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It’s funny… I was re-reading the Bitcoin white paper last week as it’s now ten years old.
Bitcoin’s founder Satoshi Nakamoto constantly refers to bitcoin as a way to avoid using a “trusted third-party,” like banks or financial institutions.
And yet it seems like all anyone can talk about right now is Wall Street adoption of crypto and banking bitcoin.
Just look at what happened in the last few weeks:
1. Coinbase is now a “qualified custodian” to hold cryptocurrencies in New York (the same designation given to banks that hold your money). (CoinDesk)
2. Mastercard filed a patent to launch a “fractional reserve” crypto bank. (CCN)
3. Bank of America filed a patent for a crypto storage system. (CCN)
3. Gemini announced full insurance for its exchange and custody service. (Block Explorer)
4. BitGo is approved as a qualified custodian to hold cryptocurrencies. (Bloomberg)
None of these stories are groundbreaking on their own.
But it’s a very clear trajectory. Major “third party” institutions are competing to hold (or bank) cryptocurrencies on behalf of others.
What we’re talking about is the quiet emergence of bitcoin banks.
Are “Bitcoin Banks” a Good Thing?
On the one hand, cryptocurrency institutions like Coinbase, Gemini, and Bitgo are taking storage security seriously. With almost $1 billion cryptocurrency stolen in exchange hacks this year alone, we need to provide better security and storage options for traders.
Secure custody also gives confidence to institutional investors who are looking to enter the space. Arguably, the next big influx of capital will come from institutional investors, who need trusted custody before making large investments.
Bitcoin was designed to operate outside the banking system. It was created so that you don’t have to trust a bank or third-party.
Crypto evangelists (ourselves included) have always advocated keeping your cryptocurrency off exchanges entirely. Unless you’re trading large volumes of crypto every day, there’s no good reason to store your bitcoin on Coinbase, Gemini or any other exchange.
Instead, you need a safe, offline, cold-storage solution where you control the private key (with backups, of course). It might be more hassle, but it’s worth it for peace of mind and security.
It seems our newsletter subscribers agree, especially when it comes to big banks wading into crypto storage. We asked them, on a scale of 1-10, how much they would trust an institution like Bank of America to look after their cryptocurrency. Every respondent picked either one or two out of ten.
Like it or not, bitcoin banks are coming. It might start small with custody solutions at Gemini and Coinbase, but the big-names are slowly getting involved. While this should bring more legitimacy to the cryptocurrency world, there are worrying ramifications, too. Mastercard filing a patent for a “fractional reverse crypto bank” is a worrying precedent that pulls bitcoin towards the very system it was designed to avoid.
Many years ago when I first stumbled across bitcoin, I’ll admit, I didn’t understand it. I remember reading explanations that looked like this: “Bitcoin is a decentralized, peer-to-peer, cryptographic currency, built on an immutable digital ledger called a blockchain…” I zoned out. It took me another year before I put in the time to learn how the technology worked.
And then it clicked.
This thing is revolutionary. Not just bitcoin the cryptocurrency, but the whole ecosystem that makes it work. It could change everything.
The only problem is finding simple, clear information about it. There’s so much misinformation out there. Some of it is biased. Most of it is too technical or confusing to get your head around.
As prices decline, traders are moving money out of altcoins into bitcoin. What’s going on here?
What is Bitcoin Dominance?
Bitcoin dominance is the term used to describe bitcoin’s market capitalization compared to other cryptocurrencies.
In early 2017, bitcoin made up 87% of the total cryptocurrency market. It was the most dominant cryptocurrency, by far.
Bitcoin’s dominance was challenged throughout 2017 as altcoins grew in popularity. Ethereum threatened to catch up and even overtake bitcoin. In June 2017, bitcoin’s dominance fell to just 38%. Ethereum was at 31%.
That balance has now shifted back towards bitcoin. It currently stands at 55%.
Bitcoin Is the “Safe Haven” of Crypto
Think about the stock market for a moment. Whenever the stock market declines, investors take their money out of risky, speculative stocks and put it in “safer” places. They move money to big, stable companies that aren’t likely to get wiped out. Some move their money into safe assets like gold or the dollar.
The crypto market is the same. When people get spooked, they move their money into something more stable. Bitcoin.
While the average investor might not consider bitcoin “stable,” it is compared to altcoins.
Bitcoin Isn’t Going to Disappear
When the cryptocurrency market declines, there’s a real chance that some altcoins will plunge to zero. Bitcoin, however, is unlikely to disappear.
Track record – Bitcoin has a nine-year history and hasn’t disappeared yet. Investors know that bitcoin has weathered storms before and will probably do so again.
Name-recognition – 71% of Americans have heard of bitcoin. It’s now a small, but important, part of our culture.
Ingrained in the wider economy – Wall Street has opened the doors to bitcoin with the launch of bitcoin futures trading. We will shortly see an exchange-traded fund (ETF) and the entrance of more institutional investors. As bitcoin becomes more ingrained in the wider economy, it’s much less likely to disappear.
Gateway cryptocurrency – If you’re just getting into cryptocurrency, you’re probably going to buy bitcoin. Not just because it’s the largest coin, but because many exchanges require you to purchase bitcoin before buying other cryptocurrencies.
Bitcoin has a stability that other coins don’t. So when the market moves lower, people move their money into something that isn’t going to disappear.
There’s also one more reason why bitcoin dominance is growing:
Ethereum Tokens Are Getting Flushed
Ethereum experienced a wild ride to catch up with bitcoin in 2017. Much of that hype was created by new currencies launching on the Ethereum system.
When new currencies launch on Ethereum, they typically raise money through Initial Coin Offerings (ICOs). Investors use ETH to crowdfund these projects, hence the price of ETH rose.
Now, with millions raised in capital, those ICOs are dumping ETH on the open market, forcing the price down.
So while bitcoin enjoys some stability, ethereum is shedding value fast.
Bitcoin Dominance Pattern
When the cryptocurrency market is stormy, investors flock to bitcoin for some element of safety. In other words, bitcoin dominance is high when prices are low.
However, there’s another interesting correlation. Bitcoin dominance also hit a peak when the currency reached an all-time high in December.
So bitcoin dominance surges at both ends of the spectrum: when prices are low and when they are high.
Why? Well, when prices are high, the mainstream floods into the market. Because of name-recognition, they’re buying bitcoin at a much faster rate than ethereum or ripple.
It seems that altcoins have their moment during the quiet growth periods, while bitcoin dominance occurs at the extreme ends of the market. For now, let’s see if bitcoin will tip past the 60% mark.
Others linked the selloff to an old crypto wallet connected to the infamous Silk Road – a dark net platform for selling drugs. A reported 111,000 BTC was moved from the wallet to various exchanges, prompting a huge downturn in price.
Another controversial theory is epic market manipulation. As CCN points out, there was a flurry of bitcoin market activity and trading volume in the moments before the Goldman Sachs announcement. It suggests that insider trading might be at play here.
Thanks to the introduction of futures contracts, a small group of wealthy traders are able to move the markets with relative ease. Because the arena is still relatively unregulated, they can do so without consequence too.
Is that what happened on Wednesday? Perhaps. No matter what the cause, it proves that the crypto market is still heavily influenced by just a handful of whales.
Ethereum Futures Are Coming
Speaking of bitcoin futures and volatility, we may soon have ethereum futures to add to the storm.
An ethereum futures contract would allow investors to bet on the future price of ether without having to buy the cryptocurrency itself. Theoretically, we should see institutional investors pouring money into the market (much like when bitcoin futures launched).
However, it could also have the opposite effect as ethereum futures contracts would allow traders to bet against the cryptocurrency. Read more here.
Could Blockchain Save Twitter From Scammers?
Congress grilled Twitter and Facebook executives this week over social media’s role in election interference and privacy invasion. One representative from California asked about the potential of blockchain in countering scams. (Something Block Explorer looked into in July).
Twitter’s CEO Jack Dorsey was optimistic about the technology:
“We haven’t gone as deep as we’d like just yet in understanding how we might apply this technology to the problems we’re facing at Twitter, but we do have people within the company thinking about it today.”
Dorsey is already evangelical about bitcoin. He previously said the internet “will have a native currency,” and that he “hopes” it will be bitcoin.
Coinbase is Working on an ETF
Who isn’t working on a bitcoin exchange-traded fund (ETF) these days? Despite nine sharp rejections from the Securities and Exchange Commission (SEC) last month, everyone is still scrambling to be the first bitcoin ETF provider.
Coinbase is the latest to join the race. The largest crypto exchange in the US is reportedly in talks with Blackrock to make it happen.
There was more ETF news this week as the SEC appointed a new commissioner, Elad Roisman. Roisman is pro-crypto, leading many to think he may swing the decision in favor of approving the next ETF proposal.
Half of Young Americans Want to Use Crypto
A recent survey revealed that 48% of US millennials are interested in using cryptocurrency as a primary method of payment.
The study also showed that 79% of Americans have heard of bitcoin or some form of cryptocurrency (where have the other 21% been??)
That’s all for this week’s roundup. Enjoy the rest of your weekend, and we’ll see you back here on Monday.
We’ve heard it hundreds of times. Blockchain is Web 3.0 or Geekdom’s latest marvel. Entrepreneurs, or business owners, who capitalize on this technology when young make it rich. Innovators like Ripple turned a $10,000 investment into $1.5 million in five years. Binance, only a year old, has a market cap of $840.8 million, according to Coinmarketcap. So it’s understandable that you’d speculate about launching your own business blockchain. You may not want to innovate anything, but, hey, blockchain’s said to be the next Revolution. Blockchain fanatics say it’s a core differentiator and value driver, leading you, if you have a business, to quite likely think maybe you should jump on board.
Brian Winker’s take on blockchain for business
Sometime last year, I interviewed Brian Winkers, founder of blockchain money automation company bitlov.com that won first place in the 2015 StartUp Chile! Competition.
Winkers himself is an open-source developer and Bitcoin analyst who has been playing around with crypto projects since 2012 and has helped small and medium-sized businesses get on or, rather, more often, off the blockchain.
For Winkers, blockchain for small business is a bonkers idea, largely because of Bitcoin. Bitcoin’s platform has problems with scalability: The platform is slow – around ten transactions per second compared to Visa’s 5,000 to 8,000 transactions in the same time span. The ledger became congested. The company itself struggles with internal squabbling.
Truth is Bitcoin is competing with more scalable and less problematic platforms like Ethereum and IOTA, so businesses can profit from blockchain more than was possible, say, ten years ago.
The problem is the expense.
Blockchain technology is free if you want to do all the work. The problem is recruiting a blockchain developer, and that’s where the trouble starts. As of 2018, a decent blockchain developer costs anywhere from $150,000 to $200,000 at the very least. Forget the fly-by-night freelancer from a platform like Elance, Guru or the like. Actually employing someone from such a platform would likely cost you more, since you may have to pay for errors. Any coding error or slight mishap means the ledger needs to be dismantled and rebuilt from scratch, aside from which technological changes occur so rapidly that top blockchain developers regularly familiarize themselves with updates.
Want a top developer? Expect to pay $250,000-$450,000 for a whiz, or triple that for a world-class specialist, according to Pavel Supronov on Medium. You think blockchain saves you money? According to John Levine, crypto consultant, author, and speaker, blockchain is the most expensive database ever invented.
Is your blockchain for innovation?
To get some ROI from your blockchain investment, you need some really BIG idea that’s stupendously different than competitors and that delights hordes of people. (Think of a Ripple or Binance). Such a feat, according to Winkers, is performed by only two out of every hundred ICOs or startups.
“In all my years,” Winkers told me, “I’ve only found one ICO that makes sense, and that’s the one I’m with right now. A Russian company called Visor looking to create a payment coin. I’m providing some technical guidance, more on the architecture side. I think they have a good team that understands the need to meet the underlying business needs. It’s not about them having a big payday.”
I regularly tell businesses not to proceed with Bitcoin, but to focus on more conventional solutions. I try to help them customize their business, figure out what they can do. Unfortunately, most people who approach me are dazzled by Bitcoin and the ledger. They don’t understand it… but just about everyone’s doing it so they want on the bandwagon. Now if they’d have a wonderful remarkable useful idea that may be one thing, but they often emerge with impractical, unfeasible ‘solutions’, so it’s a waste of their time and money.
At the end of the day, if your mind is on blockchain for fame or money, Winkers doubts you’ll succeed. You’ll want to have a solid idea that makes sense and that lasts for decades.
Blockchain to save you money?
How about if you don’t want to innovate but are sold by the blockchain hype and want blockchain to expedite your business? Say, you’ve read reports like that by management consulting giant Accenture and McLagan who insisted that blockchain promises cost savings of 70 percent or more in finance areas? Or you read the 2014 EY report how blockchain-based businesses outpace competitors?
Well, blockchains have certain problems that you’d want to know about…
The National Institute of Standards and Technology (NIST) – a non-regulatory agency of the U.S. Department of Commerce – recently released a report for beginners to blockchain and business owners often tempted by new technology.
The report pointed out that blockchain can’t control users’ conduct. The NIST also highlighted the misconception that blockchain is “trustless” – you need a great deal of trust in the technology, developers, and user cooperation for the blockchain to function. Further, users must manage their own private keys that, once lost, are harder to recover than usernames or passwords on centralized platforms.
Additionally, blockchains are massively inefficient. Set up a blockchain and you’ll need each and every user to archive, and constantly update, a complete history of all that’s happened on that blockchain.
Finally, but not conclusively, blockchains also require a computational challenge to restrict the creation of new blocks. If it’s too easy, hackers could temporarily mobilize enough computing power to rewrite history; if it’s too hard, each new block will consume megawatts of electricity. And electricity for blockchain costs hundreds, if not thousands, of dollars.
On the other hand…
As we speak, blockchain improves all the time. More modern technologies produce decentralized platforms that have more bandwidth, are faster, more convenient, easier to program. IOTA, for example, uses a “blockchain” that isn’t the traditional format but a new one called Tangle that knocks out the expense and time of mining. IOTA transactions are super-fast and process several transactions simultaneously. Its structure perfectly suits the Internet of Things (IoT), where products and appliances like cars, home appliances and machinery “tangle”. Businesses on “next generation” blockchains like IOTA report a smooth, fast and cheap experience that almost resembles that of the Web.
So to blockchain or not to blockchain?
A unanimous decision tree floating the Web may resolve your problem.
Ask yourself the following:
If you need a database, are all the writers or participants on your team known and trusted? Is there anything you need to hide? Do you need to hire, or involve, trusted third parties? Do you need to control functionality? Are your transactions private? If your answers are a flat “no” to each of these questions, either stick to a standard database or use a public blockchain.
Does more than one participant need to be able to update the data? Do you need to hire third-parties whom you’re unsure whether you can trust? Do you have any confidential data? Do you and all the updates on your team barely know one another or have some qualms of one or more users? If you answered “yes” to one or more of these questions, use a permissioned or hybrid blockchain.
Does the data need to be kept private? Do you need to control who can make changes to the blockchain software? Do you have the money for blockchain programming and continuous maintenance and upgrades? Consider a private blockchain.
Even then Winkers would tell you to mull your decisions carefully.
“I’ve always worked to make sure that small businesses aren’t taken advantage of by others in the technical fields,” he told me, “And that includes blockchain. For some it’s the right path, for others, it’s a costly diversion.”
“ICO companies that invest in blockchain have a 98% failure rate. That’s not the route,” Brian insisted, ”that I’d want to take.”