Crypto: The Good the Bad and the Ugly


(Editors note — This first appeared in John Lothian News)

The price action of most crypto-assets over the past year and, in particular, the last quarter, has been downright ugly, and a great many ICOs launched earlier have been exposed as either frauds or very bad investments.   The good, however, has come in the form of significant talent migrating into the space, with many worthwhile projects building critical infrastructure that will required for the market to grow and thrive.  That is important, considering the potential for the asset class.


You see, I believe that digital assets including crypto currency, security tokens and use tokens promise to disrupt most traditional financial markets and create the next leap forward in global productivity.  The rationale behind this hypothesis is that crypto assets permit, for the first time, global cooperation & remuneration without the need for expensive middlemen or government sponsored institutions.  Cryptographic assets will become a true force for globalization, that will eventually break the stranglehold that large money-center banks have on cross border businesses.  While it may take 20+ years to come to fruition, my belief is that most assets will eventually be traded in a digital form, using the inherent multi-currency foundation of crypto market structure.  (for an excellent explanation of why, look no further than this essay by the excellent Multicoin Capital blog or this note in TabbForum from Cryptology)  I further believe that crypto-assets, which provide an efficient method to pay for work across national borders in the “gig” economy and can directly be used to incentivize contributions to open source projects globally, will fuel a global economic expansion.  Put simply, a major increase in global human cooperation could usher in a new era.  (For some excellent background on the power of cooperation and the history of money, read this essay by Nick Szabo on the origins of money)


Considering all of this, we should not be surprised that many of the financial elite, who profit from the current financial system, are using the recent short-term price action in Bitcoin to make “death” pronouncements on the viability of digital assets.  These people claim that Bitcoin’s jump to over $17,500 a year ago[1] is “proof” that it was like the tulip bubble, and its subsequent fall to near $3000 is presumed to prove them correct.  I expect to read claims soon that the small rally to near $4000 is just a “dead cat bounce” on the way to zero …


The reality, however, is that short term price action in Bitcoin proves nothing.  As I have pointed out repeatedly, Bitcoin is fundamentally an OPTION on its long-term viability as a non-sovereign store of value, meaning it COULD fall to zero or go up substantially.   (To quantify that, the market cap of gold, the current, non-sovereign store of value, has a market cap of roughly $7 trillion or 100 times the market cap of Bitcoin.)  Since Bitcoin is traded by a vast cadre of technologists that are uninformed on how modern markets operate, its volatility is magnified even more.  Case in point is the reliance on OTC markets that lack price discovery, exacerbate price volatility when handled poorly, and often result in no trading due to the many parties to some of these transactions.


That said, there is no question in my mind that last year the price got way ahead of itself and there were many bad actors in the space.  Most of the Initial Coin Offerings (ICOs) were either outright fraudulent or provided investors with very little value.  The premiums paid to get such coins “listed” on popular exchanges, meanwhile, while the projects they represented were still in their infancy, is pretty solid evidence of a problem.  After all, when the justification for buying a coin is immediate liquidity, where initial buyers can “flip” the coin to ignorant retail investors on an exchange, the entire market somewhat resembles a series of Ponzi schemes.  This is particularly true when the asset is so new that there is little to no real information about it.  Even worse, many groups selling these assets had few controls on the information they disseminated and, in many cases, hired paid promoters to increase the price of the coin.  Add to this, the well documented operation of large scale “pump and dump” schemes, and you have a “market” where the average retail investor was being fleeced.  This is the situation which the SEC reacted to, but it is worth noting that they have limited tools at their disposal.  They can (and are) cracking down on ICOs offered to US investors, but they have little jurisdiction outside the US or over Bitcoin and other utility tokens, despite their concerns over the market structure in which they are traded.


While the SEC are essentially powerless to regulate the market structure of Bitcoin directly, they see 2 large flaws in the markets that retail investors use to trade it.  First, they see no authoritative, industry standard pricing source that consolidates available liquidity for efficient price discovery and second, they see limited surveillance vs manipulation on the markets (“exchanges”).  This, in my opinion, explains why they are using the only leverage they have over the industry, namely their ability to approve a Bitcoin ETF.


Without understanding this backdrop, it is hard to fathom the SEC’s continued rejection of Bitcoin ETFs.  After all, compared to gold, silver or oil, Bitcoin is relatively transparent, with multiple regulated markets available for investors to trade upon.  (After all, it’s not like retail investors can buy barrels of crude oil or gold bars from a single transparent market).  Like those ETF, however, there are regulated futures contracts on Bitcoin.  The result of this conundrum is frustration on the part of the ETF industry and impatience in the crypto-community.


All of this taken together explains our mission at CoinRoutes to create a neutral, third party aggregator of data and liquidity, while enabling investors to trade efficiently.  As far as the Bitcoin ETF is concerned, we believe that industry acceptance of a realtime pricing service such as CoinRoutes RealPrice for Best Execution measurement, and ubiquitous use of consolidated data for valuation (such as we provide) could ameliorate many of the SEC’s concerns, particularly over price discovery and knowledge of liquidity.  Unfortunately, so far, the best idea the ETF industry has put forward is pricing from OTC market makers whose own books creates conflicts of interest vis a vis fair and transparent pricing…   (To understand this, ask a central risk manager if they blindly accept traders position marks to value positions when there is available 3rd party pricing.) In addition, if smart order routers, such as we offer, became ubiquitous, it would make spoofing on order books a losing proposition.  That software enables traders to quickly and easily trade against quotes placed on order books, even if they are many price levels removed from the best bid or offer.


In conclusion, digital assets present incredible long-term investment opportunities, but there is still hype, misinformation, & outright ignorance of market dynamics that needs to be corrected. Stories that breathlessly quote senior financial executives crowing over the fall in prices do no more good for long-term investors than stories about Bitcoin going to the “moon”.  Investors, of course, should do their own research and fully understand why they are investing in any digital asset.  As for the question of how to invest, that is where that we operate. Helping the digital asset market mature is our focus at CoinRoutes, by providing better consolidated data and trading tools to navigate the specific market microstructure for trading crypto assets.  This is equally true whether Bitcoin trades at $3000 or over $20,000.  In the long run, Bitcoin might fade away, but digital assets are not going anywhere.





[1] While many foolish traders paid over $20,000 for Bitcoin last December, according to CoinRoutes data, at no time was the lowest offer in Bitcoin ever higher than the mid $17000s.

Leave a Reply