Thoughts on Crypto Market Mid 2018

While lot of people are focused on the prices however there is much more going on at the moment. Infrastructure is being built, retail spending crypto, first DApps launches, mining arbitrages, regulation uncertainty, lots of talk about institutions or security tokens, and much much more.

“Prediction is very difficult, especially if it’s about the future.”

#1 Nothing major happening in the summer 2018. There are two diverging price drivers for the crypto market (major token/coins):

2017: the price of crypto (and market cap) was derived from a marginal transaction of the latest buy & sell orders. The more people and the faster buys in one direction the higher the price. This says nothing about the price of coins or tokens per se.

Marginal pricing:

2018: the retail is taking more money out of crypto to fiat to finance everyday life. Since the summer is around the corner — the questions are twofold:

Will retail push prices even lower, as the vacation expenses kicks in? Will institutional short & long term capital offset the retail outflows?

2017 was retail FOMO, and funds’ informational asymmetry playing against the retail. And retail playing 24/7 worldwide video game. 2018 is not a search for the value — but a fiat outflow from crypto to fiat for everyday life expenses. So far.

#2 Institutional money is not coming to “save crypto” in the next months; there are multiple pre-conditions for large funds money inflow:

  1. Regulation. The worst what is or can happen is regulatory uncertainty. Imagine your fund is holding Ripple while the XRP is denounced as security. Imagine your hedge fund is full of tokens that may be denounced security. If token = security => delisting => liquidity gone => price crash..
  2. Custody. The first crypto funds were doing custody themselves. Slowly & sure more 3rd party custodians are merging. This will not take months, but years for really huge inflows, however the infrastructure is being built.
  3. Insurance. Imagine you’re managing 200 million in crypto — who is insuring that money? And imagine your insurance policy only covers 30% of it. How would you deal with billions?
  4. The market moves are still dominated mostly by OTC players than institutions as such. There are hardly any data on this one though, the street knows better.
  5. Demand & Supply: Capital Inflows > Capital Outflows.

No, it was not enough. And Market Cap does not equal Capital Inflows.

#3 Large miners are squeezing small miners and their market share is increasing.

  1. This was expected in the downturn, as large players can finance the operation from huge gains and or credit much longer then smaller miners who are limiting or stopped the investments. Basically large miners are arbitraging the small ones, financing the future and both protecting and also going after the market share.
  2. Electricity prices myth: “Bitcoin price cannot go lower then the electricity cost”. It’s a wrong assumption. Yes, they are both reflexive however the price is the driver here. And of the fear and panic strikes — the price will go under the electricity cost and — later the cost will follow the price, not the other way around.

#4 The mid & small projects are losing communities while the price plummets.

  1. It’s much easier to engage the community in the bull market however when the tide turns, many eyes disappear and only the true believers remain.
  2. Sure you can buy a lot of “action” with bounties and free tokens — however if the incentive structure is not built-in and self-sustaining in the long term — your project dies, your treasury is not infinite.
  3. On top, the community attention is scare however the “projects” are continuously popping up to dilute the old communities..

#5 Indexing and blood in the streets.

  1. It’s much safer for the funds to index into the large coins/tokens then into the smaller ones in the top 100. Will be interesting to watch the constant inflows & outflows among both groups. Another tactic is constant and slow buying; averaging out.
  2. Tokens and projects will start to die. They raise, they ship something or don’t ship anything, nobody will use it or the acquisition cost will be unsustainable or simply they run out of money or the token will be useless. Another way to die is being denounced as security or just exchange liquidity dries up and the price collapses.
  3. Interesting will be also watching as some communities push for price appreciation optimisation first versus utility optimisation first (as 0x below). This may suggest a fork in the mid-long term is inevitable.. However the utility token should be optimised for utility first to survive and keep community in the long term.

#6 Security Tokens & STOs will show up on the scene, this is not revolution but evolution.

  1. No idea why lots of people dislike the topic, nobody is claiming this is a revolution or bigger invention than crypto. The liquidity for illiquid assets, fractional ownership and open financial system is a major evolution and benefit.
  2. The infrastructure is being built. The first project are already on the table. Yes, there will be some growing pains, however it looks like — this will be a major asset class. Anything that can be tokenised — will be tokenised. More here.

#7 ICO Valuations.

  1. 99% of coins or tokens are overvalued while 1% or less is undervalued. This suggest still a large hope, information asymmetry, opportunism, direct or indirect scams and borrowed time to ship which will start to disappear.
  2. There are projects which are asking for 2017 type of valuations and already some major crypto VC or hedge funds are starting to pass on. It’s hard to kick off the community if the the lowest valuation they can get in is north of $1 billion. Also — it’s much easier to justify an investment if the upside is 30x-100x from $50–100 million valuation then from $1+ billion.

2018 ICO Sale Models:

#8 ICO topic no one talk about: Indexing the treasury.

This is very interesting topic for few reasons:

  1. For investor to hold a token or coin — the expectation is or should be — the ROI will be better then BTC/ETH or Hodl10 index.
  2. This means the team has two choices: a) they can do it — OK, b) they know they will not be able to either built something, or have working long term profitable acquisition or the coin/token will be useless.
  3. What they could do in the latter is: Index the treasury into the market BTC/ETH, Hodl10, spend 10% yearly maybe and became “a treasury custodian”.
  4. If they return the token/coin holder in 2–5 years more fiat on fiat raised — they should be fine. In the meantime they should probably became a security and not a utility per se.

This has also implications for STO and “indexing treasury” could become a huge play in few years.

#9 Exchanges & ICO contracts

There are tons of tokens having a 3–6 months deals with exchanges to be the their own market makers. This can cost a lot of treasury money while lasts; and also will cost more as liquidity and interest drowns out.

#10 Innovation yes, foreign ICOs no.

I was wondering how the two themes will play out:

  1. The governments do not want to push the innovation from their country to another.
  2. At the same time they do not want their citizens to be scammed by foreign ICOs.

Thus the solution is simple: banning foreign ICOs while keeping the innovation in their own country. In other words: you can scam the world however the world cannot scam us. With a caveat that yes, there are legitimate projects, teams and intentions.

#11 Signalling of early crypto funds & hedge funds strategies.

  1. Hedge funds are increasingly continuing to use major crypto VC and HFs as a signalling tool for filtering our good & bad projects. This will only increase as the volatility in crypto is very attractive for their strategies compared to other market.
  2. Previously all private companies rounds were off the market, now everything will be liquid long before the project realising the full potential. There is much more money to be made trading around Facebook Series B (volatile) versus after Facebook IPO (smooth). Venture Capital funds are not use for this, and hedge funds’ strategies are much better equipped to benefit.
  3. Formation of new enterprises may be en route — technology & trading domain at very core; sort of VC marriage with a active Hedge Fund.

#12 Retail crypto based loans.

There is no bubble without significant leverage. So far this mostly works in OTC markets and for large institutional players (maybe 80:20?). Retail is lacking and the traction is so far very very small. You can look more in to Salt or Nexo, or just google others.

Was thinking a bit about who will be the winner in the space — this is no investment advise of course, idea only — however one solution could be open source protocol matching the fiat provider with coin/token depositor. On top to go 100% outside the current banking the fiat can be provided in a chosen crypto stable coin.

Interesting solution on Dharma protocol:

#13 Shorting

This is similar to crypto based loans and so far only accessible to OTC and hedge funds. The retail has almost zero ability to short at the moment. The precondition for the correct price discovery is existence of both — long & short liquid market. Tool are being built and the ecosystem is developing however won’t be full blown for retail until 2019–2020.

#14 Ethereum is under pressure.

  1. The developer community is amazing and the largest one in crypto and it also has an excellent (dictator type) leader. The benefit is also — that the early community participated financially on the upside of the network, which they were building, much harder for new $1+ billion projects to overcome, there is a real moat.
  2. The problem is the scaling. The first really used DApps on the ethereum network planning launches in Q3 & Q4 and if the network cannot scale within a year — the developers may start to look to join other projects. Developers like to ship.

#15 Searching for the bottom continues from 01/2018..

#16 First DApps’ launches

All eyes, metrics are on Augur during the launch. The main theme will be the gas costs for transitions. Can Augur overcrowd the Ethereum network or how it will deal with the scaling issue itself?

#17 Government or Tech coins en route.

There are already few governments and large tech companies working on their own currency or tokens. More here.

#18 Final though: The major bubble in few years.

  1. During the bubble the space was fuelled by VC money who were financing startups which were using the raised money to advertise (to get eyeballs attention) on platforms like Yahoo and other. Which then was fuelling further price spiral of the tech giants in public markets. Almost no one was thinking about long term acquisition cost return. It was acquisition at any costs basically, no matter if profitable or not. Then it crashed.
  2. It was easy to divest during the bubble. You exited market into stable currencies such as USD or other vehicles. This could be though different in crypto.
  3. If there is a “” like bubble in next 3–5 years, where we “again” believe the “” crypto theme: fiat has no future, old tech companies are done, long live decentralisation, etc.. The question is:

How do you divest yourself — knowing it’s a full blown bubble?

Still searching for the right answer for what will be right asset to divest into during the full blown bubble when (not if) it happens.. Should it even be an asset? If you have any ideas — feel free to reach out!!

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Martin Skakala

Martin Skakala


Life is a video game. Full of laugh & anxiety. Choose your ammo wisely.