How to Protect Yourself – and Profit – From The Crypto Dark Age
Editor’s note: Crypto expert and analyst Eric Wade sees a cryptocurrency “Dark Age” on the horizon… Is he right? Will cryptos rally when bitcoin goes “mainstream” in U.S. markets? We at American Consequences frankly don’t know. But we think what Eric has written is worth reading.
The crypto “Dark Age” is coming. And it all started with 10 simple words…
On June 14, crypto exchange Binance updated its terms of service to say “Binance is unable to provide services to any U.S. person.”
This change is casting a big shadow over the entire crypto industry.
You see, Binance is the world’s largest crypto exchange. (Other exchanges claim higher trading volumes than Binance, but their numbers likely include manipulated data.)
Every day, Binance processes more than $2 billion in trades, and it lists more than 150 cryptos – many that are hard to find on other exchanges.
U.S. investors account for the biggest chunk of the exchange’s user base. Over a recent 30-day period, more than 23% of Binance’s traffic originated in the U.S., according to web analytics firm Alexa. The next-closest country is Japan, at 6.6%, followed by India at 5.2%.
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But since June 14, U.S. residents haven’t been able to create new accounts on Binance. And after September 12, they will no longer be able to trade on Binance.com (though they’ll still have access to their cryptos).
At that time, Binance is planning to launch a new exchange for U.S. residents, Binance.US. Binance.US will likely have more restrictions, less liquidity, and – most importantly – fewer tokens.
The move is part of a larger trend.
Crypto exchange Bitfinex stopped serving Americans last year. Meanwhile, exchanges Bittrex and Poloniex are restricting Americans from trading certain tokens.
This is a sign the crypto market is maturing. The exchanges that serve U.S. residents must meet stringent guidelines. That should make them safer and more accountable – and legitimize the sector in the long term.
But for now, it’s also a big step backward for U.S. traders – and the entire crypto market.
Estimates suggest roughly 23 million Americans own cryptocurrency. And nearly 50% of all crypto investment funds are based in the U.S.
So U.S. investors are critical to the crypto ecosystem. Cutting them off from certain cryptos is creating a crypto Dark Age, during which liquidity will dry up and some crypto prices will fall.
This all sounds bleak, but we believe the upcoming changes will create big investing opportunities for us. You see, while the Dark Age may be bad for small, illiquid cryptos, it’ll be great for bitcoin and other mainstream cryptos.
The SEC Problem
Recently, the U.S. Securities and Exchange Commission (“SEC”) has been ramping up pressure on crypto exchanges.
In April, the SEC released its “Framework for ‘Investment Contract’ Analysis of Digital Assets.” The long-awaited document was supposed to give “plain English” guidelines on how to determine if a crypto is or isn’t a security (a financial instrument like a stock or bond designed to produce profits).
But not everyone agrees on how to interpret the SEC’s framework.
For example, by some interpretations, the framework says that every crypto (besides bitcoin and Ethereum) could be considered a security.
If a crypto can be defined as a security, U.S. law says it must be registered with the SEC before it can be sold. If it isn’t, then the issuer is breaking federal law by selling an unregistered security. And exchanges could be targeted for letting customers buy and sell those unregistered securities.
So different exchanges are listing – and delisting – different cryptos.
Not only does this create risks for the exchanges… It creates risks for investors. Imagine buying a crypto on a U.S. exchange and then learning soon after that the exchange delisted that crypto. Prices for that crypto would likely collapse.
Now, most cryptos aren’t really securities. Some contain aspects of securities, but that’s often a small component of their overall functionality. That’s why we support the idea of new regulations that exempt cryptos from securities laws.
For now, though, exchanges have to decide whether to ignore the SEC, limit the cryptos they list, or block U.S. residents entirely.
Binance intends to come into compliance with U.S. securities law, so it will limit its offerings.
Bittrex and Poloniex also recently moved to block more than 40 cryptos from U.S.-based traders.
This is just the beginning. We expect to see a growing number of exchanges block cryptos and U.S. investors.
Preparing for Turmoil
Exchanges must now balance two opposing forces: the need to make money and attract customers, and the need to avoid regulatory trouble with the SEC. It’s a balance between risk and reward.
Playing it safe by only listing a handful of cryptos makes it hard to attract new customers. But listing a questionable crypto – and attracting new customers – could get an exchange in trouble with the SEC. So many popular exchanges are choosing to limit the cryptos they offer.
Now, this doesn’t mean you need to sell cryptos that aren’t available on mainstream exchanges. Regulated exchanges aren’t the only places to trade cryptos. There are decentralized exchanges (DEXs), as well as dozens of other smaller, unregulated exchanges where Americans can trade. They include Hotbit, Kucoin, and Mercatox.
But these smaller exchanges do come with higher risks. They have less liquidity (which means more volatility). They’re also high-value targets for hacking. And like Binance, they could elect to block U.S. traders at any time.
Still, in the short term, trading volumes will likely climb on these exchanges. But keep in mind, the SEC could turn its attention to any exchange at any time, so volume might not last.
How Decentralized Exchanges Fit In
A few days ago, I sold an older Ethereum miner – a stripped-down computer with nine high-power graphics processors added to it – and the buyer paid me with crypto. My smartphone wallet created a QR code (a two-dimensional barcode), which his smartphone could read. He scanned it and sent crypto straight to my phone.
Within seconds, I had my money. No banks were involved, and the fee for the transaction was mere pennies.
Cryptos were designed for peer-to-peer transactions just like this. But peer-to-peer transfers only work if the two parties find each other.
That’s where crypto exchanges come in. They connect buyers and sellers.
DEXs attempt to eliminate middlemen by giving traders a place to meet online and transact without having to trust anyone else (like Binance) with their crypto.
The sector shows great promise. But right now, DEXs are too slow and illiquid. They simply aren’t ready to take the reins from the world’s largest exchanges on many cryptos.
Bitcoin Will Be King
As more exchanges shut out U.S. buyers, more people will turn to mainstream cryptos like bitcoin. There are several reasons why.
First, almost every crypto is available for trading against bitcoin. Bitcoin also isn’t in jeopardy of being removed from exchanges. And bitcoin has been outperforming almost every other crypto.
Consider Lisk (LSK) – a smart contract platform. Over the past three months, it’s up 32% in U.S. dollar terms. However, it’s down 52% relative to bitcoin over the same time frame.
Other cryptos have suffered the same fate.
If you combine the market cap of every crypto listed on CoinMarketCap, bitcoin now accounts for more than 65% of the market. That’s a level we haven’t seen in more than 18 months. And we expect bitcoin’s market share to keep rising as Binance’s September 12 deadline gets closer.
Second, the SEC stepping into the exchange market just helps legitimize the sector. It’s a sign that crypto is moving from the minor leagues to the majors.
These changes couldn’t come at a better time for bitcoin bulls. As traders get forced out of smaller, more speculative coins and back into bitcoin, they’ll push bitcoin prices higher.
And the world’s most-valuable crypto is already up 174% year-to-date. In fact, it’s outperforming every major asset class in the world.
We believe the rally is just getting started. Remember, bitcoin isn’t just inflation-resistant… it will eventually have zero inflation due to a built-in “ceiling.” Once a grand total of 21 million bitcoins have been mined, that’s it. No more new bitcoins. Right now, bitcoin’s supply is growing at 3.75% per year. That number will fall to 1.8% by May 2020. Then, it will get cut in half again four years later.
New supply is shrinking just as central banks around the world loosen their monetary policies. It’s no wonder Intercontinental Exchange (ICE), which operates the New York Stock Exchange (NYSE), is racing to roll out an institutional-grade crypto trading platform called Bakkt.
The simple fact is bitcoin is gaining acceptance as a store of value… or “digital gold.” So long as governments flood the markets with easy fiat, look for it to outperform.
At face value, the Dark Ages are bad for bitcoin. The truth is… as always… more subtle. It’s actually fuel for bitcoin’s red-hot rally.
By Eric Wade is an analyst, editor, and investor who began picking stocks and trading futures contracts in college, eventually becoming a Certified Financial Manager at the largest American retail brokerage.
His cryptocurrency career began by mining bitcoin and other cryptos, and he has become a successful investor and analyst in this space.