S&P500 and Ethereum Moving Together?

Yesterday we mentioned some interesting moves that seemed in sync from the US stock market and Bitcoin/Ethereum.Today was another curious move.

The chart below shows a good move up in the S&P500 (an Index of the US stock market) and Ethereum. Both moves occured right in the 10:11-10:12AM EST time frame. The top chart is Ethereum from GDAX and the bottom is the S&P500 (SPX).

Clearly there are good sized traders out treating Ethereum and Bitcoin as an asset class like equities…

Ethereum vs US Stock Market
The S&P500 Moved up in sync with Ethereum

 

Weird Bitcoin Ethereum Jump at US Stock Market Open

Its more than apparent that hedge funds and banks are pushing into the Bitcoin and crypto markets. Today I noticed that both Bitcoin and Ethereum prices gapped up at 9:30AM EST. Coincidentally thats when the US stock markets open for trading. Forgive the terrible notation in the GDAX charts below, I was in a rush.

Bitcoin Stock Market jump
Ethereum 930AM Stock Market Open

There is no obvious reason why the two would be linked, I suspect it has something more to do with some traders who have algorithms for the US stock markets. When their machines flip on they also have Bitcoin and Ethereum in their portfolios, so they begin trading them, too.

I don’t currently have the time to backtest this, but I wanted to post something as a reminder.

Whats a Buy/Sell Wall in Bitcoin or Ethereum?

There is a lot of action in Bitcoin and Ethereum trading – intra-day volatility can be huge. One thing that is frequent in crytpo trading is buy or sell “walls”. I great example happened today on the GDAX exchange.

You can see at the bottom  section of the chart below you have an aggregate of buy and sell volume at various prices. On the left in green is the amount in total that people are willing to buy at various prices. On the right in red is the amount sellers are wishing to unload. As you can see there is a massive amount of Ethereum for sale around $230 ETHUSD.  This is almost 8,000 ETH units for sale at $230/ETH which is roughly $1.8 million USD.

ETH SELL WALL
Ethereum Sell Wall on GDAX Exchange

For the price of Ethereum to move over $230 there needs to either be very strong buying demand to “tear down that wall”, or the large seller(s) need to pull back.

Buy and sell “walls” is something you will see frequently in crypto trading.

This BTC/ETH Price Analog Is Working

What follows below is rampant speculation. Do not take any of this as investment or trading advice.

Bitcoin vs Ethereum Price Charts

We originally posted this analogy comparing the first (2013) exponential ramp in Bitcoin to the Ethereum price ramp of the last few months. This isn’t a prediction, but I find it quite interesting. You could make a case that Ethereums price is tracking this initial run of Bitcoin.

Ethereum now vs Bitcoin 2013
Ethereum price ramp compared to bitcoin ramp.

This chart of stock market bubbles (or any investment mania, I suppose) is well known, and seems applicable here. If I had to toss a guess, we’re in the bull trap phase. Ethereum is right around ~$200 now and I’d speculate that round numbers often prove to be support areas.

Investment Mania

Another interesting thing about this analogy – the Bitcoin hard for is 20 days from now. There was 20 days between the “Bull Trap” phase and “Return to Normal” in the Bitcoin price bounce. If Bitcoin forks on August 1st that could have a major price impact on all cryptocurrencies and drive real “Fear” into the crypto market.

Bitcoin Peak to Trough vs Ethereum

We’ll keep updating this chart to keep an eye on this analogy. While I believe in Ethereum long term, the Bitcoin fork and Ethereum ICO’s it could make for a bumpy road in the short term.

Ethereum Has an ICO Problem

Initial Coin Offerings (ICO’s) are raising hundreds of millions of dollars on pretty much hopes and dreams, using an Ethereum platform which is in its infancy. (Some ICO sales even jammed up the Ethereum network). I say hopes and dreams because despite raising mounds of cash they aren’t near releasing product. Seriously, here are just a few:

  • Tezos currently raised >$200 million, and the funding isn’t over yet
  • Bancor raised $153 million
  • Block.one / EOS raised $185 million

The total amount raised in ICO’s in 2017?

>$798,251,174

That is staggering.

How Initial Coin Offerings Hurt the Ethereum Price

Raising “cash” isn’t really the right word. They’ve raised heaps of Ether, which they need to sell in order to get cash. What does this mean? You have hundreds of millions of dollars in Ether either being sold, or potentially being sold.  Its quite possible these companies only sell portions of their holdings, or even none at all. However, these companies need to use the funds to hire developers, buy computers, or just take exotic vacations. (Remember, there are no regulations in ICO land.) Its therefore a reasonable assumption that there is a good amount of Ethereum supply created from this.

The ICO’s need to start adding actual value to the ethereum network. They need to provide a service thats good enough to bring new people into Ethereum. This would raise demand for Ethereum and should raise the price. As of now this is all just a transfer of wealth from existing ETH holders to various “start ups”, with the hope that value is created at some point in the future.

Here is a beautiful graph that lays out how much has been generated by ICO’s in 2017:

ICO Sales by Month

For sake of argument, lets just say that all of the funds will be used for legitimate business purposes. Again, they need to sell Ether to get cash to buy stuff or hire people. This means you have many sellers that have a desire to get out, for which Ethereum needs aggressive buyers. If the sellers are more aggressive than the buyers, you get a price drop.

If you use google trends as a proxy for Ethereum demand, well, you can see why the price is currently ~$250 down from $400 a few weeks ago.

ETH is trending down on google.

Notice a trend? Both peaked in June 2017. What about the Ethereum price? Peaked in late May…just before the huge ICO month in June. I can’t say for certain that the two are related, but I’d speculate there is some correlation for good reason.

Ethereum Price July 2017

Short Term Ethereum Price Forecast

First, Ill state I have no clue where ethereum prices are going. I also own ethereum. Also, the short term picture is different from long term. Long term I have high hopes, but this is about the next few months.
To recap:

Where does this leave us? Hard to paint a pretty picture there. With more ICO’s coming daily there will be more ETH supply from companies needing cash. Eventually one of these will turn out to be a “killer app” or at least an app that maims. This would draw actual users to Ethereum, as opposed to speculators. Who knows when this will happen, but I suspect within the next year well see the technology start to move up towards the hype. This would in theory bring in new capital and get the Ethereum price moving in the right direction again.

 

ICO’s – the More I Know the Less I Like

A very interesting question came up on Reddit today:

What happens when one of these ICO companies get bought out?

I hadn’t thought about this. Apparently there is no equity stake involved when buying tokens.

When companies issue tokens, they collect the money generated by the tokens. But they often owe you nothing in return (you have to read each ICO whitepaper to be sure of what you get).

But what happens if they sell the company? There is no mention in the token whitepaper aka terms and agreements about equity.

Read the Unikorn whitepaper launched with Mark Cuban: Its here.

Nothing in there regarding a sale of the company, but they do clearly state that benefits are, well, speculation that the price of the token will rise:

UnikoinGold holder benefits:
1. Granted bonus UnikoinSilver when they create a crypto-wallet
2. Granted UnikoinSilver when they bet with UnikoinGold
3. Opportunity to purchase additional raffle tickets for prizes using
their UnikoinGold
4. Opportunity to bet on on the most immersive skill and spectator
esport products, some of which will be exclusive to UnikrnGold.

What will they do with the money:

Budget Allocation of ETH Raised
5% Contractors
8% Contingency
12% Marketing (mostly organic)
15% Administration
60% Platform Development

Token Distribution
Total Tokens: 1 Billion
Partnerships & Marketing: 15%
Unikrn Betting Reserve: 15%
Initial Token Sale: 20%
Unikrn Internal: 50%

So the actual investors keep most of the tokens and only roll out 20% to the general public. I’m sure as the price rises they eventual cash out. Really its 100% free capital to the company. Actually, its more than that. The investors are getting free money, too. These tokens are fabricated out of air and nothing stops them from issuing more in the future or dumping a bunch on the market, or simply exchanging their tokens for Ethereum and cashing out.

Its really a brilliant model for compaies looking to raise capital with no strings attached.

 

World Economic Forum Pumps Blockchain

The World Economic Forum [WEC] released a report entitled ” Realising the Potential of Blockchain” yesterday, after which Ethereum gained 30%. The WEC was very pleased with themselves and posted this on their website:

WEC Blockchain Report

Curiously, they didn’t take credit for the flat price of Bitcoin. Read all 46 pages here if you’d like. There is some provoking information in there.

The authors are Don Tapscott, his website is here. Interestingly he is writing a book about the “BLOCKCHAIN REVOLUTION”.

The paper does point to issues with Bitcoin and eludes to the upcoming forking issue and states that Ethereum “is about to eclipse Bitcoin in value.”

Countless times they point to the “lack of governance” in Bitcoin as a hindrance and that is part of why they like Ethereum. The paper is all about “governance” and “stewardship”. Its about what needs to be done to guide Bitcoin and Ethereum along.

My question is: Why try to come in and govern something which you have no rights to govern? This sounded to me like a takeover. “We need to build this framework and step in to make Bitcoin right.” Well, why not just make your own currency then? If the WEC is so pervasive and powerful then copy the Bitcoin code and launch your blockchain.

Vitalik Buterin co-Founder of Ethereum is a brilliant man who launched a revolutionary product. Fortunately, he seems like a pretty stand up guy. Very, very easily he could flip and then the whole Ethereum game is over. Yes, concise leadership can be a great thing when the leader is making the right calls.

Bitcoin doesn’t have that head coach. But why does bitcoin have to be the final answer? If you just closed your ears to the blocksize debate I’d say Bitcoin is and will probably be an incredible success. I would also say that Bitcoin was the first major global launch of a blockchain product. Since when has the first launch of anything been the final answer?

Too often it seems that people want one answer in the crypto space. “We need to take over Bitcoin” or “Ethereum will replace Bitcoin”. Why? Whats wrong with 10,000 different blockchains and currencies? One answer means its easier for governments or large players to step in and control the game. If you want that then just keep your fiat at your bank down the street.

Whats Wall Street Waiting For?

Why Is Wall Street Slow to Move into Crypto?

  1. Regulation
  2. Clearing

Not the sexiest topics, so we’ll keep it short.

Hedge funds and Wall Street firms have been slow moving into trading and investing in cryptocurrencies such as Ethereum and Bitcoin. There are some

Enterprise Ethereum Alliance
Enterprise Ethereum Alliance

indicators that sentiment is shifting such as JP Morgan (and others) joining the Enterprise Ethereum Alliance and Goldman Sachs initiating research coverage of Bitcoin.

Assume for a second that sentiment is suddenly 100% positive and that all the “scam” and “crime” stigma has left the building. So, whats the problem?

Regulation of Bitcoin, Ethereum

Party of the beauty and attraction of crypto is the decentralization and lack of regulation. There are many reasons why this is beneficial. But if you’re a big bank or managing billions of dollars, regulation matters. First, Bitcoin is not “legal” in all countries. Just look at what China did a few months ago when they started “regulating” Bitcoin. As per wikipedia: “While private parties can hold and trade bitcoins in China, regulation prohibits financial firms like banks from doing the same.” Not only is there  (outside) risk of the US doing this, but if you’re a fund thats has Chinese investors or does business with China this clouds the water.

Most assets are also considered collateral. If I have $10 million in gold I can bet that the bank I deal with would consider that an asset against which I can borrow. Does every bank see Bitcoin in that same light?

What about tax treatment – the IRS has made some comments but I’d say nothing is set in stone. Just this month the IRS is talking to Congress about strategy.

A lower risk, but still foreseeable is the risks of regulators such as the SEC or FINRA coming after you for engaging in (for example) an investment used to launder money. Maybe you buy Monero and build up a large position and

Bitcoin SEC Regulation - image courtesy CoinDispatch.com
Bitcoin SEC Regulation – image courtesy CoinDispatch.com

those assets are seized because the FBI thinks they were used in some hacking blackmail scheme. Probable? Probably not. Possible? Sure.

The facts are that until a regulator “green lights” Bitcoin and/or Ethereum its going to be tough for large institutions to trade or invest.

When Might Regulators Weigh In?

I’ve been watching the SEC’s ruling on the Winklevoss Bitcoin ETF launch. Its taken years for a ruling, and earlier this year it was initially rejected. However in April the SEC decided to take another look. I think its a bit underestimated the impact that approval would have to the price of Bitcoin. This would give not only a regulatory stamp of approval, but paves the way towards clearing and settlement of Bitcoin at an institutional level.

Clearing and Settlement is a Major Problem

Take stock or ETF trading as an example. When funds (or anyone as a generalization) trade publicly listed stock that stock clears through a central clearing house called the DTC. If I am a hedge fund and have my assets at say, Goldman Sachs (your “prime broker”), I can trade stock with JP Morgan. JPM sends the stock to my account at Goldman through the DTC. Its a pretty seamless process and universal to US stock trading.

Now, lets say I’m a hedge fund and I want to buy $1 million Bitcoin. Buying is easy enough – you go to one of the exchanges, wire money and buy your Bitcoin. The problem is there is no way to get your Bitcoin back to your prime broker. No, a wallet even with vaulted cold storage wouldn’t work. The risks associated with that are high, but the mechanics of trading in and out are a huge hindrance. If the fund needs to immediately raise assets by selling Bitcoin they need to have immediate access to those coins. While yes, you can work out the mechanics if you are a small fund or “crypto” is your dedicated business. But for large institutions who want to simply invest in crypto this is a major hindrance.

How Could Clearing Change?

One possible way is for clearing houses/prime brokers like Goldman or Morgan Stanley to have some type of central clearing wallet. Linked to that wallet would be “sub-wallets” for each fund that owns Bitcoin. Therefore if I go to Gemini Exchange and buy 1000 Bitcoin, I tell Gemini to send that Bitcoin to Morgan Stanley on my behalf. Morgan Stanley then has custody and can allocate the Bitcoin to my funds sub-wallet. This “sub-wallet” concept seems to peripherally exist and I’d imagine banks could pay someone to hash it out rather quickly.

If the Bitcoin ETF launched this would circumvent all of this, because you could just buy the ETF and it would clear via the DTC like all other stocks and ETFs. (Yes, I am aware the GBTC exists, but the premium on that product is absurd). To this point I think this clearing/custodial aspect is probably one of the problems the SEC is having with the product.

In the End

I’m confident these issues will be worked out. The fact that they haven’t yet makes (in my opinion) Bitcoin and Ethereum such an interesting investment at the moment. The door is currently cracked open to big investors, but eventually we could see a real flood of assets.

Coinbase: Convienience for a Cost

Coinbase Can be Costly

The alternative title for this post was set to be “Coinbase: Spread ’em!”, but its probably best to tone it down.

Whats Coinbase?

For those in the US, Coinbase is arguably the most convenient and mainstream way to purchase Bitcoin, Ethereum and Litecoin. They link to your bank account and will allow you to buy and sell crypto with the click of a button. They offer relative security in that they have “grade A” investors like the New York Stock Exchange. (This would be in comparison to some non US exchanges owned by…???) I personally use Coinbase and have recommended them to friends.

Coinbase Exchange
Coinbase Exchange Logo

Coinbase is superficially a retail application that routes orders to their exchange, GDAX which offers more advanced functionality.

According to CoinMarketCap, GDAX is the 7th largest crypto exchange by volume.

With the recent price explosion in crypto, CoinBase has had many issues with downtime. Often when markets were at the jumpiest users would see the following screen:

Coinbase Exchange Down
Coinbase Error

This is obviously quite unsettling if you need to sell. Coinbase claims to have been getting slammed with new users claiming to have added 40,000 users in one particular day in May. I think they can be a bit forgiven for underestimating just how fast things would escalate going into June.

Uptime aside, I think its important for users to really understand the price they are paying for this convenience and security.

How [I Speculate] Coinbase Works

Coinbase does not give users the ability to place limit orders – for that you have to use GDAX. Coinbase gives you a live price at which you can buy or sell the crypto of your choice. That price comes from GDAX, and that is where they “source liquidity” (i.e. actually buy or sell). When you buy they then pull money from your bank account or credit card. This opens Coinbase up to two principal points of risk

  1. Price Risk – Coinbase guarantees you a price for a few seconds, during which the actual price could move. Coinbase still has to grant you the quoted price, even though the price may have changed between when they quote you and when you click “Buy”.
  2. “Funding” Risk – Your crypto is not available under Coinbase has received the funds from your bank. However you could probably find ways to cancel the funds transfer and stick Coinbase with the crypto you bought. This leaves them with unwanted inventory and the associated risk. Coinbase caps how much you can buy or sell, and you need special permission for higher levels to greatly mitigate this risk.
Coinbase Order Screen
Coinbase Order Screen

This risk is baked into the price when you receive a quote and pay their fee. It appears in two places:

  1. Transparent Fees: 1.49%-3.99% in the US
  2. Crypto Pricing (Not Very Transparent): They “spread” you, meaning they increase the price over (buying) or under (if selling) where the actual market is trading. For example, the actual mid point price for Bitcoin might be $2,000, but Coinbase will sell you Bitcoin for $2,010. Note that if you use GDAX you can place limit orders and have better control of your price.

I surmise that when markets get really crazy, spreads widen out. Meaning the price Coinbase is quoting you will be father away from where actual market is trading. This is what happens in stock and options trading: market makers widen their bid/ask quotes to reduce their risk.

Here is a real time example using Coinbase on iOS:

Buy 1 Bitcoin:

Coinbase Offer Price: 2284.65

Coinbase Fees: $34.04

Total: $2,318.91

Simultaneous market on GDAX:

GDAX: Bid $2,268 x Ask $2,273

Therefore Coinbase is going to sell me 1 Bitcoin at $2,318.91, then simultaneously buy on GDAX for a worst case $2,273. They clear $45 from the trade or about 2%. For the security and convenience of using Coinbase, I’d argue thats not a terrible price.

Its possible that they also have a matching engine which would pair or match my buy order off against another Coinbase user that is selling. This means that they could fill both of our orders “mid market” (halfway between the GDAX bid/ask) which would be a price of $2,270. That adds a few more dollars of profit for them.

Not a bad business.

The Flash Crash

Last week Ethereum [ETH] prices “Flash Crashed” on the GDAX/Coinbase exchange. Price went from ~$320 to $0.10 and then back to the $300’s in seconds. Heaps of money were made and lost, and Coinbase is sorting it out trying to make it right. Clearly, this was not a good thing. Yet, even “mature” exchange (like the NYSE) can flash crash and have outages. The important thing is that Coinbase is trying to make it right and that in the end will build trust. How did it happen? From Coinbase:

On 21 June 2017 at 12:30pm PT, a multimillion dollar market sell was placed on the GDAX ETH-USD order book. This resulted in orders being filled from $317.81 to $224.48, translating into a book slippage of 29.4%. This slippage started a cascade of approximately 800 stop loss orders and margin funding liquidations, causing ETH to temporarily trade as low as $0.10.

Our initial investigations show no indication of wrongdoing or account takeovers. We understand this event can be frustrating for our customers. Our matching engine operated as intended throughout this event and trading with advanced features like margin always carries inherent risk.

We are continuing to conduct a thorough investigation and will keep customers updated with any resulting actions. With that in mind, it is important to note that these trades are final in accordance with our GDAX Trading Rules (Section 3.1). Honoring properly executed orders is critical to maintaining the integrity of an exchange.

In response to the large price movement we decided to temporarily halt trading of ETH-USD. Once we confirmed all systems were operating correctly, we restored trading in accordance with our Downtime Process(Section 5).

Because there really isn’t a linkage between global crypto exchanges I think the fallout was pretty minimal. Had other exchanges traded more in lockstep with GDAX we may have seen sustained issues from this event.

Conclusion

For US investors and those abroad with access to Coinbase I think they are best of pure from a purely “retail” or buy and hold (HODL) perspective. For active traders or those a bit more technologically inclined GDAX is a better alternative. Gemini is another US exchange which merits mentioning here as a US based competitor to GDAX. These platforms offer better security and a more regulated environment than not US competitors and while that may come at a slight cost, its valuable insurance.

Crypto Prices & Froth

Bitcoin, Ethereum, Crypto: Prices & Froth

What has been happening recently in Bitcoin, Ethereum and the cryptocurrency space has been nothing short of incredible. Prices went parabolic producing once in a lifetime returns (and wealth) for many lucky individuals. I suspect the recent price declines have stripped many of their savings, but you tend to hear less about those guys.

Before I continue: Let me emphasize that what follows is not investment advice. I am completely unqualified to offer investing or trading recommendations. What follows is pure guesswork and speculation. Trade and invest in Bitcoin, Ethereum or any of the other cryptos at your own risk.

Where Have Crypto Prices Been

Ethereum [ETH] which many view as the future of crypto is up several thousand percent this year (and we’re only 6 months into ’17!).

Ethereum Price Rise

Justified? Maybe. Too much too soon? Quite possible. I think incredible things exist and are coming in this crypto, but prices that go parabolic tend to correct.

ETH launched on July 30th, 2015 which was roughly 700 days ago. Below is a chart of Bitcoins [BTC] first 700 days:

Don’t misinterpret this chart as an indication from me that ETH prices will decline, I have no idea.

There are several reasons why this specific comparison may not be valid – I could easily place charts comparing tech stocks in the 2000 or tulip prices in the 1600’s. Prices can often move too far too fast regardless of the validity of the asset itself.

Bitcoin in 2013 was the first major crypto currency and people had to wrap their heads around the entire concept.  Often Mt. Gox gets solely blamed for the 2013 price bubble, but pure speculation was also a participant. Obviously Bitcoin is now trading well above the 2013 peak, just as many tech stocks are at highs today.

Ethereum is a new player to a more understood field and therefore open to faster adoption which could justify the rise. The last several months saw several exchanges come online, many new technology developments and a large jump in media coverage.

There are some signs for caution – much of the Ethereum technology is still in very early development, despite attracting large investment. Bitcoin is wrestling with its blocksize issue which may resolve in the next several weeks (segwit August 1st). There is lot happening very fast and its easy to let hype drive emotion.

Whats Ahead for Bitcoin & Ethereum

Somewhat akin to the theory of Diffusion of Innovation early adopters have come quickly into the space. While money is flooding into cryptos (Just look at the ICO or Initial Coin Offering  market) the doors to huge assets doesn’t appear open yet. Anecdotally, it seems like Venture Capital is just catching on to the hundreds of millions being raised. (Here is a great Tim Ferriss, Nick Szabo podcast). Wall Street still hasn’t come on board if the SEC initial ruling on Bitcoin ETF’s are any indication. The lack of regulation (part of what some say is great about crypto) is a hindrance for government regulated entities. Additionally, for large entities there are massive issues in crypto when it comes to custody of funds and the like. I’d speculate that both sentiment and technology will grow, and open the doors to much larger pools of capital.

What tends to get lost in all of the price speculation is the technological revolution thats arrived. Today, with Bitcoin you can move millions of dollars globally, at an instant, for pennies. In Germany the Ethereum network helps charge up electrical cars and collects payment. Many think this is all leading towards “Web 3.0” which will decentralize the internet making it more efficient.

Regardless of current trading level amazing things are happening. As the innovation continues value will grow, and price will follow.