I'd like to take the time to reflect on the crazy year that was 2017 for cryptocurrency investors, and weigh in on what we've learned over the past year, while also making a few predictions for the future.
One year feels like a decade in crypto, and so many various forces finally cumulated together in 2017 that we had an explosion of activity that left me feeling both exhausted and exhilarated. We saw LTC go on Coinbase, we saw an ICO rush with new issues like Bancor raising 150mil in 3 hours, we saw the absurdity that is cryptokitties crushing the ETH network, we saw Bitcoin Cash and the shitshow surrounding that, we saw Segwit and the long-awaited Bitcoin futures. I will always remember where I was at the moment I watched Bitcoin pass $10,000 on GDAX. And I will never forget the flurry of questions, advice seeking and inquiries from people in December as the media spotlight made cryptocurrencies a mainstream concern. We've come a long way, from the days of being considered oddball technogeeks to now being the vanguard of early adopters.
Some major trends in 2017 and lessons learned
The Mainstreaming of Cryptocurrencies: This was the year that the "normies" entered crypto in astounding numbers, especially later in the year and cumulating in December. From Ice Tea companies to my hairdresser, everyone wanted to be involved in crypto. New naive money will continue to pump into the market this year, and its important we welcome them while also keeping their expectations grounded in reality. Encouraging new investors with stories of how they can double their investment in a week is not a sustainable method of keeping them interested in crypto.
ICO Craze: For many 2017 was the year that the ICO. People made a ton of money by getting into ICOs early before a coin became hyped by the marketing efforts. Sites like ICOBench sprung up and provided people an easy way to find new ICOs to invest in, and those who got in could get a handsome profit by buying the coins for pennies then selling them for dimes a few months later at an exchange, with many ICOs offering pre-sale discounts for early registrations. I suspect that this trend will actually die out in 2018 as there seem to be way too many coins coming out now and they won't all be able to pump, we're already seeing ICOs recently getting dumped hard the moment they start trading on an exchange.
The rapid development of altcoin investment: At the beginning of the year the marketcap for altcoins as just $2 billion. By the end of 2017 it grew to over $370 billion. This was the year that investing in cryptos became about more than just Bitcoin. We saw an explosion of new promising altcoins, Binance launched in July, LTC was added to Coinbase and Ethereum really came into its own as a dominant force. I suspect that this focus on altcoins will continue as its now easier than ever to research and obtain them.
Resilience in the face of regulation: China banned initial coin offerings and bitcoin exchanges in the first weeks of September. The ban caused a precipitous drop in cryptocurrency flows worldwide and invoked panic within me, with Bitcoin going down to almost $3K. However we recovered surprisingly quick. This is why I wasn't too concerned with the recent news that Korea may crack down on exchanges. Cryptocurrencies are decentralized and distributed, and while government actions certainly can hurt the price in the short term, I think any attempts at increased crackdowns will result in a recovery within a few months. Crypto seems to be a lot more resilient than most people realize to laws trying to destroy it, so don't freak out when you hear a story about increased regulation in the Far East.
Institutional money coming in: We saw the speculation of an ETF not come to fruition, but in December the CME Group and CBOE started trading futures on Bitcoin. The lead up to this event and the subsequent decline and relative stabilization of Bitcoin will lead to a cascade of effects. We now have a genuine price discovery mechanism that will put downward pressure on BTC with its futures contracts. McAfees predictions of a million dollar BTC are not going to come to fruition now that you can short it.
Chase for the "next bitcoin": Lambo psychosis dominated and continued into the new year with nearly every coin in the top 100 showing a steep parabolic rise. This is actually something a lot of long term investors find deeply troubling, because now people are hungry for crazy x10 gains within a month and that is simply unsustainable.
Some predictions for the year 2018
Decline for Bitcoin
I have a long-standing emotional connection to Bitcoin and really do want it to succeed. But by now even the early adopters have come to accept how far away we are from the original vision of the currency. We are now seeing a decrease in adoption among ecommerce sites, which a sad state of affairs. I'm not so confident that Lighning will be enough at this point. Lightning likely wont be here for at least another 1-2 years and the problem will be user adoption. Segwit gave users a 40% discount on fees, and was a relatively simple upgrade, yet its 2018 and only 8% of transactions come from Segwit addresses. LN is way more difficult to implement, so don't expect it to be useful for at least a year after release. Core developers should have followed through with the New York Agreement and increased the blocksize to 2 MB. It's actually much more practical to scale BTC through miners than users, as most miners abide by the rules of a small set of mining pools and use the same software. Segwit2X was doomed to failure but it had 90% support among miners before the campaign against it started, and even after it had over 70% miner support. I think 70% miner support before a fork is vastly better for initiating a change than 8% user support.
Core team really needs to wake up right away and realize that the continual declines in market dominance are a reflection of Bitcoins failure to find utility, and that the first movers advantage and name brand will not last forever. Unless it solves the problem of insane transaction fees, ballooned mempool size, long transaction times and most of the accounts not even being able to afford to move the balance out I don't see BTC doing anything but declining in market dominance.
Ethereum will become an even more dominant force
I can see the long awaited flipening come in 2018. Ethereum already processes way more transactions than anything else, it already is basically THE platform for new coins and powers so much of the entire cryptocurrency ecosystem. The Constantinople fork and Casper Proof-of-Stake changes should take care of the TPS limitations for the next few years, and I expect to see an explosion of dApps in 2018. Ethereum has tons of developer support behind it and POS means people will want to hold it for the long term. Its already become my #1 core/safe-haven position and I think a 3-5K range in 2018 is completely reasonable.
The emergence of transactable business-oriented blockchains
The last few years were about theory and technological innovation, but I think 2018 will be the year that cryptocurrencies finally start to demonstrate value in solving business problems.
Ultimately a cryptocurrency is pointless if it doesn't solve some transactional problem or alleviate some inefficiency in the value-exchange process. There are several sectors/cases for business users that are ripe for blockchain technology: supply chain, settlement layers between intercurrency transactions, payment processing, offloading processing tasks onto blockchains, identity management...etc.
I expect that transactable coins that actually have functionality will be the big winners. ICX, WTC, VEN, NEO, XLM and others that target enterprise-oriented use cases will likely be the focus over the next year.
The rise of a DAG coin as a standard for transfers between exchanges, most likely Raiblocks (XRB)
Lets be perfectly honest: Right now the vast majority of transactions being conducted on the blockchain is simply moving cryptos around various exchanges. Its quite a nerve-wracking process, watching thousands of dollars sitting unconfirmed on the blockchain explorer for hours is not a pleasant experience. If you move your balances a lot you will end up losing substantial money to transfer fees. This is why I can see a light fast DAG becoming a standard for inter-exchange transfers of funds, specifically XRB after it gets listed on Binance. Being a DAG the process of onboarding isn't as simple as just adding another ERC20 coin, but once the Raiblocks team figures this out on Binance I suspect that adoption will follow quickly to other exchanges. The quick transactions speed and no cost will make it the ideal coin to exploit arbitrage between less liquid and more liquid markets.
The rise of "dividend coins"
The next year should be one where the stretched valuations are questioned, and those coins that pay out a form of dividend and can thus be easily valued will become a safe harbor. NEO, EOS, ARK, VEN,OMG among others should gain favor. We actually saw NEO do particularly well in this recent downturn. I expect to see a lot more also following this dividend payment model.
The move away from mining to POS/dPOS and DAG secondary layers
I think its becoming clear to everyone by now that mining is a wasteful process and brings in scalability issues, along with concentrations of power in low electricity countries like China. In 2018 I think we will see more and more of a movement towards eliminating mining altogether the way Ethereum is doing, in order to get over the scaling issue that mining brings with it. I also envision that DAG secondary layers build on top of a legacy POW blockchain will likely become a trendy thing. I also think dPOS will become more and more popular as it keeps the benefits of POS but also allows for a more democratic consensus method.
Coinbase will continue having a massively disproportionate influence
Unfortunately right now there are only truly 3 onramps for crypto investors: Coinbase, Gemini and Kraken. I use Gemini but the vast majority will use Coinbase because its simply the easiest and quickest. Right now the state-by-licensing moat that Coinbase has is so large that it will be difficult for any competitor to enter and integrate into the US banking infrastructure. Bittrex has wires to fiat, but that's too difficult for the average person who wants to use a credit card. What we are essentially seeing is Coinbase achieving a natural monopoly.
Binance as the #1 exchange
Binance has already grown to the #2 exchange in only a few months of existence and its easy to see why, it has the lowest transaction fees, offers great variety of coins and is overall very solid for trading. Its appealing to both eastern and western investors. Bitfinex, GDAX, Kraken and Bittrex are frequently down and tend to lock up quite often, and Chinese/Korean exchanges are not really usable by Westerners. I think that also BNB will just continue to increase in price. Actually Binance almost guarantees it'll go up by guaranteeing that they will continue to buy BNB back with 20% of their profits and burn them.
Hype coins without use cases go in decline
We will still likely see more coins like Tron that rise quickly based on a charismatic founder and massive social media hype campaigns, however they will inevitably die off more and more in 2018. The next year should be one of demonstrated working product and clear use cases as I think that people will end up increasingly tired of being dumped on after investing in hype coins.
Tether will continue to be shady as hell
There has been an absurd amount of tether being printed by Bitfinex/Tether, which are supposedly backed by real dollars. Just right now we had yet another $100 million printed. Right now a lot of people assume they can just unload into tether quick, and their losses are therefore hedged in case they need to get out their entire position. But tether isn't backed 1:1 by the USD, their "audit" shows $1.4 billion in US dollar assets which is apparently held in shady Taiwanese banks which were blocked by US banks including Wells Fargo. Bitfinex (which owns the Hong Kong based Tether) is incorporated in a shady LLC scheme in the Virgin Islands and will be held to very loose insolvency laws if there is a run up on their liabilities. All these people won't be able to cash out, and will be left simply standing with USDT that can't be converted into fiat.
A large correction is likely coming in 2018, especially in altcoins that entered the top of the charts recently
Its long overdue and Warren Buffet does have a point. I think he's incorrect in his general dismissal of cryptocurrency investment as a whole, but he is correct that the valuations of the market is far too stretched and that a lot of speculative money entering in now is creating price action that is divorced from adoption. Easy gains will be easily lost just as fast. This would actually be healthy for the market in the long run and would be swift as long as people offload into core holdings then buy back the dips after the garbage coins are shaken out, but if there is a run up on Tether I would be much more concerned at entering a long term bear market.
Recently on January 7 the Financial Services Commission in Korea released news that Korean cryptocurrency exchanges have only $1.8 Billion in reserves to fund their leverage, which is well over $100 billion. I don't know when specifically the next Mt.Gox style meltdown will happen but I am fairly certain it will be around Tether/Bitfinex and the issue of there simply not being not enough reserve within the system to support the leverege, and USDT giving people a false sense of security. If there is a panic over some short term event and a mass withdrawl request on Tether, the whole thing would collapse nearly overnight and bring every crypto down as people overwhelm the very few offramps that exist. The lawsuits would be flying left and right and would take years, fueling endless scary headlines and keeping more people from putting fiat in. Lets hope that the correction is much smoother and that people unload the recently mooned smaller coins into other core cryptocurrencies. As long as this is done we should be fine and recover.
Moving Forward
Currently I plan to continue holding for the long term, even with my negativity over the market as a whole. I think that 2018 will ultimately be a year where coin have to demonstrate genuine utility and where they will finally need to answer that question: "Well what in fact is this thing useful for?" In my view enterprise-oriented cryptos that address transactional inefficiencies will prosper, platforms like ETH and NEO will continue to be great investments and that the privacy segment is still a solid hold. I think a lot of long term holders are pretty upset right now with how the market is being taken over by get-rich-quick schemes, but at the same time a lot of this will likely get shaken out.
Anyway I wish you all a great 2018 and may you all drive Pagani Zondas on the moon one day.