Bitcoin is seen by many as an innovative universal payment system that works without a central bank. It boasts its user anonymity, decentralized peer-to-peer network, as well as a number of other benefits. As intuitive as this may seem, there are a number of serious issues with the longevity and current structure of the cryptocurrency. Bitcoin has hit as high as $19,000 per coin in the past week. The total Market Capitalization of the digital currency is higher than massive corporations such as Bank of America, Walt Disney, and Coca Cola, to name a few. Now cryptocurrency exchanges are experiencing massive inflows and millions of dollars have been made in Bitcoin investments.
With that being said, there are a number of concerning issues with Bitcoin that need to be addressed.
Capped Total Circulating Supply: Some may see this as a benefit, but there are risks involved. With a limited circulating supply the currency can be seen as a safe haven similar to a precious metal. When there is economic uncertainty Investors historically run to gold. Gold, like Bitcoin, is limited in supply. People believe Gold has value because of this. FIAT currency can be printed many times over, while gold and bitcoin cannot. There is an important difference between Bitcoin and the US Dollar that is overlooked. When money is stored in a bank it is insured by the FDIC. When money is fraudulently used on your account you can be reimbursed by the institution you bank with. On the other hand, if Bitcoins are lost by a holder, there will not be an institution to reimburse you, there is not central authority to run to, and the coins will sit lost and uncirculated. The coins are removed from the economy because you can no longer use them. As you very well know, Bitcoin is not physical, it is entirely digital. It is incredibly important to backup your Bitcoin wallet to avoid losses.
Bitcoin transaction fees: One argument in the past to purchasing Bitcoin is “low transaction fees”. This is simply not the case. Anyone who has purchased Bitcoin knows there are often times large transaction fees, even with smaller transactions.
All of these transactions are supported by the massive Bitcoin mining operations all around the world. Miners set up large warehouses filled with supercomputers tasked with solving problems. The incentive is being rewarded with Bitcoin and transaction fees associated with supporting the ledger. These machines are simultaneously tasked with supporting the entire distributed ledger system that supports Bitcoin. When Bitcoin reaches its 21 Million circulating supply cap, will transaction fees skyrocket? How will these miners maintain profitability when there are no longer bitcoin to be mined? Surely this question comes with a number of assumptions. The gradual growth in technology and processing power will undoubtedly make the process more efficient. However, my concern is if and when this cryptocurrency becomes accepted universally by Billions of people around the world, how will the network keep up with the thousands if not millions of transactions per second? If transaction fees are already beginning to increase significantly, how will it support itself when it becomes the currency of the future? Why would someone pay for a cup of coffee using Bitcoin if the transaction fee is as large as the purchase price? This leads to my next point.
Environmental Impact: I am by no means a tree hugger, but the amount of electricity being used per year to support Bitcoin mining operations is currently higher than the country of Ireland!
If Bitcoin ever becomes a universally accepted form of payment with more transactions than a company like Visa, It could cause an energy crisis. Visa processes on average 2,000 Tps (Transactions Per Second), and at its maximum can handle over 25,000 Tps.1 Bitcoin, due to its 1MB chain, currently averages 3-4 Tps, and at absolute maximum can handle up to 7 Tps. At the current rate, Bitcoin operations uses enough energy to power 3,000,000 US households per year. By comparison, the processing of Visa transactions uses enough energy to power 50,000 U.S households.2
At the rate Bitcoin is gaining popularity, as mining operations continue to require more processing power by design, the amount of energy used by Bitcoin could be enough to power the entire United States by 2019.3
The Transaction Issue: Unless significant changes are made to increase block size in the future, Bitcoin will continue to use more energy, and users will continue to experience sizable transaction fees and a low maximum transaction rate. In short, at its current design, Bitcoin is not scalable. If Bitcoin users want this to turn into a global payment system they must increase the block size to support higher Tps. Miners queue transactions and are incentivised by prioritizing transactions that pay higher fees before transactions with lower fees. They do this by including higher fee transactions to the block before those with lower fees. This is due to the size of the block and the recent volume spike in the past months. Unless changes are made to increase the size of the block, Bitcoin transaction fees will continue to increase and will discourage users from transacting Bitcoin.
Bitcoin Selling Limits: There are limits to how many Bitcoins you can sell and withdraw in a given week on Coinbase and similar exchanges. These limits vary depending on your account verification. Even if you account is fully verified there may still be limits to how much you can sell in a given period. This is similar to the limits when withdrawing money from an ATM. Bitcoin may be considered a currency but as of now it acts as an investment. There is tremendous liquidity in the Bitcoin market, but there are limits on how much bitcoin you can sell and withdraw in a given period on a number of exchanges. It is important to understand these limits when investing in Bitcoin.
Bitcoin Futures, But No Bitcoin: A number of exchanges have announced the introduction of Bitcoin futures that come out this month and during 2018. This announcement is great news for institutions who want exposure to Bitcoin, and Miners who can now hedge operations. Bitcoin holders are excited because institutional money will start pouring into the currency. The problem with this is, it won’t.
Money will not pour into Bitcoin. Institutions buying the contract will not own any Bitcoin at expiration of the contract. These are cash-settled synthetic derivatives that do not have direct impact on the price of Bitcoin at all. It is a speculative derivative based on reference rates calculated by the price aggregate of major bitcoin exchanges. It is similar to Forex trading on any other currency. Funds may be more willing to purchase Bitcoin given that they are now able to hedge, but the contracts themselves are entirely speculative. This is in addition to the fact that fees and margins on the contracts are already massive.
In Conclusion: It is important to understand the risks associated with this innovate digital currency. Understanding the mining process, Bitcoins block-chain, and exchanges is essential to forming a well rounded opinion on the currency. Bitcoin has the opportunity to become the currency of the world, however, important changes must be made regarding block size and a number of other concerns to ensure the longevity of the cryptocurrency.
The common misconception that is being put out is that HFT, algorithmic trading, and low volatility is making it more difficult to beat the market. Our research shows outstanding results on proving otherwise.
One of the most widely used algorithms is called VWAP, which has many uses, but one of the reasons firms deploy it is to execute at a better price. The goal of the algorithm is to take into account the volume weighted average price so that when a large order needs to be executed, there is little effect on the price.
How can we use this data to gain an edge?
The easiest way is to pay attention to charts, order flow and 10 minutes before the equity close. Look for a large spike in buying or selling for two days in a row.
From back-testing results as well as deep knowledge into how VWAP is utilized at big firms, this will be useful going forward.
The situation in North Korea will have
a looming impact in the U.S.
Three exchanges have now officially announced the launch of Bitcoin futures. Nasdaq (in 2018), CBOE, and CME Group. What does this mean for the cryptocurrency? Which exchange will dominate?
Volatility: The launch of futures on Bitcoin can prove to provide the cryptocurrency more stability going forward. In almost every security, the ability to trade futures minimizes volatility and offers investors the ability to hedge downside risk. This will be the first time ever that investors will be able to trade futures on cryptocurrency. The introduction of these futures is great news for Miners, who will now be able to hedge mining operations by shorting bitcoin futures.
Bearish Weapons: Now traders and speculators can act on their bearish sentiment of the Crypto through the shorting of Bitcoin.
Institutional Involvement: After the launch of the futures contracts, institutions will undoubtedly become willing participants in the crypto game. Trading firms DRW and Virtu Financial have already announced they are planning on providing liquidity in the space. Bearish institutions including J.P. Morgan will now be able to take action on their negative sentiment and be on the lookout to exploit short opportunities.
Which Exchange will Dominate?: CBOE and CME Group may have significantly larger volume in the futures space, but Nasdaq does have name recognition among retail investors, many of whom plan on trading the contracts. Nasdaq is planning on adding the Bitcoin contract onto its existing Nasdaq Futures Platform (NFX). We may see NFX repurposed to deal with other cryptocurrencies in the near future. However, the CBOE and CME group have time on their side releasing the contracts as much as 6 months before Nasdaq.
ETF’s pose a huge risk to diversification as we know it. Large scale artificial inflation of asset prices is happening as we speak.