2017 was a monumental year for cryptocurrencies and the blockchain. The price of bitcoin rose almost 2000% from $1,000 in January to over $19,000 at its peak in December. Ether, Litecoin, Ripple and other leading cryptocurrencies experienced similar spikes and a host of new cryptocurrencies burst onto the scene. $3.7bn was raised via ICOs, calling into question the future of venture capital. And finally, CryptoKitties became a blockchain sensation as sales hit $12m in their first month.
2018 is set to be another breakthrough year for cryptocurrencies. Here are my top 4 predictions:
1. The cryptocurrency market will continue to grow as institutional capital gets involved
Last month CBOE and CME announced that they would start offering bitcoin futures bringing cryptocurrencies closer to traditional financial markets and adding legitimacy to a previously notorious asset class. Goldman Sachs was among one of the first institutions to announce that it would clear futures for its clients on a case by case basis and is set to launch a cryptocurrency trading desk by mid 2018. Other institutions will undoubtedly follow suit as clients demand access to cryptocurrencies and as the infrastructure required to trade them at an institutional level is built out. This includes exchanges offering much needed compliance and security tools as well as appropriate insurance products.
In 2018, we will see the launch of numerous crypto funds. To date there are over 100 (84 of which were launched in 2017) with an estimated $2bn in assets under management. The proliferation of these funds will be coupled with the development of new cryptoasset investment vehicles (futures, ETFs and mutual funds), which will broaden exposure to even the most conservative investors. For instance, one could envisage the development of a S&P 500 bitcoin-hedged ETF or network value weighted cryptocurrency ETFs including potentially a basket of the top 5,10 or 20 cryptoassets.
2. ICOs will professionalize as experienced investors move into the market
Last year was a bull year for ICOs. Unprecedented amounts of capital were raised with some projects such as Filecoin and Tezos raising over $200m in a single round of funding.Of the 230 ICOs in 2017, many took place off the back of nothing more than an idea (usually formulated in a white paper), a team of developers, and little to no due diligence.
This year experienced investors will get involved with this new means of funding. They will demand further business validation and transparency, bringing the ICO process closer in line with traditional venture fundraising and making it increasingly difficult to raise off the back of a white paper. This trend will be supported by the development of ICO platforms such as CoinList, which carries out due diligence prior to accepting companies onto its platform, or Balanc3, which provides crypto companies with accounting and reporting tools.
The professionalization of ICOs will be bolstered by the rise of SAFTs (Simple Agreement for Future Token Sales), investment contracts geared towards pre-product, pre-ICO fundraises and accessible to accredited investors only. In a SAFT sale no coins are ever sold. Instead money is exchanged for a traditional paper contract that promises access to a future product.
SAFTs allow developers to build out a functioning network and tokens with real value prior to launching an ICO. Importantly, they also help token-based companies to comply with US securities regulation. As SAFTs become more commonplace we will see a decrease in the number of ICOs for pre-product, pre-network businesses and, as a result, the reduction in speculative token sales.
3. Regulators will take a firm stance on ICOs leading to a short term slowdown
Professionalization will go hand in hand with increased regulation globally. In 2017 we saw China and South Korea taking a stance and outright banning ICOs while the US ruled that certain cryptoassets should be classified as securities and ICOs should regulated accordingly.
Over the course of the next year other jurisdictions are likely to follow suit leading to a slowdown in ICOs in the short term. This in turn, will result in an increase in “jurisdiction arbitrage” as crypto companies flock to countries such Switzerland and Luxembourg where cryptocurrency and ICO regulations are less stringent.
Cryptocurrency trading will also come under further scrutiny. In 2018 the UK Treasury is set to regulate cryptocurrencies in line with anti-money laundering and counter-terrorism rules forcing traders to reveal their identities in certain cases. Online platforms where cryptocurrencies are traded will be required to carry out due diligence on their customers and to report suspicious transactions. Jurisdictions around the world will most likely follow in their footsteps.
In the short run increased regulation may lead to a fall in prices and trading volumes. In the long run it may help to legitimize the industry bringing it closer to the financial mainstream.
4. Concerns around scalability and performance will lead to the rise of new platforms and approaches
Both Ethereum and Bitcoin, today’s leading platforms, face numerous issues which have led many to question their long term potential. Worldwide bitcoin mining hardware now consumes roughly the same power as Denmark and some claim that by 2020 it will use more electricity than the entire world uses today.
Bitcoin transactions times now range from 10 minutes up to several days and transaction fees have risen to over $4.75 per transaction, this will only get worse as more people join the network. Similarly to Bitcoin, Ethereum suffers from limited scalability. The crytokitties craze showed that a spike in just one app can be enough to cause bottlenecks in the entire network and a jump in transaction fees.
As users become increasingly aware of Bitcoin and Ethereum’s shortcomings they will seek out alternatives leading to the rise of other currencies and platforms. Litecoin, Ripple, Monero and Zcash have already proven to be attractive alternatives to bitcoin. 2018 will see the launch of a host of new currencies such as Chia, a “better Bitcoin”. Founded by the inventor of Bittorent, Chia is set to offer more reliable, eco-friendly mining and security measures. Likewise, Ethereum’s position as the leading smart contract platform will start to be challenged by newer platforms such as NEO and Cardano.
In 2018 several solutions and upgrades to the problems above will be put forward. For instance, off-chain solutions such as the Lightning Network (Bitcoin) and Raiden (Ethereum) will allow users to circumvent some of the high transaction costs and slow speeds of transaction. An upgrade in Ethereum’s core protocol will also take place which will change the method for verifying transactions from proof-of-work to the faster and more cost-effective proof-of-stake.
2017 brought cryptocurrencies into the limelight. As prices rose to eye-watering heights, speculators flocked to the market in droves, driving prices even higher. In 2018 new currencies and platforms will emerge, experienced investors and financial institutions will move into the market and regulators will take a stance. 2018 will be the year that cryptocurrencies become embedded in the traditional financial system.
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