Crypto Macroeconomic Perspectives


In this article we discuss about the macroeconomic perspective for cryptocurrencies today. It can be easy to adopt a short run view on cryptocurrencies. Many are aware of its ever rising fame and popularity as a store of value / medium of exchange [contested by critics]. There are however three major upcoming events that will shape the cryptocurrency industry.

Basel III in 2018

Basel III in 2018 – although cryptocurrencies have a negative or zero correlation with the real economy. It follows that the most traded pairs seem to be dominated by fiat pairs. In other words, BTC/USD, BTC/JPY, BTC/KRW, BTC/EUR, this applies to all other cryptocurrencies too. The Incoming implementation of Basel 3 thus poses a macroeconomic threat to the cryptocurrency market. As financial institutions such as banks urgently need to shore up their capitalization for Basel 3. It could result in greater risk-taking in the speculating arms of those very financial institutions. And where else other than the market with the greatest violability to depend on returns? At the time of writing (31 October 2017) The total market capitalization of the top 5 cryptocurrencies in the market is Bitcoin (USD 103 bn), Ethereum (USD 29 bn), Ripple (USD 8 bn), Bitcoin Cash (USD 8 bn) and Litecoin (USD 3 bn). In other words, the full cryptocurrency market can move at the whims of the largest too big to fail institutions. And since regulations are lacking at all levels, this can result in contagion and additional unforeseen macroprudential risks that can cause “leakage” to the global financial system. More has yet to be seen, only time will tell.

Scalability issues of Bitcoin

Scalability issues of Bitcoin. The deviation first occurred as more individuals found themselves wanting a more robust/malleable cryptocurrency. When Satoshi Nakamoto’s Bitcoin could not provide there were two major solutions that arose

a. Sidechains of the Bitcoin framework OR Supporting frameworks

  • Omni, Counterparty, and Rootstock are all of this section. The sidechains derive their usage and thus value from being used by the same users of the Bitcoin Main net. As such their values can be said to be PEGGED to the value of the Bitcoin network. They live and die by the growth of Bitcoin. [As of November 2017, all are doing very well]

b. Alternative Coins

  • Ethereum, Bitshares are the two main proponents of this sections. Although there are many similar solutions it would be useful to focus on these 2 cryptos.
  • Why? Firstly, Ethereum is a cryptocurrency founded to solve the smart contract issue, its main objective is to be the “fuel” that powers the Decentralized Autonomous Organization (DAO), as of 2017 Ethereum has been slowly losing market share to the incumbent Bitcoin but has entirely served its purpose of smart contracting as Initial Coin Offerings (ICOs) upwards of a US$200 million have been successfully funded with zero regulatory or intertemporal regulations in place.
  • Bitshares has been serving the same purpose as its micro-level control which allows for voting and spending processes to be extremely concise. Critics will be quick to point out that Bitshares is simply a fast-forwarded improvement of what Bitcoin would eventually become, but many others beg to differ, citing that there would need to be huge increases and change to the code for this to occur. And given the current level of technical debt in the Bitcoin framework, it could in fact never occur.

Before we continue there’s a need to explain the 3 main types of tokens. The 3 token types within a cryptoeconomical framework:

1) Cryptocurrencies – Digital currencies et al. that serve in place of fiat currencies.

2) Utility Tokens – Tokens that primarily serve a purpose for a project, many current ERC20 Ethereum projects are utility tokens. The use of utility tokens should not be confused with Security Tokens, utility tokens are present to help a user access a firm’s services and are distinct from securitized tokens.

3) Security Tokens – Tokens that serve as a stake in a firm. Most exchanges eg. Bifinex, Bittrex refuses to list Security Tokens as that would fall under the securities laws of countries that they are operating in. Distinct characteristics are: (i)allocation of dividends (ii)token representing a stake in ownership

It is important to be aware of the different classifications as they will dominate most regulatory/informative discussions

Deviation of Cryptocurrencies

Deviation of Cryptocurrencies into CryptoCurrencies and CryptoAssets. First proposed by Professor of FinTech Dr David Lee of the Singapore University of Social Sciences.

a. CryptoCurrencies [CC]

  1. Bitcoin
  2. Litecoin
  3. USDT aka Tether
  4. Ethereum [see ETH’s summary in Hybrid CC+CA]

b. CryptoAssets [CA]

  1. Bitconnect (BCC) – Derives its value by pegging itself to Bitcoin. It claims to operate a lending/investment bot which rewards users (at the time of writing) 7% interest in Bitcoin for lending a loan in Bitconnect Coins. Has been critiziced to be a ponzi scheme, however, that aside. Bitconnect (BCC) is a fine example of a Static CryptoAsset.
  2. Ethereum Classic – The “original” unchanged Ethereum due to a past controversy, Ethereum Classic remains under-funded and underdeveloped. It however trades at approximately USD 10/ETC. Although volumes are plenty, it has lost to its older brother Ethereum and now derives all of its value from sacarcity, much like Bitcoin. It is thus a Dynamic CryptoAsset.
  3. Steem – CryptoAsset award for sharing/posting in the Steemit forum, users are rewarded with Steem if their articles and posts get upvoted by fellow users. Steem itself serves no actual evolutionary purpose but is continually developed by its core developers and supporters of the platform. It is a Static CryptoAsset
  4. And many more eg. Basic Attention Token, etc.

c. Hybrid CC+CA

  1. Ethereum [see also CC] – Ethereum has ben devised specifically for its use as “fuel” for multiple smart contracts, it thus has 2 critical roles. (1) Serve as fuel for smart contracts of different types (2) Derives it value from the value it creates for the projects that are built on its code. Ethereum is thus a unique CC+CA Hybrid, it grandfathers many assets which are listed alongside it in and can call upwards of USD 2 billion of additional ERC20 token assets that depend on its functioning state. Ethereum is the new digital oil.
  2. Golem – Derives its Hybrid value due to its current stage in development. GNT, as it is called is still a product in development. With eventual goals of using host GPUs to help process/render images/videos. Golem is now a Hybrid. It is currently a CryptoAsset with the expectation of becoming a CryptoCurrency in the near future. Although it should only be considered as a CryptoAsset, expectations landed it in the Hybrid section. Readers should note that expectations of users very much drives the developmental direction of many blockchain/cryptocurrency projects.

Network effects decay

Existing Network effects expected to slow, users are depending on unbanked to load. There is an answer or end to everything. This includes the adoption of Bitcoin/cryptocurrencies in general. Once network effects start to reach a decaying spread of information, prices of cryptocurrencies are expected to not rise as much. This can be graphically shown as a decaying ln curve.

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