2018 in Crypto  — 11 Predictions

The exchange space is evolving rapidly — with many new entrants post-China shut down repainting the space. The emergence and quick dominance of Binance, the reboot of many former mainland platforms, as well as proliferation of exchanges in Japan and in Korea Appearance of many smaller/regional players with other raw tech will lead to more exchanges being compromised, and more used funds at risk. Some are building from scratch. Some are buying off the shelf. Strong security/tech/blockchain talent is impossible to find. Many will come under attack, and there a good chance one major exchange will fall due to lax operational standards and risk management infrastructure.

In the US, there are really only three retail on-ramps into crypto. Coinbase, Gemini, and Kraken. Because the space has grown so quickly and the State-By-State MTL moat is so wide, it will take significant time for other players to emerge and get plugged into the US banking infrastructure. This has been exacerbated by the effective departure of Bitfinex from the US market. There’s hope that Bittrex will get to fiat, but no other good solutions are in sight. What we see forming in the US is an organic natural monopoly, where a decentralized garden is supposed to flourish. Even the dream of decentralized exchanges presupposes that these “moneycenter” exchanged exist.

It’s going to be an interesting year for exchanges.

Futures were easy…. Because they are cash settled instrument that are fundamentally divorced form the underlying BTC liquidity. With the scramble to get bitcoin futures up and running that we saw towards the end of 2017, it is a given that more and more such products will emerge. We previously commented on why bitcoin futures are essential. First and foremost, they represent a movement to cater towards more traditional investors, and we are confident that we will see many more products catering towards a more sophisticated trading audience in 2018.

ETFs are hard because they have to won the coin. They take a leap of imagination from regulators. They take an orderly market with manageable volatility. The high absolute BTC price might do the trick. Here’s to them taking a leap in 2018.

Easy come easy go. Lots of people sitting on massive paper gains for shallow and illiquid coins. Many of those coins trade on small exchanges, with limited capacities. When a big dip comes and sellers don’t see buyers, are unable to sell in size, and look for any exit opportunities, we will see a massive rerating of the alts space. While there’s talk of relative value in Tier 1 coins, few will step in when the sector truly goes red. It take a certain type of chutzpah to buy something that’s down 85%. Nerves of steel. Stay calm and carry on.

5. Crowd sales and orderly markets will be the regulatory focus

While the Munchee decision drew several bright lines, it left many questions unanswered. The Chairman’s statement, a new method of regulation, is being digested by the leading law firms and the path forward remains unclear. The enforcement posture is changing. The Crypto Bar is expecting more clarity and more engagement in Q1. While it has been quiet on the cryptocurrency trading side, one or more regulator will put a stake in the ground. Market manipulation, in all its forms — pump and dump attempts, insider trading, front running and other ways of impeding an orderly market. Crypto is the first truly global market — it will be interesting what regulator coalitions emerge to address it.

The lack of traditional service providers (order management systems, reconciliation software, custodians, etc.) has kept many institutions and fiduciaries out of cryptocurrencies. The emergence of sound technical solutions in this category will mean a considerable operational risk gap will be filled, leveling the playing field for many fund managers. Many of the service providers that have emerged in 2017 will have built up a sufficient track record to prove attractive for institutional players.

In the past year, it was not uncommon for a fund manager that bought and held to promote their extraordinary returns as alpha. It is, of course, apparent that these returns had more to do with market dynamics rather than individual skills. This trend will change in the next year as markets continue to mature and gain efficiency. The skill and edge of a fund manager will become more evident as good managers will show higher returns than lucky managers.
8. We will see bouts of hyper-volatility because of futures expirations, options expirations, and ETF rebalancing.

As these new financial products become more popular, their effect on market trends will be more pronounced. Even traditional equity markets experience high levels of volatility a few times a year because of these scheduled events. This type of volatility will be an order of magnitude larger in the cryptocurrency world when futures and other derivatives expire or need to be rebalanced.
9. We will see at least one traditional financial brokerage firm lose money and go out of business because of mismanagement with a derivatives product.

Despite there being a listed derivative with futures (and possibly ETFs), the truth of the matter is that trading and hedging with the underlying asset is still an operationally tricky test. One bad trade or one bad line of code within a company that isn’t a cryptocurrency trading expert can and will do irrevocable harm to the bottom line.

10. Sentiment, Momentum and Insider posture — psychology owns this market.

There’s been quite of a bit of mob mentality driving the marketplace as the retail trader can feel empowered making public market calls on social media. That platform to voice an opinion coupled with some good luck has made the average investor feel invincible, so much that they do not listen to what insiders are saying or doing. As evidenced by the correction that happened in December, paying attention to insiders matters. More than likely they know more than the average person, no matter the numbers the latter may have.

At some point, lots of people will try to take real fiat dollars off exchanges.. and see the massive weak link. Getting dollars out of an exchange entirely depends on their banking providers continuing to play along. Most exchanges have a 100K / month withdrawal limit for their high verification tiers… hard to “go to cash” and “fly to safety” — and Tether won’t help. What if there’s a pause… the way Bitfinex paused this year, but recovered. What if all those gains in crypto, on exchange, in cold wallets, all of it… starts having a hard time getting to USD?

It’s a young, global, stormy, 24/7 capital market. 2018 will be its year.

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