Predictions 2019: 3 potential triggers for the next Bitcoin bull run

For the crypto market to start tracking bullish again, some overarching signal is required. Something that reaffirms the qualities of Bitcoin and others to become disruptive assets within financial markets, to access new liquidity from wider sources and to cement their position as ‘must have’ elements in investment portfolios. Of all the potential catalysts floating close to the surface, the general consensus is that the following three are the most likely candidates.

1. The rollout of a security token ecosystem

One way to consider the potential of security tokens, tokenized securities, and security token offerings, is to assess their precursors, utility tokens and ICOs.

The economics of utility tokens, which most ICOs and ERC-20s are built using, work as platform customer incentive/reward models. They are absolutely not purchases of equity in the underlying project they are attached to. If they were, this would make them unregistered securities – exposing them to regulatory risk and the securities laws of multiple jurisdictions.

That said, utility tokens have generally been treated like equity in their attached projects, with token holders seemingly assuming that project profits will eventually feed back to them like dividends. This misconception has been compounded by trading on secondary markets, which exaggerates price movements.

One consequence of utility tokens being traded speculatively and not being used for the intended purpose of project interactions is that the customer usage/reward mechanism doesn’t work as designed. If the price of a token falls because of speculative assessments made in secondary trading markets – then in real terms, the user’s stake isn’t worth as much. A number of utility tokens have been exposed for this glaring flaw in their value structure. This has culminated in sharp value declines that have fed back into the wider crypto market — where falling demand for tokens like ETH and BTC as ‘lakes of liquidity’ to access ICO projects has affected their short term appeal and value.

This is why security tokens have the potential to be ‘game changers’, essentially becoming the ‘ICO’ model and utility token evolution, that in reality, the market always intended to interact with.

The exciting prospect of participating in the blockchain tech revolution galvanized investors in 2017 and early 2018. Compliant security token models will allow institutional (and potentially retail) investors to participate in legally robust decentralized automated ownership models that provide similar rights to shares. At the same time, crypto projects issuing them can do so without having to justify their ‘utility’ by shoe-horning a blockchain use case into the mix.

While blockchain equity tokenization could conceivably reignite the lagging ICO investment space, it has the potential to go farther —as a viable alternative to IPO or venture capital funding — maintaining the advantages of accessible liquidity and blockchain payment verification of the ICO model, with added legal compliance and transparency.

What has to happen first?

Platforms like tZERO, Securitize and Polymath are all building frameworks for tokenizing equity, and have already begun laying the groundwork for issuing the first wave of security tokens, attached to Decentralized Autonomous Organizations (DAOs).

While the initial focus of the community and wider media has been on blockchain startups. the vast potential for security token issuance should not be underestimated, as almost any illiquid asset can be digitized. Real estate, works of art, and intellectual property are just a few examples. Tokenized securities will provide new viable channels of liquidity for these assets, secured through blockchain payments, that have been previously unavailable.

However, this form of security token appears more likely to be a ‘second wave’ innovation — in part because of the legal complexities involved, but also because the wider investment community needs to see some successful rollouts and precedents set.

If markets are seeking an immediate spark to reignite investment demand and short term crypto liquidity, security tokens attached to the type of ‘blockchain centric’ projects that emerged in 2017 and 2018 will be the most likely drivers.

The potential of a security token bull trigger is clear, the model is stronger fundamentally and legally with greater transparency and investor rights than were offered with the first wave of utility token ICOs. Investors therefore, should be much more unequivocal about investing in security token offerings when their issuance begins to ramp up in 2019.

2. BAKKT and the emergence of new institutional futures markets

News that the launch of the ICE futures platform has been delayed until at least Jan 24th, 2019 is disappointing, but nonetheless, it is widely anticipated that the roll-out of BAKKT Bitcoin (USD) Daily Futures Contracts will be a catalyst for major cash inflows to crypto.

Being a part of the ICE platform means the New York Stock Exchange will also be able to list the BAKKT contracts, giving the new Bitcoin investment vehicle excellent visibility and liquidity opportunities.

Beyond the NYSE support, the BAKKT project has also generated anticipation thanks to the backing of corporate entities Microsoft and Starbucks. Beyond name value and brand recognition, however, why should a new futures contract option excite the market? Is it more than just another way to buy bitcoin (or short it)?

Futures contracts are particularly appealing to banks and other institutions looking to invest in volatile assets, as it enables them to put a check on potential fluctuations. Bitcoin’s reputation for erratic price movements, with sharp peaks and deep troughs makes it a prime candidate for this style of product.

A futures contract lets a speculator make a bet on what the price of BTC will be at some later date, locking this price in as what they will have to pay for settlement. This means even if the price falls or rises above the fixed range, the investor is protected as they only have to settle on the locked price.

As well as having the appeal of attracting prudent investors, futures markets have other advantages over the traditional crypto spot exchange offering. Price is regulated based on new incoming information, meaning it is far less random versus exchange pricing, with new information from markets being fed back into the price of the contracts, making it more ‘fair’ and ‘aggregated’ than spot prices.

Bitcoin futures investors also don’t face hacking risk or infrastructure hassles because of the cash settlement options which adds to the robust nature of the platforms they are hosted on. This additionally makes the withdrawal and deposit process much more straightforward.

The BAKKT contract fundamentally differs from existing institutional focused futures provided by the CME and CBOE platforms, because first, the product is physically settled. Meaning traders receive actual Bitcoin at the end of their contracts following initial payment with dollars. This means new Bitcoin is purchased by BAKKT with each new speculative contract agreement — in contrast with CME and CBOE futures where all bets on price movement have final settlement in US dollars.

Second, the BAKKT contracts do not support margin and leverage trading — presumedly a decision made to improve market integrity, price reporting and formation of BAKKT BTC prices. Again, this is in contrast to the riskier, leveraged BTC future options available on platforms like Bitmex, CME and CBOE.

Overall, the BAKKT product appears to be a sustainable, accessible and safe way to access Bitcoin for skeptical institutional investors — and as the futures are physically settled, BAKKT will contribute to activity on the network beyond just price speculation.

3. SEC approval of a Bitcoin ETF

At a purely market play level, the potential price impact of an ETF approval by the SEC is large, simply because of how unprecedented it would be. Every Bitcoin ETF application to date has been rejected by the SEC, including a submission by crypto and investing powerhouses the Winklevoss twins.

An Exchange Traded Fund (ETF) represents assets of inherent value as ‘shares’ which can be traded on an exchange. These shares are typically traded on mainstream exchanges such as the NYSE or the CBOE and as a derivative of the underlying asset, they allow the purchaser to make trades based on their assessment of potential price fluctuations of the asset.

For an asset like Bitcoin, the advantage of an ETF is that Bitcoin becomes accessible on major international exchanges — making it easier to integrate with 401ks, pension funds and similar portfolio investment options.

Thus, a Bitcoin ETF has consistently been portrayed as the ‘gateway to institutional money’. With an ETF, investors would be relieved of the hassle of shifting BTC between addresses, memorizing long private keys, or having to consider unpredictable transaction costs and times when making deposits or withdrawals.

Additionally, unlike the BTC futures markets launched on CME and CBOE, ETFs are backed by and represent actual Bitcoin. More volume on BTC ETF markets, means more physical Bitcoin being bought and changing hands with each ETF purchase. There is also no inverse/short option, meaning Bitcoin ETF buyers only want the price to go one way — up.

Applications currently being processed by Direxion, Proshares, and the apparent favourite for final approval, VanEck-SolidX, have all been declined at some stage and are currently going through an appeal evaluation.

Unfortunately for any ETF application, the SEC’s primary reason for denial — market manipulation — continues to be difficult to refute and until this primary concern is addressed, an ETF approval remains a long shot.

An additional consideration is how the launch of the regulated BAKKT markets may support an ETF proposal, given the likely increase in liquidity and the extensive infrastructure that will be deployed. Because of the futures market’s potential to mechanize stable Bitcoin price development and reporting, it may provide a natural solution for some of the flaws in the existing ETF applications. Other factors that may add weight to an ETF applicant’s proposal include the development of improved custody and storage solutions, in the vein of Coinbase Custody, which improve crypto’s security profile.

It remains to be seen, however, how the delay of the BAKKT launch until January 2019 will affect the current SEC review, which is due to be completed on December the 29th.

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