Crypto Market Analysis — Hacks, tax, and forks the biggest drivers of Q1

The first quarter of 2018 was marked with continued protocol layer innovations, with heavy declines in prices across the board. Emerging and recurrent themes included transaction fees, microtransactions, increased fiat on-ramps, and regulatory changes. The Commodity Futures Trading Commission (CFTC) and Securities and Exchange Commission (SEC) in the U.S., as well as Japan’s Financial Services Agency (FSA), made sweeping announcements or changes to the cryptocurrency milieu.

In case you missed it: The Biggest Stories of Q1

Honeypot drained, regulators take notice

In late January, Coincheck was hacked for~US$400 million in NEM. The exchange reimbursed users with operating profits, which is becoming common practice after a heist.

Japanese regulators became increasingly concerned with unregistered exchanges as well as exchange security following the hack. On March 8th, Japan’s Financial Services Agency (FSA) suspended two Japanese exchange operations for 30 days, FSHO and BitStation. In April 2017, Japan passed legislation recognizing BTC as legal tender and as of September 2017, the FSA officially recognized 11 companies as registered cryptocurrency exchange operators.

The United States Securities and Exchange Commission (SEC) also released a statement on the unregulated nature of cryptocurrency exchanges. The SEC is particularly interested in exchanges which offer ICOs, which may or may not represent unlicensed securities. While not a direct enforcement notice, the statement was seen as a shot across the bow of any exchange not currently registered in accordance with securities law.

The second hearing regarding cryptocurrency regulation with CFTC chair J. Christopher Giancarlo occurred in Washington, D.C. on February 15th. Giancarlo remains focused on six elements: (1) staff competency; (2) consumer education; (3) inter-agency cooperation; (4) exercise of authority; (5) strong enforcement; and, (6) heightened review of virtual currency product self-certifications.

In March, China announced it will begin slowly regulating cryptocurrencies, as opposed to an outright ban. Zhou Xiaochuan, governor of the country’s central bank, the People’s Bank of China, has admitted that cryptocurrencies are inevitable but added; “we do not currently recognize Bitcoin and other digital currencies as a tool like paper money, coins and credit cards for retail payments. The banking system does not accept it.” China is rumored to be working on its own cryptocurrency.

Thailand has taken a softer approach to regulation, recently enacting a “special law” that “will regulate the purchases and sales of cryptocurrencies and ICOs in order to avoid market manipulation, money laundering, tax evasion, as well as multi-level marketing schemes.” The Thai Finance ministry recently released a final version of a tax framework which includes a 7% value-added tax (VAT) and a 15% capital gains tax.

Jack be nimble

In February, Square’s Cash.App began allowing all users to buy and sell Bitcoin through the mobile app, which also released an explanation of how Bitcoin was created and how it can be used. In a survey of 100 U.S. Square merchants, 60 percent said they would accept Bitcoin as payment.

The CEO of Square and Twitter, Jack Dorsey, remains strongly bullish on the future of Bitcoin. In an interview with The Times, Dorsey stated that the world will ultimately have a single currency, as will the internet, adding “I personally believe that it will be bitcoin.” Dorsey will be a keynote speaker at one of the industry’s biggest conferences, Consensus, on March 14th-17th in New York. Payment integration between Square and Twitter using the lightning network remains a likely possibility in the future.

Source: Cash.App

Mt Gox creditor sells

Bitcoin experienced a rather large supply shock. As discovered by a Reddit user, the Mt. Gox bankruptcy trustee, Nobuaki Kobayashi, moved 36,000 BTC, which according to the wallet address transaction times, was sold in five lots (*) between December and February. The most recent Mt. Gox creditor meeting report can be viewed here. The next court proceeding related to the bankruptcy isn’t scheduled until September 18th, 2018.

Lightning Network goes live

After years of research and development, Bitcoin’s Lightning Network (LN) went live in March. LN offers bi-directional, off-chain, hub and spoke payment channels on layer 2 of the protocol.

The team behind LN, Lightning Labs, also announced that it raised US$2.5 million in seed financing, with investors including; Jack Dorsey; David Sacks, former COO of PayPal; Bill Lee, angel investor in Tesla and SpaceX; Jacqueline Reses, head of Square Capital; and Charlie Lee, creator of Litecoin.

Source: https://rompert.com/recksplorer/

Poloniex sold for a lint roller and a pack of chewing gum

In February, Boston-based Circle bought Poloniex for US$400 million. Circle is one of three companies that holds a New York bitlicense, and has plans to release a retail trading app later this year.

Having launched in 2013, following a US$9M Series A funding round, Circle was created to increase mainstream adoption of cryptocurrencies like Bitcoin, by providing a payment platform for consumers and merchants. The company has since raised a total of US$140 million in venture capital from investors including Goldman Sachs, IDG Capital Partners, Breyer Capital, Accel Partners, General Catalyst Partners, Baidu, CICC Alpha, EverBright, WangXiang and CreditEase. Goldman has since started development of a cryptocurrency trading desk of its own.

Circle cited Poloniex as an important bridge for “an open global token marketplace.” Poloniex was unable to keep up with market demand in 2017, having problems with exchange uptime and answering customer support tickets. As a result, Poloniex lost much of its market share to other exchanges.

Binance eats the world and remains hungry

After gaining 7 million users in 100 days, Binance has decided to move out of Asia due to regulatory concerns. A warning from the FSA has prompted CEO Changpeng Zhao to move the Hong-Kong based exchange and team to Malta. The geographic shift will also allow for a fiat-to-crypto trading pair, allowing people to purchase crypto directly with USD or the Euro.

Binance also has its own coin, BNB, which is set to become an integral part of future expansions of the business, including a foray into the realm of a decentralized exchange.

More forks than an estate sale, more airdrops than Normandy

A Cambrian explosion of forks and airdrops peppered the landscape throughout Q1. Expect even more forks and airdrops in Q2.

Source: BraveNewCoin.com

Source: btcdiv.com

Consensus algorithms got harder to solve

Most Proof of Work coins reached record levels of both hash rate and difficulty in Q1, in large part due to ongoing development and use of application-specific integrated circuits (ASICs).

Source: BitInfoCharts.com

Source: BitInfoCharts.com

Source: BitInfoCharts.com

Source: BitInfoCharts.com

On-Chain transactions plummeted

Daily transactions for all coins decreased throughout Q1. This was likely due to a reduction in general use, but was also partially due to batching transactions and the use of off-chain vehicles like the Lightning Network.

Source: BitInfoCharts.com

In direct relation to declining prices, transaction fees also decreased. These fees can also be influenced by network usage. Bitcoin experienced the greatest reduction in transaction fees. This was in large part due to SegWit adoption which allows for smaller sized transactions and a larger block size.

Source: BitInfoCharts.com

Source: https://jochen-hoenicke.de/queue/#0,3m

Source: http://segwit.party/charts/#

Source: http://segwit.party/charts/#

Market caps fell

The total market cap of all coins peaked around US$835 billion in Q1, and have fallen almost 70%, to US$267 by Q2. Most altcoins pulled back harder than Bitcoin.

Source: CoinMarketCap.com

Source: CoinMarketCap.com

Source: OnChainFX.com

Stratospheric ICO raises continue unabated

Of the 158 ICOs thus far in 2018, a total of US$4.9 billion has been raised. Q1 raises have eclipsed the sum of funds raised in all of 2017 by over US$1 billion.

Source: CoinSchedule.com

The messaging app Telegram, which has 200 million active users, is set to raise over US$2 billion, having raised US$850 million in their first round pre-sale.  Another messaging app, Kik, which has 15 million active users, raised US$35 million in 30 seconds in 2017, and went on to eventually raise US$100 million.

The President of Venezuela, Nicolás Maduro Moros, issued a Petro ICO and claimed to have raised US$735 million. The tokens are on the NEM blockchain and remain untouched. The Petro ICO was seen by many as a scam and by U.S. lawmakers as a workaround to U.S. sanctions. The ICO prompted U.S. President Donald Trump to issue an executive order barring U.S. citizens from participating in the ICO or transacting with the token.

Trends Shifted

Every coin broke below the daily Ichimoku Cloud, entering bearish territory. Bearish 50/200 moving average crosses (DEMA) are a certainty in Q2. This will be Bitcoin’s first such cross since October 2015.

***dApps, lApps, and automobiles***

Cryptokitties, one of the most popular decentralized apps to date, descended on the world in Q4 2017. Q1 2018 brought about even more games and crypto collectables. Based on available dApp data, decentralized exchanges hold the highest number of transaction and ETH volume currently. Several dApps will continue to be released throughout Q2, including another crypto-collectable, CryptoPets.

Source: dAppRadar.com

Blockstream announced seven new LN apps (lApps) at the end of Q1:

1. FileBazaar — enables Lightning micropayments for creators who are producing digital files like photos, videos, or documents.
2. Lightning Publisher — a WordPress plug-in that enables content creators, businesses, or anyone with a WordPress website to accept bitcoin payments for their content instantly via LN.
3. Nanotip — enables Bitcoin users to tip atomic amounts of bitcoin to anyone on LN instantly.
4. Paypercall — allows web developers to request payments for specific, programmatic API actions.
5. Nanopos — point-of-sale system intended for businesses with fixed-price items, such as restaurants or retail vendors.
6. Ifpaytt (If Pay Then That) — using the IFTTT (If This Then That) infrastructure, Ifpaytt allows users to create applets by combining triggers and actions.
7. Lightning Jukebox — a video jukebox that enables users to request songs (or videos) for a micropayment.

Jack Mallers has also developed Zap, which enables payments via LN. A WooCommerce LN plugin was one of the first payment rails to be demoed on the product.

Avenues for micropayments are critical for the development of machine to machine payments on the internet of things. Payments on the IoT are set to disrupt several industries, several of which are directly connected to automakers.

Looking forward

Regulators around the world finally begin to catch up with everything from exchange and ICO regulations to taxation. Countries with blossoming crypto businesses will likely have a friendly regulatory stance, whereas as overreaction or over-burdensome regulations will cause a mass exodus.

With the increased use of chain-analysis, privacy on the blockchain has become an increasing concern. Expect to see more stories in 2018 in relation to crimes or tax evasion being discovered through the use of chain-analysis.

The fiat on-ramps coming online via exchanges or apps will allow for increased adoption and awareness of all cryptocurrencies, not just Bitcoin. When the buying mania returns, infrastructure previously unavailable will be ready for new market participants to enter.

Technicals are broadly bearish for the entire market, more so for altcoins. Q1 has historically been a down quarter, with Q2 and Q4 showing significantly more bullish price action.