By David Goodboy
The current smackdown in the cryptocurrency markets has many investors questioning the wisdom of holding through the selling.
I, however, remain a crypto bull in the major currencies. Here’s why:
Nasdaq Embraces Cryptocurrency
The market just took a vast but underappreciated step toward the legitimization of cryptocurrency. The Nasdaq stock exchange stated that it is open to becoming a cryptocurrency exchange. An established and respected financial marketplace, such as the Nasdaq, embracing cryptocurrency is another bullish step in making the burgeoning blockchain world mainstream.
While roadblocks, such as an accepted regulation framework, remain a stumbling block for the mainstreaming of crypto, Nasdaq’s openness to the market is a definite first step.
Nasdaq CEO Adena Friedman told CNBC, “I believe that digital currencies will continue to persist, it’s just a matter of how long it will take for that space to mature. Once you look at it and say, ‘do we want to provide a regulated market for this?’ Certainly, Nasdaq would consider it.”
Additional bullish news from Nasdaq includes a collaboration with the Gemini crypto exchange. Founded by the Winklevoss Twins of Facebook fame, Gemini is on the forefront of making crypto trading safer and less prone to bad actors.
The exchange has implemented Nasdaq’s surveillance technology known as SMARTS. SMARTS enables Gemini to monitor all the trading on its exchange. Most interestingly, the Nasdaq SMARTS system will be used to determine the settlement price for the bitcoin/XBT futures traded on the CBOE.
Nasdaq’s Valerie Bannert-Thurner explained in a press release, “Gemini has been a leading voice in advocating for stronger transparency and thoughtful regulation of the cryptocurrency markets — views we deeply share and have put into practice as a market operator and technology partner. She went on to say, “Being regulated by the New York State Department of Financial Services (NYSDFS), Gemini is held to the utmost standards regarding capital reserve requirements. This is a major milestone in the application of SMARTS — and an important indicator of our commitment to expand the use of our market technology into non-traditional marketplaces, as well as new frontiers beyond the capital markets.”
The creation of rules based and enforced marketplace for cryptocurrency is a significant bullish step for the nascent market.
The CFTC Cracks Down
The Commodity Futures Trading Commission (CFTC) has stepped into the fray as the first U.S. regulator to issue guidance to exchanges and clearinghouses dealing with derivatives based on virtual currencies.
At the North American Securities Administrators Association conference on May 21, CFTC Chairman J. Christopher Giancarlo said,
“In the next few days, the CFTC website will publish a CFTC staff advisory guiding exchanges and clearinghouses on specific enhancements when listing a derivative contract based on virtual currency.
He went on to say, “The advisory will clarify staff priorities and expectations in reviewing new virtual currency derivatives to be listed on a designated contract market or swap execution facility or to be cleared by a derivatives clearing organization. This advisory will reflect CFTC staff’s current thinking based on our growing experience with virtual currency derivatives. As new products are brought forth, staff will reevaluate and revisit the advisory, as necessary, to address any new and emerging issues.”
The CFTC getting involved is another huge step in creating a baseline for cryptocurrency to attract the big money which leads us to the next bullish happening.
Most recently, the CFTC and the U.S. Department of Justice announced they would be investigating cryptocurrency fraud by traders. While the CFTC is primarily focused on derivatives of cryptocurrency, such as bitcoin futures, it can pursue cases of fraud in the trading in the spot markets.
Indeed, this is not bullish short term. The crypto markets are aggressively selling off due to the announcement. However, long term it is an excellent thing for the market.
3. Institutions Start Coming On Board
Until recently, cryptocurrency investing was primarily an individual pursuit. The large institutional money managers and hedge funds shied away from the asset class due to lack of regulation and ultra-high risk.
However, this is quickly changing. One example is Circle’s, a fintech company owned by Goldman Sachs, purchase of the Poloniex Exchange. Circle has plans to scale up the exchange and utilize it for tokenized assets. Tokenized assets allow the more natural management of existing assets which is opening the door for banks and institutions to accept virtual currencies as a mainstream asset class.
Further opening the door for institutions, crypto exchange Coinbase has launched four new products aimed at the money management market. First is Coinbase Custody, which was designed to be the world’s most secure cryptocurrency storage solution. Coinbase Custody also adds third-party auditing and third-party auditing capacity of an SEC-regulated custodial broker-dealer.
Second, Coinbase Markets will provide an on-premises data center, low latency, and deeper liquidity to help pave the way for institutional activity. Third, Coinbase Prime is an institutional level trading platform providing a suite of trading tools.
Last is the launch of Coinbase Institutional Coverage Group. This feature adds sales, sales trading, market operations, and research to Coinbase’s institutional offerings. I see it as building a template for additional institutional offerings from others; as well as creating a long-term institutional ecosystem similar to the established financial markets.
Also, a recent survey by Reuters revealed that one in five financial institutions would be considered trading cryptocurrencies.
What makes the institutional interest incredibly bullish is the massive amount of capital that can be put to work. The market will merely explode higher should even a small percentage of large asset managers start adding crypto to their portfolio.
4. Central Banks Interest
Even more bullish than institutional interest is central banks getting involved with cryptocurrency. Sovereign bank involvement remains in its nascent stages, but it is a very positive sign for the long-term viability of the crypto markets.
5. The Selloff
Yes, you read that right. I consider the current selloff a very bullish signal. Markets never go straight up. Healthy markets surge higher, then pull back, then push higher. Profit taking is a natural part of every market.
In the crypto world, everything follows bitcoin’s lead. I have little doubt that the introduction of futures contracts on bitcoin is the primary cause of the current selloff. Interestingly, the San Francisco Federal Reserve Bank is on record as saying the same thing.
An economic letter from the central bank on May 7 compared the advent of bitcoin futures and the subsequent sell-off of the underlying instrument (bitcoin) to the creation of tools allowing investors to bet against the housing market and its crash.
The same thing happened upon the securitization of bonds in the early 2000s per the economic letter’s authors.
It is all part of the maturation of the market!
Risks To Consider: Cryptocurrency is exceedingly risky. Even with my very bullish stance for the long term, the short-term volatility is brutal. Only use the money you can afford to lose when speculating in cryptocurrency.
Action To Take: Use the selloffs in the major cryptocurrencies as buying opportunities. Average into positions and be prepared for significant volatility!