The cryptocurrency market is back! Volume is roughly double the size of peak trading in 2017

3 Month Change: +116% $134B - $290B

Daily Volume: +169% $32B - $86B (peak $131B), approaching volume of Nasdaq (~$92B/day)

Peak Volume in 2017: $42B, Low Volume in 2018: $8B

In this issue:

Four Key Themes in Q2:

#1: Less users are holding more Bitcoin , however, distribution is improving as the top 100 wallets reduced Bitcoin holdings by 21%. Institutional traders (or high net worth individuals) are driving trade volume, compared to retail users in 2017.

Bitcoin transaction size increased nearly 8.5X from $3,750 to $34,800 while the number of active Bitcoin addresses only increased by about 39% from (618k to 856k). Users who already have Bitcoin are accumulating more, versus having more actual users/wallets holding.

Top 100 Bitcoin addresses reduced holdings from 19.5% of all BTC in 2018 to 15.3% this year. This continued dilution, or spread, of wealth, shows a fairer distribution as market adoption grows.

99% of total trading volume is happening on centralized exchanges as opposed to 1% on decentralized (on chain volume is only 860M on average a day)

$6.25B of fiat inflow into the crypto ecosystem in Q2 from stablecoins, crypto funds, and exchanges who were waiting on the sideline for the bear market to end

First half 2019 blockchain wallet growth has outpaced this time last year by 22% as we grew from 32M wallets to 40.3M compared to 21.5M to 26.2M first half last year. We estimate between 60% to 80% wallet growth this year placing end of year total wallets between 51M and 58M.

#2: Geopolitical tension and generally positive regulatory guidance continue to fuel adoption.

Many high net worth individuals in Asia sold their local currencies into BTC this quarter as USA and China trade war picked up steam - with both sides imposing a combined $360B in tariffs. Hong Kong also increased tension with mainland China in June - increasing the local price of BTC.

President Trump implemented a hardline stance towards Iran this quarter - increasing military presence nearby as tensions escalate. As President Trump imposes strict financial sanctions many Iranians are buying BTC in peer to peer marketplaces and on decentralized exchanges.

Russian headlines paved the path to more fruitful legislation, with the Central Bank considering a gold back cryptocurrency and using cryptocurrency on their international trade borders with China.

India clarified that their ban on crypto won’t include 10 years of jail time for traders as many initially feared but has yet to identify the restrictions that will be implemented.

The SEC and FINRA finally admit to being slow to implement regulations creating a backlog of requests from Investment Banks and Brokers who want to start offering crypto products to US citizens. As we move closer to congressional hearings regarding Facebooks Libra we expect better guidance toward the future of US blockchain legislation.

The S&P 500 underperformed BTC both Q1 (3.22%) and Q2 (5.06%) this year while BTC performed 12.9% and 175.42%.

#3: Bitcoin dominates the market: Bitcoin represents 68% of the total crypto market cap because other utility coins have not lived up to their utility claims, whereas Bitcoin has: as a store of value and investment vehicle (trading).

BTC dominance hit a historic low of 36% in January 2018 when alt coins and ICOs were surging. ETH performance during late 2017 outperformed BTC by nearly 30%

The hype and dominations of altcoins were short-lived following the decline of BTC in January of 2018. Many speculated XRP to take over the world banking system, Litecoin to become the silver to BTCs gold, and ETH to “flip” and overtake BTC - but none of that has happened and probably never will.

Bitcoin, however, has continued to outshine most altcoins retaining its place as the dominant force as a store of value with the top developers building scaling solutions on top of the chain to increase speed and decrease fees.

Since the fall of ICO and altcoin season in January of 2018, BTC dominance has increased signifcantly outperforming altcoins on the way down through the 2018 bear market, and on the way up in the current 2019 bull market.

The strong correlation between Bitcoin price and Altcoin price has made it difficult for the majority of alts to outperform a strong BTC. Stellar moves in the same direction as BTC 61% of the time, ETH moves the same as BTC 68% of the time and Litecoin 69% of the time.

#4: Two major price increase periods occurred over the past quarter. Both were surrounded by Positive Sentiment and Geopolitical Tension.

Q3 Predictions

Going forward we recommend traders keep an eye on the price during times of both strong headlines for crypto adoption and worrisome political trouble

Increase in Retail Investors: Total blockchain wallets are expected to grow another 20-30% next quarter to about 52M.

Increase in Average Transaction Size: Average transaction size should reach 2018 highs of $55,000, driven by new adopters.

Continued distribution of wealth: Over the next quarter we expect the ratio of wealth of top 100 address to all addresses to continue to decline by 1-2% as new high net worth individuals and institutions accumulate large portions of BTC via OTC desks

Hashrate and difficulty to reach all-time highs: as miners look to accumulate every Bitcoin they can before block reward halving in 2020. Bitcoin dominance is expected to break above 70% and reach as high as 80% in the next quarter.

Decentralized exchange volume will remain steady or decline: as more new retail traders invest we expect decentralized exchange volume to remain stable or at a slight decline until the markets fully mature as many DEX exchanges are too complicated for the standard user.

Institutional traders will continue to dominate: who have brought much of this past quarters volume will continue to trade on regulated exchanges by the CBOE, CME, and CFTC.

Increased blockchain legislation: Libra testimony this month will force US lawmakers to start initial drafts of legislation. Russia will pass legislation permitting for retail cryptocurrency trading and start cross-border institutional trading.

Asian crypto markets will trade at a premium: Chinese citizens will increase demand for Bitcoin as they face increased censorship from their government. South Korean institutional interest will gain headlines driving the price higher first locally and then abroad.

African markets get much-needed crypto infrastructure: Through google search query “Buy Bitcoin” Nigeria is the number 1 search area. We expect countries with hyper-inflationary currencies in Africa to build crypto exchanges and launch their local currency digitally to quench the demand for a more stable currency.

Global financial markets slow down: The US Federal Reserve just announced their first interest rate cut and the NY Fed predicts a 33% chance of a recession in the coming 12 months. These two factors may be signals of an underlying fundamental weakness in the economy that is not yet exposed. If global stock markets decline the demand for safe-haven assets like Gold and Bitcoin will increase in price.

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Fundamental Price Drivers

Cryptocurrency is still a highly speculative market, which means that sentiment and technical analysis represent a significant portion of the price movements. The past quarter's fundamental price drivers can be broken down into four main categories Positive Sentiment Drivers, Negative Sentiment Drivers, Geopolitical Turmoil and Crypto Exchange Outlier Events.

Positive Sentiment Drivers increase optimism in the space while producing a positive economic value or removing barriers to entry. Eg. Facebook removes crypto ad ban, or Russian central banks consider gold backed cryptocurrency

Negative Sentiment Drivers increases uncertainty about future cryptocurrency prices leading many retail traders to sell. Eg. lawsuits against Bitfinex for defrauding investors or the Chinese government seeking to ban crypto mining

Geopolitical turmoil international fear of political uncertainty that is brought about by the fighting between two or more countries. Eg. President Trump's trade war with China or Iran shooting down a US military drone.

Crypto Exchange Outlier Events semi-random one-off events that happen in early stage markets that traders can't predict but need to keep in mind can happen. Cryptocurrency is still an early stage speculative and inefficient market with over 1000+ global exchanges with the top 5 representing over 93% of the real daily volume. Small movements in one exchange can affect others with a large impact. Eg. Binance bans US traders or Kraken flash crash.

Over the past 3 months this is what moved price

Positive Sentiment Drivers

The past quarter offered many positive headlines invoking optimism among all investors of crypto, from Bitcoin to altcoins. These headlines may have been the reason for the long positive uptrend we saw this quarter marking the start of the bull run that is expected to continue through next year.

Facebook announces Libra

Introduces cryptocurrency to the mainstream in a user-friendly way



Creates headlines bringing BTC back into the public eye



Has access to facebook’s 2.6B userbase & partnerships with Uber, Spotify and Mastercard



Will draw capital into crypto in unprecedented ways

Facebook lifts crypto ad ban

Hindered growth of many crypto startups as exposure to consumers was limited



People are now more likely to read crypto related headlines 45% of Americans get their news from Facebook

Forbes Headline: “Bitcoin Price Report: The Bottom Is In”

3.3M daily readers saw a positive headline on Crypto



Reminder Bitcoin is not dead and the opportunity to invest is now

Courts decide Bitfinex & Tether don’t have to follow NYAG demands

USDT is the second largest trading pair after BTC



Affects the underlying price of BTC in many markets

Russian Central Bank considers gold backed cryptocurrency

Russia made several positive crypto headlines this year



Adopting crypto instead of defending from it

India denies crypto ban & jail time for crypto traders

1.3B people in India & with many being unbanked provides a large opportunity for digital currency



The central bank removed unsubstantiated fear

Negative Sentiment Drivers:

Over the past quarter, there were several headlines in the news which made retail investors fearful about the future of cryptocurrency. Many of these headlines turned out to be nothing more than speculation, and many of the proposed policies were never turned into legislation, but at the time they shook the market.

NYAG accuses Tether & Bitfinex of defrauding investors

$1.00 stable coin only $0.74 backed made people question the true price of BTC

NYAG submits new documents against Bitfinex & Tether The reopened case against Bitfinex and Tether drove fear back into investors

China discusses a shutdown of all crypto mining

China is linked to 71% of total BTC mining power - any attempt to shut down power could freeze the BTC blockchain or open it up to 51% attacks

China & US trade negotiations restart

Decentralized currencies do well when there is fear in current economic systems



When everyone is happy there is little distrust leading many to question why we need alternatives to the status quo

Geopolitical Turmoil

When fear is invoked of existing political or financial systems, individuals question why they are following the status quo and often drive them to create a new system - like Satoshi building BTC out of the 2008 financial crash. This past quarter there had been a lot of headlines regarding increased tensions between global leaders invoking financial restrictions on foreign nations, and even threatening for military action - this events often created an increase in local BTC prices and helped decentralized cryptocurrencies gain traction.

President Trump threatens to raise Chinese tariffs Capital flight from local currencies into decentralized ones

President Trump signals tougher economic sanctions on Iran Iranian citizens attempt to move money overseas through crypto as banking sanctions tighten

Hong Kong protests push the local price of BTC higher Protesters buy crypto for increased anonymity compared to local currency

Initial Brexit deadline British Pound uncertainty as trade rules are set to change

China increases tariffs on US goods Tougher tariffs increase capital outflow from both countries currencies

US blames oil tanker attack on Iran Escalating military tension drives uncertainty of local currencies

US & Iran confirm Iran shot down a US drone Increased military tension from the already heightened stance further drives concern about long term health of countries economy



Crypto Exchange Outlier Events:

These outlier events are referred to as the “known unknowns” - events that can happen at any time, we just don't know when or if they will. Hacks, flash crashes, and bans are nothing new to crypto and they will continue long into the future as that’s the nature of the digital market. These events - given the magnitude via dollar value - can have different implications, varying from a small price change, to a major trend change.

Bitmex hits a record $16B volume in a single day - BTC crashes from 13.6k to 11.2k in less than 2 hours Traders overleveraged themselves as price skyrocketed - leaving the other side of the trade empty When price increases 20% in one day - expect some sort of price retracement

Binance announces a ban of US users US traders have been skirting local regulations for years as the US SEC & FINRA fail to provide guidance Binance increasing the long term health of crypto by launching a US regulated exchange to now make users trading legal

Trader market sells $38M BTC on Bitstamp - driving the price down 13% in one hour A hacker transferring funds to their account bidding significantly below market price shows the potential for manipulation in a thin order book

BTC flash crashes from $8,000 to $101 on Kraken Unpredictable flash crashes occur for various reasons from over leverage, thin order books, or to fat finger trades Little effect on long term health of crypto - just a blip on the price chart

Binance hacked for $40M Luckily this hack was small and fully compensated or it could have tarnished the Binance brand name and crypto as a whole



And that wraps up Q2 2019.

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President Trump tweets about Bitcoin:

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