bitcoin in death spiral, or is the bottom near?

Award-winning cryptocurrency writer Gary McFarlane runs through the latest news in crypto land and discusses whether this really is the end for bitcoin.

Bitcoin continues to slide, down 2.7% at $3,870. On a week view the leading cryptocurrency is off 12%, failing to hold the high at $4,407.

Confirmation that Nasdaq, the world's second-largest stock exchange, will be listing bitcoin futures hasn't helped to stabilise matters.

In comments to the UK newspaper the Express, Nasdaq vice president Joseph Christinat said:

"bitcoin Futures will be listed and it should launch in the first half of next year – we're just waiting for the go ahead from the CFTC [Commodity Futures Trading Commission] but there's been enough work put into this to make that academic."

He continued: "We've seen plenty of speculation and rumours about what we might be doing, but no one has thought to come to us and ask if we can confirm it, so, here you go - we're doing this, and it's happening."

Market participants are pegging their hopes on institutional money flooding into the market next year. 

However, with the tech sector hovering around correction territory it means risk-off sentiment could slow developments in that area, given that Silicon Valley investors are a key constituency one would expect to lead the institutional charge; it may be more a trickle than a flood to begin with.

Now that volatility has returned to the bitcoin market, traders are having fun. Shorting the cryptocurrency is proving a profitable game as our chart of a position a trader could have taken on 28 November shows (entry $4,122; target $3,471; stop at $4,557):

Above:  BTCUSD 1-hour chart

Source: TradingView    Past performance is not a guide to future performance

Death spiral?

The Nasdaq bitcoin futures confirmation didn't do anything to endear bitcoin to hyper critic New York University economics professor Nouriel Roubini, aka Dr Doom. 

For him, the deathly stench remains, as a recent tweet confirms:

"If it all sounds funereal it is because Bitcoin and all other crypto-currencies are on the way to a funeral march!"

Another American professor, this time Atulya Sarin of Santa Clara University, weighed in with predictions of crypto's imminent demise, describing it as close to becoming worthless. 

In an article for MarketWatch he sees mining losses delivering the coup de grâce.

"So, it appears bitcoin is now entering a death spiral: If the price continues to drop and the cost of mining does not fall correspondingly (the cost of mining will algorithmically decrease, but not necessarily to same extent as the decline in prices), bitcoin will quickly go to zero."

A sign the floor is in?

But others see miners exiting the system as a necessary development before recovery can take hold.

Mike Kayamori, the chief executive of Quoine, a Japanese fintech company that also owns a crypto exchange, sees miners' cash flow problems as a sign of the much-sought-after bottom for the market.

"If there's enough miners going out of business, that [means] equilibrium is near. When you look at how markets overshoot, both up and down, you can probably say it’s close to the bottom."

The hash rate (a measure of the amount of computing power on the network doing the verification work) has dropped around 30% since its August.

As a result of that, the difficulty adjustment mechanism that recalculates roughly every two weeks, has decreased difficult by 15%. 

The built-in mechanism is doing what it was designed to do and cheapening the cost of mining as the computing power falls, in the same way that it increases the difficulty as more processors comes onto the decentralised network.  

Sarin, although making a nod to this, postulates that the difficulty adjustment will not be enough to make up for the gap between total costs – which includes hardware maintenance such as housing the processors and keeping them cool) and electricity expenditure – and mining reward revenue.

The breakeven price for miners, before the most recent difficulty adjustment, was thought to be around $4,500.

G20 sets sights in crypto in 2019 

The recent G20 meeting hosted by Argentina in Buenos Aires issued a final communique, otherwise known as the "leaders declaration", in which it again mentioned cryptocurrency and the need for international co-ordination of its regulation.

The implementation of internationally agreed regulatory standards in line with the Financial Action Task Force would be an important step towards wider adoption of distributed ledger technology and cryptocurrencies.  

The most professionally operated exchanges already abide those standards, so it is only the less well-resourced and cowboy operations that need to be worried.

Indeed, the crypto industry should welcome initiatives to implement and improve anti-money laundering and anti-terrorism financing regulations. An exception to that would be privacy coins such as Monero and Verge, which may come in for special attention from the financial authorities, perhaps banning them from trading on exchanges in the authorities' yet-to-be-formulated new regulatory framework.

The G20 communique doesn't really add anything new. The statement in paragraph 26 of the communique talks about "the impacts of the digitalization of the economy on the international tax system", which has been interpreted by some as a call to tax cross-border transactions when in fact it is more likely a reference to finding solutions to global technology corporations declaring their profits in low-tax jurisdictions.

The industry will be pleased that the G20 is maintaining a balance between protecting investors and consumers on the one hand and fostering innovation on the other, but we’ll have to wait to see what that means concretely.

Crypto-friendly outliers such as Malta, Singapore or even Belarus may find that their attempted positioning of themselves as the go-to global hubs for crypto start-ups may be in jeopardy, especially if their legal frameworks turn out to be out of step with whatever the G20 brings forward. Malta in particular, as a member of the European Union, could find its carefully laid plans up-ended.

Also, there may be a move internationally to regulate initial coin offerings and that could hurt places like Singapore, which has become a hotspot for token sales. It could also lead to security token offerings displacing ICOs, although that has the downside that it could prevent smaller projects from coming to market if they have to abide by the same stringent rules that apply to equity markets.

Continuing in that vein, an accredited investor regime could, by definition, cut out the less well-endowed private investor in the same way that it is near-impossible for the regular Joe or Jill to invest in small early-stage private companies. Access to small privately held companies remain the preserve of private equity and venture capital firms, with the only route in for retail investors being through investing in unit trusts and investment companies.

Crypto exchanges are likely to come in for special attention from the authorities, with licensing regimes that stipulate much stronger levels of market surveillance and client fund custody arrangements.

A report in the Japanese media said that G20 leaders were presented with a paper calling for "a taxation system for cross-border electronic payment services", but this hasn't been confirmed by any of the governments.

Japan's National Tax Agency said this week that it would be setting up a system in the new tax year (beginning 1 April 2019) to hunt down crypto investors that haven't paid their taxes. 

Additionally, the country’s Financial Services Agency made the crypto industry self-regulatory earlier this year and is the only G20 country that has a functioning licensing system for crypto exchanges. The country recognised bitcoin as legal tender in April 2017.

Japan will be the host of the G20 when it next meets in Osaka in June 2019 and may take a speedier and more proactive approach to bringing regulation of crypto to the table.

Crypto market participants' Tether denial

Bloomberg today reports on the trials and tribulations of Turkish citizen Oguz Serdar, who started using bitcoin to pay contractors who worked for him after the country banned PayPal from operating there in May 2016. 

Soon thereafter he began trading bitcoin on his own account. When he thought the price was due for a fall he changed his bitcoin into the "stablecoin" Tether (USDT) to avoid losses, which is the main way in which the dollar-collateralised crypto is used. 

However, there are persistent doubts as to whether tether really is backed 1-to1 by US dollars, as the eponymous company claims.

When Serdar tried to change his $1 million worth of USDT into US dollars he received the following from Tether, according to Bloomberg:

"Due to ongoing banking difficulties we are only able to process requests for verified corporate customers."

Serdar has since reported his alleged difficulties with Tether to the US Treasury Department and Justice Department but hasn't heard back as yet.

Tether is connected to sister company Bitfinex, a popular crypto exchange. 

Spokesperson for Tether and Bitfinex, Ronn Torossian, responding to Serdar's allegations, told Bloomberg that he "doesn't have any money with us and he never did".

He added:

"The customer in question was flagged as suspicious because of numerous irregularities. If this customer wishes to complete our KYC [know-your-customer] process properly, we may review this matter further. Until that time, this individual will not be permitted to do business with us."

So, Serdar never had any money with Tether/Bitfinex but the "customer was flagged as suspicious", which implies he did have some sort of relationship with Tether and Bitfinex. Something doesn’t quite add up.

Serdar said his experiences show the dangers that tether represents: "It's the elephant in the room, but a lot of people don't want to talk about it because they're invested in it."

Tether also stands accused of using Bitfinex to release unbacked USDT into the market, thereby artificially propping up the price of bitcoin, but has denied the allegations and hired lawyers, threatening to go after "bad actors".

But the lack of transparency of Bitfinex and Tether and the companies' refusal to subject their books to a full audit only adds to the suspicions.

On 2 December Bitfinex published a report in which it said it would no longer be offering its services to US customers due to excessive expenses incurred in so doing. US bank Wells Fargo had been providing correspondent banking services to Bitfinex but withdrew from the arrangement earlier this year. Bitfinex and Tether sued the bank but then dropped the case.

It is still not known for certain which financial institutions provide banking services to Bitfinex/Tether, although the latest documents to emerge online claim a Polish bank called Bank Spoldzielczy may be the latest banking partner. The Polish bank has refused to comment.

On 1 November Tether said in a statement that it had $1.8 billion held at Bahamas-based Deltec Bank & Trust Ltd, but this was never confirmed by the bank. 

And in October Noble Bank of Puerto Rico, known to have opened accounts for Bitfinex/Tether in the past, was said to have been seeking a buyer for the struggling business, according to a Bloomberg report at the time.

Roger Ver is still a believer

Roger Ver on was asked Bloomberg if the floor was in for bitcoin, to which he answered "no one knows". The Bitcoin Cash (BCH) supporter remains bullish, not surprisingly, on the sector:

"I'm a fundamentals investor… There's more awareness, there's more adoption, and there's more stuff happening all over the world. So, of course, I'm incredibly bullish on the entire crypto-coin ecosystem."

Bitcoin Cash has been one of the heaviest fallers in the space following the hard fork which led to the creation of the forked Bitcoin SV (BSV). BCH is down 11% in the past 24 hours to $136, with BSV also declining but by a little less for a 5% loss to $87, as the latter continues to close the price differential between the rival chains.

Ethereum Classic development team give up

Among the other altcoins, Ethereum Classic is in trouble if the news from one of its top development teams – ETCDEV – is anything to go by. ETCDEV's founder and chief technical officer, Igor Artamonov said in a statement that they were stopping all development work on the coin.

"It is with great regret that I communicate the shutdown of ETCDEV current activities related to Ethereum Classic, effective immediately.

"As is publicly known we have struggled with funding our operation in the last few weeks. This was partially due to the market crash, combined with a cash crunch in the company.

"We appealed to investors in the ecosystem as well as external to it. We also did the community fund, but in none of these cases were we successful in securing short-term financing."

The coin is down 10% today at $47.

Ethereum Classic is the original Ethereum chain. Ethereum had to implement a hard fork (a software upgrade that is not backwardly compatible) after the hacking of the DAO contract back in 2016. Those who didn’t want to update the protocol stayed on the old chain and adopted the name Ethereum Classic.

Big news on blockchain adoption by fund industry

Calastone, one of the leading global fund transaction networks, is shifting 1,700 financial organisations across 40 global markets onto blockchain, with the aim of reducing costs for fund management firms.

Julien Hammerson, Calastone's chief executive, in a statement on the company website said: "The launch of our DMI marks an exciting step for the industry in accelerating the digitisation of the funds sector and is a significant achievement for Calastone. 

"The migration of our global network is the culmination of years of hard work and continued investment in innovation."

"Funds remain a vital investment vehicle, though remain hampered by continually rising costs and threat of competition, ultimately rendering the current system economically and operationally unsustainable. Through leveraging blockchain technology, the DMI transforms the way in which funds are traded, enabling an investment management community that can meet the changing needs of investors." 

Hopefully, the cost reductions will be passed on to the end user: fund investors. The company told the Financial Times that it was too soon to say whether its charging structure would change and it was up to fund managers to pass on any savings.

Calastone estimates that its innovative technology can save the global fund industry (excluding the US mutual fund industry) $3.4 billion annually.