The Blockchain Bitcoin & Crypto Weekly CXO Briefing is all you need to know, each week, jargon free for CXO level business leaders and investors who will use this technology to change the world. Each week we select the 3 news items that matter and explain why and link to one expert opinion.
For the intro to this weekly series, please go here.
News Item 1: Bitcoin’s Lightning Network Moves Closer to Compatibility
Decrypted: The SegWit soft fork was activated on the Bitcoin network. This is Bitcoin’s biggest upgrade to date, rearranging how data is stored in Bitcoin blocks. Nodes that upgraded will use a whole new data structure, while the nodes that didn’t upgrade will still continue to function normally.
Bitcoin blocks now have a weight limit instead of a size limit, which allows for blocks up to 4 megabytes. Additionally, SegWit also solves the malleability bug, that’s been a major problem for Bitcoin, but most importantly opens up the road for advanced protocols like the Lightning Network that are necessary to push Bitcoin into mainstream.
Our take: Lightning Network is a technology that leverages off-chain scaling. Its sets the stage for a decentralized option and extends Bitcoin with some nice properties for asset transfers.
The basic idea is to switch from a model where all transactions are stored on the blockchain, which creates a bottleneck, to a model where users can employ private payment channels to transfer value. Payment channels are a way to do secure Bitcoin payments, without broadcasting each transaction to the blockchain. The Lightning Network effectively improves upon this idea by creating a network of these payments on top of Bitcoin.
The Lightning Network allows for rapid payments, no third-party trust to control the transfer of funds between two entities, reduced blockchain load as transactions are not stored on the blockchain, additional multi-signature security and atomic cross-chain swaps.
One of the major benefits of the Lightning Network is cross-chain transactions, also known as atomic cross-chain transactions or atomic swaps, where users can trade different cryptocurrencies instantaneously, without risk. Payments can be routed across more than one blockchain, including altcoins. With Lightning transactions we’ll be able to stream money to pay anyone in the currency they want to be paid in, with whatever money we have in our digital wallet. For example, with atomic swaps a user would be able to pay a merchant in Bitcoin, even if they only had Litecoin, as long as both blockchains are using the Lightning Network.
On May 10, Segwit was activated on Litecoin, allowing Lightning Network transactions from various software clients to settle on the cryptocurrency’s network. The creator of Litecoin, Charlie Lee, described the two competing networks as two highways:
“Think of it being two highways: Today, Bitcoin is packed full of cars and Litecoin is empty. Even with Bitcoin packed, the cars are not coming to use the Litecoin highway today because it’s not connected and it’s inconvenient (centralized exchanges and slow on-chain transfers) to go across. LN will build bridges over the highways. But a side benefit is that these bridges will connect both highways together. Maybe the bridges on Bitcoin are enough such that cars will still stay on the Bitcoin highway. My bet is that the convenience and the cheaper tolls on Litecoin highway will convince cars to cross over and use Litecoin. But we won’t know until both are built.”
Including Litecoin, at least another six cryptocurrencies are running the SegWit upgrade, and most have tested Lightning transactions on their main network successfully: Groestlecoin, Syscoin, Digibyte, Viacoin, Vertcoin and NAV coin. All of these cryptocurrencies have seen price spikes, that many attribute to the Segwit integration.
In the future, there could be dozens or even hundreds of cryptocurrencies using the Lightning Network. Each network simply needs to implement SegWit on their blockchain. While not every cryptocurrency is compatible with SegWit, Lightning can make it possible to interconnect different blockchains, allowing smaller altcoins to benefit from the advantages of established cryptocurrencies.
The Lightning Network is still under development, and there are still several steps before before Lightning transactions are available on Bitcoin’s blockchain. When it ready, this technology has the potential to significantly improve scalability and privacy and help Bitcoin achieve mainstream adoption by individuals and institutional users.
News Item 2: The Bitcoin Sovereign Wealth Fund
Decrypted: Estonia is one of the most digitized countries in the world. The small Baltic state has been one of the most technologically advanced nations, since the dawn of the Internet. It was the first to offer its citizens free, public wifi and was the birthplace of Skype over 13 years ago. Often labeled “Europe’s Silicon Valley”, Estonia is now considering its own Initial Coin Offering (ICO) for a token called Estcoin.
Estonia’s proposed ICO, described in a Medium post by Kaspar Korjus, the managing director for country’s e-Residency program, is not national policy yet. If there’s enough demand, the government plans to launch its own token. The Estcoin would allow Estonia’s many e-Residents, who don’t actually live in the country, to invest in the country’s future.
Our take: Estonia is not the first country to consider launching its own digital currency to rival to cryptocurrencies, like Bitcoin and Ethereum. Many countries around the world are exploring the idea of issuing their own national digital currency. China’s is testing the idea of a new national cryptocurrency, and so is Russia.
Usually, this involves a central bank issuing digital money using distributed ledger technology, but for Estcoin this is not the case. The proposed currency will not be issued in the traditional way. Instead, an official government-backed ICO will issue these coins and offer them to the public. The proposed currency would effectively serve as a national digital currency for Estonia.
Estonia may have an advantage over others that are considering the same idea. Over the last three years, with its e-residency program, Estonia has offered foreign entrepreneurs the freedom to easily start and run a global business in the country. Estonia is the first country to give foreigners an Estonian government digital ID, the ability to register an EU company, access to banking and payments services and tools that allow entrepreneurs to digitally sign documents. So far, over 23,000 people from 138 countries have signed up to the program.
The Estcoin holds a lot of promise for Estonia. It would allow people from around the world to directly invest in the country’s digital future. The goal of the Estcoin is to raise funds to help expand the country’s economy and increase its global presence. The proposed idea would result in the creation of a major digital investment fund, raised through the world’s first government-supported ICO. It would give people a stake in the future of the country, not just as an investment, but also providing expertise and ideas to help propel the country and grow exponentially.
Keep in mind that all holders of Estcoins will have a say in how the overall fund is used, which could mean that digital residents could have greater power than the actual citizens of Estonia. It’s expected that the Estonian ICO would add 10 million digital residents, which would outnumber the country’s 1.3 million current population.
The tokens could be used to pay for government services or even taxes. However, the Estcoin is meant to be an investment. Korjus explained that the funds could be managed through a Public Private Partnership (PPP). This would enable Estonia to invest in new technologies and innovations for the public sector, from smart contracts to Artificial Intelligence, as well as make it technically scalable to benefit more people around the world. Estonia would then serve a model for how societies of the future can be served in the digital era.
If token is successful and rises in value after the ICO, this could be a major boost for the Estonian economy. But it could also be a major boost for ICOs overall. Launching a government-supported ICO would solidify Estonia’s laws around cryptocurrencies. While US has only only begun to address ICOs, with the recent investigative report by the SEC, Estonia would allow companies to launch ICOs with no gray areas.
Vitalik Buterin, one of the advisors for the proposal, said: “An ICO within the e-Residency ecosystem would create a strong incentive alignment between e-residents and this fund, and beyond the economic aspect makes the e-residents feel like more of a community since there are more things they can do together”.
This kind of project has the potential to blur the boundaries between nation states. If Estonia is successful, it will show the world a new borderless digital nation, where opportunities are not just offered to a country’s residents, but can be potentially offered online to anyone, anywhere.
To track the progress of the Estcoin sign up here.
News Item 3: SEC and CFTC Take Opposing Views on Whether Bitcoin is Ready for Mainstream Investors
Decrypted: The U.S. Securities and Exchange Commission (SEC) has rejected Bitcoin ETF requests in the past. In March, it rejected the Winklevoss Bitcoin Trust, a Bitcoin-based ETF. It also rejected a Bitcoin ETF listing on NYSE Arca by SolidX.
With these rejections the SEC does not allow securities with Bitcoin as the underlying asset to be traded on a national securities exchange, because of its concern that Bitcoin markets are unregulated and susceptible to manipulation.
But recent developments have changed that picture and Bitcoin derivatives are likely to be available to investors much sooner. In July, LedgerX, a cryptocurrency trading platform, was granted permission from the U.S. Commodity Futures Trading Commission (CFTC) to act as a clearing house for cryptocurrency-based derivatives contracts.
Regulatory conflict is not unique to digital currencies. Whether the SEC, the CFTC or both try to claim power over trading in the digital currency markets, potentially there could be a battle for regulatory dominance.
Our take: While the Winklevoss and SolidX Bitcoin ETFs have faced tough times with the SEC, the recent CFTC approval of LedgerX practically allowed it to offer options on Bitcoin to institutional investors this fall, making it the first federally regulated Bitcoin options exchange.
Also, some competition may already be on the horizon for LedgerX. On August 2, the Chicago Board Options Exchange (CBOE) announced it was planning to launch cash-settled Bitcoin futures in the coming months. The futures, which are pending regulatory review by the CFTC, could begin trading in Q4 of this year or early 2018, and would be supported by market data from the Gemini digital asset exchange.
But it looks like the winds are changing, as the SEC rejections were made prior to the LedgerX approval. LedgerX’s stamp of approval by the CFTC is unique and groundbreaking. Bitcoin derivatives will generate significant volume, and this will potentially pave the way to an ETF approval, The debut of Bitcoin options coupled with a recent change in SEC leadership, could signal approvals for Bitcoin EFTs. And if one gets approved, it’s likely that several others will not be far behind.
Other Bitcoin ETF are already positioning themselves for a more favorable shift in the SEC’s view of Bitcoin. On Aug. 11, VanEck filed a proposal with the SEC for an exchange-traded fund called the VanEck Vectors Bitcoin Strategy ETF. The VanEck Bitcoin ETF would be backed by the new Bitcoin derivatives. If approved, the Vaneck Vectors Bitcoin Strategy ETF will be listed on the Nasdaq Stock Market. It will be an actively-managed ETF which does not seek to replicate the performance of any index. VanEck is not the only one, REX also plans a new fund that will invest in Bitcoin-based derivatives. REX has filed two products, specifically REX Bitcoin Strategy ETF and REX Short Bitcoin Strategy ETF.
The CFTC’s stance to Bitcoin differs from that of the SEC. A U.S. federally regulated venue for derivative contracts settling in digital currencies opens the market to a much larger customer base. The SEC and the CFTC may end up sharing power in the digital currency trading space, but the LedgerX approval gives the SEC the precedent it needs to approve future Bitcoin ETF proposals.
Opinion: Is It Too Late To Invest In Bitcoin?
It’s been an incredible year for Bitcoin, with its value quadrupling in the past six months, surpassing the value of an ounce of gold for the first time in March. Over the last three weeks Bitcoin’s price has remained around the $4,000 mark, and various analysts and traders have tried to guess the price of Bitcoin in the future, with some saying it might even reach $15,000 in the near term.
Personally, I think there is never a bad time to buy Bitcoin, but it really depends on your strategy. If you’re looking for short-term gains, currently with the price soaring, your upside will be much more limited. Everyone would love to buy Bitcoin at the cheapest price possible, for example at $0.01 the price when Bitcoin was first released. But if you are investing for the long term, then it doesn’t really matter when you buy, as the future of Bitcoin is a bright one.
Scarcity makes Bitcoin valuable to a lot of people. Since Bitcoin has a fixed supply of coins, its value will continue to rise until it hits its 21 million supply cap. Even when the supply cap is reached, if the demand continues, its price will maintain an upward trend.
Considering everything that going, we are seeing major economies around the world embrace it, more institutional investors coming on-board, scaling issues being resolved, and the fact that most people in the world have not even heard of Bitcoin, tells me that it will continue to grow and the price will rise even more in the coming years.
For now, after SegWit’s activation last week, the price remains bullish and people are optimistic about the future. Undoubtedly, with the debate about the Segwit2x roadmap there will be a lot going on over the next few weeks with can impact the price of Bitcoin and create volatility in the short-term.
Despite the gains Bitcoin has made over the past few years, there is no reason to think the price has peaked already. Opportunities will come and go with Bitcoin. If you think the price right now is too high for a single Bitcoin, you don’t need to buy a full BTC. You can always buy a fractional amount of Bitcoin.
Bitcoin has enormous potential to grow and evolve, so its a smart idea to buy, even if you buy small amounts, and hold on to it for the long-term.
Ilias Louis Hatzis is a Blockchain entrepreneur who writes the Blockchain Bitcoin & Crypto (BBC) Weekly CXO Briefing each Monday.
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