February Newsletter

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

By Drew Feliciano, Stephen Arancio, and Crista Yamasaki

FAL Consulting

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.

About the Newsletter

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

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.

Bitcoin and the overall cryptocurrency market have had a bearish January following news of the Fed’s intent for interest rate hikes. Many saw this as inevitable, however, it still impacted global markets heavily, including cryptocurrency markets.

On the daily candle chart, BTC has broken below short-term support, however, it is still looking like there could be a continuation of this overall uptrend. The MFI is currently trending upwards on the daily chart. The MACD is looking like it could swing downwards slightly, however, the EMAs are looking fairly neutral on the MACD. Volume has also taken an overall dip since its peak in mid-January, now holding fairly steady. It’s likely that BTC will continue to dictate cryptocurrency market movement.

Ethereum

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 has had an interesting month on the fundamental side with a rebranding of its long-anticipated ETH 2.0 update. This update and the ETH 2.0 blockchain will now be referred to as the Consensus layer. The Ethereum Foundation will be having a community call on February 11th which could have some big announcements regarding the merging of the networks.

On the technical side of things, Ethereum was rejected after testing resistance and was not able to breakthrough, however, both the MFI and the MACD look to be preparing to swing upwards on ETH’s daily candle chart. It’s very likely that until BTC either settles into sideways movement or breaks this range, ETH will continue to closely follow BTC’s movement.

BNB

Many exchanges have developed their own blockchain-based cryptocurrencies on their own native blockchains. The largest exchange is Binance and they have their own token called BNB. BNB is an ecosystem token that also has smart contract capabilities native to the Binance Smart Chain blockchain, and it can also be used to pay for trading fees on the exchange.

Recently, Binance’s Secure Asset Fund for Users was valued at $1 billion. They’ve been a strong proponent of exchanges providing their users with transparency regarding exchanges’ insurance funds. This is a big deal for Binance as they, like many other cryptocurrency exchanges, struggle to prove to regulators that they are ready to be the institutions that they can trust to protect their users. This ensures that they’re able to reimburse consumers in instances where the exchange is liable and money is lost or stolen.

On the technical side of things, BNB is currently preparing to test long-term support that it hasn’t seen since September. Both the MACD and the MFI are looking to trend upwards, however, it should be noted that both BTC’s movement, as well as ETH’s, will likely determine whether BNB is able to break out of this range.

XLM

The XLM token is based on the Stellar blockchain. It is a decentralized blockchain protocol and open-source network. You’re able to create, trade, and transfer digital versions of a variety of types of money. It helps act as an efficient intersection between global financial systems and assets. Stellar touts low fees and a swap on its native wallet.

XLM is the Stellar Foundation’s official native token on the Stellar Network. Stellar boasts a wide array of partnerships, acquisitions, and services built on its network. More recently the Stellar Development Foundation discussed the implementation of smart contracts on XLM. This will allow for Stellar’s native blockchain to have even more of a robust ecosystem where a variety of decentralized applications could be developed.

This is huge news because it could even open the doors for XLM to become a true ecosystem token. Their goal is to create efficient and cheap smart contract solutions that could withstand the growing pains of scaling. That means low fees and quick execution. If they’re able to pull this off this year, this would be huge for XLM.

On the technical side, XLM is currently riding support fairly strongly. It’s likely that it will continue to do so as long as BTC and ETH remain in this range. It should be noted that volume is also fairly steady on XLM. Both the MACD and the MFI are currently trending upwards.

Solana

Solana is a project that has seen tremendous growth over the past year. It uses a proof-of-history consensus algorithm. This type of consensus protocol is intended to allow for more scalability. This allows for short transaction processing times and a more efficient network. This method of consensus actually also allows for more efficient smart contract execution as well. This efficiency has resulted in institutions being fairly interested in the protocol.

While Solana has been thought of to be the “Visa of the Digital Asset World” according to Bank of America, it’s had a fairly bumpy road along the way. With multiple accusations of it being centralized after shutting down on numerous occasions, as well as a large hack that’s occurred within the last few days of posting, it hasn’t been easy for Solana. While there’s undeniable potential with Solana as a protocol, there are also some undeniable issues that need to be dealt with. The most recent network hack is the largest yet for Solana with $320 million reported stolen.

With Solana’s controversial fundamentals, let’s take a look at the technicals. On SOL’s daily chart, it’s currently testing an area of support with a slight uptrend since bottoming out a couple of weeks back. Currently, its MFI is fairly neutral and its MACD is swinging upwards. While SOL looks fairly positive on the technical side and some of its fundamental side, many in the space are looking forward to seeing what solutions they bring forth to some of the issues they’ve been experiencing.

Features

Growing Pains of the NFT Space

NFTs are one of the newest innovations to come out of the cryptocurrency space. They’ve taken both the cryptocurrency space and the world by storm. Just as the broader cryptocurrency space has experienced the growing pains of a volatile asset class, so has the NFT space.

While the technology of Non-Fungible Tokens is revolutionary for artists, brands, and individuals alike, the NFT space is not immune from its fair share of issues. From wash trading to laundering accusations, to the belief that NFTs are useless, the NFT space has had plenty of accusations thrown at it, so we’ve decided to break down some of these accusations and look into their legitimacy as well as where the space is at in addressing these issues.

First, let’s touch upon what NFTs are and some of the basic long-term possibilities. According to Investopedia, “Non-fungible tokens or NFTs are cryptographic assets on a blockchain with unique identification codes and metadata that distinguish them from each other. Unlike cryptocurrencies, they cannot be traded or exchanged at equivalency. This differs from fungible tokens like cryptocurrencies, which are identical to each other and, therefore, can be used as a medium for commercial transactions.”

Think of NFTs as digital collectibles that are verified by the blockchain. The blockchain can verify ownership, as well as what collection the NFTs are a part of. This can be used to verify whether the NFT is part of an original collection or a fake copy. This leads us to our first issue in the NFT space.

Fakes and copies run rampant throughout the NFT space. This is something that the space struggles with for a variety of reasons but is not exclusive to NFTs. This is something that also plagues the broader cryptocurrency space as well. In the NFT space, this issue presents itself through fake copies of viral projects or fake websites that have extremely similar links to their legitimate counterparts.

These fake versions of NFTs take advantage of the fact that so many people are new to the space and thus, a bit uneducated about the process. These issues will likely become less of an issue as more and more people become educated about the NFT space and its potential risks. The space is starting to try and educate people through Twitter, blog posts, and discord groups, however, the learning curve still presents a challenge for those that are less informed. The best way to avoid these types of scams is to only use official links that are given on OpenSea by the official collection, and not link your Metamask wallet to anything other than these official links.

On OpenSea, the best way to avoid these types of issues is by confirming whether it’s a part of the original collection. You can do this by clicking on the NFT, and then clicking on the collection name at the top. Popular collections will often have a verified checkmark, and for smaller collections, you’ll be able to see the entire collection. As the space grows, it’s likely more education-based videos, programs, and information will become more widely available and prevalent to help teach people about risks like these.

Another issue that the NFT space has been accused of is wash trading. According to Investopedia, “Wash trading is a process whereby a trader buys and sells a security for the express purpose of feeding misleading information to the market.” In the NFT space, this type of market manipulation is unfortunately very easy to do and very hard to prove when it occurs. It involves the owner of two wallets, facilitating both the purchase and sale of an NFT at the desired price, often with the intent of inflating the price of an NFT. This could result in someone else buying it for a much higher price than the “free” market would have valued it at.

On decentralized platforms like OpenSea, this is an issue that is extremely difficult, if not impossible to prevent and just as difficult to prove. This allows for individuals to inflate the price by purchasing it from themselves, so then those that look to buy after this are manipulated into paying higher prices. This is a blatant type of market manipulation.

Money laundering is another accusation that the NFT space has had to deal with. This one isn’t necessarily exclusive to NFTs and has been something hurled at the broader cryptocurrency community for years now. This is also an issue that has plagued the traditional fine-art market for decades as well.

The broader cryptocurrency space has already largely been addressing these concerns by regulating the point of exchange. They do this by instituting KYC or (know your customer) policies to help identify and monitor activities that occur on exchanges. This information is often then shared with third parties including regulators, law enforcement, and tax authorities as required by law. It’s likely that centralized institutions that plan on developing NFT exchanges will also eventually go down these routes in order to maintain regulatory compliance.

Since NFTs are still a bit of a new frontier, many are claiming that they are “useless.” Oftentimes, this usually comes from those who’ve had fairly limited exposure to the tech, but it, unfortunately, is a notion that reverberates beyond the NFT and cryptocurrency space. Now as those involved in the space, we know differently. We understand that the potential for NFTs has to do with so much more than just overpriced JPEGs and social media hype. When you look at the potential that NFTs have, whether it be to create new industries or revolutionize existing ones, that’s when you can see why they’ve captured so many people’s attention. This notion can be fairly easily combatted with some education and a better understanding of the potential of NFTs.

NFTs allow for verification of ownership through the blockchain which acts as an open ledger. As we covered earlier, the blockchain will be able to identify every transaction up to the point of the token’s original minting, and it will be able to identify what collection it’s a part of. However, this isn’t just useful for identifying original collections versus counterfeit/fake ones. This revolutionary blockchain technology can allow creators and artists alike to receive royalties on every sale that’s made of their NFT in cryptocurrency. This is something that many artists, especially visual artists, would be left out of because in the traditional art world artists would often only receive revenue from the initial sale.

This function of royalties for creators is not just useful for visual artists. It’s useful for anyone that could benefit from being able to attach a one-of-a-kind file that can be verified by the blockchain and would like to receive royalties from each sale. Imagine if venues or artists could actually continue to receive a commission from tickets in the form of NFTs, or if music artists could receive royalties on their music NFTs each time it’s sold.

This could allow independent artists the potential at receiving royalties from the sale of their art without as much direct facilitation from predatory record companies. NFTs can also be used as a ticket to entry for private clubs, shows, events, or groups. And these are just some of the ideas being thrown around the space now. We can’t even begin to imagine the ideas that will come out of the NFT space as it continues to grow and only becomes more mainstream.

The NFT space can be overly ambitious at times, however, the long-term potential that many in the space are working towards is what will keep the space growing.

Not Your Keys, Not Your Coins

“Not Your Keys, Not Your Coins” or some variation of this phrase is a very popular saying within the cryptocurrency community. If you stick around long enough it is only a matter of time until you hear someone talk about this idea. However, it is one thing to hear this popular phrase and a completely different thing to both understand and internalize the significance of exactly what it means.

To start, we have to establish what are your “keys”?

Every cryptocurrency wallet has an associated pair of public keys and private keys. Your public keys are needed when receiving funds and are used so others know which address is yours. This can be thought of as something similar to an account # with a bank.

On the other hand, your private keys are much more similar to your bank password because if someone else gets access to the private keys they now have access to all of your funds and assets which are held in that associated wallet. Your private keys are used to generate your public key and to send your money.

As previously stated, if someone gets access to your private key, that entire wallet is compromised. Your private keys are meant for you and you alone.

An example of a situation where this went horribly wrong is the infamous Mt. Gox hack where a ton of private keys were accessed by hackers which allowed the malicious actors to steal 850,000 Bitcoin from users’ accounts. That 850,000 Bitcoin was valued at about $500 Million at the time of the hack and would be worth over $8 Billion at Bitcoin’s recent all-time high prices of over $60,000. This highlights one of the main concerns hardcore crypto users have with leaving their coins on any type of exchange.

Most exchanges typically give you a non-custodial wallet. You share it with them and you don’t have your own private keys. They keep control of your funds and the keys that control these funds. This is why you should never just leave money sitting on an exchange.

At this point, there are a bunch of much more secure alternatives for storing cryptocurrency with differing levels of increased security, ranging from hot wallets such as MetaMask to hardware wallets like Ledger or Trezor. Typically in most modern wallets (especially hardware wallets), you are given a unique 12–24 word mnemonic phrase which is often referred to as a “seed phrase.” This is given to users instead of having to remember an entire 64 digit cryptographic key and is often protected further by an additional passphrase and/or PIN.

Hot wallet solutions such as MetaMask are popularly used to interact with decentralized applications such as DeFi or NFTs. Technically while using a “hot wallet” if your computer gets a virus you could potentially be vulnerable but it is still much more secure than leaving your coins on a centralized exchange that doesn’t even give you control over your keys.

Nonetheless, the most secure and recommended option for storing your cryptocurrency is usually a hardware wallet. This is typically a USB-style wallet where your private key is stored and encrypted. While using a hardware wallet, as long as you don’t ever share your private key with anyone else then you can be 100% certain that no one else has access to your funds. If the first thing your wallet provider or application does when generating a new wallet is to prompt you to write down a 12–24 word mnemonic phrase then you are in control of your keys.

They are generated locally on your device and not communicated to any type of server. This means they are not stored by any third party such as an exchange or service and is the best security option for most crypto users. However, using a hardware wallet also means you take on the responsibility of keeping those keys safe and backing them up properly because if you mess up and lose them then there is no support number or anyone to contact that can help you.

“Your keys, your coins” is one of, if not the single most fundamental principle of control and ownership in the decentralized cryptocurrency economy. If you generate a backup of your mnemonic phrase, you must never enter that phrase into any application or program that you are not 100% certain is a popular, secure, properly constructed, and well-reviewed wallet that keeps the keys locally on your device. Never enter them into websites or online documents like Google Docs or Dropbox as this just introduces more potential points where the security of your wallet could potentially be compromised. The safest way to back up your mnemonic phrase is good old-fashioned pen and paper where you can store a physical copy in a secure location.

Centralized exchanges still play a vital role in the ecosystem by providing an easy-to-use on and off-ramp to get back and forth from the fiat world to the crypto world. They also provide very seamless user interfaces that allow newbies to make their first cryptocurrency purchases in an easy-to-understand and digest manner. However, exchanges are not wallets and they are not safe to keep your funds on for any period of time longer than is absolutely necessary. Money sitting on an exchange is not your money, it is a promise from the exchange.

The best advice is to do your trade on the exchange and then either send your fiat back to your bank or crypto to your hardware wallet ASAP after completing the desired trades. Cryptocurrency users will always have different levels of technical sophistication and risk tolerance thresholds so you should always do what is best for your individual situation. However, if you’re beginning to journey into the decentralized realm of cryptocurrency you should always remember, “Not Your Keys, Not Your Coins.”

Government Regulation and Crypto

During a briefing on Tuesday, White House Press Secretary Jen Psaki indicated that the heavily anticipated executive order on cryptocurrency oversight is being helmed by the National Economic Council (NEC), but failed to offer any additional details on a timeline or what it will entail.

The executive order, reportedly being issued this month, is said to be a general call from the president to enlist the federal government in providing an overall assessment of cryptocurrency as well as the potential opportunities and threats they pose. The speculation behind this executive order is that the president will appoint a Crypto Czar at the helm of his policy agenda. Government oversight will impose restrictions on an industry that remains largely unregulated, but despite opinions to the contrary, there are potential gains from a government presence.

The overall idea of regulation may tighten the profit margins for the early adopters, but it will also onboard a significant number of newcomers in the process. Prior to this past year, the hesitation of mainstream investors to buy cryptocurrencies was fueled by tales of scams and predation. Crypto, to the average person, was and is the Wild West of finance. There are still an overwhelming amount of predatory agents and practices within the crypto space, but government watchdogs could offer a line of defense against mainstream investors being victimized.

Some may debate whether government involvement is advantageous but unfortunately it is both inevitable and now necessary. Opinions to the contrary present an unsavory message: that the crypto community is full of gatekeepers who prefer to maintain an exclusive and insular space that grows on the misfortunes of others.

This damages the crypto community in a number of ways, the primary being that without onboarding investors the market will become stagnant. Even with government involvement, every investor, rookie or veteran, should be aware that the extent of protection being provided may not be optimal. Much of the government is at the disadvantage of having a limited understanding of cryptocurrency and blockchain technology.

It’s far too late for the industry to halt government involvement however it remains that the lack of protection for new investors has become a glaring issue. Perhaps the crypto community creates their own digital neighborhood watch in the meantime–government relief, while inevitable, will not be timely.