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Word on the Street: Crypto and Wall St sell-off, correlation or causation?

Prices on Wall St and crypto moved almost in tandem again this week when both suffered their worst 24-hour performance for months. The S&P index and BTC/USD were both shaved of over 5% between late Wednesday and Thursday and still no sign of bitcoin behaving like 'digital gold'.

For the drop in US equities the explanation given was the tightening of interest rates, with President Trump accusing the decision-makers at the Federal Reserve of going "loco". However, an explanation for the crypto market, which dropped ~7% in market cap, is not so immediate. Are we looking at correlation or causation or completely unrelated?

btc spx 5dBTC/USD (green line) and S&P 500 (red line) both down ~5% over the past 5 days.

Due to the technical analysis heavy influence on the crypto market, the conclusion of the major consolidation patterns in BTC and ETH over the past year may have had more to do with the crypto-wide sell-off as it looks like short-term support for ETH in particular has been broken.

ethusdSupport since the last ETH/USD major sell-off in September was broken on Thursday

As yet, bitcoin is not reflecting anything like the traits of "digital gold" many hope it to be.
Gold reversed its downward trend this year with a sharp rise over the past two days due to the flight to a safe haven from stocks.

gld btcBTC/USD and gold (red line) have shown a sharp divergence since the stock/crypto rout began

Economist Nouriel Roubini rips into crypto in Senate testimony (mid impact)

The lauded economist famed for foretelling the coming of a crisis before the GFC in 2008 brought his vehemence against cryptocurrencies to a new level in a Senate hearing, calling them "the mother of all scams" in a Senate Committee meeting titled ‘Exploring the Cryptocurrency and Blockchain Ecosystem’.

Among his somewhat flawed criticisms:

  • Crypto is not scalable, not decentralized and not secure
  • Crypto is not the internet, nor will it be
  • Cryptocurrencies have no intrinsic value, whereas fiat currencies certainly do, because they can be used to pay taxes
  • Bitcoin’s deflationary supply is its Achille’s Heel
  • Biggest scam of all is the case of "stable coins"
  • Crypto-currencies instead have not and will never have the tools to pursue economic and financial stability, like a central bank
  • No lender of last resort like central bank or IMF
  • The real revolution in finance is FinTech, nothing to do with Blockchain or Crypto
  • PoW mining is a cartelized oligopoly and PoS mining will be even worse
  • SEC considers ETH and XRP securities
  • Massive manipulation: pump n dump, spoofing, wash trading, front running
  • Crypto mining "an environmental disaster"

Among the many anecdotes in the 37-page screed, Roubini cited the December ’17 all-time high scenario of "$55 dollars of transaction costs to buy a $2 coffee cup is obviously never going to lead Bitcoin to become a transaction currency," without conceding that the average transaction fee is now ~40c. Nor did he balance it with the $6.2 billion class action settlement that Visa and Mastercard reached last month with retailers over unfair swiping fees.

He does make the valid point that due to bitcoin’s deflationary supply it will not be used, and most likely cannot be used, to pay wages or replace fiat as it would imply the cost of goods going perpetually down and wages going forever upwards. And it’s hard to argue against security at exchanges and crypto infrastructure in general being comparatively stone age.

His accusation that Ethereum was created as a ponzi "inside job" whose creators made and continue to hold billions of dollars worth of ETH caused Vitalik Buterin to post a snapshot of his Etherwallet contents – showing a value of ~$70m. Whether or not the Italian economist’s vitriol has had any effect on crypto prices it has certainly stirred emotions. The Twitter storm continues…

Losses from hacks hit almost $1b this year, report _(low impact) _

According to a study by CipherTrace, an AML and cyber security company, theft of cryptocurrencies through exchanges and other platforms soared to $927 million in the first nine months of 2018, up 250% from 2017.

"The regulators are still a couple of years behind because there are only a few countries that have really applied strong anti-money laundering laws," Dave Jevans, chief executive officer of CipherTrace, told Reuters in an interview.

The company also inferred from its data that the world’s top crypto exchanges are in countries with weak AML regulations and that $2.5b of BTC was laundered through these exchanges since 2009. The study covered the top 20 exchanges but CipherTrace didn’t reveal the names of the exchanges it suspects of laundering.

Ivy League university funds buy into market (low impact)

Yale University, the US’ best performing and one of the biggest university endowment funds over the past 30 years has invested in the cryptocurrency market having helped raise $400m for a new crypto fund.

The fund, called Paradigm, was recently started by Coinbase co-founder Fred Ehrsam, former Sequoia Capital partner Matt Huang, and Charles Noyes, an ex-employee of crypto fund Pantera Capital. Yale is also a long-time investor in technology venture capital firm Andreesen Horowitz, which has set up its own crypto fund.

Other universities funds at Harvard University, Stanford University, Massachusetts Institute of Technology (MIT), University of North Carolina, and Dartmouth College have also started investing in the industry.

Liquid sidechain goes live (low impact)

Some good news this week, Blockstream, the company founded by Bitcoin Core developers to advance the technology has launched its first sidechain product, Liquid.

Sidechains have the promise of carrying a large amount of bitcoin’s transactions and could go towards solving some of its scaling issues. However, rather than this sidechain being a retail solution, it is aimed towards companies, mainly crypto exchanges, that transact large volumes of BTC daily.

Among the companies in the "federated sidechain" are: Bitfinex, BitMEX, Bitso, Coinone, OKCoin, Xapo, XBTO and Zaif.

Those participating in the network will need specific Liquid wallets and exchange their BTC for LBTC (liquid BTC) to transact. The sidechain could go some way to reducing load on the network.

Chinese BTC miners mine more empty blocks, report (low impact)

A yet to be peer-reviewed study of Chinese influence over the bitcoin network has suggested that Chinese miners mine a disproportionate amount of empty blocks over non-Chinese counterparts: 7% compared to 2%.

This practice is entirely useless for the network apart from the miners themselves who get the same block reward and climb up the mining queue to mine the next blocks. Although largely speculative, the report hypothesizes on the danger of the close tie between miners and the Chinese government and the potential political agenda in the bitcoin network.


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