The year 2017 marked a watershed in the cryptocurrency world. We have seen the price of bitcoin increase 1,700% from US$1,000 at the start of the year to a peak of over US$17,000. Not to be outdone, the price of ether, the cryptocurrency underlying the ethereum blockchain, rose 10,000% from US$8 at the start of the year to a peak of US$800.
There are now over 1,300 active cryptocurrencies with a total market capitalisation of US$200 billion. The past year has seen the emergence of cryptocurrencies’ killer application — the initial coin offering (ICO) — bitcoin splitting into bitcoin cash and bitcoin gold, regulators taking a stance on the industry, and an influx of institutional and family office funds buying into cryptocurrencies.
In 2018, we see a continuation of the trends that have been observed in 2017, albeit with some market corrections. Some of the developments we see are outlined below.
VCs BEING DISRUPTED BY ICOs
This year has seen an explosion of projects conducting ICOs as a fundraising option. This can be explained by the popularisation of the ICO-fundraising method using ethereum’s ERC20 token standard.
ICO projects raised over US$3.5 billion in the first 11 months of 2017. Some of the eye-popping amounts raised were by Tezos (US$232 million), Bancor (US$153 million), Status (US$95 million) and TenX (US$83 million).
Among blockchain start-ups, the trend is to raise funding via ICO rather than venture capital (VC). In fact, in 2Q2017, ICO funding (US$797 million) exceeded VC funding (US$235 million) by a factor of three. This trend is likely to have continued in 3Q and 4Q.
Venture capitalists in Silicon Valley now need to buy tokens in ICO projects directly instead of equity in a startup to get exposure to the rapidly growing blockchain industry. We expect more venture capitalists to participate directly in ICO token sales as blockchain startups continue to eschew traditional fundraising models. However, big questions remain as to how regulators will regulate future ICOs and it is expected that regulations will play a big part in shaping future ICO designs.
The past year has seen regulators taking a stand on the industry, with US, Japanese and Singapore regulators being the most permissive and Chinese regulators being the most regressive.
The People’s Bank of China made two major announcements this year, first banning ICOs and then banning cryptocurrency exchanges from operating within China. This resulted in a momentary crash in bitcoin prices. But the restrictive regulations simply led to Chinese cryptocurrency exchanges ceding market share and trading volume to the 11 Japanese-regulated exchanges.
We see a similar trend in 2018 with more regulators making their stance official. Some will take an iron-fist approach by banning ICOs, some will take a laissez-faire approach by not regulating ICOs, while others may take the middle ground by coming up with some regulations for ICOs.
Progressive regulators are already seeing the benefits of ICOs as a way for utility tokens to achieve their distributive network effect. However, securities-type ICOs will find it hard to continue as there are already existing laws and frameworks in most countries. The US Securities and Exchange Commission (SEC) has already released its report, labelling the Decentralised Autonomous Organisation as securities and many ICOs have already stopped selling to US and Chinese citizens.
We may see a few regulators setting up an ICO sandbox to encourage innovation in this space. Countries with permissive cryptocurrency frameworks will see blockchain talent moving over to push innovation there. At the moment, Switzerland and Singapore are taking the lead with some of the most progressive regulations.
We see ICOs being more closely watched by regulators in 2018. At the moment, there are too many questionable projects conducting ICOs with just a simple presentation deck without any working prototype. We see certain countries’ regulators stepping in to put a stop to certain suspect ICO projects.
SCALABILITY AND SPLITS
At the moment, cryptocurrencies are just proof of concepts and there are scalability issues facing all of them. Bitcoin, for example, can only handle about seven transactions per second. Community members have raised concerns about this constraint for over two years but there has been no consensus on how to scale bitcoin.
In May 2017, the “New York Agreement” consensus was reached, which implemented SegWit2x, a two-pronged scaling solution that first implements Segregated Witness, followed by an increase in bitcoin’s block size from 1MB to 2MB in November 2017. The second part of the agreement was not honoured and bitcoin now only has Segregated Witness and 1MB.
The lack of consensus on bitcoin has seen its share of overall cryptocurrency market capitalisation in 2017 fall from 90% at the start of the year to about 47% now. Lightning Network may get activated on bitcoin eventually but this scaling method still seems a long way off with testing only happening now on the Litecoin network.
Due to the disagreements in the ways to scale bitcoin, we saw bitcoin split into bitcoin cash and bitcoin gold in 2017. We do not see the bitcoin community rallying behind a common consensus in 2018 and this will result in more splits in the bitcoin network.
Unlike the bitcoin community, ethereum’s scaling roadmap is more defined. Measures have been taken to scale ethereum, such as Plasma, Raiden Network, sharding and so on. We may see ethereum showing other cryptocurrencies the best practice in scaling blockchain networks in 2018.
As the cryptocurrency market continues to grow, we see more cryptocurrency funds being created and institutional/family office funds putting their money into this alternative asset class. We will finally see regulated structured products being approved in 2018, allowing the broader public to buy into cryptocurrencies more easily. 2017 has seen several bitcoin ETFs almost get approval and the launch of the bitcoin futures market by CBOE and CMF. The year has shown Wall Street that cryptocurrencies as an asset class can no longer be considered too small to be ignored.
We also expect a lot of developments in decentralised cryptocurrency exchanges. At the moment, most trading is done on centralised exchanges where users need to trust their funds with a centralised entity. We expect to see trading volume moving to decentralised exchanges and a market leader to appear in 2018.
There will also be some blockchain interoperability projects being pushed forward and we may see more cryptocurrencies being exchanged on-chain instead of via exchanges. We have seen the first Litecoin-Vertcoin atomic swap happen on-chain and there will be more such experiments in 2018.
Lastly, we expect more enterprise blockchain projects to emerge. Private blockchain firms such as R3, Hyperledger and ethereum Enterprise Alliance have taken a backseat this year with not much news coverage, but we will not be surprised if more companies experiment with the blockchain solutions of one of these platforms in 2018.
Bobby Ong is founder of CoinGecko