On Chain Research
New asset class
Crypto currency, digital assets, tokens and blockchain are a new asset class encompassing a wide range of innovative new technologies.
An analysis of the greater crypto market reveals similarities to previous and existing emerging tech. The initial surge in prices are a function of new money infused into an illiquid market. Never before has digital scarcity existed at a global distributed scale. Because of the way the first generation blockchains like bitcoin were initially created at a time where very little computational power was required, individuals with basic CPU’s could earn bitcoin in quantities which at the time had little monetary value. This of course changed when outside money from investors and speculators flowed in to a limited digital chain of time stamped data blocks. This was this first blockchain, an idea which is revolutionary yet its true power is still only comprehended by a small few.
As time unfolded crypto currencies became more complex. The out of the box functionality of bitcoin is cryptographically secure and semi anonymous store of value.
Generation 2.0 blockchains
Scalability continues to be a roadblock for global scale adoption. Several scaling solutions have been proposed but not implemented to solve these issues. Solutions such as sharding and a proof of stake model are still in the works but while Ethereum drags its feet, other projects have progressed in scalability focusing on enterprise applications and permissioned blockchains. Projects like Cardano (ADA) and EOS are pioneering this charge with live networks already active for development.
Other problems in the crypto ecosystem exist such as lack of live input data to smart contracts. Projects like Chainlink (LINK), Rhombus, and Aeternity (AE) are working on solving the connectivity hurdle by exploring decentralized oracle networks. Once live, these networks will allow enterprise solutions for financial companies to reliably execute contracts based on events that occur in the real world.
The current state of blockchain technology relative to its ultimate potential is still very early. We are now getting to a point where the network is secure but not at speed global e-commerce level. This may change with the advent of bank partnerships which have already been agreed but not officially rolled out for public consumption. IBM’s partnership with Blockstream and Ripple labs (XRP) partnership with over 100 international banks has prompted many to speculate a bright future for distributed ledger technology. We now have several categories of crypto currency which can be separated into groups that each have specific functions.
Money – Bitcoin, Ripple, Litecoin, Dash
Platforms – Ethereum, EOS, Cardano, Stellar, Neo, Lisk, QTUM, ICX
Oracles – Chainlink, Aeternity, Rhombus
Privacy – Monero, Z-Cash, Z-Coin, Dash
Utility tokens – Binance coin, Komodo, Huobi token, Elastos, Ravencoin
These are some examples of sub asset classes within the larger crypto landscape. Time will tell if there is room for one or several ultimate winners within each class that will be widely used and adapted. As for the general crypto market as a whole, cycles are much quicker than traditional asset classes like equities.
Crypto assets operate on a 4 year cycle which coincided with the halving schedule of bitcoins reduction in block rewards. Approximately every 4 years the reward allocated to bitcoin node operators is cut in half on a predictable schedule which is open source code. This creates an ebb and flow of price action as miners invest in equipment infrastructure during times of low crypto currency prices and sell of the mined coins at peak profitability when coins are the most scarce. The increase in price over a long timeline is due to the fact that at some point in the future there will be no bitcoin left to mine. At that point one of two scenarios would play out; either the price of bitcoin becomes large enough where miners are incentivized only by transaction fees (Currently a small fraction of the the actual monetary value compared to the block award) or the network fails due to a decrease in hashpower followed by a 51% attack on the network. A third less likely scenario exists if a change to bitcoins maximum mineable number of 21 million coins is agreed upon by network participants. Currently second layer solutions like Lightening Network exist to allow for instant payments that are conducted off chain and settle on chain. The introduction of Segregated Whiteness allowed for bitcoin, Litecoin and several others to allow for this scaling upgrade. This and similar off chain scaling solutions exist but at the cost of a less decentralized network.
The price action speed and time cycles thus are contained in fractals of this larger 4 year cycle in which many crypto assets are quoted in terms of bitcoin or Satoshi value. Satoshis are fractions of bitcoins that go to the 8th decimal place with 1 Satoshi equaling 1 one hundred millionth of a full bitcoin.
1 Satoshi = 0.00000001 bitcoin
This micropayment level component of bitcoin sets a standard for micro granularity at a payments level. Most crypto currencies are now measured in terms of bitcoin instead of the native fiat currency of the users jurisdiction like Euros or United States dollars. From a value perspective, this gives the chartist another tool to measure if an individual crypto currency project is appreciating or depreciating relative to bitcoin. In this sense, bitcoin acts digital gold standard to price other crypto assets.
From a charting perspective crypto assets should be evaluated in the standard bitcoin as a base pair to minimalize complexity for global active participants. Because of this added layer of price action, for example bitcoin price relative to USD as well as a crypto currency’s price relative to USD and bitcoin we get a quickened peak and trough cycle of prices. This evident when we look at the price of Ethereum to USD as well as Ethereum to bitcoin (BTC). The digital scarcity layer of bitcoin flows out to all other crypto currencies resulting in a more exaggerated price curve. The speeds of these curves can be compared to sine and cosine lines on a graph. The cosine wave moves faster than the sine wave and leads the peaks and troughs. A similar relationship exists between moving averages of different time lengths. For example a 20 day moving average reacts quicker to current fluctuations in price than the longer 50 day moving average wave. The 20 day moving average will often indicate the beginning of a bullish trend when it crosses the 50 day average from below and signals bearishness when it crosses the 50 day average from above.
Sine wave = Total stock market index (Russle 2000)
Cosine wave = bitcoin (BTC)
In addition we see an exaggerated sine and cosine relationship between bitcoin and Ethereum.
Sine wave = bitcoin (BTC)
Cosine wave = Ethereum (ETH)
The Problem of Limited Data
Reliable price data information for the general crypto currency market exists starting from 2009 to present. Compared to traditional assets like stocks and bonds in which there are decades of historic price information puts crypto assets at a disadvantage from a long term evaluation perspective. Part of the reason institutional players and family offices have delayed announcements in large scale crypto investments is lack of a track record. When we compare price action of the crypto market relative to stock prices we get an interesting result. The data suggests that crypto assets actually lead price action in equity prices. The near term low in equity indexes December 21st indexes was proceeded by low in crypto assets on December 14th about 2 weeks earlier. It is the conclusion of our research that crypto market prices are faster than equity indexes and act as a leading indicator. Bitcoin and other crypto projects are perceived as high risk and give us a measuring standard of market risk sentiment. Because of the global nature of bitcoin and crypto assets we now have access to continuous 24/7/365 data that is cross borders and controlled by no single majority party. By analyzing blockchain activity including percentage of bitcoin stored in offline (cold wallets) versus exchange addresses (hot wallets) we can get a picture of the overall liquidity of the market. A combination of illiquidity and inflow of fiat to crypto assets was a primary factor in the 2017 bubble fueled also in part by a now defunct Initial Coin Offering (ICO) boom and bust.
Problems of Centralization
Solitons to the problem of centralized wallets at exchanges has been addressed and has certainly improved since the infamous theft of Mt. Gox exchange in 2013. Many decentralized exchange (DEX) projects have been introduced to to allow users to trade and swap crypto currencies for value against one another while still maintains access to the private keys and ultimate ownership of said coins. Most notably Binance has developed and is in the process of integrating a DEX for its existing crypto currency exchange. While other DEXs exist, Binance is the clear leader in this space.
Open source finance
Analysis and evaluation of blockchains provides a new dimension of predictive modeling to assist in price discovery for broader markets.
Resources and free APIs such as blockchain.info allow us to visualize data from an asset class that did not exist more than a decade ago. To request research compiled by Onchain Ventures send us a message at email@example.com.