, Namecoin developers updated the blockchain to accept proof of Bitcoin mining as valid on the Namecoin blockchain as well.

Merged Mining Process

Merged mining requires no additional computing power for the miners. As a miner, you mine Namecoin and Bitcoin just as efficiently as you would when mining only Bitcoin. You (or your mining pool) just need to perform the additional set-up to support it.

Here’s how it works:

You begin by assembling a block of transactions for each chain – Bitcoin and Namecoin in our example. The Namecoin (auxiliary chain) block includes what you’d expect in a standard set of transactions. The Bitcoin block also contains regular transactions. However, it has an additional transaction with the hash pointing to the Namecoin block you just constructed.

After assembling your blocks, you mine. There are a few different scenarios that could play out here:

  • You mine a block at Bitcoin’s difficulty level. You finish creating the Bitcoin block and broadcast it to the Bitcoin network. Because the difficulty level at which you mined the Bitcoin block is higher than Namecoin’s difficulty level, you also mine a Namecoin block. You receive both mining rewards.
  • You mine a block at Namecoin’s difficulty level. You finish assembling the Namecoin block by inserting the header and hash of the Bitcoin block. The Namecoin chain then accepts this block. It’s able to recognize the additional Bitcoin header and hash as your proof of work because of the development work you did to support merged mining. You only receive the Namecoin mining reward.
  • You mine a block between Namecoin’s and Bitcoin’s difficulty level. You experience the same outcome as scenario number two.

Merged Mining Implications

The Good

Small and new blockchain projects have a few good reasons to integrate merged mining. Most importantly, doing so beefs up the security of their network while still being able to operate as a distinct chain. These auxiliary chains also gain exposure by being associated with a more popular blockchain.

Additionally, miner’s are heavily incentivized to participate as they receive extra income at no additional cost or power. And, because miners usually trade between the two coins to keep what they favor, there’s a boost in liquidity for both cryptos.

The Neutral

Parent chains fall victim to some blockchain bloat with the addition of auxiliary chains. The hashes that the auxiliary chain adds to the parent chain’s transaction tree are small, but they do take up space. As long as coins like Bitcoin are successful in implementing second-layer scaling solutions, this bloat shouldn’t become an issue.

The Bad

Unfortunately, it’s not all sunshine and rainbows. Integrating merged mining requires additional development work on the auxiliary chain. When switching over from another mining protocol to merged mining, you need to hard fork. Another hard fork is necessary if you ever want to switch away from merged mining.

Miners and mining pools also have some work to do if they want to reap the benefits of mining two chains. Although merged mining doesn’t require additional power, it does require more maintenance work. In mining two blockchains, you have twice the connections to serve and twice the distribution channels to maintain (if you run a mining pool). Some groups may not find the added upkeep worth the extra coin.

Investor Insights

Overall, merged mining provides more of an advantage to miners than it does to investors. However, when combined with other information, merged mining could be a telling sign of a promising project. Here are some past and future examples:

Namecoin – No Long-term Guarantees

Namecoin, effectively a decentralized domain registry, was the first coin to have merged mining with Bitcoin. Once a top 10 cryptocurrency by market cap, it’s dropped significantly to a spot in the high 200s. It serves as a great example of how a project can slowly fall by the wayside – even when tied to cryptocurrency’s most powerful network.

merged mining coins

Previously the number three coin by market cap, Namecoin is no longer in top cryptocurrency discussions

Even though a significant number of mining pools support Namecoin merged mining, the coin hasn’t seen much adoption in its five-year history. Development is also not as active as similar projects. This fall from grace goes to show that just because a cryptocurrency includes merged mining that doesn’t necessarily mean the fundamentals warrant an investment.

Dogecoin – Immediate After Effects

Early in Dogecoin’s life, the community decided to integrate merged mining with Litecoin. They found that with the original mining mechanism in place, the network would run out of significant mining rewards within the year. With no changes, miners wouldn’t have an incentive to mine, and the network would be susceptible to a 51% attack.

Almost immediately after switching from Proof-of-Work to Auxiliary Proof-of-Work, the Dogecoin price rose from about $0.0002 (~0.00000041 BTC) to around $0.00047 (~0.00000115 BTC). That’s over a 180 percent increase in BTC price over just a couple of weeks.

Dogecoin

Dogecoin experienced a significant price increase after implementing merged mining with Litecoin

Although just one data point, it shows that a project that switches to merged mining could be a profitable short-term investment. There are a few reasons why this may be true.

First, the additional network security brings immediate confidence to the community. Also, tethering to a more well-known coin provides more exposure to lesser-known cryptocurrencies. It’s like a quick marketing boost. Finally, merged mining adds liquidity to both chains as miners trade to keep the coins they prefer.

Elastos – Potential Sleeper Pick

Elastos is a blockchain-powered Internet that integrates merged mining with Bitcoin. With this coin still relatively unknown, it may be a solid pick up at this time. Once the platform is complete and merged mining is available, the Elastos price could see a similar rise to Dogecoin.

Additionally, Elastos is collaborating with NEO and Bitmain as the G3 of China. It’s rumored that Bitmain will dedicate a portion of the company’s hash power to mining Elastos. For those of you that don’t know, Bitmain controls some of the largest Bitcoin mining pools. So this support is a positive indicator for the Elastos price.

With this in mind, it seems as if the Elastos price should have firm upward pressure once mining begins. However, analyzing the project as a long-term (greater than one year) hold requires a deeper dive into the fundamentals.

Final Thoughts

Merged mining is an excellent option for young projects looking to grow without fear of a 51% attack. From an investment standpoint, a project’s decision to implement merged mining could cause an immediate jump in price. Although, this price boost may not last.

No matter how it affects the price, merged mining is something to be aware of as an investor, a miner, or even just a crypto enthusiast. With the ever-increasing threat of 51% attacks, switching to merged mining could very well be a trend that we start to see more of as we grow as an industry.


The Eye of the Withholder: Personal Insights into ICO Tokenomics and Processes

Crypto is a transient space that is constantly adjusting to investor preferences. Sentiment shifts on a whim and emotional biases seem to dominate the crypto investor’s decisions. As someone who was groomed within the investment management industry, I have always been fascinated by the behavioral aspects of investing, attracted to the thought process behind the action. Within the cryptocurrency market, I have had the privilege to study how sentiment and investor behavior drive market movements and vice versa.

In an environment where the majority of market participants look to external sources, YouTube influencers, cryptocurrency news portals, ICO review services, etc, in order to validate their beliefs of what constitutes value, I believe that certain insights can be identified as what drives not only market sentiment with regards to individual ICOs, but price, as well.

Crypto, and its related blockchain technology, has the opportunity to experience unprecedented growth, although it is still considered an infant asset class. According to IPE Research, cryptocurrencies only currently represent 0.67% of assets managed by the top 400 global institutional asset managers. Cryptocurrencies also only represent 0.58% of the value of global stock markets. Market capitalization is highly concentrated among a wealthy few, with approximately 96% of all Bitcoin being stored in just 4% of addresses.

As a result of the perceived opportunities within the space, security issues and instances of fraud or hackings have been on a steep rise, with ICOs and exchanges attempting to pick up the pieces after the fact. These developments have forced investors to evaluate their investments with more prudency, compelling them to demand that security become an integral part of both the pre- and post-ICO process.

Within the current market, the projects that have realized the most value since ICO from the perspective of return on ones’ investment have largely been within the blockchain infrastructure and finance sectors. With regard to projects that are launching in other areas (such as gambling, prediction services, health, identification, data storage, etc), growth in these projects’ capitalizations have generally been significantly lower.

Fig#1: Growth in Project Capitalisations since ICO (110 Projects).

ICOs in 2017

Source: Ernst & Young, Initial Coin Offerings (ICOs), 2017

Broadly, I have noticed that investors place large amounts of value on ICO preparation, administration, and a project’s post-token sale marketing techniques.

As the cryptocurrency landscape morphs, I believe that we will start seeing the ICO market mature. Investors are beginning to make more efficient decisions, and projects are beginning to find it more difficult to differentiate themselves from the onslaught of new coins in the marketplace.

With the majority of blockchain capital stemming from proceeds from ICOs as opposed to VC funding, measurements of ICO quality (procedure, metrics, administration) are becoming vitally important for the average investor.

My goal in this article is to provide investors with a checklist of what I have found to be the most important aspects of ICO investing.  Hopefully, this will equip you with the know-how to optimize your investment decisions. I have divided these aspects into two areas:

  1.     Quantitative – dealing with favorable metrics, lockup periods, discounts, etc.
  2.     Qualitative – Dealing with things such as security, KYC processes, whitelisting.

This article is not meant to cover aspects such as the project roadmap, vision, or team. It is only meant to focus specifically on metrics and processes that affect the perceived value of a project during and after the ICO.

Quantitative Considerations – ‘Tokenomics’

Tokensale Hard-cap (& subsequent Total ICO CAP)

Early on in the cryptocurrency markets, we saw ICOs raising large amounts of money, in some cases well over $100 million. This was due to multiple factors, at a time when an investor’s understanding of proposed value within the space was still being developed. Within recent months, we have witnessed a transformation within the investor mindset and subsequently, within their investment strategies.

More investors are now calling for projects to demonstrate proactive, clear business development strategies. They would also prefer a certain level of organic growth within each project, which they hope will translate into the growth of the token’s price. Recent events within the space have forced investors to be more judicious with their investment decisions, and they are starting to question how the funds that they invest will ultimately be used.

Previously, a fancy website that touted a vague business concept and an insubstantial whitepaper was enough to raise millions of dollars in funding within a matter of minutes. In today’s market, investors are becoming far more selective with what they feel would constitute a good investment.

This can be seen in the graph below, developed by Architect Partners, which indicates an increased number of projects not achieving their stated funding goals.

Fig#2: ICO Capital Raised – Missed expectations on the increase

ICO landscape

Source: Architect Partners

A reasonable hard-cap signals to investors that the project team is serious about utilizing ICO funds responsibly. This, coupled with a team lockup period/vesting schedule, is a strong indicator that the team has confidence in its creation, and that its incentives are aligned with token holders.

In my experience within the space, there is a sweet-spot with regard to the amount of funds a project is aiming to raise. Of course, the project should never look to raise anything less than what they feel is absolutely necessary to be able to reach roadmap targets and allow the idea to come to fruition.

  • If a project raises too little funding, without taking into account the costs of both exchange listings as well as marketing, they will find themselves struggling to find buyers for their tokens in this vastly oversaturated market. I have personally had the experience of investing in fantastic projects (Blockchain Diploma [BCDT]) that resulted in a complete lack of liquidity and exposure because they did not factor in the price of listing within the space, as well as increasing exposure.
  • Low valuations more often than not lead to over-subscribed ICOs (from the perspective of investors wanting to participate). In this situation, demand exceeds supply generally leading to a rise in token price on listing.
  • If a project is perceived to have an unreasonably high hard-cap, then it will be deemed by investors to be “cash-grabbing” and will either not be able to reach its stated hard-cap, or the token will run the risk of slipping below ICO price upon exchange listings. The likelihood of a project doubling in value from a low base far exceeds that of an overvalued project maintaining its ICO price. I always ensure that projects I am interested in are looking to raise a realistic and reasonable amount of funds for their stated goals.

Fig#3: % of Projects that reached hard cap

ICO landscape

  • Projects that have set initial hard-caps, and later adjusted these caps, have faced a substantial backlash from the crypto community. Examples of such projects are Enigma Catalyst (ENG), GEMS (GEM), and Havven.

So what does it all mean?

  • ICO hard-cap sweet-spot: $15 – 25 million.
  • Projects that adjust their hardcaps once consensus has been reached are a no-go.
  • Make sure that each project has factored in post-ICO costs such as exchange listings and marketing

ICO Token distribution/supply metrics

Distribution and supply metrics play an important role in assessing the merits of an ICO. Supply metrics, I am referring to the amount of tokens to be distributed to, for example, investors, team, and advisors.

Multiple approaches have been taken in the past with regards to the amount of tokens to be distributed to an ICO’s respective stakeholders. Experience has shown that in this area investors want to be assured that they are being adequately compensated for their assumed risk.

Investors also want to be assured that the team’s incentives are aligned with their own. To this end, they prefer teams to have an allocation of between 15% – 20% of tokens locked in a project with a suitable vesting period, as discussed below.

Successful ICOs have offered at least 40% of tokens to be purchased in the sale. The ideal percentage is closer to 50%. It is always advisable to ensure that the ICOs an investor is interested in offer a fair amount of tokens in the sale. This ensures that they won’t look to raise additional funds in a future funding round, which could possibly be detrimental to ones’ holdings.

Maximum Discounts

  • In the second half of 2017, the cryptocurrency market saw a surge of new funds, and the interest in the ICO space reached a relative peak. With this influx of new investors, ICOs were largely over-subscribed, and demand almost certainly exceeded supply for newly listed tokens. In a demand-driven environment such as this, it was normal to see projects offering huge discounts to main-sale investors, while still seeing their tokens increase in value on initial listing.
  • Since the market correction in January 2017, I have seen three interesting developments:
    • Pre-sale allocations have become more attractive to large investors who generally want to invest more than individual investor caps will allow.
    • Main-sale investors have become cognizant of the discounts offered to pre-sale participants, and want to be assured that they are also getting a good deal
    • Pre-sale and main-sale discounts and bonuses have slowly declined. Where they once were, in some cases, as high as 50%, current discounts offered usually range from between 10% – 30%.
  • The crypto investor of 2018 only gets excited about token discounts if they are on the receiving end. Early investors in projects will always push for the highest discounts they can receive. Be careful not to invest in projects that have offered insane bonuses/discounts to pre-sale participants, because these projects will almost certainly dump on listing as pre-sale investors realize the profits on their discounts.

Team Token Lockup Periods

In a space where everything is transient and money exchanges hands on a whim, investors want the team they are investing in to have a long-term vision. To this end, we as investors demand not only that the team retain a certain portion of tokens to incentivize them to develop their value and see the project grow, but also that this team is bound by a lock-up and vesting schedule, ensuring that they seek to establish themselves within the blockchain space in the long term.

Generally speaking, the longer a team’s lock-up, the more desirable the metrics to us as investors. Team token lock-ups within the blockchain space range from twelve months to five years. In my personal experience, I have found that a lock-up period of three years or more, with an associated vesting period that releases team funds on a quarterly basis, allays investor fears, and ensures that the team is adequately aligned with the success of the project.

Cyber Security

Most ICOs still lack adequate cybersecurity measures, which represents a major risk that ultimately lies with investors. It has been calculated that approximately 10% of all ICO funds are lost as a result of hacking attacks on associated projects/websites/investors. The absence of a centralized authority, permanence of blockchain transactions, and rush due to fear of missing out (FOMO) have led to a wave of scams that have siphoned millions of dollars to the accounts of hackers. It is of utmost importance that teams do everything within their power to secure investor data and funds.

The most popular types of attacks are:

  1. Phishing websites,  the most common form of fund theft, in the form of creating an identical website to the ICO in order to fool investors into thinking it is legitimate, with minor or insignificant changes to the URL that often go unnoticed.
  2. DDoS attacks
  3. Hacking of websites
  4. Cyber-attacks through company employee:  In this instance, I have witnessed ICO community managers turn on projects and ultimately abuse their power as admins to scam investors, who trust that they are dealing with legitimate persons. Any person who is put in a position of power, specifically with regards to being able to converse with or exert influence over the investment community, should be properly vetted.
  5. Cyber-attacks on investors
  6. Exchange (Coincheck) & wallet (Parity) hacks

Investors need to take heed of the multiple horror stories surrounding wallet hacks, scams, and fraud. In my opinion, a project is only as good as its ability to secure investors’ funds and private information.

When researching potential investments, it is always advised to do a cursory background check on the team via LinkedIn, and to contact the project community managers to get a greater understanding of the steps they are taking to ensure that the ICO follows a smooth, lawful, transparent, and secure process.

Whitelisting Process

A smooth whitelisting process almost always leads to a smooth ICO process. A  team’s ability to effectively manage the whitelisting process is deemed to be an indicator that the team is competent enough to run with the project as a whole. Different whitelisting processes have been adopted over the last few months, with varying levels of success.

In the relatively early days of the ICO market, it was common for projects to whitelist, for example, the first 500 members to join their Telegram community.

This approach had two goals: first, to speed up the whitelisting process, and second, to cause FOMO within the investment community as a whole. This was generally successful and lead to large subsequent entries of investors into project communities, with the hope of being the lucky few that qualified for the whitelist.

This approach has not been successful in recent months, as there has been a general trend towards better practice and formalized processes. In addition to this, the fear of missing out has transformed slightly, into a fear of regret. Investors are much warier with regards to rushing to commit funds to a project.

An example of this strategy can be seen with Bounty0x (BNTY). The team decided to cap pre-sale whitelists to the first 500 members to join their Telegram Community Group, and main-sale whitelists to the first 1000. This, coupled with a low hard-cap ($1.75m), saw the price of BNTY rise significantly within the month’s post listing.

Another approach to whitelisting, which has gained traction in recent months, is to hold a ‘Whitelist Lottery’. Within this approach, the project opens itself to whitelist submissions, while only allowing a set portion of applicants to invest. This leads to the majority of applicants not being able to participate in the main sale and creates an organic demand amongst those who were interested in the project but were not fortunate enough to be whitelisted.

An example of this strategy can be seen with Neon Exchange (NEX). This strategy has created a fair amount of buzz within the crypto community.

The most common form of whitelisting is in the form of direct email. Teams establish a subscription service on their website, whereby investors that are interested in the project are able to subscribe for new information in the future. When the whitelisting process begins, each investor will receive a direct link to a whitelisting form.

A sound philosophy: ‘WFAL’ – Whitelist First Ask Later. Whitelist for any and all potential opportunities within the space, and then, by method of elimination, only select those projects that meet your investment requirements.

Final Thoughts

The insights that are listed here are by no means exhaustive, as I have found that subtle differences in processes, vision, or strategies of projects can have unforeseen consequences on subsequent sentiment and price momentum. I have, however, found the above-mentioned to be a great starting point, or yard-stick, in a space that constantly morphs alongside the technology that it propagates.

The hope is that we can empower you with a set of tools that allows you to better gauge potential success in a space that is largely valued on speculation rather than solid delivery. As the ICO landscape changes, no doubt there will be further insights to be shared in the future. Through the subtle tweaking of the manner in which we identify, approach, and analyze ICOs, we as investors will deliver a clear message to the market: that quality, integrity, security, and governance are all virtues that we must strive to uphold.


Why Crypto Investors Should Care About Private Blockchains

The ICO has become almost inseparable from the idea of a blockchain startup. It is now the go-to means of raising capital for development teams convinced they are onto the next big thing. The sheer volume of ICOs has led to a proliferation of new tokens entering the market and, almost inevitably, an ever-expanding graveyard of projects that are now dead for a variety of reasons.

ICO Success or Failure – What Is the Secret Sauce?

For the individual investor who is still looking to crypto as a means of getting decent returns, it can be near impossible to work out whether or not a project is likely to succeed or fail. True, there are many practical checklists out there that can help potential investors navigate through the minefield of judging the long-term potential of a white paper or a development team.

But there are also other indicators of whether or not a blockchain startup is likely to do well. Rather than trusting a checklist, we can also look at a different model of raising capital that may also offer attractive potential for forward-thinking investors.

Blockchain — and broader distributed ledger technologies (DLTs) — are now gaining traction across many industry sectors including banking, automotive, aviation, and FMCG. Corporations are getting involved in a number of ways.

Some are participating in industry-wide consortia like R3 (financial) or MOBI (automotive) to work together on integrated solutions. Others are investing in trusted tech companies to custom-build systems for a particular solution; for example, Walmart working with IBM on developing DLT for use in its supply chain.

Digital Asset – DLT Solutions for the Finance Industry

Digital Asset is one such example of a company that has established itself as a firm frontrunner in the game of developing DLTs for the financial sector. The company has never conducted an ICO. Instead, it followed a more traditional funding route and successfully gained financial backing from the likes of JP Morgan and Citigroup, raising more than $110m in venture capital.

Because Digital Asset is venture-backed, and its technical platform is not built on any public blockchain, it doesn’t operate within a token economy like blockchain startups that undergo an ICO. Instead, Digital Asset has created its own distributed ledger system, known as Digital Asset Platform. This platform combines distributed, permissioned ledgers together with a custom language for developing smart contracts.

The ledgers that underpin the platform are segregated, meaning users can only view their specific section of the ledger, based on their permissions. This protects data with the level of confidentiality necessary for deploying the system within the financial sector. At the same time, a synchronization log works to ensure the integrity of data across the entire ledger.

Digital Asset Modeling Language (DAML) is the domain-specific programming language used by the platform. It’s designed to allow developers to program predictable behaviors and analyze any possible outcome. This enables the creation of smart contracts that serve to automate and standardize many of the complex statutory agreements and reconciliation efforts across the financial sector today.

How Does This Differ from Ethereum?

A custom-built DLT like that used by Digital Asset contrasts with a public blockchain ecosystem like Ethereum. The Ethereum blockchain is open, meaning node operators can see the entire blockchain. There are some workarounds to the confidentiality element in existence, but not to the extent that would satisfy the requirements of corporations and banking institutions.

Public blockchains like Ethereum allow the development of apps in general smart contract programming languages. General languages enable full programming flexibility, which can generate a vast array of eventualities from a single smart contract. This creates inevitable difficulties in foreseeing and testing every possible eventuality.

So Ethereum-based smart contracts coded in general programming languages may be subject to unintended consequences, which Digital Asset is able to avoid by developing its smart contracts in DAML.

The now-infamous case of The DAO hack is a prime example of unintended consequences in an Ethereum-based smart contract. Funds were siphoned off by a malicious party who was able to exploit inherent weaknesses in the underlying smart contract programming. This kind of hack demonstrates the vulnerabilities that are inherent in Ethereum.

Why Predictability Matters

Predictability is important because corporations have to consider risks to shareholder investments when they are implementing new technologies. Given the potential damage to share price, companies are understandably reluctant to embrace the same public ledger technology associated with a hack such as one suffered by The DAO.

Therefore, the predictability element of DAML for programming smart contracts may well mean that the Digital Asset offering could have applications beyond the world of finance and into other sectors in future.

This is not to detract from the fact that Ethereum and other public blockchains offer many advantages for both blockchain developers and the crypto investment community. However, the corporate world has many legitimate concerns with using public blockchains in their current state.

Within the world of finance, confidentiality is one of the most stringent requirements, and transaction data on a public blockchain is by definition, public. Furthermore, slow transaction speed and the proliferation of high-profile hacks also mean that public blockchains are not fit for all purposes, within the financial and other sectors.

Understandably, corporations need to ensure that the implementation of any new technology will create value, which means it must serve to help increase share price and hence return on investment for shareholders. Any risk that something will go wrong will scare the markets and achieve the opposite effect.

Why Private Investment Matters for Blockchain

Digital Asset is a private company, meaning it is not possible for individual investors to get involved unless the company undergoes an initial public offering (IPO) in the future.

So what then? If you can’t buy shares or tokens for Digital Asset, why bother? The point is, there is something to be learned from this in the context of the hundreds of new blockchain startups launching, and failing, each month right now.

Consider that the financial sector is dependent on middlemen for every step of even the most straightforward transactions. Brokers, lawyers, and other intermediaries pin the system together with the aim of ensuring that with enough parties involved, trust is established. However, financial institutions like those investing in Digital Asset understand that this system is complicated, with many handoffs for each transaction.

The system is not this difficult by design; it has evolved, based in part on externalities like the 2008 global financial crisis. But the industry itself recognizes a need for development. It sees the long-term potential of DLTs to do that. The core of the original blockchain principle was that of creating a system that serves to connect two parties directly and to replace the need for an intermediary to establish trust in transactions that involve the exchange of value.

Digital Asset is taking these core principles and developing them in a custom solution for the financial sector. It is promising to speed up trade times, automate many of the legal agreements around trading, and assure the legal requirement of confidentiality, through segregation of permissioned ledgers.

Private Ledgers as a Catalyst for Adoption

This is where the fundamental question of blockchain adoption starts to get interesting. Blockchain purists tend to scoff at the idea of decentralized ledger technologies getting adopted by big businesses. Making decentralized ledgers private or permissioned also defeats the inherent principles of an open consensus network overriding the need for trust. After all, if the consensus network is closed to a particular group, why do they even need to decentralize?

Well, the world, even closed networks between financial institutions and corporations, still doesn’t operate on peer-to-peer trust. It runs on those middlemen. And they charge fees. Reducing fees reduces costs, hence increasing the potential return on investment to shareholders, which attracts more money and investment to the company in question.

So, private blockchains do have value and could ultimately be the catalyst for widespread adoption of decentralized technologies, whether blockchain purists like it or not. If we compare this evolution to that of the internet, nobody thinks anything these days of companies utilizing closed intranets and private networks to get business done.

Companies who hadn’t bothered to stay up to speed with internet technologies would have gone bust a long time ago, taking shareholders’ investments with them. Nevertheless, corporate adoption of internet technologies didn’t change the fact that the world wide web itself remains an open system in which anyone can participate.

Why Crypto Investors Should Pay Attention to DLT Adoption

Digital Asset has the attention and investment capital of some of the world’s most prominent banking institutions. Those institutions believe in the power of distributed ledger technology to bring innovative changes to the sector, or they wouldn’t have invested. This belief comes about because using DLTs in the financial sector holds true, long-term, industry-changing potential.

What Digital Asset is doing right is using the very core functionality of DLTs to solve an existing problem. It isn’t building a solution for a problem that doesn’t exist, neither is the company seeking to make a fast buck in quick returns.

It is playing a long game, the result of which will create automation and increase trust between parties. This, in turn, will speed up transactions and increase the profitability of players in the financial sector. Profitability is ultimately what increases return on investment to shareholders.

Profitability is the same reason that Walmart and IBM partnered on the initiative to use the digital tracking capabilities of blockchain in the Walmart supply chain. If Walmart can decrease lost product, then it serves multiple benefits.

The company believes it can increase profits from less lost product and reduce spending on trying to track and trace product through the supply chain. Blockchain-based digital tracking will also decrease the risk that spoiled products can get onto shelves and into consumers homes. Decreased risk also increases share prices by giving confidence to the market that the company is a sustainable bet for investment.

New Solutions, Not New Problems

Many blockchain startups today are trying to build entirely new markets using blockchain as a basis. This is a significant part of the reason why so many blockchain startups can and do fail. In evaluating opportunities for investing in the next big ICO, it makes sense to look at where big money is already going.

The solutions developing for DLT’s in big businesses do not come with public white papers and the offer of immediate returns on tokens. However, this doesn’t mean they can’t become the blueprint for savvy investors who are evaluating upcoming ICOs and the potential for long-term rewards.

Taking a broader view, this could also present a way of assessing other long-term investment opportunities. Rather than putting money into the company offering the blockchain solution, start to look at which companies are implementing DLT’s; is there a chance that share prices would increase as a result?

Smart Investing

Adoption of this wide-angle view is how successful investors make money. They don’t chase quick returns based on a sexy white paper. The savviest investors look out at the world, take the time to learn about what is making a difference to the markets and use that knowledge to make insightful evaluations of future potential for change.

Those who successfully came through the dotcom boom understood this, and those who will make the most profit from investing in blockchain and DLTs are likely to be no different.


Insights into Stablecoin Mania

You may have been hearing a little too much about stablecoins in the past few weeks. Let’s take a stab at the macro and micro effects of this “stablecoin mania”.

On September 10th, the Winklevoss-owned cryptocurrency exchange Gemini launched a stablecoin called the Gemini Dollar. The stablecoin (GUSD) is an ERC20 token pegged 1:1 to the U.S. dollar with oversight from the New York State Department of Financial Service. Like Tether, an independent accounting firm will confirm each that the USD reserves equal the amount of GUSD.

On September 26th, the incredibly well-funded Boston-based Circle, a platform primarily focused on onboarding institutional investors to the world of cryptocurrency and providing them the trading desk to be involved, launched its dollar-pegged stablecoin (USDC) as well.

Quick Insights:

  1. Gemini has garnered a reputation for working with regulators. In the vapid grey territory that is cryptocurrency exchange regulation, being the first exchange to respond to potential business-model altering is a huge advantage to have over the competition. It appears there is also a competitive nature to cryptocurrency exchanges in working with regulators to pioneer, or at the very least be one of the first to get word of, cryptocurrency exchange regulation changes.
  2. Earlier this year, the SEC rejected an ETF launched by the Winklevoss twins. Gemini adding a stablecoin could be a play to add stability to their potential ETF that may bring on a more favorable judgment from authorities.
  3. Circle owns a Gemini competitor, Poloniex, but the launch of the USDC isn’t a kneejerk reaction to Gemini’s stablecoin. The company noted its plans to launch a stablecoin when it raised $110M in a round that included Bitmain, Breyer Capital, Tusk Ventures, IDG Capital, Pantera, and Blockchain Capital.
  4. Circle’s whole shtick is to facilitate the onboarding of institutional money to the cryptocurrency trading world. Offering its own dollar-pegged stablecoin means that traders that can find solace in some sort of stability in an incredibly volatile market.

Why this is relevant for you:

Stablecoins play an extremely important role in the movement of cryptocurrency markets. Experienced traders can note an increase in trading volume in stablecoins, such as Tether, during upswings and downswings in the market. For example, a large number of people purchasing Tether can indicate a mass of Bitcoin and other coin holders selling their holdings for stable ground. Alternatively, these investors will also tend to sell off their Tether for cryptocurrencies in anticipation or in reaction to a bull run.

Gemini and Circle launching stablecoins native to their exchange is an attempt to provide their users access to a liquidity pool for their token holdings. Gemini is a New York trust company regulated by the New York State Department of Financial Services (NYSDFS), and is often on the frontlines of exchange regulation and establishing legal ground. Circle has raised money from companies such as Goldman Sachs and is on the frontlines of onboarding institutional investors.

What this means for the cryptocurrency industry:

The approval and launch of the Gemini Dollar coincided with the approval and launch of another stablecoin, the Paxos Standard (PAX) by Paxos Trust, the company that oversees the over-the-counter (OTC) exchange itBit. The rise of stablecoins in the wake of a down market isn’t surprising, but the interaction and competition between them all are interesting.

As each independent stablecoin attempts to carve out a base of regular traders, more alternatives will appear offering marginal iterations to attract more users (i.e. Gemini attempting to attract more users to its exchange with the Gemini Dollar feature, Circle attempting to attract more institutional investors to its fleet of products).

Another stablecoin isn’t seismic by any means, but it does provide yet another narrative to follow as the stablecoin market moves from a Tether monarchy to more of an oligopoly.


What Bitmain’s IPO Means for the Cryptocurrency World

Bitmain and its ICO IPO is going to be one of the biggest news stories of 2018 for the cryptocurrency world. The Beijing-based ASIC chip producer, strategic investor, and owner of one of the largest Bitcoin mining pools is a force to be reckoned with inside and out of the cryptocurrency industry.

Although it hasn’t disclosed how much it is seeking to raise in its IPO, a prior CoinDesk estimate placed the number at around $18B, giving it a valuation between $40 and $50 billion. That’s a lot of cheddar for a company in a highly volatile industry, but it seems fairly on par with what Bitmain is presenting.

Bitmain flexed impressive growth numbers in its IPO prospectus to the Stock Exchange of Hong Kong in September 26th, 2018.

Bitmain IPO Numbers

Image via WallStreetJournal

However, not all that glitters is gold. Decreasing margins, depreciating assets, and new competition are a handful of challenges Bitmain will have to overcome.

For example, if you’ve been investing in cryptocurrencies for longer than a year, you’re more than likely holding some tokens that have heavily depreciated in value. If this point brings you any solace, Bitmain is holding huge amounts of various cryptocurrencies that have all plummeted in recent months.

One of Bitmain’s largest holdings is Bitcoin Cash, a coin Bitmain is infamously tied to as co-founder Jihan Wu pushed heavily for Bitcoin Cash to overtake Bitcoin in the August 2017 fork. As of this writing, Bitcoin Cash is down nearly 80% for the year. A common assumption is that Bitmain bought BCH at or near its peak. Yikes. Additionally, Bitmain offered its customers the ability to pay in cryptocurrency, and 27% of all purchases in 2017 were paid in various tokens.

However, this article won’t dive deeper into Bitmain’s troubles, but more so the psychology behind and implications of the potential IPO.
Bitmain already raised a decent chunk of change, why do they need more? Bitmain raised around $784 million across Series A and Series B rounds that included IDG, Sequoia China, and Kaifu Lee’s Sinovation fund, NewEgg, EDBI (the corporate investment arm of Singapore’s Economic Development Board), and Coatue. Sure, every company has its burn rate and plans for growth, but $800M tends to go a much longer way for a revenue-positive company. Either Bitmain has some very aggressive plans to further establish and fund its dominance in the cryptocurrency world, or our next point here has some validity.
Is Bitmain looking to cash out? The above Series A and B rounds were likely overjoyed with Bitmain’s success thus far, but like any rational investor, have their doubts and have an exit in mind. Bitmain Founders Ketuan Zhan and Jihan Wu hold 36% and 20%, respectively. If Bitmain is valued at $12B, the two Founders are well into the Three Comma Club. Staring at all the negative factors in the current bear market, you can’t blame the team for considering exit plans for some of their positions.

Final Thoughts: What Ifs and Pipe Dreams

Bitmain’s core team and investors cashing out has numerous implications for the cryptocurrency world. The first few that are top of mind include:
How does a publicly traded company operate when choosing which cryptocurrencies to hold/mine? This sounds like quite the headache for lawyers to figure out. Bitmain obviously sways towards Bitcoin Cash, but if the core decision-making team changes and the company starts buying and holding other cryptocurrencies, we may have one of our first publicly-traded whales.
What does life look like for multi-billionaire Ketuan Zhan and Jihan Wu after Bitmain? The duo have been in crypto for a long time and are credited with building one of, if not the, most valuable company in the cryptocurrency industry. It’s hard to imagine that these two relatively young founders would be content sipping margaritas in the Cayman Islands and trolling Twitter. One could postulate that they would have more mobility to get involved with new projects in the space (and would likely be enormous assets).

Key Crypto Trend/Momentum Analysis for Friday, September 28, 2018

The ‘big picture’ technical backdrop for BCHUSD, ETHUSD and LTCUSD has greatly improved over the past month and crypto traders/investors now have numerous technical dynamics working in their favor. Famed stock/commodity trader Jesse Livermore (1877-1940) would always position himself in a trade according to its ‘line of least resistance’ and right now, that line appears to be biased toward higher prices in the cryptocurrency markets, as bullish price cycles and strong patterns of accumulation signify that the ‘big money’ is indeed the power behind the latest rallies.

Two-day momentum/trend/key technicals for BCHUSD

The previous two trading sessions (Sept. 25th and 26h, 2018) were part of a strong bullish breakout pattern for BCHUSD, one coming shortly after a ‘higher low’ swing pattern occurred. This particular cycle/swing pattern often precedes a strong multi-day advance, and in this case, suggests that this coin will have little trouble hitting its next price target of 659.00 sometime in October/November 2018.

Six-day momentum/trend/key technicals for BCHUSD

The previous six days worth of price action for BCHUSD were part of a multicycle low reconfirmation pattern of testing and basing, prior to the strong surge seen since September 25th 2018. The chart paints a compelling image of a market preparing for a sustained bullish trend reversal, but as always, there will probably be speed bumps along the way. The previous swing high at 659.00 will no doubt be a profit-taking zone for short-term traders, but if the ‘big money’ accumulation ‘footprints’ over the past six weeks are indeed a foreshadowing of much bigger rallies to come, the 700.00 area might well be reached by late October/early November 2018.

The Relative Strength Index or RSI (14) is back above 50 (bullish) and the long-term Chaikin Money flow histogram (CMF (89) is also pointing to more gains ahead. But as always, wise traders take things one day at a time, adjusting their tactics as additional data impacts the technical scenario.

Figure 1 BCHUSD cycles daily final

Figure 1.) BCHUSD daily: This coin is finally making a major bullish breakout, coming out of a significant multicycle low. The ‘higher low’ breakout pattern can sometimes be a precursor to a sustained, multi-day rally; price targets are now at 659.00, with an extended target near 700.00. Created with NinjaTrader 8

Figure 2 BCHUSD CMF Boll VP

Figure 2.) BCHUSD daily: Bitcoin Cash.is hitting minor resistance on its 6-hour chart; minor pullbacks toward volume support may be viable long entry points. Note the pronounced volume ‘hole’ depicted by the market profile histogram on the daily chart (right); there is little overhead ‘supply’ to hold back any potential advance until around 700.00. Created with MotiveWave Ultimate.

Key takeaways for BCHUSD:

  • A bullish ‘higher low’ breakout pattern has been confirmed
  • Expect rising prices into the next near-term cycle high in early/mid- October 2018
  • Anticipate the current rally to stall around 659.00 to 700.00 – near the next supply zones
  • The long-term trend is slowly morphing from bearish to bullish

Two-day momentum/trend/key technicals for ETHUSD

Ethereum has been in a small consolidation for the last two trading sessions (Sept. 25th and 26h, 2018), and is, in fact, the comparatively weakest of the three coins covered in this article. However, the bigger-picture technical structure for ETHUSD still looks promising.

Six-day momentum/trend/key technicals for ETHUSD

The last week’s worth of price action has seen a minor reversal of a previous rally, one coming out of a significant multi-cycle low pattern. Nevertheless, a ‘higher low’ has printed on the decline, and this is indicative of an uptrend in force – a series of higher swing highs and higher swing lows. ETHUSD is currently trading near a key volume demand zone, one offering support to this market, so watch for any strong surges in either direction from this critical area near 210.00 to 215.00.

Note that two of the cycle oscillators are moving toward the lower end of their range, suggesting that a typical 18-20 bar cycle low is ready to form; given the confirmed uptrend in place, any break back above the highest high of the previous two-day high is an absolute near-term ‘buy’ signal in ETHUSD. Look for a test of the recent swing high at 255.00 and, if the bulls can hold their ground, a run-up to the next key volume node (supply zone) near 270.00 to 280.00 becomes a very real possibility in October/November 2018.

Figure 3 ETHUSD cycles daily

Figure 3.) ETHUSD daily: With a confirmed uptrend in place and a 18- to 20-bar cycle low ready to print, ETHUSD is a near-term ‘buy’ on any real-time break above the highest high of the previous two trading sessions, especially after a bullish turn in the red/blue oscillators Created with NinjaTrader 8.

Figure 4 ETHUSD CMF Boll VP

Figure 4.) ETHUSD, 6-hour and daily: Ethereum’s 6-hour chart (left) reveals a neutral to mildly bullish pair of Chaikin Money flow histograms; the daily chart, however, paints a decidedly more bullish money flow picture. As with BCHUSD, note the lack of overhead supply; this sets up a possibly powerful bullish breakout scenario. Created with MotiveWave Ultimate.

Key takeaways for ETHUSD:

  • A large-scale multi cycle low pattern is playing out as a slow, bullish trend reversal
  • Possibility of 5 to 8 more days of generally bullish action into the next near-term cycle high
  • Anticipate the current rally to find selling pressure near 255.00. Extended price targets exist between 270.00 to 280.00.
  • The long-term trend is slowly morphing from bearish to bullish

Technical view for LTCUSD

Litecoin’s daily chart has, arguably, the most bullish potential of the three coins analyzed this week; BCHUSD has already staged a powerful bullish breakout and ETHUSD is still seeking its key entry trigger previously described. But LTCUSD is now on the verge of a powerful bullish breakout from a consolidation pattern, one taking place in the midst of a significant bullish trend reversal. And on a percentage-of-gain possible basis, the chart setups below looks very promising indeed.

First, note that LTCUSD is getting close to a confirmed 18-20 bar cycle low (two key cycle oscillators are getting near their lower range) AND that the cycle low is occurring against a pattern of higher highs/higher lows in the price of the coin itself; once the red and blue oscillators turn up, a ‘buy’ signal is generated on a takeout of the previous price bar high. If/when that occurs, LTCUSD should easily challenge the previous swing high at 69.38, if not actually make a run for the extended price targets of 75.00 to 77.00. Those are going to be profit-taking zones, so be sure and grab your share of them on any rise higher from 69.39 to 77.00, progressively locking in more gains as this anticipated move gets underway.

Chaikin Money flow histograms (CMF 21 and CMF 89) both look promising on both the 6-hour and daily charts for LTCUSD, with a clear pattern of higher swing highs/higher swing lows now evident on the smaller time frame chart. The huge volume ‘hole’ extending all the way from the 55.00 area to the 77.00 area (daily chart) should get the bulls very excited, as there will be little in the way of selling pressure to be encountered on any sustained rally.

Figure 5 LTCUSD cycles daily

Figure 5.) LTCUSD daily: Similar to ETHUSD, LTCUSD is a near-term ‘buy’ on any real-time break above the highest high of the previous two trading sessions. This appears to be a market highly determined to make bullish headway over the next four to six weeks. Created with NinjaTrader 8.

Figure 6 LTCUSD CMF Boll VP

Figure 6.) LTCUSD, 6-hour and daily:. Minor pullbacks on the 6-hour chart (left) toward the highlighted demand zone (blue square) should be considered low-risk buys; a breakout back above 69.38 should see a large influx of buying pressure, potentially pushing this coin back into the mid-to-upper 70s. Conversely, a strong breakdown below 53.00 would be very bearish, near-term. Created with MotiveWave Ultimate.

Key takeaways for LTCUSD:

  • A large-scale multi cycle low pattern is playing out as a slow, and steady bullish trend reversal
  • Possibility of 3 to 6 more days of generally bullish action into the next near-term cycle high
  • Anticipate the current rally to find selling pressure near 69.38 Extended price targets exist between 75.00 to 77.00
  • The long-term trend is rapidly morphing from bearish to bullish

Summing up this week’s look at these three major crypto markets:

All three coins completed significant multicycle lows over the past three weeks and each is doing its best to morph from a bearish to a bullish mode.

Without exception, all three coins have only minor overhead supply (potential selling pressure waiting to be unleashed), allowing for the potential (but not a guarantee) for noticeable gains over the next few weeks.

LTCUSD’s emerging bullish consolidation breakout pattern offers perhaps the best risk/reward opportunity for those wishing to deploy swing trading capital right now; be sure to book profits along the way at the key price zones previously discussed, assuming the rally becomes a ‘go.’

BCHUSD’s recent breakout has been powerful; swing traders should look for a low-risk buy point on any pullbacks toward volume support on intraday (4-hour to 6-hour) charts. Never chase a breakout move that you’ve missed; be patient and wait for the next opportunity.

ETHUSD has the ‘weakest’ near-term chart pattern of the three coins, but its daily chart still looks like it has potential for gain. Take profits on any strong rallies at the previously mentioned supply zones and don’t let your open gains be robbed from you.

Remember, this is the cryptocurrency market, and NOTHING is certain, especially in this relatively unregulated, manipulation-prone corner of the financial markets. Always use sensible position sizing and risk control regardless of how bullish a particular chart pattern or trade signal setup appears to be.


Trading Education 101:

The need for proper money management and position sizing

Taking on too large a position in cryptocurrency trades is one of the fastest ways to blow out your account equity once an inevitable string of losing trades comes along; new traders succumb to the temptation to ‘bet the ranch’ on ‘sure-fire winners’ all the time, and it’s a guaranteed-loss situation that can easily be avoided once traders understand some basic math formulas.

Avoiding ‘risk of ruin’ by choosing how many shares/unit of crypto to trade

A good swing trading system might win 60-70% of the time, have a profit factor (dollars won/dollars lost) of 2.00 of higher, and also boast an average win/average loss ratio of 1.25 or better; such a system will typically produce a nice, steadily upsloping equity curve, with drawdowns averaging 20% or less, especially if the maximum account risk per trade is limited to 2% – or less. But even a good system like this can cause you to lose way too much money during otherwise normal losing streaks – when prudent position sizing constraints are thrown to the wind, as the following example will illustrate.

For example, if you have a $25,000 account, a 2% maximum account risk per trade is $500; let’s say you want to buy LTCUSD at $91.00 (after a hypothetical Bollinger Band Squeeze bullish breakout) and are willing to let the trade move $7 against you before calling it quits at $84.00, how do you know how to limit your per-trade account risk? It’s very simple; here’s how to calculate how many units to buy in order to cap the per-trade risk to your trading account:

91.00 – 84.00 = 7.00   

Seven points is your trade risk, the difference between your entry price and stop loss price.

Now take your 2% account risk figure of $500 and divide it by your trade risk amount of 7.00:

$500/7.00 = 71.428

71.428 is the maximum number of units of LTCUSD you can buy for this trade and keep your per-trade account risk at 2%.

71.428 * $91.00 = $6,500

$6,500 is the maximum dollar amount of trading capital to commit to the trade.

** Note, the above example is NOT a current trade rec for LTCUSD **

spreadsheet example

Figure 7.) Here’s a sample spreadsheet template that you can use to make this trade sizing process easy; just enter in your trade variables and then paste the formulas in the correct cells and you’re all done.

Avoid this all-too-common – and frequently fatal trading error

The egregious error many new traders make is in allocating huge chunks of capital to each trade setup, oblivious as to the amount of account risk they are taking on. If a trader puts on a $25,000 position using their entire account equity and LTCUSD hits the stop loss of $84.00, they lose $1,923 dollars instead of $500, their trading account takes a hit of -7.69%, and all it takes is a string of six losing trades in a row (yes, even a good, historically reliable trading system can experience a streak of six or more losers) for them to be in a world of serious financial hurt.

Even worse, many new traders use no stop loss/risk control at all, and these are the real horror stories in the trading game; these traders may even ‘average down’ on a big losing trade, and within a few days (hours?) they are flat broke!

Trading with conservative position sizes is the safer way to take on the crypto markets

Avoiding this kind of tragic outcome is easy; simply limit your per-trade account risk to 2% if you are a skilled trader with a proven track record, and if you are still learning to swing trade, then by all means limit this per-trade account risk to 1%, or even .75%.

Huge drawdowns kill a trader’s confidence, will typically take an inordinate amount of time to pull out of, and can even cause other problems like ‘revenge’ trading, overtrading, depression, problem drinking, bad marriages, etc., etc. Don’t go that route; limit your risk on every trade and live to trade another day, week, month or year. Preserving your trading capital with wise risk management techniques helps ensure you’ll be ready to pounce once the inevitable big winning trade setups come back around.


Disclaimer:

The material presented in this article is to be construed as educational in nature only and in no way does it constitute specific investing and/or trading advice for any specific individual or entity. Speculation in the financial markets involves substantial risk and therefore only risk capital should be used when trading or investing. Always consult your licensed financial advisor before deploying risk capital in the financial markets.


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LAST WEEK’S UPDATE