Are crypto exchanges poised for a growth explosion?

What will the financial sector look like in 2030 after spending the decade challenging the incumbent financial services? Leeor Shimron, a Forbes Contributor, believes that crypto exchanges are poised to capture the growth in this space.

To date, crypto exchanges have provided users with a first contact point with an ever-increasing range of crypto assets. Lets’ not forget that the first crypto enthusiasts were retail investors who for the first time were able to access a new asset class before the institutional investors. As a result, most exchanges, such as Coinbase and Binance, were set up to service demand from the retail investor. For example, as Shimron remarks, “In just 8 years, Coinbase propelled crypto to the mainstream serving over 30 million users.”

Follow the Internet’s history

There have been several commentators who have suggested that the crypto story is very similar to the emergence of the Internet. The Internet was a fundamentally disruptive and paradigm shifting technology, and crypto very well may exhibit similar changes, mimicking the growth in Internet usage.

Illustrating this claim, Shimron cites the statistics: “User adoption of the internet reached 10% of American households in 1995, five years after the first web browser was launched. User adoption reached 50% in the U.S. by the year 2000.” Currently, US adoption of crypto is at around 5%, and hasn’t seen the same rate of adoption as the Internet. This is caused by “issues of scalability, privacy, and ease of use,” something that the Internet also had to overcome.

However, if Bitcoin’s growth story follows that of the Internet, it should achieve user adoption of between 20–50% by the year 2030.

Crypto exchange growth

Shimron applies a similar metric to exchange growth. He writes, “To project future exchange growth in the U.S., I assumed 5% user adoption of crypto in the US currently and calculated revenue growth if user adoption reaches 10% (conservative case), 20% (base case), and 50% (optimistic case) in the year 2029.”

The resulting scenarios for 2029 in terms of exchange revenues are: “$1.9 billion in the conservative case, $3.8 billion in the base case, and $9.6 billion in the optimistic case.”

He also remarks that although the 50% adoption may seem far-fetched, there are indicators supporting it, including ample growth potential amongst retail investors and demographic changes over the next decade, with more 18–39 year olds living in cities and being more familiar with digital technologies and virtual goods. These millennials will also inherit $68 trillion from the baby boomer generation by 2030, and they are looking for new ways to generate yield and store their wealth.

So, the future for crypto exchanges is bright, “as new use cases and killer apps emerge,” alongside retail users flooding the market and exchanges capture this growth.

Elon Musk hogs the headlines again!

Elon Musk, the Tesla and SpaceX entrepreneur, is making headlines again. Over the last week, we’ve had the controversy over the naming of his latest offspring, his nmother-in-law condemning his ‘red pill’ tweets, and now, unable to stay out of the press, he has slammed the Federal Reserve’s coronavirus stimulus package.

Musk claims that US fiscal policy has become “detached from reality,” and that it should be viewed in sharp contrast with “bitcoin’s looming supply squeeze,” as reported by Billy Bambrough. Now, Musk has gone a step further, according to Bambrough in Forbes, where he quotes the entrepreneur as saying “the central bank currency issuance” is making cryptocurrency bitcoin look “solid by comparison.”

Harry Potter and the Bitcoin Blockchain

Rather bizarrely, Musk’s latest statements came in response to a query from Harry Potter author, J.K. Rowling about how bitcoin works. The two are prolific Twitter users, and this is where the conversation took place on 15th May.

Rowling tweeted, “People are now explaining Bitcoin to me, and honestly, it’s blah blah blah collectibles (My Little Pony?) blah blah blah computers (got one of those) blah blah blah crypto (sounds creepy) blah blah blah understand the risk (I don’t, though.)

In reply, Musk told her Bitcoin looked solid by comparison with the currency issued by central banks, and said that he still owns 0.25 BTC. Cointelegraph stepped into the fray, and tweeted, “I think wveryone is just waiting for you to send them to the moon Elon,” which resulted in some comic responses in the form of Buzz Lightyear memes.

However, it seems nobody was able to convince Rowling about bitcoin, as she later tweeted, “I’m just about able to grasp a barter system. Talk of collectibles, tokenomics and blockchains and my brain just takes a walk.”

Vitalik Buterin of Ethereum then stepped up to provide the creator of wizards with his explanation, and Neeraj Agrawal, of Washington-based cryptocurrency policy think tank Coincenter, really tried to get Rowling to understand it by saying it was “magical Internet money.” Tyler Winklevoss objected to this, replying bitcoin was not ‘magical’, it was the US dollar that could be described that way.

J.K. Rowling may not have been convinced by the responses of the various cryptocurrency heavyweights, but as Bitcoin Magazine tweeted,

“Dear Diary, Today was a wild ride for #BitcoinTwitter.”

Is it time to buy bitcoin?

This is the big question of the week, although you may have other questions on your mind, particularly those about Covid-19. But let’s forget the virus for the moment, and focus on the bitcoin halving that is happening this week, in fact in about nine hours from now at the time of writing.

What will this halving, which happens approximately every four years, or every 210,000 blocks, mean for the bitcoin price. Is it a time when investors should jump on board?

What is the evidence for a price change?
We can look back at the halvings in 2012 and 2016 and see what happened. In 2012 the price increased slightly after the halving, but it was nothing like a bull run. In 2016, it shot up and then shot right down to where it had started at the time of the halving. Therefore, it seems reasonable to conclude that we can expect more of the same this time.

As Billy Bambrough wrote towards the end of last week, whilst bitcoin did surge at the beginning of May, that doesn’t mean it is time to invest, because the market is volatile. He quotes Lennard Neo, head of research at Singapore-based institutional-grade bitcoin index fund Stack, who said, “With the bitcoin halving fast approaching, we believe a short-term pullback is highly likely immediately post-halving, as traders begin taking profits.”

Rich Rosenblum, co-head of trading at Hong Kong-based crypto market maker GSR told Bambrough, “
“The move back down to $8,000 wasn’t a big surprise. It’s likely that we’re going to see increased volatility through May, with the pandemic, ongoing stimulus measures and the halving.”

Scott Freeman, co-founder at New York-based bitcoin and crypto-focused institutional trading firm JST Capital, added his view: “Bitcoin has risen over 100% over the last few months and we believe most of that rise was driven by continued retail demand.” He also added a comment of interest: “We expect continued volatility but expect to see good long term risk reward in bitcoin and also expect it to behave in an uncorrelated manner to traditional financial assets.”

Another factor that might galvanise investors is the announcement that Paul Tudor Jones is buying bitcoin as a hedge against the inflation he sees coming as a result of unprecedented coronavirus and lockdown-induced central bank money-printing, Bambrough writes, and we should perhaps take into account that the two previous halvings didn’t take place during a global pandemic.

Scott Freeman believes Jones’ move could prove to be a “seminal moment for bitcoin.” Why? Because the value of traditional assets is looking questionable in this crisis, and he claims he has received calls from a number of institutional investors “who now see bitcoin as a great hedge against the easy money policies and the looming global recession.”

Although it depends on your viewpoint of the crypto market, it appears there is no clear answer about whether or not this is the time to invest, but the views aired by these experts seem to suggest it is.

The bitcoin halving and quantitative hardening

You have heard of quantitative easing, but what about the opposite — quantitative hardening? Jamie Redman, in a recent article that takes a look at the bitcoin halving writes: “The first two halvings correlated with gigantic price surges and speculators are assuming the next “quantitative hardening,” will produce the same effect.”

The first halving was in 2012 when the bitcoin price was around $11 per coin (imagine!!) and by the end of 2013 it was at $1,150. The second halving was in 2016 and it was followed by the spectacular bull run of 2017, when BTC rose from $650 in 2016 to $19,600 in December 2017. So, you can see why people think the same thing may happen this time, although not everyone agrees.

The quantitative hardening refers to the reduction in rewards for BTC miners caused by the halving. For example, after the last halving event, miners saw the 25 BTC reward slashed to 12.5 coins per block. This time the rewards will be reduced to 6.25 coins per block. The bitcoin system will continue to produce block rewards and halve every four years, until on or around the year 2140.

Redman explains that the way Satoshi Nakamoto built the bitcoin blockchain means it is a system that is “a synthetic form of inflation protection, meant to keep BTC scarce over the course of its history. At the moment, bitcoin’s inflation rate is around 3.8% per annum, and this will drop to around 1.8% after the halving this month. “Estimates also show that through the year 2025 and the halving in 2026, BTC’s inflation rate will be as low as 0.4%,” Redman says, and at 1.8% it will be lower than the world’s central banks’ benchmark reference rate. “Soon after that, the issuance will even outshine the precious metal gold,” which sounds enticing. This will happen because “it will be slower to produce than all the gold mined on earth being added to circulation.”

The halving has huge implications for miners, because every time it means their profits are cut by half, and in order for them to profit, the price must balance the amount of capital they are putting into operations. Moreover, if transaction fees alongside the price of bitcoin is lower than what they are spending, they will be forced to shut down

Many eyes will be on bitcoin’s price and hashrate after the halving. What we really want to see is a price rise above above what it costs to mine blocks, which should increase the hashrate and the system’s security. Tradeblock assumes the price per BTCneeds to be at least $12,500 per coin to avoid a mass exodus of miners.

As Redman says, the three most-watched data points during the next 24 hours and during the next few weeks will be the countdown clocks, bitcoin’s price, and the hashrate.

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