bitcoin blockchain future trends 2019

There’s no other way to say it: 2018 was a true rollercoaster for the blockchain world.

While it started with a historic surge to an unbelievable crypto market capitalization of $900 billion at its peak, the market disastrously retraced by nearly 90% since those glory days.

Despite countless financial analysts and crypto experts predicting heights of up to $60,000 per bitcoin in 2018, the year, unfortunately, turned out to be one of the worst for the crypto market.

However, now it’s time to focus on the future. In order to effectively prepare yourself for the following year, you definitely want to take a look at the following sectors of the blockchain world.

1. Bitcoin Exchange-Traded Funds (ETFs)

bitcoin etf approval date

Date to Watch: 27th of February, 2019 – VanEck and Solid X Bitcoin ETF Decision Date

Bitcoin ETFs have undoubtedly been one of the hottest topics during the past 12 months, especially since they are regarded as a potential catalyst for rapid price increases of bitcoin and other cryptocurrencies. 

One ETF application, in particular, has been declared as a possible game-changer. The collaboration between investment firm VanEck, the blockchain company SolidX and the Chicago Board Options Exchange (CBOE). It is one of the few physical ETF proposals that is actually seen as promising by several financial experts. 

If a trading vehicle of this kind was approved, the ETF issuer would need to actually buy real bitcoins from an exchange or, more likely, the over the counter (OTC). A potential ETF of this size requires tens of thousands of bitcoins, and the ensemble would need to acquire them, which could lead to a rapid increase in price. 

Furthermore, an ETF would enable investors and traders to eventually trade bitcoin on a traditional stock exchange, which would also help the digital currency to gain popularity and availability. 

Unfortunately, the US Securities and Exchange Commission (SEC) has not yet decided on the ETF submitted by VanEck and SolidX. The final decision has been postponed several times, however, the SEC announced an ultimatum on December 7, 2018. The Commission chose the 27th of February, 2019, as the day for either the approval or disapproval of the proposal. 

Although dozens of established cryptocurrency specialists, like CNBC expert Bill Barhydt, believe that we will see an ETF approval in the following months, it remains to be seen if the SEC is convinced that the time is right to unleash the first physical Exchange-Traded Fund for Bitcoin.

Further reading: What is a Bitcoin ETF (And Will it Trigger a Bitcoin Price Surge?)

2. Tokenized Securities

security token map - the block
Mapping the Security Token ecosystem, by The Block

“Security tokens, not utility coins, will attract significant amounts of Wall Street money next year.”

Security tokens or tokenized securities were definitely buzzwords that grew in the past 12 months in crypto. This is, of course, because tokenized assets are one of the most promising innovations in the blockchain sector, as they could disrupt the corporate and financial world.

Rohit Kulkarni, the managing director of SharesPost, one of the leading marketplaces for private securities, firmly believes that 2019 is going to be the year of tokenized securities. In a recent article on Nasdaq, Kulkarni stated that “security tokens, not utility coins, will attract significant amounts of Wall Street money next year.” 

Despite missing regulations often being seen as a major stumbling block for the industry to grow, Kulkarni is confident that the space will mature in the near future. “We ultimately expect a more stable regulatory environment over the next six to twelve months,” he said.

In 2018, many companies already started engaging in the security token industry. Overstock, for example, became the first billion dollar company to start building their very own security token exchange, which is expected to open up trading during this year. 

Moreover, Open Finance became the first U.S. based security token exchange that went live on December 13, 2018. With traditional stock exchanges, such as Switzerland’s and Malta’s main stock exchanges, forming partnerships to build security token exchanges, the industry is without a doubt worth to keep an eye on in 2019.

Further reading:

Nasdaq Stocks on the Blockchain: You Can Now Buy Tokenized Shares in Apple, Tesla, and Facebook

Real Estate on the Blockchain: Is Tokenized Property a Reality in 2019?

3. Nasdaq and New York Stock Exchange Get Involved in Crypto

Nasdaq bitcoin futures

Date to Watch: Late January – The expected launch of Bakkt.

The two biggest stock exchanges in the world will step into the crypto ring in 2019: the New York Stock Exchange and the Nasdaq. 

Bakkt, a cryptocurrency exchange built by ICE, which is the parent company of the NYSE, planned to launch the first physical-backed bitcoin futures on January 24. Although the start has already been postponed several times, crypto enthusiasts still see the exchange as a potential game-changer for involving institutional investors into the market, due to the reputation and experience that is connected with its operator.

Meanwhile, Nasdaq is following Bakkt on its mission and recently announced it was working on Bitcoin future trading for 2019 as well. Further news from Nasdaq include the exploration of security tokens and a potential exchange for such assets in the following time.

While it is not yet certain what kind of future security token trading Nasdaq will be providing, it still shows that some of the biggest financial enterprises in the world are not scared of the overall bearish market sentiment of 2018. “The concept of having a digital currency that does allow for transfer of money across borders, that really transcends the banking system, and allows for a seamless transfer, is really really fascinating and one that we have to assume will become a part of the ecosystem of the internet,” Nasdaq CEO Adena Friedman commented on digital currencies such as bitcoin.

Further reading: “We’re Doing This No Matter What”; Nasdaq Confirms Bitcoin Futures Launch

4. Custody and Storage Solutions

fidelity-investments-crypto-blockchain-bitcoin-760x400

Fidelity: We’ll “make digitally native assets, such as bitcoin, more accessible to investors”

$1 billion in cryptocurrency was stolen in 2018 with high-profile crypto exchange hacks hitting the headlines. Keeping cryptocurrency on an exchange is risky. And, while holding bitcoin yourself in a personal wallet is safe, you risk losing the wallet.

That’s why custody and storage solutions will be a huge talking point in 2019.

As for institutional investors, bitcoin or storage solutions are seen as major hurdles for attracting the big fish to the crypto market. Most institutional investors are prohibited from investing in assets unless they are held in secure custody provided by highly specialized firms, 

Coinbase and other blockchain companies already gave birth to novel crypto asset custodial solutions in 2018. Fidelity, an established asset management firm that administers its clients’ assets with a combined worth of about $7 trillion, also decided to “make digitally native assets, such as bitcoin, more accessible to investors,” and founded a new subsidiary that focuses on storing digital assets for its clients. According to CNBC, the company is already in the process of onboarding clients and is expected to launch its platform in early 2019.

Some say that we should even expect major banks to join Fidelity and Co. in providing services for storing bitcoin and other cryptocurrencies. As stated in several reports, Ripple CEO Brad Garlinghouse, at the Singapore FinTech festival in 2018, mentioned that banking institutions are about to offer blockchain asset custody solutions to their clients during the next year.

5. Over-the-Counter (OTC) Trading

Circle OTC bitcoin trading

The Circle Trade OTC desk

Circle reported $24 billion in OTC crypto trading last year

OTC or over-the-counter trading is another keyword that pops up here and there when scanning the blockchain related stories of 2018. OTC trading is the private buying and selling of cryptocurrencies, often in huge amounts, off the major exchanges.

Bitcoin OTC coverage has increased in the media and social networks, but the trading activity itself seems to have increased in 2018 as well.

With Goldman Sachs-backed Circle’s OTC trading platform recording $24 billion in OTC trading last year, it is regarded as a true money-making machine. “We have seen triple-digit growth enrolling in our OTC business. That’s a big growth area,” mentioned Jeremy Allaire, the CEO of Circle, in an interview with Bloomberg in October.

Consequently, some of the biggest cryptocurrency exchanges are now working on their own OTC trading desks or, in regard to Coinbase, quietly launched one in the matter of a few months. 

Binance, on the other hand, decided to act in a different way, as its newly founded investment wing Binance Labs recently invested $3 million into a U.S. based OTC desk called Koi Trading. 

With major exchanges moving into the OTC business, the field is likely to play a key role in the blockchain world during 2019.

Further reading: What is Bitcoin OTC Trading? Inside the Mysterious World of the Rich and Nebulous

6. Banking and Blockchain

Creating a “seamless experience for storing and managing digital assets”

Banking institutions around the globe are already experimenting with blockchain technology in order to improve cross-border trading and daily operations. In 2018, several achievements were made and they might give us an outlook of how the following 12 months could look like for banks.

The first real customer transactions between several big international banking institutions were conducted on the blockchain platform We.Trade on July 3, 2018. This event is considered a major milestone for blockchain adoption, as institutions across all industries were previously not interested in leaving their sandbox test environments.

While established banks are continuously pushing forward adoption of distributed ledger technologies, new players are also eyeing the creation of banks that are focused on blockchain assets. 

Smaller offshore destinations in the Caribbean, e.g. Bermuda, recently announced an update of their banking legislation in favor of blockchain technology and assets. Additionally, a young enterprise called EQIBank, founded by previous bankers from HSBC, UBS and Credit Suisse, just opened their first customer accounts in December 2018.

EQIBank aims to provide a seamless experience for storing and managing both traditional and digital assets, as stated in a recent press release. This can definitely be considered as an upcoming trend since crypto startups around the world are currently applying for banking licenses in their countries.

7. The Cryptocurrency Insurance Industry

Gemini insurance
The Gemini exchange and custody service is now fully insured

“The evolution is dramatic”

Insurance giants, such as MetLife and Allianz, are often regarded as notable blockchain researchers and adopters. Fair enough, considering that transparent ledgers and smart contracts seem to be the perfect enhancements for the daily business of an insurance company. The most promising use-cases include, but are not limited to, automating payments once the terms of a claim are met, increasing the transparency of transactions, storing information and enabling blockchain powered IoT processes.

Ryan Rugg, the global head of insurance at R3, believes the current evolution of insurance companies is a huge leap for the industry. “These developments would be innovative in any sector, but when you consider the processes underpinning the insurance industry have remained largely unchanged for hundreds of years, the evolution is even more dramatic,” Rugg explained in an article on BlockTribune. When talking about the future, Rugg further stated that “2019 will undoubtedly see the insurance industry enter the next stage of its digital transformation.”

Further reading: Cryptocurrency Insurance: What is It?

8. Regulation Developments

“We need appropriate regulations to be put in place and enforced to safeguard the interest of investors”

2018 has definitely seen some considerable developments in terms of global blockchain regulations. With Malta officially becoming a blockchain island, smaller jurisdictions opening up to security tokens and the SEC finally cracking down on a majority of all the controversial ICOs, the blockchain space clearly advanced and is on its way towards becoming a matured industry. Still, there are countless regulatory issues left that hamper the global adoption of blockchain technology and services.

With 2018 as a foundation, we most probably will see exponential progress in the following year in the most important jurisdictions, such as the US and the EU. In fact, there are already several signs that validate this assumption. On October 18, the SEC announced the launch of a new FinHub, where regulatory approaches to novel financial technologies, like blockchain, are researched and evaluated.

After Singapore, Malaysia is another Asian country that wants to introduce new legislation for blockchain in the following year. “While some parties might still be skeptical of this space, there can be no doubt that we need appropriate regulations to be put in place and enforced to safeguard the interest of investors,” said Lim Guan Eng, Finance Minister of Malaysia. In Liechtenstein, the government is currently working on the Liechtenstein Blockchain Act, which should pave the way for institutional investors in 2019.

Further countries that are expected to unveil updated laws for blockchain include the United Arabian Emirates, Israel, Russia, Thailand and seven major states within the EU. The ball is finally rolling and global regulations in various areas of distributed ledger technology seem to be closer than ever before. We definitely have an exciting year ahead of us and might even be looking towards one of the most productive years for the blockchain industry ever.

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Bitcoin OTC trading

As much as half of all crypto trades take place in secret, behind closed doors.

The trades are executed quietly, with billions of dollars worth of crypto changing hands outside the main exchanges. According to many experts, including Binance CEO Changpeng Zhao, this means the crypto trading market is twice as big reported.

Welcome to the mysterious world of OTC crypto trading, or “over-the-counter” trading where bitcoin “whales” buy and sell ludicrous amounts of crypto between each other.

Very little is known about OTC trading, how it works, or its true effect on the market. 

During my research, I spoke with OTC expert Mark Sapolinski, who has organized bitcoin OTC deals since 2012 and currently manages an order book worth about $2 billion. 

During our energetic conversation, I gained several precious insights into the mysterious world of over-the-counter trading that I’m now about to share with you.

What Is Bitcoin OTC Trading?

In a nutshell, OTC, or “over-the-counter” trades are private deals for buying and selling cryptocurrencies. They are not done through regular exchanges and are therefore not displayed in any public order book, which means increased privacy for both the buyer and the seller.

Some estimates suggest that the volume of crypto traded on OTC markets is two-three times larger than regular exchanges.

OTC Transactions are Private and Have Lower Impact on Market Price

Apart from the improved anonymity, another reason to trade in this way is to minimize the impact on the market itself.

Trades worth millions or even billions of dollars would inevitably move the price in the opposite direction of your need. Nowadays, it appears that a large share of the OTC volume comes from only a few hundred massive transactions. 

As a result, many “whales” seek private deals that will not affect the market as much as deals on regular exchanges.

Further reading: Who are the Bitcoin Whale? (Criminals, Traders, & Early Adopters)

How are OTC Trades Executed?

At the moment, there are two different ways to handle OTC transactions: through a middleman or by using big online platforms. 

OTC brokers, the men in the middle, have their very own network of crypto investors and cryptocurrency sellers. They constantly keep themselves up to date with who wants to sell or buy coins, how much they want to deal with and when they want to pursue the deal.

It’s a very personal, bespoke service.

In the end, they want to match a crypto buyer with a crypto seller and take a commission for the service. Unfortunately, dealing with OTC brokers usually takes a lot of time. Establishing trustful relationships is a key element of conducting business in this way.

… Or Through an Online Platform like Circle

On an OTC platform, the intermediary will be replaced by a software platform. Think of it like Coinbase for the uber-rich. Perhaps the best-known crypto OTC platform is Circle, but even Coinbase has quietly opened an OTC trading desk.

Circle OTC bitcoin trading

In this method, algorithms will match buyers and sellers, and trades will usually be conducted over the platform. Just like with OTC brokers, the platform will take a fee for setting up the deal. 

The main downside of using a platform instead of a broker would be the omnipresent risk of a hack, as we have seen in the past. 

Additionally, one should always make sure that the platform is compliant with the current regulations, such as KYC and GDPR, since authorities might crack down on it otherwise.

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The History of Bitcoin OTC Trading

Many crypto people believe that engagement in OTC deals requires them to be a high net-worth individual, or, in other words, a whale. 

You might be surprised to know that one of the most popular and oldest OTC markets is actually for the small fishes: LocalBitcoins. The popular platform matches local bitcoin buyers and sellers since 2012 and still serves more than four million users worldwide, as recent reports have shown.

Especially in the first few years of Bitcoin’s life, OTC transactions appeared to be the most common way of trading the digital currency. “At this time, OTC deals were done completely different than now,” says Sapolinski. 

localbitcoins logo

From Small Trades to Multi-Million Dollar Deals

From 2013 to 2016, the number of Sapolinksi’s clients ranged from 1,000 to 2,000 clients a month, but with rather small order sizes of $1 to $50,000 dollars. As Sapolinski later explained. “I remember a general negative stigma for doing Bitcoin transactions in these years. There were not many questions asked.” 

2017 would be the year that brought change to the cryptocurrency market. Easier methods of buying and selling small amounts of bitcoin cropped up, like Coinbase and Binance.

Meanwhile, with continuously rising prices of bitcoin, there was suddenly a greater need for larger purchases, larger amounts. The new, vastly wealthy bitcoin whales needed a place to trade.

The OTC space changed from quantity to quality. Fewer clients, bigger transactions. However, with great power comes great responsibility. “As Bitcoin was now traded in unbelievable monetary value, it also became a liability to report big transactions to banks and financial authorities,” Sapolinski mentioned.

How Does a Bitcoin OTC Transaction Work?

As explained, the most popular way of conducting large OTC transactions during the past few years was using OTC brokers. 

According to Sapolinski, bitcoin and other cryptocurrency OTC trades usually follow a traditional discount model. Using an example name of “Bob,” here’s how it works:

Bob wants to sell a large amount of bitcoin. He’ll offer a discount of about 3% against the market price to do so. In order to make such a transaction, Bob will first look for an intermediary, an OTC agent, that he can personally trust. 

Bob needs to provide his trusted intermediary with a proof that he actually owns the bitcoin he wants to sell, which is also known as a “Satoshi Test.” Satoshi Tests can be done by conducting a small transaction from a wallet with the alleged funds.

At the same time, there is a buyer somewhere hoping to find a person willing to sell their precious coins or tokens. 

That person, let’s call her Alice, will also find a trusted intermediary herself. She will also provide proof of funds. Both intermediaries will now find each other through their complex black book of contacts. They’ll start negotiating with each other. 

However, there is still an inherent problem with every OTC deal that is done through two different middlemen: the buyers and sellers are often not able to trust each other.

Can You Trust an OTC Deal?

This is where the “OTC Tango,” as Sapolinski calls it jovially, starts. Both parties are expecting the information they need from the other party, which could either be a proof of coin or a proof of funds. 

The problem is: they will only provide each other with this highly private information if they feel absolutely comfortable in trusting each other. 

In many cases, buyers and sellers are separated by several thousand miles, sometimes there’s even a language barrier. It is now the time to find a base of trust, which can be pretty hard if you are not able to properly meet. 

This can usually be achieved by leveraging the network of colleagues that brokers already have a trustful relationship with. Otherwise, trust can also be established through honesty, transparency and the documentation that is provided.

What About OTC Platforms Like Circle?

Although working with intermediaries has been the crypto OTC method of choice for most of the last decade, it seems like OTC platforms are steadily gaining more influence and power.

This may be due to the fact that large institutional investors would most probably prefer using an OTC platform rather than working with middlemen. 

Many financial heavyweights fear the severe trust issues that come with regular cryptocurrency OTC deals. In order to provide a suitable solution for such clientele, many companies started working on fully regulated and secure electronic bitcoin OTC exchanges. 

As explained, Goldman Sachs-backed Circle is probably the best-known cryptocurrency OTC desk. In April this year, Circle Trade told Business Insider that their minimum transaction size moved to $500,000, with the average trade being valued around $1,000,000.

Another interesting project is Republic Protocol. The team is currently building the world’s first decentralized dark pool, which aims to be a fully anonymous OTC platform, expected to work with smart contracts, and hence eliminates any possible trust issues for its users.

Republic Protocol bitcoin OTC trading

What Impact Do OTC Transactions Have on Bitcoin Price?

While unlisted transactions should theoretically not affect prices of cryptocurrencies, the past has clearly shown that it doesn’t work that way in the real world. 

Imagine a whale that is sitting on thousands, if not tens of thousands, of bitcoins that he wants to sell. Due to the incredible amount of bitcoin he wants to sell, he will contact multiple OTC brokers to find him one or more trusted buyers. 

The word about this deal will slowly spread and some bigger investors might now start to sell their bitcoins in order to participate in that deal and obtain bitcoin at a steep discount. 

As you see, OTC deals might have an impact on the price of bitcoin, but they could also be completely excluded from it. 2018 was undoubtedly a year that brought many innovations to the world of crypto over-the-counter trades and it remains to be seen how the space develops in the years to follow.

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bitcoin etf price

Bitcoin ETFs were all over the news during 2018. 

Many voices called them out as some kind of magical act that would lead the price of Bitcoin to its former glory and maybe even higher than that. 

While an approved ETF could be the catalyst that kicks off a new bitcoin bull run, there is still misunderstanding and misinformation among crypto enthusiasts. 

It’s time to answer some burning questions: what is a bitcoin ETF? What consequences will it have for the future bitcoin price? And, of course, how likely it that a bitcoin ETF is approved in the coming months?

What is an ETF? (A Simple Explanation)

To start with, let’s define an ETF itself.

ETF stands for Exchange-Traded Fund. It’s a fund that tracks and mirrors the price of an underlying asset (like gold, for example). An ETF might also track a basket of assets (like tech stocks).

Shares of an ETF are traded on real stock exchanges and generally do not differ from traditional stocks in terms of trading.

Some of the most popular ETFs include those for gold (GLD) and crude oil (USO).  

The main advantage of an ETF is simplicity and convenience. It is much easier to trade an ETF than it is to purchase gold or bitcoin or oil itself.

what's an etf
Credit: Stocks to Trade

Who Makes and Approves ETFs?

ETFs are created by asset management firms. The firm buys the underlying assets (i.e. bitcoin) and keeps them under custody before creating an ETF.

The US Securities and Exchange Commission (SEC) is responsible for approving an ETF. Once they are approved, investors can buy shares of the ETF from a stock exchange. 

An ETF share represents a certain percentage of the fund, but it does not represent ownership of the underlying asset. If you buy a bitcoin ETF, you are not buying bitcoin itself.

ETFs are popular investments for diversifying portfolios with minor monetary and timely expenditures. 

What is a Bitcoin ETF?

A bitcoin ETF is an investment tool that would track the price of bitcoin. If approved, it would introduce an easy way for investors to get exposure to bitcoin without having to buy or store it directly. Traders would be able to buy and sell shares of the bitcoin ETF on a regulated stock exchange.

Although Bitcoin is already one of the most liquid assets on earth, it still can’t be traded on a regular stock exchange.

As well as the added convenience, investors could buy the bitcoin ETF through their existing, familiar investment account.

bitcoin etf on the stock exchange

Why a Bitcoin ETF Could Lead to “Big Money” Institutional Investors

The most significant benefit of buying ETF shares instead of real bitcoins, apart from its availability on stock markets, is the fact that institutional investors don’t have to store it themselves. 

Therefore, there is no risk of the bitcoins getting stolen. 

Big institutions are currently prohibited from buying bitcoins directly, but an ETF would make their participation in the market a reality.

Regarding that, there are currently two different types of bitcoin ETFs proposed by multiple asset management firms: physical-backed ETFs and futures-backed ETFs.

What is a Physical-Backed Bitcoin ETF?

As you might have already suspected, a physical-backed bitcoin ETF gains its value through actual bitcoins. 

This means an asset management firm needs to buy bitcoins from the market and then store them in their own wallets or custody service. 

Price swings in the ETF should, therefore, be reflected by the price of an actual bitcoin. If bitcoin’s price increases by one percent, the price of a physical-backed ETF should rise by one percent as well.

What is a Futures-Backed ETF?

When trying to set up a futures-backed ETF, the issuing company does not have to buy actual bitcoins, but bitcoin “futures contracts”. Futures are financial instruments that are used to bet on the future price of that asset.

All futures contracts expire on a certain date, although there are different timeframes, e.g. weekly or quarterly. 

Futures traders are confronted with higher risks, but also higher rewards. Regarding the ETF, the issuing company has to update their future contracts every time the contracts expire.

Historic Bitcoin ETF Proposals and Rejections

Although Bitcoin ETFs received a lot of media attention in 2018, there have been dozens of attempts to push one through before. 

Two of the most popular applicants might be the Winklevoss twins, who have supported bitcoin for several years. As CoinDesk investigated in 2017, the brothers submitted their first ETF proposal in mid-2013, with numerous additional proposals in the following years. Unfortunately, the SEC was not satisfied with their offerings so far. 

Winklevoss Twins bitcoin ETF
Credit: Forbes

Besides Cameron and Tyler Winklevoss, many other players are heavily interested in issuing a Bitcoin ETF. As Block Explorer previously reported, the SEC rejected nine applications solely in August this year. This includes multiple proposals for a futures-backed ETF by ProShares, Direxion, and GraniteShares, in collaboration with the New York Stock Exchange (NYSE) and the Chicago Board Options Exchange (CBOE).

Often referred to as the most promising ETF is a proposal given by a collaboration of the investment firm VanEck, the blockchain company SolidX and the CBOE. 

In this case, the ensemble is proposing a physical-backed ETF. Experts think this particular group has a higher chance of approval, due to their past experience issuing ETFs. 

The date for a decision has already been postponed by the SEC for the second time. While the next date would be on December 29, it is very likely that it will be changed another time. 

What Does the SEC Need to See Before It Approves a Bitcoin ETF?

According to most experts, it probably seems more logical to introduce a physical-backed ETF than a futures-backed one. 

However, from the angle of an asset management firm, it’s actually quite the opposite. Roughly 85% of all Bitcoin ETF applications are futures-backed ETFs. 

A major reason for this trend is, without a doubt, the frequently discussed custody question. Securely storing large amounts of cryptocurrencies has been a great stumbling block for many big players, like exchanges, in the past and present. 

Additionally, bitcoin futures are already a financial instrument open to institutions and have been approved by the SEC before. Consequently, it appears like a smaller step to introduce a futures-backed ETF. 

However, a very critical development the SEC wants to see, before approving an ETF, is a steep reduction of market manipulation and fraud attempts.

When rejecting nine ETF proposals in August, the SEC stated that 

SEC“…the Commission is disapproving this proposed rule change because, as discussed below, the Exchange has not met its burden under the Exchange Act and the Commission’s Rules of Practice to demonstrate that its proposal is consistent with the requirements of the Exchange Act Section 6(b)(5), in particular the requirement that a national securities exchange’s rules be designed to prevent fraudulent and manipulative acts and practices.”

 

Further reading: Bitcoin ETFs: Why Do They Keep Getting Rejected?

Bitcoin ETF Quotes and Predictions

Since ETFs are one of the hottest topics this year, there have been several voices expressing their opinions, about if and when an ETF could be on the cards.

For example, FIC Network Founder Arturs Ivanovs told Finance Magnates that:

“Volume from institutional investors would facilitate a significant regulated market that would reduce the scale of price manipulation thereby easing the SEC’s concerns. An ETF would also open up the market to more retail investors.” 

 

After being asked for a date, Ivanovs said, “2020 is my prediction.”

Income Locker CEO Csaba Csabai thinks that there might be other hurdles that need to be cleared. “There is still technological development needed to make Bitcoin exchange-tradable because when buying an ETF, someone has to actually purchase bitcoins,” he said in a conversation with Finance Magnates. Nevertheless, Csabai also sees a silver lining, as he went on with “if the rate of adoption continues to grow at the current pace, we will soon see an ETF, because it’s the only way institutions can access this asset class, so solving it as soon as possible is in their best interest.”

In an interview with ETF.com, Spencer Bogart, Needham & Co vice president of equity research said:

spencer bogart bitcoin etf quote“We have pegged the odds at less than 25 percent. That is because the very first thing the SEC lists in its own mission statement is protecting the investing public. When you think about the game theory aspect of this, if I work at the SEC and I approve this ETF. and it goes well, nobody is probably going to come around and pat me on the back and give me a promotion. But if I approve it and a lot of money flows into it, and something goes wrong, I am likely to lose my job.”

 

However, there are also parties that don’t believe in a Bitcoin ETF at all. Nouriel “Dr. Doom” Roubini believes that the crypto space has several issues, like fraud and manipulation, that will make an ETF not feasible in the near future. In a debate at CoinTelegraph’s BlockShow, Nouriel recently stated that “The academic evidence is, that this market is totally manipulated.” He later continued, “How do you expect anybody, who is an institutional investor, who has to be compliant with the rules and regulation, KYC/AML, to enter the space.” 

Could an ETF Influence Bitcoin’s Price?

To answer this question, one clearly needs to distinguish between a futures-backed and a physical-backed ETF. As already elaborated in the beginning, to create a physical-backed ETF the issuing firm needs to buy bitcoin from the market.

Although those deals wouldn’t be made on a regular crypto exchange, it would inevitably have an effect on bitcoin’s price, due to the immense amounts of bitcoin that would be needed for an ETF. 

In addition, an approved ETF would attract countless speculators, who would probably buy bitcoin right away.  So yes, a physical-backed ETF would, with almost full certainty, have a great impact on the price of bitcoin. 

In regard to a futures-backed ETF, the impact might not be as big as with the physical one. The issuer would only need to buy futures contracts, hence the price wouldn’t be directly affected. 

Futures would most probably help to spread adoption in institutional circles, but this would only be valid in the long term. In the worst case, it could even have a negative impact on bitcoin, as the past has already shown when bitcoin futures were introduced for the first time. 

Still, we can’t be sure about the impact before an ETF has even been officially approved.

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stablecoins

Cryptocurrencies are notoriously volatile, with falls of 20% in a day not uncommon. It’s one of the reasons why some people are nervous about entering the market. 

Stablecoins, however, aim to bring stability to a hot market by acting as an anchor.

Stablecoins are designed to hold their value, even when the rest of the market is swinging wildly.

But they don’t always work…

The stablecoin debate was ignited recently by Tether (USDT). The world’s largest stablecoin, which is supposed to remain at $1, lost more than 15% of its value in a day, falling off its crucial $1 peg.

So what is a stablecoin? And how can we make them more secure and trustworthy?

Stablecoins Are “Pegged” to a Stable Asset

As we’ll see in this article, there are many different ways to keep a cryptocurrency stable, but it usually involves fixing the price to something else.

stablecoin pegged to the dollar
Credit: MakerDAO

Stablecoins fall into four different categories depending on how they are backed:

1.  Fiat-backed stablecoins – pegged to a fiat currency, like the dollar. This is the most common form of stablecoin.

2. Crypto-backed stablecoins – backed by another cryptocurrency, but “over-collateralized” to absorb the bigger swings in value.

3. Non-backed stablecoins – pegged to nothing, but regulated by an automated central bank system. This is much like how normal currencies work.

4. Asset-backed stablecoins – pegged to an asset like gold, oil, or diamonds.

Let’s look at each one in more detail. 

1. Fiat-Backed Stablecoins

Examples: Tether, Circle, True USD, Gemini Dollar, Paxos Standard

Coins backed by fiat currencies are certainly the most popular stable cryptocurrencies. The US Dollar is the most common fiat currency used as a collateral. 

In this method, every token is backed on a 1:1 basis against real USD deposited in a bank account. If a stablecoin holder wants to liquidate his position, the coins will be destroyed and the deposited USD will be paid out. 

what is tether logo

However, as recent developments of Tether have shown, it is often not as simple as it seems.

Read more: What is Tether? The Controversial Stablecoin

To build trust in the coin, we need to know it really is backed by dollars on a 1:1 basis. 

Tether claims its reserves are 100% backed by real dollars. But a major issue is the auditing aspect – an independent review to confirm the claims. If the issuer does not provide public audits on a regular basis, people quickly assume the tokens are created out of thin air.

That’s exactly what happened to Tether when it crashed well below its $1 peg.

But Fiat is Flawed…

Then there’s the debate around fiat currencies in general. Since the abolishment of the gold standard in 1971, fiat currencies are constantly losing value through inflation. 

As a consequence of the economic crisis in 2008, Satoshi Nakamoto invented bitcoin as a hedge against the current monetary system. With that in mind, it appears quite ironic that bitcoin supporters are now using fiat-backed cryptocurrencies.

Tether Alternatives

Gemini dollar

If you still want to use a fiat-backed stablecoin, you might want to take a look at the alternatives of the notorious Tether. Three emerging stars in the stablecoin sectors are the True USD, the Gemini Dollar, and the Paxos Standard Token. 

The companies behind those tokens claim that they are fully regulated under US law and aim to provide audits on a monthly basis. 

Coinbase has also added support for a stablecoin issued by Circle, USDC. In addition, we might see a coin that is backed by Swiss Francs in the near future.

2. Crypto-Backed Stablecoins

Examples: DAI

A promising alternative to fiat-backed coins is tokens that are collateralized with volatile cryptocurrencies. 

In order to maintain price stability, the tokens need to be over-collateralized by 50 to 100%. 

Assuming you want to buy $1,000 worth of stablecoins, you will need to deposit crypto assets worth at least $1,500. This over-collateralization will be used to absorb the volatility of the underlying asset. If the price of the assets drop by 25%, the stablecoin will still be able to maintain its value.

DAI stablecoin

Threat of a Falling Market

However, in the world of cryptocurrencies, where assets previously dropped by 90% and more, it could make sense to deposit 100% or even more of the initial value. If your collateral is in danger, due to plummeting prices, you immediately need to increase your position. Otherwise, it will be liquidated. 

Experts frequently warned of a so-called “black swan event”, wherein a crypto-backed stablecoin would lose its value in case of a heavy market crash.

Using Crypto-Backed Stablecoins to Speculate

The main incentive for locking assets that actually carry a greater value is the fact that you can use the stablecoins as leverage (i.e. bet on an asset with more money than you actually have). 

If you think the price of a particular altcoin will rise in the future, you can easily use you stablecoins to buy even more altcoins.

A well-known project is called MakerDAO with its stablecoin DAI. In order to mint new DAI tokens, which are pegged to the US Dollar, investors need to deposit a premium amount of ether. 

The platform uses smart contracts in order to keep the price stable. In the future, MakerDAO plans on allowing other cryptocurrencies as well as tokenized real-world assets, like gold or stocks.

3. Non-Backed Stablecoins

Examples: bitUSD, Basis

basis stablecoin

After two methods backed by collateralized assets, it’s time to take a look at a radically different approach: a stablecoin that isn’t backed by anything at all. 

While it might sound like a bizarre idea at first, it’s exactly how the dollar works.

Since 1971 when the dollar moved away from the gold standard, it is solely backed by the belief that one unit will have the same buying power on the next day. So why shouldn’t this work in the cryptocurrency world as well?

Examples include bitUSD, which was founded by EOS, BitShares and Steemit inventor, Daniel Larimer. BitUSD was one of the first non-collateralized stablecoins on the market. 

Since late 2014, the price managed to stay more or less around the one dollar range. Its market capitalization is not as high as with other stablecoins, at only around $10 million. 

A very promising candidate for becoming a way bigger non-backed stablecoin is a cryptocurrency called Basis. The company raised $133 million in a private placement through various venture capitalists in 2018.  

An Automated Central Bank?

Basis works by expanding on an idea by macroeconomist Robert Sams. It means the blockchain acts like an automated, or algorithmic, central bank.

It’s actually a very simple idea. If the price of one coin rises above one dollar, the blockchain will issue and sell new coins to the market until the price falls down to one dollar again (it uses a smart contract to do so). 

During this stage, the smart contract generates profit by selling new coins. These will be kept as a reserve.

If the price falls below the value of one dollar, the smart contract will use the reserves to buy back coins from the market.

4. Asset-Backed Stablecoins

Examples: DigixDao’s Gold Token, Diamcoin, Petro

Cryptocurrencies backed by real-world assets are the latest members of the stablecoin family. But this type of stablecoin tries a completely different approach than its relatives. 

In these cases, the price of the stablecoin is defined by its underlying asset whether it’s diamonds, oil, gold, or something else entirely.

Perhaps the most high-profile case is petro – a cryptocurrency created by the Venezuelan government. Its value is backed by the price of an oil barrel. The petro, however, has been wrapped up in controversy since its launch. 

Read more: Everything You Need to Know About Venezuela’s National Cryptocurrency

The UK Royal Mint was also planning a digital gold token, but it has since suspended the project. 

We’ve also seen the launch of gold-backed coins. The DigixDao’s Gold Token is the best known. Although the value of gold generally increases in the long term, its price still fluctuates quite a lot on a typical day. This means it might not be the best candidate for a stable currency in the short run, but rather as a safe investment for the future. 

Stablecoins “Necessary to Replace Payment Systems”?

Sir Christopher Pissarides, Economic Nobel Prize winner of 2010, concludes that asset-backed stablecoins might have a great impact on the adoption of digital currencies. 

According to Pissarides, who is involved in a diamond-backed cryptocurrency called DiamCoin:

“Blockchain technology has the potential to disrupt the current financial system, but it is still mainly used for speculation. If we can eliminate the volatility and bring in stability, we now have the financial tool necessary to replace the archaic payment systems in place today.”

 

Whether a stablecoin is backed by real-world assets, fiat, crypto, or nothing, we probably need to wait a few more years until we can really see which stablecoin class proves to be the least volatile cryptocurrency.

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New York skyline Wall Street blockchain and finance

Blockchain technology is often referred to as one of the most disruptive developments of the 21st century. From medical records to artificial intelligence, the list of potential use cases is endless. In particular, the finance sector is one of the best fits for this technology.

Blockchain has several key advantages. It is secure, transparent, and immutable (meaning it cannot be edited and transactions cannot be reversed). That makes it the perfect way to store data and funds, and open doors to the world of big money.

With the debut of smart contracts (contracts that execute automatically when certain criteria are met), the blockchain world got a massive step closer towards wider adoption. These features are sending ripples through the financial world in the following ways:

Blockchain and Banking

Banks have been working on blockchain technology for several years. In fact, there are various international blockchain consortia, consisting of institutions like HSBC and Santander. The groups are trying to advance the $17 trillion trade finance industry by adopting blockchain solutions. Meanwhile, J.P. Morgan is building its own blockchain services on the Ethereum network.

blockchain banks consortia - a list of all banks and logos involved in blockchain
Image credit: Business Insider

A decentralized, digital system has the potential to weaken fraud attempts, improve document turnaround times, and streamline accounting for businesses. Moreover, by working with smart contracts, the consortia aims to progress in cross-border trading and to enhance the supply chain industry.

At this point in time, the third-most-valuable cryptocurrency is Ripple’s XRP, which has announced more than 100 partnerships with major banking institutions around the world. Most of the banks are using Ripple’s blockchain solution called xCurrent. However, at least three companies are now using Ripple’s cryptocurrency service, xRapid, to settle cross-border payments.

Initial pilots reveal that blockchain solutions can reduce international payment times from days to minutes (and at a 40-70% discount in fees).

Blockchain and the Stock Market

Wall Street is one of the best places for the implementation of blockchain technology, and the conversation is ramping up around “security tokens.” Security tokens are issued by companies, much like stocks and bonds, but on a blockchain.

It has benefits for shareholders and the company itself.

Shareholders, for example, can take advantage of increased transparency and simplified stock market duties, like dividends and voting. Companies may also add extra features to their security tokens, which might be access to products, discounts or memberships.

For the company, issuing stock on a blockchain improves liquidity, distribution, control and investor relations. Companies that issue security tokens will also benefit from customizable trading settings, automated whitelisting processes and the tracking of their investors.

Wall Street stock exchange

Several big institutions have expressed interest in issuing tokenized securities. The most popular supporters are Overstock’s subsidiary tZero, cryptocurrency exchanges Coinbase, Binance, and OKEx, as well as the main stock exchanges in Switzerland and Malta.

Additionally, there has already been a successful attempt to issue corporate stock on the blockchain.

Blockchain and Real Estate

The real estate sector is one of the most profitable businesses in the world, but there are many ways it can be improved. Real estate agents, as well as private investors, usually face high costs for bureaucracy and notaries. They are also flooded with tremendous waves of paperwork. Blockchain and smart contracts would undoubtedly save time and wealth by cutting out intermediaries. It also provides a secure and reliable place to store data.

The tokenization of assets would drastically reduce the time needed to trade property. And it would allow us to easily divide the ownership of property among multiple investors. As a consequence, investing in property may become available to everyone around the globe, and not just wealthy individuals.

blockchain real estate

Blockchain adoption in real estate is already a real thing. In February this year, the US state Illinois announced an initiative for real estate transfers supported by blockchain technology. The government’s goal was to experiment with blockchain, which could potentially save millions of dollars and provide enormous value.

Blockchain and the Insurance Business

Insurance corporations represent another industry primed for the introduction of blockchain technology. On the one hand, there are lots of people in the world that can’t live without insurance for health or property. But dealing with insurance companies is extremely time-consuming, especially when trying to claim refunds.

Meanwhile, most businesses in this sector are confronted with several issues in terms of verifications, data collection, and auditing policies.

One of the world’s largest insurance companies, People’s Insurance Company of China (PICC), has teamed up with the blockchain startup VeChain to address these problems. According to VeChain, its native blockchain VeChainThor “provides enterprises with the tools, securities, and governance to properly control their assets while collaborating across multiple verticals, industries, and even countries.”

S&P 100 enterprise MetLife is also wading into the blockchain space. With their Singapore based innovation center LumenLab, the insurance company is actively experimenting with smart contracts on a private blockchain.

In their sandbox project Vitana, the customer connects electronic medical records with their smartphone to issue a policy in a matter of minutes. In addition, a smart contract triggers an automatic payout upon diagnosis, without the need to make a claim.

Blockchain and Cross-Border Payments

Everyone who has ever made an international wire transfer has experienced the huge effort and time it requires to do so. Cryptocurrencies and blockchain are perfectly poised to fix this issue. Projects like Ripple and Stellar are already building an ecosystem to transfer value across borders, yet these digital assets still face serious obstacles before a wide adoption is in sight.

cryptocurrency cross-border payments

To become a viable form of money, currencies need to store value fairly well. Most cryptocurrencies do not fulfill these requirements due to their extreme volatility. However, many people depend on a currency with a relatively stable value. Tether’s USDT is probably the most popular stable cryptocurrency at the moment. Unfortunately, this does not solve the problem of fiat currencies, as the token is pegged to the US dollar and controlled by a centralized power.

Consequently, many projects are working on an alternative, more suitable, method of creating a stable coin. One of the main ideas is to back a cryptocurrency with all kinds of assets, including precious metals, stocks, property, and other cryptocurrencies. Stable coins and tokens are still in a very early stage of development, but the potential to substitute all fiat currencies is real if a project eventually succeeds.

A handful of international governments, such as Russia and China, are currently exploring the potentials of having their own cryptocurrency. The South American nation Venezuela announced its official cryptocurrency petro, which was created after the hyperinflation of the bolivar this year. The petro is based on NEM’s blockchain and backed by the country’s oil and mineral reserves. However, many critics denounced the project for its lack of transparency and decentralization, which are originally the fundamentals of a blockchain currency.

Obstacles for Blockchain Adoption in Finance

There are still some hurdles standing in the way of worldwide acceptance. Not least the problems of scalability, speed, and decentralization. Applications that include micro-transactions or high-frequency trading, like decentralized exchanges, are particularly in need of a fast, scalable and secure blockchain architecture.

There are hopes for improvement. New concepts are being developed, like “proof-of-stake”, where block validations are conducted through owning stakes instead of computation power. Sharding is another alternative, where the blockchain history is split into multiple sections and computed in parallel.

A decentralized network is also required to maintain extraordinary security standards. A blockchain is generally referred to as a secure place to store funds and data. Yet, we occasionally observe serious security issues like 51% attacks, which happened at least half a dozen times to prominent cryptocurrencies in the last year.

In other cases, the chains of major cryptocurrencies face problems when consensus nodes go offline all of a sudden. The fear of quantum computer attacks is something every digital currency has to deal with.

Apart from the blockchain itself, there are also many incidents where smart contracts have been reported as wrong. In order to convince massive enterprises to adopt the technology, blockchain constructions are required to provide a predictable and trustless experience.

There’s one more problem. Blockchain and cryptocurrency communities are split as to whether the technology should offer full anonymity or explicit transparency. The dilemma is a stumbling block for convincing big institutions and governmental authorities. The vast majority of governments around the globe are not in high spirits about privacy coins. Tax bureaus and other regulatory entities demand insight into transaction histories.

However, most companies and institutions refuse to use cryptocurrencies as long as the histories of their accounts are public to everyone. In order to find a fitting solution, several international universities are collaborating in the “Accountable Privacy” initiative. With its project Abelian, the initiative is proposing a concept of privacy, where the user determines the transparency level of his transactions.

We are still in the experimental phase of blockchain in the financial world. But as we can see above, there is phenomenal scope for this technology to transform the way we do business. Just don’t expect it to happen overnight.

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