Smart investors check out a crypto’s utility

There are somewhere in the region of 4,000 cryptocurrencies to invest in, each representing a different blockchain project. When investment experts look at the array available, they don’t base their choice on price, they look at the utility.

When the exeperts talk about Utility, they are referring to digital tokens built on a specific blockchain ecosystem – most often based on Ethereum’s ERC-20 standard – which grants token holders certain rights. As Katharine Wooller, UK and Ireland managing director at crypto wealth-building platform Dacxi told Rich McEachran, “Any cryptocurrency is only as good as its use case.”

There is a tendency amongst investors to buy Bitcoin simply because it is the most famous cryptocurrency. But Bitcoin’s utility is limited to promoting financial inclusion and cross border payments. Ethereum on the other hand is the preferred ecosystem for building cryptocurrency projects. So, it is not hard to figure out which of the two has more long-term potential.

One of the issues facing investors, particularly retail investors, is that the digital assets they hear the most about and are therefore drawn to, are the “cryptocurrencies addressing or solving specific problems on a macro level,” says Roman Matkovskyy, an associate professor in finance and accounting at Rennes School of Business. But there are many, many more that offer solutions to more ‘micro’ questions. As Wooller says, “it’s essential to do your homework and spend time researching and analysing a coin’s long-term intended use,” usually via the project’s white paper that should be freely available online.

Of course, a coin may appear to have great utility, but that doesn’t guarantee it will be successful. What is required for that to occur, is demand for the coin’s ecosystem. Let’s not forget that there are over 2000 coins that have come and gone, their related projects dead due to lack of demand.

The meme coins, such as Dogecoin, are a good example of complete lack of utility. Yet, investors have poured money into them, resulting in a 12,000% gain for DOGE between January and May 2021. They may look good right now, but they won’t last, as they serve no purpose. Dogecoin was started as a joke, and that should really tell you all you need to know. Still, people buy DOGE because they hope for its value to skyrocket. It’s speculation rather than investment.

Where should you look for long-term investments?

For long-term gains based on utility rather than making a quick profit, experts point to Ethereum (ETH) as the top choice, because it provides a platform for developers to create apps and run them on a blockchain without the involvement of third parties.

Paddy Osborn, managing director of the London Academy of Trading, suggests three others with potential: Polkadot – a network that can support multiple different blockchains and enable them to work together; Internet Computer, which aims to disrupt the internet space by building a decentralised web platform that runs on a blockchain and vechain, which helps companies track their products safely and securely through each stage of the supply chain.

To conclude, nothing is certain, but if you’re looking for a solid, long-term investment, look for the cryptos that are showing the greatest level of user adoption and functionality.  

Read this before October 2021 if you’re in crypto!

For those of us who believe in the concept of decentralization that underpins Bitcoin, I believe we are shortly going to receive a shock in the form of new regulations. The wealthiest countries in the world are snapping at the heels of the crypto universe and are looking at ways they can use financial regulations to bring fintechs, exchanges and crypto owners into line.

What do governments want to restrict?

Here’s a list of ‘things’ they are planning to target:

  • Peer-to-peer transactions
  • Stablecoins
  • Private wallets (phone, desktop, cold storage)
  • Privacy (privacy coins, decentralized exchanges, TOR and I2P)
  • Former ICOs & future projects (NFTs, DeFi, smart contracts, second layer solutions and more)

What is their intention?

At it’s most basic, you could say that they want to know EVERYTHING!

They want to:

  • Businesses active in crypto to be licensed and regulated like banks
  • Ensure full transparency for all transactions
  • Have the ability to freeze crypto assets belonging to persons or countries they believe are a ‘risk’
  • Force the disclosure of user information for all transactions
  • Revoke licenses of any that don’t comply with regulations.

They want control of a space that emerged precisely as a reaction to government and bank controls on money, both of which allowed a global financial crash to happen in 2008.

Why do governments suddenly want more regulations?

The answer is fear. Wesley Thysse in his document “Government Planning Worldwide Regulation of Bitcoin”, he points to one event that suddenly made them sit up and take real notice of cryptocurrencies, and that was Facebook’s 2018 announcement that it intended to create and launch a ‘so-called’ stablecoin. As Thysse says, “Until then they didn’t see cryptos as a risk to the global financial system.”

Why did Facebook’s Libra coin, as it was called at the time, send a ripple of unease through wealthy governments? Because Facebook’s billion users would have access to an instant payment system that was faster and more importantly cheaper than anything offered by the existing financial system.

Governments and the central banks huddled together in talks about what to do, and engaged an organization called Financial Action Task Force (FATF). Its goal is “to protect the integrity of the global financial system.” A real Big Brother!

FATF has already passed similar legislation for global governments, and it is the organization behind the rule insisting that all cryptocurrency exchanges that exchange fiat for crypto have the same KYC and anti-money laundering requirements as banks. What they will do now is turn their attention to all the elements of the industry outside this kind of control and as Thysse says, “declare what is, and isn’t acceptable.”

In 2018 FATF set out to control money laundering and terrorist financing, but now it is going much farther, and they are making swift progress. The document anyone in the crypto space should be looking at right now is FATF’s ‘Guidance for a risk-based approach to virtual assets and VASPS’ (GVA). This is due to be implemented in October 2021. Furthermore, it is impossible to move FATF out of its powerful position, because the organization is protected by the Vienna Conference on Diplomatic Intercourse and Immunities, which means they enjoy immunity with regard to their actions and are unburdened by the rules the rest of us must live by.

The so-called public consultation on the GVA was a farce, as they only chose the feedback that suited their agenda. They have delayed the implementation of the GVA until October, but after that expect to see their recommendations being implemented at national level, and in our legal systems. You should also note that the GVA will not apply to central bank-issued digital currencies. So, the agenda is very clear!

It may not be all bad news

As much as those dedicated to crypto may be horrified by all this, let’s take a moment to look at a possible upside: regulations may just pave the way for mass adoption, something the crypto community has long been waiting for. But at what cost? However, I urge you all to read the FATF GVA, because in just a few months it is going to start affecting your life, and most likely it won’t be in the way you would like.

The New China Syndrome

Do any of you remember the 1979 film ‘The China Syndrome’? In it, a news reporter (Jane Fonda) and her cameraman (Michael Douglas) are unintentional witnesses to a SCRAM incident, an emergency core shutdown procedure at a nuclear power plant in California. The crew prevents a catastrophe, but the plant supervisor (Jack Lemmon) begins to suspect the plant is in violation of safety standards, and tries desperately to bring it to the attention of the public, fearing that another SCRAM incident will produce an atomic disaster.

You may ask why was it called ‘China Syndrome’ when the action took place in California. The answer is that the nuclear meltdown scenario in the film is based the fanciful idea that there would be nothing to stop the meltdown tunnelling its way to the other side of the world, i.e. China.

This week we have seen another form of ‘China Syndrome’ in the cryptocurrency markets. Bitcoin, Ethereum, Cardano and others have plummeted in value after Beijing renewed efforts to rein in the sector by cutting power to bitcoin miners in Sichuan province over the weekend, one of the country’s largest producers of the digital currency, writes Robert Hart at Forbes.

China accounts for 80% of global bitcoin operations and the crackdown in Sichuan has cut the country’s bitcoin production by more than 90%, according to China’s Global Times. This state media source also says, “regulators in other key mining hubs in China’s north and southwest regions have taken similar harsh steps.”

The move has cut bitcoin’s hashrate and caused bitcoin to drop to its lowest value in nearly two weeks. As you’ve probably noticed, the altcoins suffered as well.

China has an abundance of cheap electricity, making it an ideal location for energy intensive bitcoin mining, and Sichuan has an abundance of hydropower, hence its regional domination of the sector. However, a great deal of the energy used for mining coming from coal power stations, which means the industry is at odds with China’s new climate goals…and Elon Musk’s thinking.

This sounds commendable for a cleaner energy future, but that is not the only reason China has clamped down on mining. According to Hart, “China is also keen to prevent cryptocurrencies from “infringing” upon financial order, prompting a ban on financial services facilitating crypto trade.”

China has been causing problems in the cryptocurrency market since May when it announced its intention to intensify its regulatory crackdown on cryptocurrencies, something it does periodically.

Shentu Qingchun, CEO of Shenzhen-based blockchain company BankLedger, told the Global Times on Sunday: “We had hoped that Sichuan would be an exception during the clampdown as there is an electricity glut there in the rainy season. But Chinese regulators are now taking a uniform approach, which would overhaul and rein in the booming Bitcoin mining industry in China.”

And then he added, “As a result, Chinese miners must form alliances to migrate overseas, to places such as North America and Russia.”  It sounds like a move that might stop the meltdown that is currently tunnelling from China to the rest of the world.

Panic over: it’s time to buy crypto again

June has not been a wonderful month for cryptocurrencies, but Dan Morehead, CEO of Pantera Capital, is confident that “we’ve seen the most of this panic” and that the sell-off is slowing down.

I read his newsletter published on 14th June with interest. He names three things that caused the markets to fall sharply:

  • China banning bitcoin (again)
  • Tax day
  • Elon Musk

The first point, regarding China, he says is one that happens in a cycle, as China has ‘banned’ bitcoin in 2013, 2017 and 2021. So, that’s every four years. Will they do it again in 2025? It’s hard to say, but by that time the cryptocurrency markets will look rather different one suspects. Morehead warns “Investors who sell on China “bans” usually end up bummed.”

Tax day is also something that comes around with an inevitable regularity. It is also important for crypto prices. In 2013 and 2017 when we also had spectacular bull runs, “bitcoin peaked four months before Tax Day and hit a low about a week before Tax Day.” People sell their crypto to pay their tax bills, especially when they are being asked to pay on their crypto gains. As for Elon Musk’s swivel over bitcoin, Morehead stays silent on that. He’s right, enough has been said to inflate the entrepreneur’s sense of himself as a market mover.

What Morehead does address is human behaviour and our love of acting in cycles. As he says, “Humans have an innate herd instinct.” He explains it like this:

  • It’s human nature that we want to buy when the market is surging up — when the FOMO devil is whispering in our ear.
  • When the markets are crashing – and our spouse/friends/boss are all WTF, we want to flee…we want the pain to stop..

And that is what happened in May and June. Although, Morehead does add another warning: “I could imagine that the traits we imprinted on the plains of the Serengeti might not be optimal for trading early-stage protocol tokens.”

It is worth noting that the Pantera Bitcoin Fund is the oldest cryptocurrency fund, so Morehead speaks with some authority when he says of this moment in the markets, “The volatility has presented a very compelling opportunity.  We are eager to deploy assets of the new Pantera Blockchain Fund on June 30th.”

Buy in the dip is not a new message, but when the evidence is clearly laid out, as Morehead has done, then it injects investors with renewed confidence that the panic is over and it’s time to buy. 

 Read the full Pantera Capital newsletter