December Newsletter

by Drew Feliciano and Mike Vescera

Neither this post nor any other on cryptofal.com should be taken as financial advice. It is not.

FAL Consulting is a cryptocurrency consulting company. We provide a wide variety of services related to cryptocurrency and blockchain. You can find a full breakdown of our services at cryptofal.com.

The FAL Cryptocurrency Newsletter is a monthly newsletter that focuses on the monthly highlights throughout the cryptocurrency and financial technology (FinTech) industries.

Coins To Follow

Bitcoin

*BTC daily candle chart, approximately 3:00 pm, ET, 12/1/21.*

Bitcoin is the first cryptocurrency and the largest by market cap. Created in 2009, Bitcoin has grown astronomically since its launch and continues to lead the cryptocurrency industry while also often dictating overall cryptocurrency market movement. It also established the norm of using blockchain as a public ledger for tracking cryptocurrency transactions, providing a revolutionary level of transparency that the broader financial system has lacked.

BTC is currently making an attempt at breaking this downtrend that it’s been in since the beginning of November. Currently, it is consolidating strongly in the shorter term, however, on the daily chart things are looking like we could see a turnaround in price action soon. The MFI is trending upwards fairly strongly, departing oversold territory, while the MACD is currently attempting to trend upwards. This could mean that if support is held, we could see BTC price action start to make some gains.

Ethereum

*ETH daily candle chart, approximately 3:30 pm ET, 12/1/21.*

Ethereum is the second-largest cryptocurrency by market cap. It’s known for being the first cryptocurrency to introduce smart contract capabilities on its blockchain, setting the precedent for ecosystem coins into the future. As the most actively used blockchain, Ethereum has established itself as the largest ecosystem coin by market cap. Many other tokens are based on the ERC-20 protocol on Ethereum’s network.

Ethereum’s indicators are showing similar patterns to BTC’s. The MACD and the MFI are both trending definitively upward as ETH tests resistance. If BTC starts increasing in price, it wouldn’t be too surprising if we started seeing ETH make some gains as well. It should be noted, that ETH dominance has also slowly increased and is currently at 20.7% at the time of posting. This means that ETH is starting to take some more of the money flow from both BTC and/or altcoins.

Litecoin

*LTC to BTC daily candle chart, approximately 3:50 pm ET, 12/1/21.*

Litecoin is one of the oldest cryptocurrencies. Created in 2011, LTC was designed to be able to process smaller transactions at a cheaper price. Their fees were less than BTC’s and the speed was much faster, enabling it to be used more realistically as payment for point-of-sale-based transactions. Its block time is 2.5 minutes which is one of the ways its ability to improve transaction times, as well as efficiency of the overall network. Charles Lee, the founder of Litecoin, created LTC with the goal of it being a “lighter” version of BTC.

LTC is something that we watch whenever we think we may see some potential movement from BTC. This is partly because LTC often follows the market movement that’s dictated by BTC. It often moves in more volatile swings than BTC and can be used as an investment tool for such (slightly lower percentage lows and slightly higher percentage highs in swings).

LTC is maintaining higher lows in its ratio to BTC over the past month or so, and we believe that this could be a bullish sign for LTC. With both momentum on the MACD and MFI trending upwards as it prepares to test resistance once more, it wouldn’t be too shocking if LTC broke resistance in its ratio to BTC if Bitcoin breaks out.

Loopring

*LRC 4-hour candle chart, approximately 4 pm ET, 12/1/21.*

LRC is an ERC-20 protocol that’s intended to be used for building DEXs. It is a layer-2 protocol with its own swap that allows for efficient, and low-fee swaps in comparison to layer-1 based swaps that are often both costly, and less efficient. Loopring wants to combine the centralized version of order matching with the features of decentralized blockchain-based order settlements. It is a “zkRollup Layer2 for Trading and Payment,” according to their website. It is able to batch-process requests off-chain, which allows for a more efficient and quicker transaction. This allows for more transactions to occur per second. It’s able to settle about 2,025 transactions per second.

Loopring has had some pretty intense price swings lately, with LRC finding new all-time highs. There are rumors that LRC may be the protocol that could be facilitating the Gamestop NFT marketplace that was announced back in October. These rumors have only increased in frequency as a large amount of liquidity was deposited into the LRC exchange. There was a wallet that deposited about 61.3 million LRC, which is approximately $164 million. The assets were then moved from layer 1 to layer 2 as well. There are also rumors claiming that this wallet maintains some type of connection to the founder/CEO, Daniel Wang.

The Bank of China has recently applied for a patent using Zkrollups through LRC which is rumored to be planned to be used as a type of “fast pay” application. If these rumors are true, we could see usage on the LRC network skyrocket.

Currently, LRC is consolidating on its 4-hour chart as it tests support. The momentum is nearing neutral territory on the MACD and the MFI is nearing oversold territory as well. Volume has also settled quite a bit on LRC. These technical factors coupled with the fundamental factors discussed above could create a profitable outcome for LRC holders if it all goes according to plan.

Features

What Will Crypto Look Like in the Future?

In many ways, we have yet to see even close to the true potential that cryptocurrency and blockchain technology can provide. While there will likely be benefits we can’t yet imagine, there are some positive aspects of this tech that are already showing potential. From its quicker p2p transfer process to the endless possibilities presented by smart contracts, this technology has the potential to revolutionize the way we think about finance, and a myriad of other industries as well.

Before we can discuss the potential, it’s important to understand what cryptocurrencies and blockchain are. According to Investopedia, “A cryptocurrency is a digital or virtual currency that is secured by cryptography, which makes it nearly impossible to counterfeit or double-spend. Many cryptocurrencies are decentralized networks based on blockchain technology—a distributed ledger enforced by a disparate network of computers. A defining feature of cryptocurrencies is that they are generally not issued by any central authority, rendering them theoretically immune to government interference or manipulation.”

As we said earlier, these currencies are easier to transfer than moving money through the traditional system and blockchain technology allows it to be more secure by not having a central point of failure. These create the potential for a more efficient and transparent financial system. Not only is every transaction traceable on the blockchain, but these transfers of money also aren’t limited by the logistical obstacles set forth by the fiat system.

The transactions are much quicker, and significantly cheaper. This revolutionizes (or destroys, depending on who you’re asking) the remittance payment industry. With cheaper and more efficient payment options available than the traditional ones, the traditional companies will likely be forced to adopt blockchain tech or risk obsolescence.

The peer-to-peer aspect of cryptocurrency will change the way we view financial custody as well. In the fiat system, custody for both liquid funds and assets is often maintained by a third party with specific licenses. This third party could be a bank for liquid funds, or a broker and/or bank for other types of less-liquid assets.

With cryptocurrencies, all you need is a wallet to maintain custody, more specifically a cold storage wallet to maintain autonomous custody. While you can indirectly maintain custody through hot wallets and exchanges, to maintain complete control over and access to the funds in your wallet, a cold storage solution is best. It is very possible that this type of self-custody for individuals could vastly change our relationship with liquid capital and its custody.

While it’s very likely that institutions will still require custody solutions, blockchain tech could lead to a point where the need to keep our money in a bank in the traditional sense becomes less pronounced. Especially when businesses and individuals alike can maintain custody and control of their funds on their own without the need for a third party in-between. This can help reduce fees for both businesses and individuals while increasing efficiency overall. When you couple this with the opportunities presented by smart contracts, it’s not too surprising when someone labels the potentials to be almost limitless.

The long-term potential that smart contracts have is truly hard to imagine when you understand what these blockchain-based contracts bring to the table. Different blockchain protocols provide different benefits. They have the ability to revolutionize financial interactions as we know them. Not only can smart contracts be used to create other blockchain protocols on that coin’s network (like with ecosystem tokens, like ETH), they can also be used to help dictate the terms of cryptocurrency transactions.

These contracts can dictate how the transaction occurs. Oftentimes, these blockchain-based smart contracts use Oracle protocols, or APIs built on the blockchain that help input information into smart contracts. In more basic terms, these oracle tokens/protocols help translate values from the real world into something the smart contracts can understand.

The combination of these oracle protocols with smart contract technology allows for unparalleled levels of accuracy in finance. Smart contract technology can be used to set terms that must be met for transactions to take place, etc. For institutions, this could be monumental as they learn the benefits of using smart contracts. Not only can it help eliminate human error, but it could likely increase productivity as well so manpower can be focused elsewhere. The transparency of blockchain tech is another feature that will change the way we keep records of money and its movement.

Blockchain technology provides a public ledger that anyone can access. This ledger keeps a record of every transaction that occurred on the blockchain. These transactions can be viewed on blockchain scanner websites or sites that provide openly accessible transaction details. You can view details of specific transactions including both wallets involved in the transaction, when it occurred, how much of the currency the transaction contained, etc. Certain scanners for certain blockchain protocols can even say which exchange those wallets may be affiliated with as well.

This type of transparency allows the general public unparalleled access to what transactions occur on a specific blockchain protocol. If the broader financial system goes this route, it will be much harder to hide transactions from the general public in the ways the traditional financial system allows for. This feature will be especially useful for the tracing of public funds and investor funds. It can help prevent fraud, larceny, etc. Companies and governments alike will likely be instituting cryptocurrency-oriented policies for tracking the movement of funds. This can help with public trust and transparency for both governments and brands alike. Companies and governments can publicly identify their wallet addresses so anyone can watch the transactions taking place.

The NFT space in the future will likely be larger than we can even predict. It will change the way we create art, the way we release music, and so much more. The NFT space has two current limitations that will likely be significantly less prevalent in the future.

The first is the lack of knowledge regarding NFTs that the general public has. NFTs are still in their infancy so it’s understandable that much of the public has yet to have a firm grasp on the topic yet. When people understand that NFTs can be almost any type of file (under a certain file size), they can really start to realize that the possibilities are endless. From fine art to memberships to exclusive communities, to proof of verification using the blockchain, NFTs will likely act as a useful medium in a variety of ways in the future.

The other limitation is more of a logistical one. Currently, gas fees are a large problem on layer-1 blockchain protocols. These transaction fees are high which can automatically limit accessibility to the space when both purchasing and selling an NFT can have gas fees that are more expensive than the NFT itself. When most of the NFT space achieves layer-2 efficiency, many of the issues with gas fees will be solved, or at least significantly cheaper.

One of the best features of NFTs is how creators can receive royalties from sales. This feature uses smart contract technology to make sure that a percentage of each sale can be set by the creators upon minting that dictates the percentage that the project creators receive with each sale. This means that artists and creators will be compensated every time their art or project is circulated, creating a passive income for artists and creators alike. We’ll likely see this used for a variety of creators from musical artists to graphic designers.

The potential for change that blockchain technology provides is limitless. They provide solutions to a myriad of logistical issues with the traditional financial system and they will likely provide solutions we can’t even begin to comprehend yet. It’s going to be interesting to see where the cryptocurrency and blockchain space takes us.

Three Crypto-Friendly Countries

Cryptocurrencies are still a fairly new addition to our financial system. Regulators are still struggling with how to classify cryptocurrencies, which results in many confusing regulations, and regulations that don’t accurately fit the use-case of many cryptocurrencies.

One of these main issues is capital gains on cryptocurrencies that can be used as transfers or for purchases. Instead of being recognized as its own individual asset class, it’s often placed within the ruleset of older, significantly different asset classes such as securities.

Fortunately, there are some countries that are attempting to be more proactive with how they view and classify cryptocurrency. One country that supports cryptocurrency strongly is El Salvador. El Salvador’s support is so strong that they even made BTC legal tender alongside the dollar. It was the first country to make BTC legal tender. It’s taken a strong initiative in instituting ways for its citizens to use BTC for p2p transactions and even p2b (peer to business) transactions and beyond.

El Salvador has plans to build the first “Bitcoin City” as well through the first bitcoin-backed bonds. The city will be powered by geothermal means using the heat from a local volcano. The only tax in this city will be the VAT tax (or value-added tax). This VAT will go to funding the bonds issued to build the city and city services such as garbage collection. El Salvador exempts BTC profits from income tax and capital gains.

Switzerland is another country with cryptocurrency-friendly regulations. The Swiss Federal Tax Administration views cryptocurrency transactions as no different than fiat transactions which are exempt from tax reporting. One of the main reasons investors look to Switzerland as an option for cryptocurrency investing is their lack of taxation on cryptocurrency trading profits.

That is why many large projects have chosen Switzerland as home to their headquarters. It should be noted that crypto businesses and professional trading is subject to be taxed as income. This income tax can be different in each region, however, these businesses will also incur an annual wealth tax.

Germany’s take on cryptocurrency is different than that of the EU. Germany is another country that has a unique perspective on cryptocurrency taxation. When these assets are held for a year, it exempts them from capital gains tax. If your cryptocurrencies are then sold for fiat within a single year, but the profit is under €600, or around $700 you will be exempt from paying tax on that transaction. Beyond that, it will have to be reported for tax. Businesses must pay corporate income taxes for crypto gains, and it will work the same as other assets.

Some of these countries may change their laws in the long term, so it’s always important to keep up with regulatory developments. As the space grows regulatory changes will only become more and more likely, however, we hope that these regulatory changes will be a more accurate representation of what the space needs compared to what it currently has.

ZK and Optimism Rollups

by Mike Vescera

Over the past year or so we have seen the crypto market expand greatly with new users from around the world. It is great to see such rapid growth but that does also bring network congestion issues for most projects but most notably for Ethereum. When the network is backed up it causes the gas fee prices to skyrocket and at this point is creating a large barrier for entry to those who are just getting into it now.

Currently, we have two types of rollups attempting to scale Ethereum which are ZK-rollups and Optimistic rollups. Layer-2 solutions have been the saving grace to an extent with Matic leading the way in the summer with its side chain solution and more recently Loopring using a Zero-Knowledge (ZK) solution.

Loopring started catching fire earlier this month off of the rumors of a partnership with Gamestop that sent Reddit into a frenzy. More importantly, than the partnership is the underlying tech that people are also taking note of causing the prices to continue trending upwards. What makes a Zk solution important is that it processes transactions and stores data off-chain while funds are held in a smart contract.

Since ETH is a traditional layer-1 blockchain everything is processed on-chain and when there is a high amount of traffic it inflates gas fees as well as slows down transaction times. As it currently stands Defi would be almost unusable for the average user without the help of these layer-2 solutions. While Loopring is currently the biggest name in layer-2 it is important to note it is not the only solution.

As well as ZK-rollups we also have optimistic rollup solutions such as Arbitum and Optimism. What makes an Optimistic rollup different from a Zero-Knowledge rollup is that they can execute smart contracts whereas ZKs are mostly for simple transactions (with the exception of a few like Loopring).

For example, Optimism works by using a smart contract to relay transaction data from the Ethereum mainnet to a Layer 2 network. From there, transactions are bundled into a batch and sent back to the main ETH chain as a single transaction. While both solutions have their benefits they also have slight drawbacks.

The main drawback of zk-rollups as mentioned before is that some are not capable of executing smart contracts at the moment but Loopring and others are becoming capable. The other is that the rollup moves bundles of transactions to Layer 2 and generates a validity proof for every bundle which is a long and complex process on the technical side to get it right. This is not necessarily a bad thing as it seeks to find that the transactions are “valid” and wean out bad actors.

This bleeds directly into why Optimistic rollups are technically, “more scalable” solutions because they are bundling transactions in “good faith” that everyone is doing the right thing. The downside of that for Optimistic roll-ups is that withdrawals are now subject to a “challenge” period making the time to withdraw funds significantly longer than zk-rollups.

Everything has its pros and cons but the fact of the matter is that anything that will help ETH scale right now is beneficial. Loopring has been killing it because of the fact that they have their own DEX and makes it easier for people to exchange tokens while taking advantage of lower fees. It remains to be seen how advantageous these rollup solutions will be in the future since their main purpose is to support Ethereum.

If Ethereum is able to successfully move ETH 2.0 it may render some of these useless. The ones that will last are going to be the ones that can branch out and have smart contract use like some are already trying to accomplish. If they are able to branch off from ETH to an extent where they start forming their own ecosystem, like Matic is trying to do, then the future can still be bright. For now, though they are keeping ETH afloat for more advanced users that know how to navigate the web3 space.