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The Market Corner: the month in review

By Filippo Lecchini

Crypto Currencies

Earlier in the year we discussed Bitcoin and the technology behind it, Blockchain. Even though September brought some selloffs, possibly a correction, 2017 has been a huge year for crypto currencies and digital money, with a rally in the neighborhood of 300% for BTC (that is Bitcoin’s ticker which you can search using BTC or BTCUSD on any website like Google or Yahoo Finance, among others).

Cryptocurrencies have made their way into the general conversation with media and investment experts joining the discussion. Business of course has been following along with a proliferation of exchanges, trading platforms, websites, applications and information readily available to the general public.

While Bitcoin mostly dominates, the conversation is the number of cryptocurrencies, not just their price, that increased exponentially. ICO, which stands for Initial Coin Offering, is now a popular concept that describes how new coins are being brought and offered to the public for adoption or investing. The idea is not new. Historically there have been many precedents of complementary or local currencies that communities chose to adopt with or without legal tender. What’s new in this case is the digital nature and universal access. Believe it or not there are hundreds of different coins available for trading or investment. For example, have you heard of NEO, OMG, SAFEX or DASH? You can trade them on Bittrex or Bitfinex. More user friendly alternatives for beginners are Coinbase and GDAX. Deribit offers futures and options on BTC only. ICOs have also become a popular way for tech savvy startups to raise capital in exchange for tokens that practically represent stakes in the business, pretty much like some kind of shares.

Unsurprisingly the vertiginous development of the sector, some would say a movement, has triggered all sort of reactions. Some call crypto currencies a fraud while others believe their price action is typical of a bubble without venturing as far as dismissing them completely. Believers describe them as a revolution that will be just as important as the internet, with the majority of people mostly confused and left wondering what this is all about.

Regardless of one’s affinities with one camp or another, it is certainly true that a lot of questions remain to be answered, as it often happens with new markets and technologies.

Are coins an alternative to traditional currencies? Adopters seem to believe so; however the amount of coins is finite and some believe they are better suited to store value like gold, so they hold them as an investment. Certainly nobody wants to be next paying for a very expensive pizza.

The idea that coins can replace traditional currencies clashes with two important facts. Adoption is limited and the level of financial and technological literacy required for people to participate is not common, at least for now. Secondly they lack legal tender as the authority to print money normally belongs with the government. Another aspect supporting the investment proposition is market capitalization, which is often discussed to validate the size and legitimacy of new and existing issues. That is generally a metric to evaluate stocks, not fiat money. Nobody knows what the euro’s market cap is.

However, what supports the idea of day-to-day use as wallet money is the opportunity to reduce cost, uncertainty, risk and transaction costs. Blockchain seems pretty unequivocally en route to disrupt the existing forms of payments and all sort of transfers. Innovation is about improving efficiency and reducing transaction costs, not only of the monetary kind, which in this case will also translate into a drastically reduced role of intermediaries.

At the time of writing China has announced a ban on ICOs and crypto currencies exchanges which possibly triggered the selloff mentioned at the beginning. Whether that was in the cards already and the headlines were just a signal for the market is hard to tell, but regardless of what happens observing how it all unfolds will be exciting and exhilarating. The popular sentiment is that a new wave of innovation will change how financial transactions happen forever, one way or the other.

Looking ahead:

The FED will start unwinding its portfolio in October. That has been known for a while and markets have not shown any particular reaction so far, but nobody knows the full extent of what happens next. This is unchartered territory, and with a possible if not likely rate hike coming in December, the mood can change in a heart beat.  Political circumstances will weigh in as well. The German elections were not as uncertain as some of the other recent ones in Europe, but the wider international situation is far from reassuring. In the US ambivalence reigns. The new administration and congress took office with a very ambitious agenda, but as we approach the end of September, there is no telling of what can be accomplished in the near future. Tax reform, healthcare reform, infrastructure and budget, it will come up again in December, are as important as government undertakings can be and could certainly sway the economy and the markets in fundamentally different directions.


RISK DISCLAIMER: Trading in futures products entails significant risks of loss which must be understood prior to trading and may not be appropriate for all investors. Past performance of actual trades or strategies cited herein is not necessarily indicative of future performance. The information contained herein is provided to you for information only and believed to be drawn from reliable sources but cannot be guaranteed; Phillip Capital Inc. assumes no responsibility for errors or omissions. The views and opinions expressed in this letter are those of the author and do not reflect the views of Phillip Capital Inc. or its staff.