Price action in the digital asset space continues to dominate with fear and loathing being the drivers like a bad acid trip to Las Vegas. The initial financial failure of the 1998 film based on Hunter S. Thompson’s novel is a good analogy for the present mood in digital assets. Today, the Terry Gilliam film is a cult classic. The free-spirited dreams of decentralized money clashes with the pump-and-dump reality of hype. This last week was about the demotion of the entire space to being a risky asset rather than a store of value. This is about the doubts of private money being able to replace the US Dollar. This is about new technology find economic limits. The biggest problem for investors isn’t the momentum in the price downtrend, but in the correlation to equities, particularly to the technology sector. The hope of Bitcoin becoming electronic gold has faded with the correlation of BTC to the S&P 500 rising and the correlation to gold falling. 

A new low for Bitcoin in 2018 this week at $3269 from its January $19,862 highs – off another 14% for the week and 84% for the year – leaves the market respecting $4300 as the new key top as it was the last rung of the Fibonacci retracement support along with $3700 the failed hope for a double bottom Thursday.  The bears remain in control with $2800 and $1500 the next targets. Technical oversold conditions are not sufficient to spark a sustainable rally back.  

The reality for crypto winter shifting to spring requires some good news and some price bounces beyond the current resistance to restart the “flywheel up” cycle. Price dynamics in the crypto coin space matters for investors. The hope that blockchain technology and its use will over-time convert investors and gain traction in the real economy still requires capital now. The death of the ICO and the return of the VC to the space is the key for reversing the present fear and loathing mood. 

What Happened?  

• SEC postpones decision on approving Bitcoin ETF. The US Securities and Exchange Commission (SEC) decided to delay, once again, its decision on a request for an Exchange Traded Fund (ETF) for Bitcoin. The request, made by SolidX Partners and asset manager Van Eck had a deadline of December 29 but was pushed back to around February.
• Chinese authorities push back on STOs.  One of the key hopes for 2019 has been that the utility tokens and ICOs of the last 2 years are replaced with security tokens.  Last week, the Chinese authorities pushed back on this idea. On December 1st, at the 2018 Global Wealth Management Forum, Huo Xuewen, director of the Beijing Municipal Bureau of Financial Work, warned that STO activities in Beijing would be seen as illegal. He said: “A new concept called STO is now being widely promoted. I shall warn those involved in promoting and issuing STOs in Beijing: STO is not allowed in Beijing. All STO practitioners should suspend their operations and wait for further government’s guidance. ”

• You Tube is the traffic cop for crypto according to BDCenter report. The report covers the profitability and the business divergence of the crypto exchange space. The distribution of cryptocurrency exchange traffic from social networks is heavily skewed towards YouTube according to a new report by BDCenter. YouTube likely leads the way because of referral links, which incentivize content creators to make convincing videos. YouTube is followed by Twitter and Facebook.

• More coins listing on exchanges– Coinbase explores adding 30 new coins. Gemini enables custody and trading for Bitcoin cash. Gemini will only provide support for the Bitcoin ABC network, which the exchange will refer to as bitcoin cash. The exchange will also be adding replay protection to all bitcoin cash withdrawals to "ensure transactions are only valid on the Bitcoin ABC blockchain."

• Grayscale now holds over 1% of the BTC supply in circulation. Grayscale, the largest cryptocurrency institutional investment firm, now holds over 203,000 BTC in its Bitcoin Investment Trust (GBTC), which represents 1.17% of circulating supply.The GBTC's Assets under Management (AuM) are now $826 million, which marks December the first month the AuM dropped below $1 billion in 2018.

Themes:

Do inflation rates matter to crypto?  

In the fiat world, the rate of inflation usually drives down the value of the currency, though with a lag to present price. In crypto, this relationship isn’t quite the same. Clearly, forks and changes in protocols matter as they are the implicit drivers for increasing money supply. The MV=PC equation is one of the “value” propositions for BTC. The chart from visual capitalist last year on the amount of fiat currency vs. crypto is worth remembering here. Point is that there is less ETH now than silver in the world, with the ratio of crypto market cap at $112 billion to actual global cash $7.6 trillion – down below 1% from nearly 10% at the highs this year. The inflation rate of ETH vs. BTC is worth comparing as well. For ETH in 2017 and 2018 was 14.75% and 7.40% respectively. Projected inflation rates for other crypto currencies at the start of 2019 include; ETH 4.70%, BTC 4.11%, BCH 3.77%, LTC 8.97%, ETC 8.60%, DASH 9.02%, and XMR 6.54%.

Is speed more important than safety?

NEO – the “Chinese Ethereum” suffers last week as it pushes further decentralization. NEO is down 96% to $6 from $168 highs. Some of the cause of the drop was due to the failed bid for Bitorrent network – which Tron rival bought – but some also point to the consensus nodes as block validators plan. The key issue is that moving from the delegated byzantine fault tolerance consensus algorithm to a more public proof-of-work one matters to the market value.  NEO Global Development has announced plans to accelerate network decentralization through a selection process, and is encouraging organizations to get involved by running consensus nodes on NEO. Currently, there are seven consensus nodes live on the NEO mainnet, of which five are managed by the NEO Foundation. The remaining two are run by Dutch telecoms company KPN, and City of Zion, an independent, global group of developers In 2019, NEO will replace four of its own consensus nodes with the nodes of applicants who have passed a screening process and completed a six-month trial on the testnet.  From a technical perspective NEO needs to break over $10 and $14 to get interesting again. The risk of $4 or lower is the bear-trend target.

Question for the Week Ahead: What are the growth drivers for the market?  

After prices crumble in most markets, growth becomes a key factor for investors. Figuring out what drives the price in the crypto currency space – other than hype and momentum – is crucial for the 2019 investor flow hopes to become realized. Here are some observations on what matters now and what might matter later – much of the correlation analysis comes from the binfocharts.com grid.

• Transactions.  The argument for the size of the network of use to drive the price up in crypto – as an alternative private money – continues to be a philosophical principle many expect to pay out, but its not working right now.  The number of transactions in a crypto coin are not a good measure of vale in the major coins – BTC 3M correlation is -0.15%. The exceptions are Dogecoin, which is negatively correlated at -0.65% and Vercoin, which is positively linked at +0.67%. The blockchain ecosystem replacing pars of the present fiat economy argument rests on the rise of correlations in alt coins driving value on their own. 
• Hashrates/Mining/Difficulty.  The supply argument for value in crypto grabs the headlines as the hashrate and mining profitability are right now some of the best indicators for prices in major coins – from BTC at +0.82% to ETH at 0.94% for 3M hashrate to price correlations. Difficulty is similar as a tool for value but it works best when prices are in an uptrend. Of course, there is a logical connection here as money supply in crypto is driven by demand. The more demand, the higher the price, the more supply follows. This makes crypto act a lot like a commodity market – similar to oil drilling, crypto mining is price sensitive. 
• Speed.  The argument that speed matters to the space rests on the longer term view that settlement of currency matters, particularly in small sizes. The block time to value connection is at the present not a good measure for price as the amount of transactions in the space remains modest and value seems to be driven by other factors. BTC is negatively correlated to block time creation. 
• Stakeholders.  The float of a stock matters in trading equities. Whether this works in crypto is yet to be seen. The number of active addresses using a coin is important to some alt-coins but not to BTC or ETH as much. The large players (call them whales) matters much more to the market price particularly for BTC – and for open markets and investors this is a problem as it sets up for insider trading and manipulation of market issues.  

Market Recap:  

Another bad week for crypto currencies extends the winter season. Markets were focused on many stories beyond just Bitcoin last week. 

The pain trade of crypto to cash and gold being the most notable loser, but so too that of  Beyond BTC pain and suffering, ETH is at 80-week lows and off 50% in a month, 92% down from its January highs. The market cap is now $9.4 billion firmly in third place behind BTC and XRP. There are some key changes ahead for ETH including a hard fork as noted by Josh Olszewicz in Bravenewcoin.com: EIP 1234 will reduce the block reward to 2 ETH/blockand delay a difficulty increase, and will be implemented with the Constantinople hard fork. While the update was slated for release on October 30th, problems discovered while testing the changes have pushed back the hard fork to January 2019 at the earliest. Further down the pipeline is Casper, which will drastically alter the ETH network, reducing the inflation rate significantly.  

One of the best indicators for the ETH price track might not be in the fear about forks and mining but about the net flow of borrowing in November to short it. Getting this data real time is clearly an edge in the present trading ecosystem across all coins, not just ETH.