Crypto Theses for 2019

Asanother year wraps up, I started writing an email to close friends and investors on the state of crypto and my forecasts. As it got longer, it turned into this sprawling post. A few notes:

  • This write up contains wide-ranging theses and obvious biases (my own) and is by no means authoritative. Please dont nitpick.
  • Where I make predictions, I try to be as specific as possible (inspired bySlateStarCodexs format). Not all predictions are quantifiable. Some will be off and many will likely be directionally incorrect. Thats OK.
  • Unless otherwise specified, my criteria for a liquid, actively-traded project dying is either (1) < $100k volume/$20m market cap or (2) primary development abandoned, whichever comes first.
  • None of these predictions are normative; in many cases I see momentum in products or approaches I consider fundamentally flawed.Cest la vie-this is an attempt at a descriptive 2019 outlook.

Index

  • Bitcoin
  • Ethereum
  • Other Tokens
  • Private Projects
  • Stablecoins
  • Crypto-funds
  • Product Potpourri
  • Crypto Companies
  • Regulation
  • Closing thoughts on prices and adoption

Bitcoin

1)After a strong launch in 2018, I see Lightning Network growth continuing into 2019. I predict the number of Lightning nodes with channels will be ≥ 10,000 from~2,100 now(60% confidence) due to the proliferation of node hardware and hosted solutions (e.g.Nodl.it,CasaHODL) and easy-to-deploy GUIs like Pierre Rochardsnode launcher. I predict network capacity will increase even more from ~$2m notional to ≥ $25m+ notional (75% confidence) due to the lifting of maximum channel limits, dual-funded channels, etc.

2)At least one major exchange will launch a Lightning Network hub for their users as confidence in the stability and security of the network grows over 2019 (50% confidence). If this occurs, my money is on Binance given their iteration speed and product chops or Coinbase, due to increased focus on adoption and usage of cryptocurrencies. Im particularly excited about Cash Apps potential here given 1) theyre a business that understands Bitcoin 2) Jack sees Bitcoin asa path to financial inclusionand 3) Jacksinvestment inLightning Labs 2018 seed round.

3)A working implementation ofSchnorr signatures, for which Pieter Wuille released adraft BIPin July, will make its way into Bitcoin via soft fork by the end of 2019 with ≥ 5% node adoption (75% confidence).

4)Low volatility and lower prices always attracts concern trolls and people who believe they can change Bitcoin for the better.The last two years have seen a lot of forks where the codebase is changed but the UTXO set is kept intact. In 2019, I expect to see the opposite: forks with technology kept intact (to merge future upstream changes) where the monetary policy or UTXO set is modified; an example being the Zclassic team forking Zcash to remove the Founders Reward). I predict 2019 will see a major fork proposal from Bitcoin OGs fixing post-block reward fee market sustainability either by re-appropriating Satoshis Bitcoin (e.g. mytongue-in-cheek tweet-proposalfor Bitcoin Freedom) or by adding predictable, low inflation in favor of the fee-market (50% confidence).

5)2018 was a big year for Bitcoin privacy and fungibility R&D, with proposals forTaprootandGraftrootfrom Gregory Maxwell in Q1, adraft BIPfor theDandelion protocolin May, and an emergent path for a soft fork upgrade to Schnorr-based signatures. By the end of 2019, there will be a clear roadmap for good enough fungibility and privacy on Bitcoins base layer across a meaningful set of trade-offs (e.g., speed, confidence level, etc.) (50% confidence).

6)2018 sawplentyofpromisingexperimentsbuilding products around, with, and on top of Lightning. I anticipate 2019 will see significantly improved UX for developers who want to build with Bitcoin, includingweb3/Truffle-likeJavascript wrappers, hosted node services, better docs, tutorials, etc. which makes me very excited about the potential for new products.

Ethereum

7)2018 was a big year for proof of stake research withJunes deprecationofEIP 1011(Hybrid Casper FFG), scrapping the hybrid PoW/PoS step in favor of moving to pure PoS. The next phase for Ethereum-first termedShasper(Casper + Sharding), now calledSerenity(Ethereum 2.0)-hassix distinct phases, which stretch over several years. There are 8+ dev teams working on independent implementations including:

Despite seeing major setbacks and changes to the Ethereum 2.0 roadmap, I think the first phase will ship some time in Q4 2019 (70% confidence), albeit with friction.

8)Augur, whose launch everyone awaited with bated breath, seems to have gained little traction (outside of niche markets around the election). I suspect it will be the breakout dApp of 2019, leaping from~$1.5-2m notional at staketo ≥ $10m (70% confidence). My bullishness is due to (1) a full year elapsing with a working product (2) improved UX/choice of clients (3) increased brand awareness (4) demand in the market for a non-custodial prediction market (5) stablecoin integration and (6) better market-making and liquidity provisioning.

9)The crypto-collectibles narrative which gained major steam in Q1/Q2 (peaking in Marchs$12m raise for Cryptokitties) will lose traction despite the orthogonal interest for tradable in-game items. While collectiblesare interesting, they feel like a solution looking for a problem (though worth noting: Im not a tastemaker) and gamer adoption feels like a pipe-dream as companies are unlikely to replace their existing monopolies. I suspect several of 2018s niche X-for-Y Cryptokitties imitators (e.g.Etheremon,Cryptopunks, etc.) that are less well-funded will shut down next year (85% confidence).

10)Despite the hype going into the new year, consumer adoption of decentralized exchanges (DEXs) have materially lagged expectations. Relayers leveraging 0x?-?viewed by many as the best exchange protocol?-?in aggregate have traded <$2m notionalmost days in 2018. I predict December 2019s aggregate volume on 0x will lag a single days volume from Coinbase (90% confidence).The big problem with DEX adoption in 2018 is that it’s unclear who the target user is.

While non-custodial trading feels like a boon, the trade-offs presented (e.g. in matching/execution speed, the potential for front-running, decreased privacy, the difficulty of accounting, etc.) make it an unappealing product for institutional investors, not even considering the UX curve. Whether retail investor participation will be sufficient for long-term sustainability remains to be seen. In addition, many DEX protocols with fee-based tokens will get forked (like 0x hasby their top relayer), though I predict we’ll see a surge in cross-chain swaps and similar non-custodial trading options sans token.

11)A lot of early prominent projects promised new types of markets, e.g. forcomputationorstorage. Along with the utility token narrative, demand for these solutions appears dead, as its unclear whether (1) demand for un-censorable XYZ is compelling enough given increased cost relative to centralized alternatives or (2) any of these new marketplaces will be sufficiently bootstrapped to hit the economies of scale necessary for their adoption. Not a single one of the new decentralizing marketplaces promising to marshal distributed or idle resources pose a threat to AWS, Microsoft, Dropbox, etc.

12)I anticipate well see major pushback from disenfranchised ETH miners, who will propose a contentious hard-fork (60% confidence). This is distinct from Ethereum Classic?-?which itself is (hilariously)forking in January. Ethereums roadmap is already relatively antagonistic to miners: Januarys planned Constantinople upgrade (which, among other changes, reduces block rewards from 3 to 2) hurts miners currently at the margin, likely putting them out of business. While a supply reduction is generally bullish, the upgrade may be short-term bearish (given increased miner inventory sales) if its not already priced in.

13)Governance tokens will be less popular than ever by the end of 2019. To me, they appear misaligned incentive-wise: in practice, it feels like rational token holders should be oriented around (1) entrenching existing power structures (as original token holders have out-sized sway in future protocol decisions, including future value-capture design) and (2) maximizing token value rather than whats often cited as the goal (maximizing tokenutility). The excitement around the governance token (e.g. We dont need to worry about value-capture, we just need to build something worth governing.) was a by-product of a never-before-seen crypto bull market and will warrant meaningful skepticism in 2019 (60% confidence).

14)On the face of it, decentralized finance (a.k.a. DeFi or Open Finance), a dominant narrative of Ethereum in 2018, is compelling to me in spite of my Bitcoin bias. A goal of the cryptocurrency movement has always been to increase financial inclusion and the core premise of the DeFi movement-to provide crypto-native financial products to the unbanked-has obvious appeal. However, I dont understand what product market fit looks like for the vast majority of DeFi products.

If these products (in many cases, novel non-custodial derivatives or leverage-oriented lending products) are designed for institutions, I struggle to understand how theyll achieve product market fit for many of the reasons posed in10on DEXs. Bootstrapping liquidity will beextremelydifficult (i.e., I dont want to trade an exotic non-custodial derivative with no liquidity and its unlikely a marginal trader will want to do the same- the classic chicken-and-egg problem). If these products are designed for retail investors, I dont understand the product market fit either. The long-shot thesis may be that the globally unbanked are looking for easy entry points that DeFi can solve, e.g. exposure to US capital markets/equities with synthetic on-chainCFDs, but I am doubtful. Most consumers in the world dont have meaningful savings, mirroring Vanguard-type indices or more complex derivatives doesnt feel like the right entry point for global adoption.

I believe some of the US-based teams working on the DeFi stack are taking on material risk and will face regulatory scrutiny in the US (70% confidence) given their move into structured products. This will test the runaway killer app of Ethereum: regulatory arbitrage (first with the offering of unregistered securities offerings and now with quasi-legal structured derivatives), as teams move fast and break [the law].

While engineers are discussingcompounding financial primitives,Im worried about compounding technical (or legal) risk.

Other Projects

15)Two years after pseudonymous Tom Elvis Jedusor posted a paper outlining the Mimblewimble architecture to the#bitcoin-wizardsIRC channel, 2 different implementations,GrinandBEAM, are set to launch in Q1 2019. Both subscribe to different design philosophies, from Grins Bitcoin-like immaculate conception to BEAMs Zcash-like foundation model, in addition to differences in monetary policy, stance on ASICs, etc. I expect both will be meaningful in 2019s privacy wars, with Grin seizing the lions share (≥ 70%) of market interest in Mimblewimble (75% confidence). Though its monetary policy isnt ideal for early adopters due to high early inflation, it wouldnt surprise me if it finishes ≥ $250m market cap (60% confidence).

16)Given both comments from Zooko about bothPoSand theZcash Founder’s Rewardand rumblings from the community, I think it’s possible that (1) Zcash plans a multi-year transition to propose a move to a hybrid PoW/PoS system (50% confidence) or that (2) a change to the Founder’s Reward (30% confidence) takes place. As the Founders Reward runs out in 2020, with a lot of research and engineering work left, I can see a proposal to extend it (or lengthen the reward beyond 2020) emerging.

17)It’s not a secretI’ve been hopingmost un-differentiated means-of-exchange tokens (e.g. $IOTA, $DASH, $BCN, $XVG, etc.) will die for some time. With the exception of Litecoin (which has the benefit of an old brand, widespread integration, and Bitcoin test-net status) and Dogecoin (which will never die), I expect ≥ half these un-differentiated payment tokens will be flushed out over the next year (70% confidence) as (1) 2018s price action shows they are subject to the same volatility issues as Bitcoin (2) growth of the Lightning Network dampens need for a faster Bitcoin (3) they dont have interesting innovation keeping a large community engaged the same way other public blockchains do with privacy (e.g. Monero, Grin) or ecosystem products (e.g. Ethereum, EOS, Tezos).

18)From the days of the Silk Road, dark net markets (DNMs)-along with pornography-have been a hot bed for cryptocurrency innovation. DNMs have gottenmore sophisticated than ever, moving from centrally-run sites with single points of failure (e.g. DNS shut-down) to decentralized infrastructures, spider webs of Telegram chats and bots, and better reputation systems. There are still problems: bitcoins are still the pre-eminent cryptocurrency of choice (given lack of customer awareness) despite the lack of better, more private options and the fiat-to-bitcoin conversion is a honeypot for law enforcement agents.

Its no secret I dont think there are many real use cases of blockchain outside of quasi-legal applications. While its directionally clear that the future of DNMs is in moving to a fully decentralized stack (with smart-contract-based escrows, etc.), the lack of privacy on most public blockchains makes this a pipe-dream for 2019. Despite this, DNMs serve as an important crypto mind virus entry-point for many-a painkiller rather than a vitamin.

19)With greater focus on the fairness of Bitcoin and other cryptocurrencies, its inevitable we will see new distribution-focused blockchain experiments. WhileIm less enthused, 2019 will likely be the year a Valley-based blockchain project focused on the long-standing goal of getting crypto in the hands of everyone in the world comes out. This form of UBI (inb4 universal blockchain income) is compelling to many and will have some traction as cryptocurrency mind-share has exploded beyond its libertarian-anarchist roots to include ideologies across the political spectrum.

20)$XRP, err, I mean Ripple Labs, Inc. will get a small fine/slap on the wrist from the appropriate regulatory authorities, who will finally confront the fact thatits probably an unregistered security(80% confidence). Thanks to the regulator-revolving-door,Ben Lawsky(a.k.a. Architect of the BitLicense: The Worlds Worst Crypto Regulation) isnow on their board. While its unlikely anyones going to jail, its hard to see Ripples egregiousness let them off scot-free.

21)Bitcoin Cashsplit in 2018, with factions ABC and Satoshis Vision (SV) emerging. While the ABC camp has kept the $BCH ticker, BCHSV lives on. With Bitmain potentially seeing internal issues (rumored layoffs, balance sheet issues, IPO delays) and Craig Wright willing tosee 2014 pricesto win, this could continue on despite the fact that no one cares. Im more optimistic about Bitmains business than most people, but think that Bitcoins dominance v. both forks will grow from today (80% confidence). I also expect ABCs dominance v. SV (~64% right now) will grow to > 80% by the end of the year (70% confidence). Despite my qualms about Bitmains strategic decisions, Dont start a hash war with Bitmain might be as prescient as Never fight a land war in Asia.

22)2018 was a big year for Bitcoin forks with Bitcoins December peak sparking imitators like Bitcoin Gold ($233m market cap), Bitcoin Diamond ($140m market cap), and Bitcoin Private ($41m market cap). They’re all currently Top 25 in market cap and have survived everything from51% attacksandexposs of covert pre-mines, but I think theyre unlikely to stay in the top 25 by the end of the year (70% confidence, lest the crypto market’s extreme inefficiency fails me).

23)Both EOS and Stellar have committed a significant amount of time to building out developer experience and core infrastructure over 2018. Despitemy skepticismof their potential to be internet money, theres interest from some dev teams globally to interface with these networksfor decentralized applications. The groups hacking on both networks are extremely well-funded. While they arent seen by many in the crypto cognoscenti as legit projects, some SV energy might push them to meaningful developer adoption (50+ launched dApps) in 2019.

24)Ive beenwhistling with schadenfreudeon masternodes for some time. They were the perfect bull market trade: lock up more and more coins as prices go up (even more right-tail vol thanks to the smaller float) but we havent seen a true unwinding/liquidity crunch despite the drawdown. I would be very surprised if any masternode projects outside of DASH have the liquidity or community backing to extend life to 2020 (40% confidence…sigh).

25)Token curated registries, once the hottest crypto-economic primitive on the scene, make less sense to me now than they did before 2018. They strike me as a prime example of 2017s excesses (and desire to tokenize everything). The model feels extremely convoluted and it wouldnt surprise me to see the industry move away from the TCR en masse (60% confidence).

26)Formal on-chain governance, which saw significant hype in 2017 from projects likeTezos,Decred, andAragonleft a lot to be desired. While the goal of formal governance systems is to enable smooth upgrades with input from a range of stakeholders, most suffer from elementary issues, cementing plutocratic regimes rather than enabling open participation. Most experiments with formal governance feel primitive due to the lack of proper tooling (e.g. for anonymous voting). There were some new announcements, including Commonwealth Labswork with Edgeware(a chain on Parity Substrate) but the long-term viability of formal governance systems remains unclear. In 2019, I think well see some non-trivial core protocol decisions decided on-chain for the first time.

27)One thing to be more excited about: with more research in formal governance systems, DAOs could make a comeback over the course of 2019. Widely written off as a failed concept due toThe DAO, two years later, there are new attempts. One DAO launch which looked cool this year is theMoloch DAO, which aims to contribute to Ethereum infrastructure and solve the tragedy of the commons problem in the ecosystems open-source (infrastructure) development. Ivestated beforethat crypto projects should have a plan to dissolve into some future decentralized governance model. I see crypto projects re-architecting Swiss foundations into DAOs as the first potential killer use case and think we will see iterations of this in 2019.

Private Projects

Note: I’m not an investor in any of the projects or companies mentioned in this section.

28)Despite sustained drawdowns in public crypto markets, private valuations (particularly for projects coming from Silicon Valley) haven’t quite adjusted. Fred Wilsonrecently notedthe relationship between public market valuations in the equities market:

There is a big difference between the private markets and the public markets. They do not move in lockstep. For years now, the late-stage private markets have been trading at valuations that are well in excess of their public market comps. That is true for a number of reasons. First, private market investors have longer time horizons and are looking for a three to five year return, not an immediate one. Second, private market investors get a liquidation preference which in theory protects them from losses.Finally, deals in the private markets clear in an auction like environment where the highest bidder wins the deal. All of these factors mean that a hot company can raise capital in the private markets at valuations well in excess of where they can raise capital (and trade) in the public markets.

Most compelling for crypto is the last argument: starved for alpha,investors pattern-matchedto find the next Ethereum. While several crypto-funds still have these investments marked at cost, its hard to believe investments made at ≥ $500m valuations (and in many cases, in excess of $1b) will represent gains for investors when the broad public crypto-market has drawn down so significantly. In 2019, I expect that many teams will re-raise at lower valuations or see material drawdowns when listing (90% confidence).

29)Some of these networks include Dfinity, Hashgraph, Algorand, Filecoin, Ncent, Thunder Token, etc. I anticipate less than 50% of these networks will launch in 2019 (70% confident).

30)The last quarter of 2017 and the first half of 2018 saw sky-high private valuations thanks to a potent combination of new crypto fund/whale money and a path to liquidity that divorced fundamentals and due-diligence in favor of memes and FOMO. As fast paths to liquidity have all but disappeared, I anticipate well see projects return to more traditional approaches to raising money (read: equity) and focus on protocol-adjacent business models rather than building new base-layer protocols.

31)A launch ofHandshake(technical overview) could be an interesting 2019 development. Though Im skeptical of their need for a token, replacing the ICANN root server is an interesting problem and its clear the current DNS/Certificate Authority system is broken. One potential 2019 development: Handshake serves as a crude but effective solution for sites with regulatory or speech-related risk, which is enough to serve as an effective bootstrapping mechanism.

32)One thing Im not looking forward to in 2019: the battle of messaging app crypto-tokens, with Telegram (TON), Signal (Mobilecoin), and even Whatsapp jumping into the fray. While none of them are interesting as a potential non-sovereign money competitor, Im most interested in seeing what Facebook does: astablecoin designed for remittancecould make a meaningful impact while on-boarding millions of people to the cryptocurrency UX (as well as normalizing it in India, a country whichhas had 2018 legal boutsaround Bitcoin). Im least excited for Telegram Open Network, who had ared-hot $1b saleon the backs of crypto mania, Telegram’s traction, and many many pages of techno-babble.

Stablecoins

33)2018 was definitely year of the stablecoin with Paxos StandardsPAX, GeminisGUSD, CirclesUSDC, CarbonsCUSD, and TrustTokensTUSD; though none of these are true decentralized stablecoins (I prefer the term price-stable asset backed token or fiat-coin if thats a mouthful).

Since these tokens allow traders to treat exchanges like banks, it should be no surprise thatthey are under KYC/AML-scrutiny, like banks.Fiat-coins are not permission-less, thoughaggregating demand for the productat the exchange-layer makes perfect strategic sense for exchanges. Even the briefest taint of anunsavorytransaction can charge Tyler and Cameron to personally shut down your account.

Holding fiat-coins leaves you at the whim of the issuer to control your financial fate: weve just swapped one God for another. WhileTether dominance has fallento new lows due to concerns over credit risk and the emergence of these new projects, its unclear what product market fit for fiat-coins looks like. Is the use-case as an intermediary safe-haven or settlement currency for traders? Is it a new digital dollar with its own ecosystem of products?

In 2019, I anticipate Tethers dominance of the fiat-coin ecosystem dips below < 50% (75% confidence) with total fiat-coin (counting TUSD, USDT, USDC, PAX, GUSD) exceeds 4b in market-cap from ~2.5b now (80% confidence).

34)Despite my reservations about the long-term viability of the model,MakerDAOsaw serious growth in 2018 (with~1.8m ether lockedas of this post). While the system is robust-a by-product of excess collateralization in the system (currently ~370%)-use generally seems limited to demand for margin in ether, though the team has shared otheruse cases for CDPs. Continued deposits of ether in CDPshave affected ether price, it wouldn’t surprise me to see ether in CDPs exceed 3% of total ether in 2019 (60% confident) though less volatile collateral or the emergence of centralized options likeCompound Financemay be more appealing.

35)After marquee stablecoin project Basisreturned money to investors, we lost one of the most interesting experiments in cryptocurrencies. Is it possible for a group of venture capitalists and clever twenty-somethings to bootstrap a price-stable currency based purely on belief (spoiler: probably not for now)? Despite the set-back, teams likeReserveare working on similarseignorage sharesmodels with plans on decentralizing over time. I think its unlikely we see a a seigniorage shares-based stablecoin project launch with > $1b in total issuance in 2019 (80% confidence).

36)Fear over Tethers backing was higher than ever in 2018 with concerns aboutbanking relationships,enablement of price manipulation, and a constantstream of concernsover a proper audit of funds (though this may beimpossible to provide in any conclusive way). The year ended with aBloomberg storyhinting that all the reserves may in fact be there. I predict its highly likely Tether in fact has all the US dollar deposits they claim they do (85% confidence) but that due to other investigations around criminal activity (e.g. money laundering, market manipulation, etc.), consumers may have their funds locked by authorities in a long withdrawal process,similar to online poker sitesafter the infamous Black Friday (30% confidence).

Crypto-funds

37)My favorite fundamental indicator is still price action. Earlier this year,I saidabout crypto funds:

Early in the cycle, many progressive funds will allocate to managers to get smart on the space (see: Passport Capital, Union Square Ventures, a16z, Sequoia, and others allocating to crypto-funds). This comes out of a recognition thatthe new asset class is different than the one that they’re used tobut could potentially become much more relevant to their strategy… As initial hype subsides, a second generation of capital allocators will emerge who are more experienced, taking away capital from the gun-slinging fund managers who rode the first wave. It’s highly unlikely that the very best fund managers in a new asset class were also the first to spot it. We’re starting to see this now, with Matt Huang and Fred Ehrsam’s new fund, a16z’s newly announced crypto-fund, and several more unannounced funds raising money in today’s crypto bear market.

This has roughly held up as new second-generation funds have raised from (1) more credible LPs [including the Yale endowment] (2) with longer lock-ups and (3) more credible GPs.

With that said, I think funding will slow down in 2019 given (1) lack of momentum in public crypto markets (2) limited investable opportunities given the size of the market and (3) proliferation of beta exposure vehicles. The third point is critical:many of the largest funds are overweight BTC/ETH, with capital allocators paying excessive fees for beta(particularly with long-only models). While experienced GPs will have no trouble raising and often argue that BTC/ETH allocation is a portfolio decision, I suspect many LPs will opt for exposure directly through low-cost single/multi-asset investment products.

38)With the blood this year, the opportunity for crypto fund differentiation finally emerged- though returns look less than stellar (Vision Hill’s benchmarkingwas a positive development). More funds are starting to figure out where they fit in the landscape (e.g. fundamental long-only v. long/short v. generalized mining etc.) v. generically labeling themselves crypto funds. I expect well see similar institutionalization in 2019 top-to-bottom of the entire crypto-fund pipeline, from back-office ops to custody. In addition, many funds will be one-and-done after the last year’s price action and will see too many redemptions to continue (the death zone AUM-wise is probably ~$25m unless you skimp majorly on services/legal/salaries).

39)Concentration will becomeen voguewith consolidation of funds (due to shut-downs and re-allocation of LP capital) as blue-chip funds (of the fundamental long-only/long-short flavor) have heavy overlap with ownership in the same 20-25 names. I anticipate this will help greatly with decreased cross-asset correlation over the course of 2019.

40)Investing strategies from traditional capital markets like activist models, e.g.Layer1s, have been extremely under-explored. While early models look something like Blockstream-meets-trading-firm and questions remain (e.g. is a model where wins are socialized but losses are not sustainable?), Im excited about the development.One activist model Im particularly interested in seeing: a fund pursuing legal arbitrage to attempt to secure treasuries from projects where the aggregate value of treasury funds exceed market cap.With the current market landscape, creativity is necessary.

Product Potpourri

41) Ive been skeptical of enterprise blockchains and promised I wouldnt spend any more time on them aftermy experienceat a meet up last year. That said, it looks like corporate interest in capital-b Blockchain is slowing with depressed crypto prices using things likeearnings call mentionsas a useful proxy. Who would’ve thought? Turns out investment in enterprise or permissioned blockchain efforts were only cool while crypto prices (and corporate interest) was mooning.

In many cases, were in Year 3 or 4 of the Blockchain, not Bitcoin experiments that started in the aftermath of the 13-14 Bitcoin bubble. We’ve already started to see the first casualties asnoted execsare abandoning projects ranging from R3, Hyperledger, and other efforts from Microsoft, IBM, etc. I expect most of these teams to see layoffs or shut down in 2019 (75% confidence) on the back of limited adoption and even more limited utility.

42)A positive development of 2018 is the number of new, cheap node-in-a-box hardware products, ranging from boutique consumer products likeCoinminesto barebones hardware likeNodl.its. While costs range wildly based on feature-richness and form factor and there are concerns about commodification (from an investors perspective), this is undoubtedly good for users who want self-sovereignty when interacting with public blockchains. The average industry cost for a full-node box should trend to ~$150 USD (though it can be run even more cheaplyon a Raspberry Pi).

43)Security tokens saw extreme hype going into 2018 withhundredsofmillionsof dollars in investment to exchanges, token standards, issuers, and more.My thesisremains steady that nearly all value generated by tokenized securities will be captured by 1) underwriters 2) asset holders [who benefit from the illiquidity premium] 3) early investors in STOs who can arbitrage sophistication 4) infrastructure providers.

A little STO inside baseball: as it stands, the space has little traction and is teeming with underwriters-who often stand todirectlybenefit from the deal from advantageous pricing as principal investorsin addition tounderwriting fees-hyping up future retail investor interest. Incentives are often misaligned.

Despite grandiose claims of $80T TAMs, Im skeptical that security tokens have found investor-market-fit.Its unclear who the right audience for STOs is. Its not institutions, who lack any effective way to hedge or manage risk of these long-only products (or take custody, for that matter). Howard Marks’ comment in a2015 letter on liquiditycomes to mind:

Its one of my standing rules that No investment vehicle should promise greater liquidity than is afforded by its underlying assets. If one were to do so, what would be the source of the increase in liquidity? Because there is no such source, the incremental liquidity is usually illusory, fleeting and unreliable, and it works (like a Ponzi scheme) until markets freeze up and the promise of liquidity is tested in tough times.

With investor-market-fit uncertain, a potential macro cycle shift, and lack of institutional-grade infrastructure, and the roadmap to deployment looking uncertain, Im skeptical the world will be tokenized in 2019. I would be surprised if the actively traded market of (novel) tokenized securities exceeds $2b in the next year.

44)There are a wide range of different institutional-grade custody offerings funded in Q4/Q1 of last year set to launch in 2019, either with direct self-custody products or by providing the technology back-end for other custodians. I suspect well see a major custody product offering from a traditional sell-side firm (excluding Fidelity Digital Assets) by the end of the new year (60% confidence). I also think well see the first crypto-native custody solution be granted broker-dealer/qualified custodianship status, a major step in the maturation of the asset class (75% confidence).

45)Im bullish on efforts likeLolliandCash App, beautiful products from companies who grok consumer UX and are making meaningful strides to help consumers understand and buy, earn, move, and store cryptocurrencies directly.I suspect these and new consumer products will lead to millions of people interfacing with a cryptocurrency for the first time in 2019.

Crypto Companies

46)Asdescribed earlier: Coinbase is fighting a multi-front war. Fidelity, Gemini, and a slew of Wall St. firms are competing for any institutional business. In the event there is an STO battleground to fight over, tZero, Templum, Harbor, Securitize, ASX/Malta/Gibraltar, and others are in fray. The profitable consumer business faces constant pressure from Robinhood, Circle, and Binance.

While their regulatory moat remains strong, Coinbase appears to be going into 2019 heavily focused onincreasing consumer usage/adoptionandaggressively expanding token listings(perhaps motivated by dampened trading volume in a crypto bear market). In 2018, Coinbase launched both theirventure armandexpanded their M&A activity(acquiring Paradex,Earn.com, and acqui-hiring many smaller teams) in an effort to become the Google of crypto.

While Im skeptical of the strategy to list tokens with dubious utility other efforts, a few facts remain true going into 2019: (1) Coinbase is still synonymous with place to buy crypto for millions of consumers. (2) They have a war chest to rival many of the largest companies in the space while (3) having a sizable regulatory moat in the US and (4) top-of-the-line product teams (at least relative to other crypto companies).

In 2019, I expect to see continued expansion into crypto-native consumer products that allow consumers to interface directly with protocols in addition to improvements to exchange infrastructure (as the bear market offers ample time to prepare for the next cycle of adoption).

Coinbase has already launched their Earn.com-based education service. Other product moves from them could include: a more consumer friendly wallet (Toshirefreshed) which allows customers to stake and interface with dApps/Lightning, increased focus on lending (Coinbase is a bank after all), and productization of the OTC workflows as theyexpand their institutional presencewith sales and trading (other OTC desks lack the product and engineering chops).

I also strongly suspect that Coinbase shifts to a more Bitcoin-friendly position in 2019.

47)On the subject of exchanges, after a year spent acquiringfastest unicorn everstatus, I suspect Binance will have a much tougher 2019. What Binance has in engineering chopsthey forego in regulatory attack surface area.

I suspect 2019 will see (1) Binance more comprehensively close access to US participants (75% confidence) after facing regulatory action (2) launch a full-on DEX (80%confidence) (3) launch multiple global fiat on-ramps (80% confidence) while (4) becoming the dominant exchange in Africa (90% confidence). While regulatory action will slow down growth from prospective US customers, I doubt theyll see a full shut-down given their Malta domicile (30% confidence). I would peg a prospective shutdown of BitMEX (given shades of market manipulation/excess leverage) significantly higher (70% confidence).

48)2018 was the year of the shitty exchange tokens following the runaway success of Binances token in 2017 (success always breeds imitators), with many resorting to shady transaction mining from companies likeFcoin,catex,ZBG,coinall,coinex,Cashierest, andabcc.

This is a new type of scam: instead of taking fees from customers, these shady third-tier exchanges choose to give back the notional value of trading fees to customers in the form of their native exchange token. This is clearly unsustainable, with a couple of these businesses already shutting down.

Many of these native tokens saw huge jumps in initial volumes from curious traders but are now cesspools of wash-trading given easy gamification. Not only does offering a token represent a serious liability, it represents major counterparty risk as the exchange-token scheme could collapse at any moment. I suspect ≥ 75% of the exchanges offering these trans-mining schemes will shut down in 2019 (85% confidence).

49)Consensys has had a rough year with major drawdowns in ether and other ERC-20 tokens (held in treasury/launched by Consensys subsidiaries), ending the year withlay-offsand plans ofspinning offmost of their less-favorite children. This is a bearish sign and I suspect the majority of projects that are spun off will have trouble raising follow-on financing due to cap-table concerns and broader theses shifts in the ecosystem.

50)Given Consensys contributions to Ethereum infrastructure (includingInfura,MetaMask,Truffle, etc.), it raises meaningful questions about the sustainability of open-source development and how important non-core protocol-adjacent work (e.g. developer infrastructure, etc.) will be funded. Historically, we’ve seen a few different models:

  • A company likeBlockstreamorLightning Labs(taking cues from Docker, Redis Labs, SUSE, and others), focused on delivering value-added services on top of an open-source protocol. Whiletheir primary orientation is profit-seeking, a large part of the company’s resources is committed to maintaining the project. Historically, this has been seen as unsuccessful (if not on an absolute basis, certainly a questionable risk-adjusted bet) for clear reasons: (1) It was unclear for many years what, if any, services would emerge as potential profit centers. (2) Unlike other new technologies (e.g., a web framework or database), a bet directly on the technology, without layered execution risk, is possible. Despite this, some of the largest contributions to Bitcoin have come from similar teams, indicating that their work was integral.
  • An exploratory research group likeChaincode Labs(which I believe is entirely self-funded), which has free reign to work on anything theyd like. This sort of patronage model allows for intellectual freedom, including hosting mercenary contributors or community members like tenured professors. While the freedom is optimal, funding these types of initiatives is often quite difficult: it requires recurring charitable donation.
  • A formal foundation which has wider-ranging set of responsibilities, including interaction with regulators, organizing the network launch, etc. This is?-?of course?-?sub-optimal and unlikely to be of any interest to communities like Bitcoins (who have historically pushed back against any formal Foundation designation given the many charlatans whove attempted to profit).
  • Direct fees from a crypto-network used to support core protocol and protocol-adjacent work, the approach taken by teams like Decred and Zcash.

While economists like Elinor Ostrom have tried toanswer this questionin other domains, I suspect well see significant iteration on different funding models in 2019.

51)While the news ofBakkt’slaunch (delayed twice) and the announcement ofFidelity Digital Assetswere eagerly promoted by the broad crypto-community, I suspect their Q1 launches will have less demand than expected with adoption trickling in over the course of the year. It remains ambiguous to me who the anticipated customer is for Bakkts bitcoin-settled futures product. Fidelitys DNAappears to be deeply-rootedaround Bitcoins cypherpunk roots, they will go a long way to combating common worries aroundrehypothecationduring the financialization of Bitcoin.

52)[Disclosure: I’m an advisor to The Block.] 2018 saw the emergence of a number of new media properties (and media-adjacent companies/projects) includingThe Block,Messari,BREAKER,Token Daily, andTruStory. While they have various flavors of ideology and differing goals, they all go a long way to legitimizing coverage of an industry plagued with fake news, disingenuous PR, and blatant scams. While regulators have their hands full with low-hanging fruit, these companies are often the first toexpose foul play?-?they will continue to play an important role in uncovering the deep underbelly of long-tail crypto projects as the industry continues disciplined self-regulation.

53)Bitmain, once the unstoppable inspiration of 1000 mining is centralized thought-pieces (a behemothstaring at a $12b 2018 IPO price), doesnt appear to be immune from crypto bear market woes. The bearish case for Bitmain is straightforward: theyve suffered immensely from a costly bet on Bitcoin Cash (and an ensuing pissing contest, err, hash war), lost some top engineering talent (who are now competitors), and are victims of depressed crypto prices along with other miners. Bitmain has lost technological superiority?-?their latest, the S15 (23 TH/s) has formidable competition from both BitFurysTardis(80 TH/s) and EbangsEbit 11+(37 TH/s).

Despite additional rumblings that Jihan Wu and Micree Zhan will be replaced with new leadership, I believe Bitmains obituaries are premature. 2018 saw many people come at the king, though some early competitors arealready shutting downdue to the difficulty and prohibitive cost of 7nm ASIC manufacturing. Bitmain maynever be Ghashbut shutting down this year feels like a long shot (85% confidence).

54)Ivebeenbearishon Overstock (and tZeros) prospects for some time. I think its highly likely that Overstock successfully spins out their retail business (85% confidence) by 2019s end but that their blockchain efforts continue to sputter given a lack of profitability and slower-than-anticipated adoption of security tokens.

55)After seeing the $1b in revenue some OTC trading desks were generating in 2017, banks leapt at the opportunity to capture juicy spreads and generous commissions, most notably led (and latersupposedly shuttered) by Goldman. I suspect demand for Wall St. offerings for spot BTC trading will be ~0 given the existing landscape of institutional-grade options (which execute the majority of spot bitcoin trading). It would surprise me if any tier-one bank opened an OTC spot or derivatives trading desk in 2019 (50% confidence).

56)A large exchange (top-10 in volume) will be hacked in 2019. The bear market is prime time for hackers, particularly with more fringe exchanges laying off some staff amidst difficulties (50% confidence).

57)As part of broader market consolidation in the bear market, I think well see strategic acquisitions by larger companies or early movers in both on-chain analysis (e.g. Chainalysis, Elliptic, Coinmetrics) and custody products like Anchor (60% confidence).

58)Rage over payment system censorship felt like it reached a tipping point in 2018 with Mastercard (downstreamvia Patreon),SWIFT, and evenPayPal demonstratingthat payment networks likeother web-based messaging servicesare susceptible to top-down decisions to cut off free flow of money at any point. Bitcoin can potentially catch a lot of these leaks as we saw with late 2018 examples from fringe social-networkslike Gaborcontroversial personalitieslike Jordan Peterson. I anticipate this trend will continue into 2019.

Regulation

59)2018 also saw many different proposals (from the BIS, IMF, and others) around central bank digital currencies (CBDCs) peaking withthis paper.

The core argument for CBDCssome economists makeare that by moving private deposits to CBDCs, a more safe narrow-banking system system emerges replacing the current commercial and private banking infrastructure (which in turn allows central banksgreatercontrol of the economy). Other economists like Ken Rogoffhave made historical argumentsin favor of moving to digital cash systems (phasing out large bills) citing both financial efficiencies and greater oversight into money laundering (and downstream crime).

Personally I find CBDCs terribly uninteresting, another attempt to extend to the financial systems Foucauldian panopticon. CBDCs, not cryptocurrencies is just the latest of the already-tiring Blockchain, not Bitcoin trend. However with the world largely trending towards digital payments, I think CBDCs in some form are inevitable though I doubt we see large-scale consumer-ready deployments in 2019 (75% confidence).

60)Weve already started to see the firstregulatoryactionscome to ICO teams in 2018, with the SEC going after low-hanging fruit, establishing a clear pattern through the process. While no large projects have faced serious regulatory scrutiny, I anticipate the SEC will shift focus here in 2019 with a top-25 project (by market cap) facing injunction (60% confidence).

61)2018 saw more Bitcoin ETF proposals than ever withSolidX-VanEck Bitcoin Trust,ProShares Bitcoin ETF(they also filed aShort Bitcoin ETF),GraniteShares Bitcoin ETF(correspondingshort ETF), and others, including more esoteric multi-asset ETFs from companies like Bitwise Investments. Despite outstanding concerns over market manipulation of BTC spot prices, I think its likely we see a Bitcoin spot ETF approved by the end of the year (70% confidence), with my bet on VanEck to grab first approval.

62)One place weve seen little regulatory action is with crypto influencers facing fines or other actions, though regulators have startedclamping down on celebrities. Naming names is rude, but this SHA-256 hash has my list of influencers that are more likely to get rekd, with a reveal coming in 2020:a6c061624f97399d08fb58dbd23801ab9d03a9329128f5147a9873c9daf906a1

63)Along with excitement over CBDCs, I think its likely some country (likely smaller) will announce a pilot or experiment around a blockchain-based identity system (50% confidence).

Some closing thoughts on prices andadoption

With this year marking the start of a crypto recession, the focus for many technologists has been aroundadoptionandusage.

In my view, the only thing that can drive cryptoadoptionis (1) bitcoins or other cryptocurrencies serving as an escape valve for people who are in uncertain monetary regimes (and willing to stomach Bitcoins volatility), e.g. Venezuela, Iran, etc., (2) people buying into the idea that Bitcoin is effectively a call option on becoming a future store-of-value, or (3) people buying the idea that Ethereum, Dfinity, Tezos, and other crypto-networks represent a radical shift in the way computing works (Web 3.0) ahead of what will likely be a multi-year validation process.

There may be others, but those three things represent to me the majority of factors that could drive crypto adoption in the short-term.

As peoples interest fade and near-term sell pressure drops off (which weve seen over the last several months), well enter a prolonged phase of virtual boredom (read: this is right now) which lasts months, if not years, where many spend time speculating on whats next for adoption (post-13/14 cycle this was new protocols like Ethereum, merchant/payment processing tools, etc.) while the majority of people involved in the previous bubble leave.

I dont really worry about questions like short-term adoption drivers. People will buy cryptocurrencies for one of the reasons above, or they wont. Gradually as the market bottoms out, prices becomes more appealing and perhaps renewed interest leads to another cycle, serving a self-fulfilling prophecy. Or maybe the price dips below a point of no confidence (i.e., BTC prolonged < $1k) at which point no one has faith and only HODLers of last resort are left (like we saw last cycle). Either way though, the digital sound money genie is out of the bottle.

As Ivenoted before,cryptocurrencies are still in the risk basket (along with venture capital) for institutional capital allocators.Particularly considering a broader macro risk off scenario over the next 12-18 months, I doubt bitcoin prices will make new all-time-highs in 2019 (95% confidence) and think theres a strong chance we dont break $8k BTC (60% confidence).

I think its unlikely that BTC will be a crisis alpha in the next recession the way many people are hoping (Ive also notedmy own signsof late-cycle behavior). That said, the flight-to-quality to bitcoin and other blue chip cryptocurrencies will likely continue into 2019.

Either way, Ill be here studying, investing, and sharing my learnings. Whatever small role I can play in the experiments around non-sovereign money is among the most important projects Ill work on in my lifetime.