Continuing our five key tech trends to watch out for in 2019, we come to number four, crypto.
Depending on your outlook, 2018 was either a terrible year or a great year for crypto.
In terms of prices, it was uniformly terrible. Prices started dropping in January and continued to drop in every following month.
2018 was filled with lower lows and then drops to even lower lows.
Every few weeks we’d see a slow rally over the course of a few days, and then we’d get the inevitable collapse, down to even lower prices than before.
Over the course of 2018 the crypto market shed around $700 billion, or about 84% of its value.
For investors who believe in the long-term future of crypto, right now is a great buying opportunity.
For everyone else, it’s a catastrophe. And they would argue that anyone who believes otherwise is deluded.
Well, I am one of the deluded. Today, I’ll show you why.
Like I said, depending on your outlook, 2018 could have either been a great or a terrible year.
The reasons why it is considered terrible are obvious, the price dropped.
The reasons why it could be considered great are far less obvious, but I would argue far more interesting.
Scaling solutions and energy waste
While everyone else was hung up on prices, crypto projects were putting in the hours and laying the groundwork.
Behind the scenes, a lot has been happening. The main criticisms levelled at crypto’s major players are its lack of speed compared to Visa, and its massive energy usage.
Many altcoins have already solved these problems, but these coins don’t move the market and most mainstream press doesn’t care about them.
If bitcoin or Ethereum were to increase its transaction speed to that of Visa and solve its energy wastage, well, that would be a big deal.
And that’s exactly what bitcoin and Ethereum developers spent 2018 working on.
Bitcoin is pinning its hopes on transaction speeds to its Lightening Network. This won’t reduce its energy usage, but it will vastly increase its transaction speed.
Lightening Network is already operational, but it can currently only handle around 550 bitcoin transactions at maximum capacity. Like most tech developments, however, this is improving all the time.
Lightening Network does not really help with bitcoin’s energy usage, however.
On the Ethereum side, a scaling solution has been coming soon for the better part of a year. But as with most software projects, the closer it gets to completion the longer it takes.
That last 5% of a project tends to take 95% of the time.
Ethereum has a number of scaling solutions in the works, most of which have been coming soon for so long that people tend to write it as soon(TM) as a joke.
Ethereum is also switching over to a Proof of Stake consensus. What that means in real terms is that it will no longer consume massive amounts of energy.
It will also mean that if you hold Ethereum you will be able to “stake” it and receive a reward for doing so. Current estimates are around 5%.
So to recap, Ethereum will soon™ solve the two biggest criticisms levelled at it. It will be able to process thousands of transactions per second, while using very little electricity. And it will return around 5% a year in Ethereum interest.
These developments are incredibly important for Ethereum because it is much more than just a currency. It calls itself a “world computer”.
What that means in reality is that people can develop decentralised apps to run on its network. When it can scale, these apps become infinitely far more useful.
And one of the biggest things to be built on top on Ethereum last year solved the third and final criticism people level at crypto: its price volatility.
To explain just why stablecoins are so important, and why Ethereum’s smart contract stablecoin, DAI is so ground-breaking, I’m going to add a (long) excerpt from issue seven of my Crypto Wire newsletter below.
As you’ll see, stablecoins, and DAI in particular, may be the biggest development in crypto since bitcoin was first created.
A stablecoin is a cryptocurrency that remains price stable.
Let’s say today stablecoin x is priced at $1 per coin.
You buy 10,000 stablecoin x for a total of $10,000 keep it for five years.
When you come to sell your 10,000 stablecoin x, after those five years, your 10,000 stablecoin x are still worth $10,000.
I guess that begs the question, why would you ever want to invest in a stablecoin if you’re never going to make a profit when you sell?
You wouldn’t, you’d never use it as an investment. But you would use it as a currency, or as a store of value. The exact thing that bitcoin was invented for in the first place.
Which then leads us on to the next question. If you’re an investor, why should you care about stablecoins?
Because of what stablecoins enable.
Stablecoins provide the foundations for the new crypto economy to be built on.
Let’s take a look at some of their main uses
- A liquidity tool for exchanges
Crypto enables people to trade in and out of other crypto assets extremely quickly and extremely easily.
But it takes a lot longer to trade between crypto and fiat. And worse still, many banks are blocking trades to crypto exchanges altogether.
Stablecoins mean you don’t have to trade back into fiat to take a profit or to cut a loss.
You can simply trade into a stablecoin, instantly and at virtually zero cost.
You can even deposit your money on to an exchange and change it directly into a stablecoin so you’re ready to execute a trade whenever you feel like it.
This is much easier and safer than keeping your trading money in your bank in fiat.
What if a few days before you want to make a trade your bank decides it doesn’t want you moving your money to crypto exchanges? You’re stuck.
Having your money in a stablecoin is like having it in a bank. Except you’re completely in control of it. When a bank has your money, you never really own it.
Remember the capital controls Greece imposed during its crisis?
Remember the run on Northern Rock and the bank bailouts that followed in the UK?
Remember that Times headline written into the bitcoin genesis block?
Put your money in a stablecoin and no one can take it from you without the threat of force.
- An actual currency
As I said in the opening of this issue:
Bitcoin was created to be an alternative world currency. A peer-to-peer currency that no central authority could control, manipulate or shut down.
However, its massive price swings mean it is useless as an actual currency, for all the reasons I already covered.
We all remember the cautionary tale of “Bitcoin Pizza guy” who was foolish enough to actually use bitcoin to buy something. The two pizzas he bought ended up costing him tens of millions of dollars.
No one want to end up like Bitcoin Pizza guy and so no one is really using bitcoin in the way it was intended to be used – as an actual currency.
With a stablecoin, there is no chance you’ll fall to the same fate as Bitcoin Pizza guy.
If you buy two pizzas for £16 with a stablecoin today, in five years that same amount of stablecoin will still only buy you two pizzas. (Or slightly less if you want to be pedantic and take inflation into account.)
Stablecoins allow you to keep your money in crypto. They mean that you never need to go back to fiat if you don’t want to. Just take a second to think about how big that is.
- A lifeline during hyperinflation and access to money for the unbanked
This third one is probably not something you’ll need yourself. But for many people around the world it is the single most important use.
Let’s say you live in Venezuela, with its predicted 1,000,000% inflation rate this year.
Imagine if instead of keeping your money in bolivars, you could put it in a stablecoin and completely avoid the horrors of living through hyperinflation.
Put enough money for six months’ food into a stablecoin and you can use that money to eat for the next six months. Keep that money in bolivars and you can only eat for a few days.
And let’s not forget about all those “unbanked”. These are people who, for whatever reason can’t get a bank account. In the US alone there are 10 million unbanked households.
Around the world, there are a staggering two billion unbanked people.
Stablecoins are a global currency that anyone can access, without restrictions and without prejudice.
- As the basis for other financial crypto products – loans, insurance, etc
This is a big one.
Because stablecoins maintain a stable price it means you can build other financial instruments on top of them.
Think smart bonds, smart loans, smart insurance.
I’ve written before about how smart bonds work. (If you missed it you can read it here.)
Smart loans can be set up easily and allow people to effectively lend to themselves – at very low interest rates… 0.5% a year. Seriously.
They work in a similar – although less evil – way to how a pawnbroker does.
- You put up collateral in the form of Ether.
- You then get stablecoins in the amount your collateral was worth at that time.
- When you pay back the loan you get your collateral back.
In practice it’s a little more complicated than that – you can only load out up to a certain percentage of your collateral. But that’s essentially how it works.
And that’s just the tip of the iceberg. As MakerDAO says on its blog:
Decentralized cross-border lending can occur through the introduction of a stable cryptocurrency. This removes the problems seen with popular high volatility cryptocurrencies which creates an uncertain lending environment as borrowers and lenders cannot comfortably plan for the future. This has the potential to transform many industries including supply chain, exchanges, shipping and more. Another example is financing and financial planning. Ethereum and the crypto-ecosystem, at large, proved the large scale potential for global crowdfunding campaigns. However, many projects face uncertain accounting procedures as they struggle to manage a predictable financial plan due to volatility of their assets.
Ultimately, decentralized currencies pave the way for a modern financial revolution that will remove inefficiencies, reduce risk stemming from centralized parties and change the way we transact.
To sum up, stablecoins allow for Satoshi Nakamoto’s vision to be realised. They enable an alternative financial system.
But wait, what is a stablecoin’s price pegged to?
A stablecoin can be pegged to any asset you want… the gold price, the dollar, the pound, the euro, the silver price, a Big Mac… anything.
Most stablecoins, though, are either pegged to the gold price, the dollar or another major currency.
They can either be fully backed by that asset or they can be built around smart contracts.
Asset-backed stablecoins are much easier to get your head around. Smart contract based ones are a little more complicated, but have much more potential.
First let’s take a look at a few of asset-backed stablecoins, then we’ll move on to a smart contract based one.
How asset-backed stablecoins work
Tether is the most well-known stablecoin – and the most controversial.
One Tether (USDT) represents $1 held by Tether Limited.
There are currently 2.7 billion USDT in existence, so in theory Tether Limited holds $2.7 billion in a vault somewhere.
Whether Tether actually does or not is very much up for debate. There is no way of verifying it.
In fact, Tether is potentially the biggest threat to crypto’s future. If Tether turns out to be a scam, it’s going to take the whole market down with it.
However, due to Tether’s lack of transparency and credibility, other more reputable stablecoins were formed.
For example, TrustToken saw the shambles that Tether was and decided to create TrueUSD.
Here’s how it describes TrueUSD:
TrueUSD is a USD-backed ERC20 stablecoin that is fully collateralized, legally protected, and transparently verified by third-party attestations. TrueUSD uses multiple escrow accounts to reduce counterparty risk, and to provide token-holders with legal protections against misappropriation. TrueUSD is the first asset token built on the TrustToken platform.
And there are a number of other, reputable and accountable companies making stablecoins like this now.
On 10 September, the Winklevoss twins announced they are launching a stablecoin for their Gemini exchange, which has the full backing of the New York Department of Financial Services.
And on 26 September, Circle announced its own stablecoin, USD Coin. In launching it, Circle’s CEO Jeremy Allaire even referred to how little trust there is in Tether:
Market infrastructure like stablecoins will become the base layer that supports every financial application. It has to be legitimate, trustworthy, built on open standards. We are solving a lot of these fundamental problems that exist. That’s a huge difference from something like Tether, and we think the market will very quickly gravitate to that.
You’ll probably notice that both these cryptos are pegged to the US dollar. So there is definitely a large amount of irony here.
Cryptocurrency was created to get away from the current financial system, yet these stablecoins are pegging their prices to it.
However, that’s not true of all stablecoins.
Digix Gold Token (DGX) for example is backed by gold and pegged to the gold price.
1 DGX represents 1 gram of gold, audited logged and stored in a Singapore vault.
You can actually buy DGX tokens and exchange them for that gold if you want.
So, although most stablecoins are pegged to the dollar, they don’t have to be. The US dollar is simply a very well established and stable asset right now.
It is the price which all other prices are measured against. So it makes sense that’s what most stablecoins are pegged to.
Should that change, people could easily exchange their dollar-pegged stablecoins for ones pegged to a different asset.
And unlike with traditional currency, they could do this in seconds, with a couple of clicks of the mouse and at virtually zero cost.
How smart contract stablecoins work
The best example of a smart contract stablecoin, and the most exciting stablecoin out there right now is DAI.
Basically, DAI is a decentralised stablecoin. You’ll notice that in all the above examples, a team is needed to look after the assets backing the stablecoin. Not so with DAI. It can work in a completely decentralised way.
This means it is much more in line with the original bitcoin vision. It doesn’t require any central parties to work.
How it actually works is rather complicated.
Basically whenever its price falls under $1 there is incentive for people to buy it so they can sell it for $1 and profit.
And whenever it goes over $1 there is incentive for people who bought it for $1 or less to sell it and profit.
It is backed by assets that people have put into it – I based the loan scenario earlier on how DAI works.
If you want to really understand how it works, I recommend this article: Maker for Dummies: A Plain English Explanation of the Dai Stablecoin.
As for whether DAI’s smart contract based system works… well, it launched on 27 December 2017, right before the most volatile period in crypto’s history.
It’s had a real trial by fire and come out with flying colours.
Although stablecoins might not seem exciting at first, when you really think about them you soon realise they are possibly the biggest development in cryptocurrency since bitcoin.
Stablecoins are laying the foundation for a real financial revolution.
Developments like DAI are why I believe Ethereum will one day overtake bitcoin as the most valuable crypto.
And DAI is just one project being built on Ethereum, there are hundreds, if not thousands of others – many with world-changing potential.
But back to the 2019 trends…
Regulation and stockmarket integration
Regulation was another area of crypto that changes massively in 2018.
The SEC declared bitcoin and Ethereum were not securities and NYSE owner ICE announced it was going to launch its own crypto exchange (Bakkt) and range of services.
I covered these stories extensively in 2018, but just to recap:
Bakkt is a new trading platform created by ICE, who owns the New York Stock Exchange and many other major exchanges around the world.
It is basically the biggest recognition the traditional world can ever give to crypto. It will be a huge platform that will enable traditional institutions and their clients to start trading and investing in crypto.
And it will start trading bitcoin futures on 12 December [now postponed to “early 2019”].
Here’s a notice from ICE on the opening. And here’s the most important part:
ICE Futures U.S., Inc. will list the new Bakkt Bitcoin (USD) Daily Futures Contract for trading on Wednesday, December 12, 2018.
The Bakkt Bitcoin (USD) Daily Futures Contract is a physically-settled daily futures contract for bitcoin held in Bakkt LLC, ICE’s Digital Asset Warehouse, and will be cleared by ICE Clear US, Inc.
Each futures contract calls for delivery of one bitcoin held in the Bakkt Digital Asset Warehouse, and will trade in U.S. dollar terms. One daily contract will be listed for trading each Exchange Business Day.
As I have said before, the important thing here is that these futures contracts will be physically settled.
Here’s an explanation on physically-settled futures from Investopedia (emphasis mine):
With a physical delivery, the underlying asset of the option or derivatives contract is physically delivered on a predetermined delivery date. Let’s look at an example of physical delivery. Assume two parties enter into a one-year (March 2019) Crude Oil futures contract at a futures price of $58.40. Regardless of the commodity’s spot price on the settlement date, the buyer is obligated to purchase 1,000 barrels of crude oil (unit for 1 crude oil futures contract) from the seller. If the spot price on the agreed settlement day sometime in March is below $58.40, the long contract holder loses and the short position gains. If the spot price is above the futures price of $58.40, the long position profits, and the seller records a loss.
So, as you can see, unlike cash-settled futures, like we saw open around this time last year, physically-settled ones will mean people actually have to buy bitcoin.
This is why Bakkt’s futures could have a massive impact on bitcoin’s price.
But futures are just one small part of what Bakkt will be doing. I’ll update you on more of that, and how it could affect the crypto markets, as its services launch.
Bakkt is also hoping to bring crypto exchange-traded funds (ETFs), which will give ordinary investors an easy way to get into crypto – if they still want to.
I’ve realised today’s issue is getting very, very long. So I’m going to draw it to a close here.
There are many more crypto developments to come in 2019, but of the ones I haven’t yet mentioned, some to keep your eye on are:
- Blockchain powered games – not just simple games like “crypto kitties” but proper, console-quality ones
- Blockchain secured shipping solutions
- And new decentralised social media platforms, powered by crypto built to solve the data harvesting mess Facebook et al have left us in.
In fact, the idea of decentralised social media platforms deserves its own issue. If someone cracks this, it could literally become the next Facebook. So I’ll be devoting an issue to this idea in the coming weeks.
This concludes part four of my five key tech trends for 2019. Tomorrow you’ll get the third and final part on medicine.
If you want to know how to get started investing in crypto, you need to read my colleague Sam Volkering’s book: Crypto Revolution. It includes everything you need to know to get started, and a lot more besides. Click here to find out more and claim your copy.
Editor, Exponential Investor
PS Tomorrow is my colleague Nick Hubble’s Predictable Profits Summit. He will be going on camera to prove the collective wisdom on investing is very wrong. During this summit, he will show how ordinary investors can:
- Make money from rising and falling stocks
- Increase their profits even when markets crash
- Beat “the market” without any special software or techniques.
And the best part is, you can take part for free. All you need to do is get your name down here now to ensure you don’t miss out.