Blockchain Bitcoin & Crypto Weekly CXO Briefing for week starting 9th October 2017

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: SEC Asks For Two New Bitcoin ETF Applications Withdrawal

Decrypted: Several companies have attempted to launch Bitcoin derivative products, but up to now the SEC has been reluctant, issuing rejections in the past and more recently suggesting to applicants to withdraw their applications for Bitcoin ETFs.

VanEck has backed down on its proposed Bitcoin ETF application, at the request of regulators. Rex Shares LLC, is another financial services company that withdrew its application to create Bitcoin exchange-traded futures, indicating in a letter that officials at the SEC don’t want to weigh in on such products until the underlying instruments become available for investment.

Also, the Intercontinental Exchange had hoped to launch Grayscale Investments LLC’s Bitcoin Investment Trust (GBTC), but reportedly withdrew its application once it ran into difficulties with the SEC.

Our take: Currently, there are no U.S. exchange-traded Bitcoin derivative products on the market. Earlier this year, the SEC denied requests made by the Winklevoss brothers and SolidX for Bitcoin ETFs.

The Chicago Board Options Exchange is planning to launch cash-settled Bitcoin futures in the coming months, but no official launch date has been announced. The futures, which would be supported by market data from the Gemini digital asset exchange, could come to market as soon as Q4 or early 2018, according to the CBOE. Also, Bitcoin options have already been approved by the CFTC, but they too have yet to launch. LedgerX is expected to bring them to market soon.

A Bitcoin ETF would be a major step and have a positive impact on the price of the cryptocurrency. The listing of a Bitcoin ETF on a major U.S. exchange, would put Bitcoin on track to rival other commodities such as gold, silver and oil. It would allow for institutional investors, funds and individuals to add Bitcoin to their portfolios.

When it comes to the Bitcoin EFTs, the U.S. government isn’t the only one that’s been treading lightly. However, other governments around the world have been adopting different stances. Bitcoin investment products are already available in Europe and regulators in Canada are considering a Bitcoin ETF.

There are exchange-traded Bitcoin products in Europe, ETNs (Exchange-Traded Notes), but they’re not ETFs. The Stockholm-based XBT Provider was the first company to offer Bitcoin Exchange Traded Notes, COINXBE and COINXBT, which are listed on the Nasdaq Nordic.

In Canada, Evolve Funds Group Inc. recently announced that it filed a preliminary prospectus with the Canadian securities regulators for Canada’s first cryptocurrency ETF, Evolve Bitcoin ETF (“BITS”). This new Evolve ETF is designed to provide Canadian investors with indirect exposure to the world’s first decentralized currency.

Everyone recognizes the need for a cryptocurrency-tracking fund. Institutional investors could easily buy and sell shares in the ETF, or use as hedge, allowing them to speculate on Bitcoin’s price movement, without the need to actually own the digital currency. A Bitcoin ETF would basically be the first time institutional money could really flow into Bitcoin in a meaningful way.

We can expect compnies to continue with the applications for a Bitcoin ETF, in hope to be the first to list a cryptocurrency-tracking fund.

News Item 2: Indian Self-Drive Car Rental Firm Beats Uber in Bitcoin Adoption

Decrypted: Drivezy, an Indian peer-to-peer car and bike sharing platform, has been busy. The startup was launched earlier in 2017 and has grown to a fleet of 1,000 cars and 300 bikes across four cities in India.

Recently, the company raised $10 million in debt and equity from American and Japanese investors. Companies including Das Capital, Axan Partners and IT Farm, took an equity stake in the company for $5 million. Also, a group of banks and financial companies, including Mahindra Finance, ICICI Bank, Cholamandalam Finance and Shriram Financ, invested $5 million in debt in Drivezy.

Later this month, the company is planning an ICO in Japan, with the goal to raise another $5 million to expand its peer-to-peer sharing marketplace for cars and bikes.

Our take: Drivezy, an alum of both Google’s Launchpad Accelerator and Y Combinator formerly known as JustRide, pivoted from a car-sharing marketplace to being a peer-to-peer aggregator.

Drivezy’s platform enables micro-ownership of personal cars. It connects vehicle owners with passengers looking for a ride. Passengers get access to a car at a fraction of what it would cost them to own it. For car owners it provides an opportunity to generate revenue or share the cost of owning the car.

Drivezy has also announced that will be launching its Initial Coin Offering at the end of October. AnyPay, a Japanese fintech company, is advising Drivezy for its upcoming ICO. Investors in Drivezy’s token sale will be able to purchase cryptographic tokens that will give them a share of the revenue generated by rentals from its platform. The company will making available 12.5 million tokens for sale and plans to create a fleet of collaboratively owned vehicles that shall be accessible to all.

The startup has already integrated Bitcoin as a payment option, and so far processed over 150 Bitcoin transactions.

While Bitcoin has had explosive growth since last year, most merchants have been hesitant to adopt it as a payment option. The lack of governmental backing and the thinness of its trading volume, creates the kind of volatility that been keeping most merchants away. Even overnight settlements can result in businesses losing a lot of money. Also, most owners of Bitcoin are unwilling to let go of their holdings to pay for goods, because they expect the price of Bitcoin to go up.

To accept Bitcoin for payments and manage the risk with price volatility, Drivezy has partnered with Unocoin. While customers pay in Bitcoin, Drivezy receives the rupee equivelent of these Bitcoins and is guarded from volatility. When a customer requests a refund, the amount of Bitcoins they’ll get back, may be less or more than the Bitcoins originally paid, depending on the Bitcoin’s price at the time of the refund.

Cryptocurrency needs major merchants and retailers to come on board. While no one doubts Bitcoin’s transaction value, a small percentage of this money is effectively used to pay bills and purchases today. Smaller companies, like Drivezy, can be more versatile about accepting cryptocurrencies for payment. On the other end for huge companies like Amazon and Uber, that sell their products in multiple geographies around the world, it can be extremely hard.

According to a report from Internet Retailer, merchant acceptance of Bitcoin is at an all-time low. Out of the leading 500 internet sellers, just three accept Bitcoin, down from five last year.

Before major merchants can start accepting cryptocurrencies, they need to make sure that regulators are on board, providing a legal framework for accounting and taxes. For now service providers, like Coinbase and BitPay, are filling the gap, acting as intermediaries, and accepting Bitcoin from the customer and providing dollars or some other fiat currency to the merchant.

While the number of purchases with Bitcoin will probably increase, as the sheer volume of transactions continues to increase, the bulk of the growth will most likely come from trading or investing in Bitcoin. For now Bitcoin continues to go mainstream, but as an asset rather than a transaction method.

News Item 3: Bitcoin Exchanges Coinbase, Bitfinex Issue Guidance Before SegWit2X Hard Fork

Decrypted: Segwit2x was ratified at the New York Agreement (NYA) in May, and was intended to create compromise in Bitcoin’s long-raging scaling debate. To activate Segwit using BIP 91 (which happened in July), and then to hard fork the base block size to 2 MB, ninety days later.

With the upcoming Segwit2x hard fork scheduled this November, the scaling debate continues to heat up. Once more, supporters and detractors of SegWit2X have turned social media into a political and philosophical battleground. Some are even engaged in a protest movement on Twitter, under the banner of “NO2X.”

Since early September, Bitcoin price has struggled to recover beyond $4,500, due to uncertainty surrounding the Chinese cryptocurrency exchange market and SegWit2x.

Our take: Several business have pulled out from the SegWit2x NYA agreement, the plan led by the Digital Currency Group, to carry out a hard fork in November. This uncertainty around the upcoming SegWit2x hard fork is continuing to hold back the momentum of Bitcoin in the short-term.

An updated list of companies that did not sign or dropped out from the NYA can be found here on the NO2BX site. For those that have not kept up with the debated, here are the points each side is making:

2X says “yes” to:

  • Lower transaction fees and/or faster confirmations.
  • Compromise.
  • Keeping their word.
  • “Firing” Bitcoin Core client and switching to the BTC1 software client.
  • Miners being the deciding factor.

NO2X says “no” to:

  • More security tradeoffs.
  • “Backroom deals”.
  • “Firing” Bitcoin Core client.
  • Contentious hard forks.
  • Rushed hard forks.
  • Lack of replay protection.
  • Brand confusion.
  • Keeping a broken agreement.
  • Miners being the deciding factor.

Charlie Lee, Litecoin’s creator, when discussing the issue on social media said it was not as easy for industry players like Coinbase and Bitfinex, to take sides on the next fork, as when Bitcoin Cash came into play:

In other words, they can’t just choose one fork and ignore the other fork. Choosing to support only one fork (whichever that is) would cause a lot of confusion for users and open them up to lawsuits. So Coinbase is forced to support both forks at the time of the hardfork and needs to let the market decide which is the real Bitcoin.

Two months ago, Bitcoin experienced a hard fork, that created a new cryptocurrency, Bitcoin Cash (BCH). BCH disagreed with SegWit2x and hard forked August 1st, so that block sizes could be variable, up to 8mb. The aim for BCH is to become an everyday means of payment.

Recently another hard fork was announced called BTC GPU, also known as Bitcoin Gold. Bitcoin Gold developers declared that 25th of October will be the day when BTG coins are created through the hard fork. Bitcoin Gold wants is aiming to democratize mining, and to see at-home enthusiast miners back in control.

Yet, with SegWit2x fork in November, by 2018 we could see four different Bitcoin chains in operation.

So are these hard forks going to kill Bitcoin? No.

The reality is that things are never black or white, instead they are very much shades of grey. When hard forks happen, it simply means that of a part of the community is not happy with the existing blockchain protocol and its better to separate and create something new, instead of continuously debating and remaining at a standstill.

OpinionRising fees have bitcoin users rethinking practicality

With the growth of Bitcoin’s value, a few more things have been going up. The number of Bitcoin transactions and the fees to process the transactions. The transaction fees have gone up exponentially, because the miners are taking advantage of the numerous transactions happening, selecting to give priority to those that have a higher transaction fee.

Fees for sending money over Bitcoin’s blockchain have risen from 13 cents per average transaction in the second quarter of 2016, to $2.40 in the same quarter of this year and to $8.90 on Aug. 22.

The transaction fee is received by the Bitcoin miner. Transaction fees are voluntary on the part of the person making the Bitcoin transaction, as the person attempting to make a transaction can include any fee or none at all. On the other hand, nobody mining new Bitcoins necessarily needs to accept the transactions and include them in the new block being created. The transaction fee is therefore an incentive on the part of the Bitcoin user, to make sure that a particular transaction will get included into a block.

The rise of transaction fees, elevates doubts about the Bitcoin’s original promise and perceived benefit, over different ways of payment. The negligible cost of transaction was one of the main points that attracted new users to Bitcoin. Bitcoin has been pitched as the future of global economy, the digital currency that can bank the unbanked, enable micro-transactions and make remittance a walk through the park. That seems to be a thing of the past and all these claims have now stumbled on the once upon a time, negligible transaction fees.

Today, Bitcoin has turned into a “fee market”. A user that wants to transact on the blockchain must bid for inclusion, effectively turning block space into a scarce commodity, driving up fees and increasing average transaction confirmation times. The block size and scaling issues of Bitcoin have never been as important as they are these days.

Ilias Louis Hatzis is a Blockchain entrepreneur who writes the Blockchain Bitcoin & Crypto (BBC) Weekly CXO Briefing each Monday.

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