Cryptocurrency ether plunges again, decoupling from bitcoin  

• Bitcoin is up 0.1 percent in the last 30 days, while ether has nosedived 45 percent.
• “In this case, bitcoin is acting like more of a safe haven for cryptocurrencies — it’s kind of consolidating,” said Mati Greenspan, analyst at cryptocurrency exchange eToro.
• Pressure could also be coming from short orders, which market intelligence platform CoinFi says are at all-time high.

Kate Rooney | @Kr00ney



Kin Cheung | AP

A man uses the Ethereum ATM in Hong Kong, Friday, May 11, 2018.Ether, one of the best-performing cryptocurrencies during the boom last year, is taking another nose dive on Wednesday.

The world's second largest cryptocurrency fell 8 percent to a low of $170.34, bringing its drop since the high in January to roughly 90 percent, according to CoinDesk.

Ether typically rises and falls alongside its larger, better-known predecessor bitcoin. But that trend is changing.

Despite volatility, bitcoin's value in 30 days has risen by 0.1 percent. Ether meanwhile has fallen 45 percent in the same time period."In this case, bitcoin is acting like more of a safe haven for cryptocurrencies — it's kind of consolidating," said Mati Greenspan, senior market analyst at cryptocurrency brokerage eToro.Ether's recent performance marks a sharp reverse from last year.

Retail investors were excited about its utility compared to bitcoin, which can't be used to build blockchain applications and is mostly seen as a speculative investment or a store of value. The cryptocurrency rose more than 9,000 percent after starting the year around $8.

Bearish comments from co-founder of the Ethereum blockchain Vitalik Buterin over the weekend may have also spooked ether investors."There isn't an opportunity for yet another 1,000-times growth in anything in the space anymore," Vitalik told Bloomberg News interview this Saturday in Hong Kong.

 "The blockchain space is getting to the point where there's a ceiling in sight."Ether is the name of the cryptocurrency, but it's closely associated with the popular Ethereum blockchain. Unlike bitcoin, which gives access to a global financial network, ether gives users access to a computer network. Its use has been compared to gasoline for a car.

Developers can use ether tokens as fuel for certain functions on that blockchain. "The fact that Vitalik is less bullish could be causing some to sell and it stands to reason that most of his most devout followers will be holding Ether," eToro's Greenspan said.Short-sellers are also putting pressure on markets.

Data from market intelligence platform CoinFi shows bets against ether at an all-time high, according to CoinFi CEO Timothy Tam.Not insignificant bets, either. Tam said they're watching "multi-million dollar bets" in real time."Retail investors were completely euphoric a few months ago. Now, that emotion has flipped and they're panicking," said Tam, who is also a former Goldman Sachs analyst. "Shorts are going to ride that wave.Ethereum shorts at an all-time high




Source: CoinFiAnalysts also say investor enthusiasm is eroding because of scrutiny in initial coin offerings that built on Ethereum's platform. The Securities and Exchange Commission said earlier this year that ethereum itself is not a security. But the agency's chairman has said initial coin offerings, many of which were built on the Ethereum blockchain platform, are indeed securities subject to SEC law.

Tons of those projects have failed since launching during the crypto boom, and have had to sell a significant portion of ethereum holdings to manage cash flow and expenses.

On Tuesday, a federal judge in New York refused to dismiss a case that argued two cryptocurrencies were not securities for the purpose of criminal law. The Brooklyn, New York district judge said a reasonable jury should be able to apply what's known as the Howey Test, which is applied to securities.While CoinFi's Tam sees regulation as a positive for the long haul, and the only way to usher in a "healthier market," investors seem to disagree.

"Others see this as cause for panic — an end to the lax rules and low hanging fruit to which they've become accustomed," Tam said. "You also now have a ruling on the table that effectively means ICOs are now subject to securities law.

"Bitcoin was mostly flat Wednesday, trading near $6,269 while the rest of the cryptocurrency landscape was mixed. XRP was up .5 percent, and Stellar rose 4.8 percent. Bitcoin Cash meanwhile fell 7 percent, EOS was down 1 percent, according to CoinMarketCap.com.

The entire cryptocurrency market has suffered alongside ether in 2018. The total crypto market capitalization has fallen by about 68 percent since January 1, according to CoinMarketCap.com.



Kate Rooney

Markets Reporter

It is not terribly common for a mainstream economist to say something good about bitcoin in the period of its downtrend, but Mohamad El-Erian once again made an exception.

Cryptocurrency’s Not Going Away

The Allianz chief economic advisor said in an interview that cryptocurrencies are not dead, though they may be overvalued. He specifically mentioned bitcoin as an asset whose buy value should be circa $5,000, a sentiment he had already shared in June. In his latest statements, El-Erian added that unnecessary speculations had led to the previous bullish action, causing an unwarranted buying frenzy.He told Yahoo Finance:

“What we’re getting is the realization that adoption is not going to be as big and as quick as the proponents of crypto would like. I think it’s going to be there, it’s going to last for a long time, it’s going to play a role in the ecosystem, but it’s not going to be the currency that a lot of proponents would like it to be.”

The statement arrived at the time when the cryptocurrency market as a whole is undergoing a robust bearish correction. The industry’s capitalization has dropped by as much as 80 percent since its all-time high this year. All the top coins, including bitcoin (BTC), ripple (XRP), ethereum (ETH), and stellar (XLM), have contributed to the overall loss. All eyes are now on the bitcoin price’s yearly low around $5,800 — just $800 above El-Erian’s expectations.

Who Said What during Bitcoin’s Downtrend

Source: ShutterstockOther notable financial experts have feared bitcoin’s downtrend is far from over and its value could even go lower than what El-Rian expects.

Luis Carranza, the founder of London Fintech Week, in June, had said that bitcoin could likely establish its bottom near $2,500 in 2018.“$4,500 could be the bottom, but nothing is preventing $2,500 from being the bottom,” he had told Express UK.

Nouriel Roubini, the American economist and vociferous cryptocurrency skeptic who predicted the 2008’s stock market crash, has said that bitcoin’s value could eventually drop “all the way down to zero.” He even criticized ethereum smart contracts for being the tools that can only govern “kangaroo courts.

”Neil Welson, an analyst at ETX Capital, had said during the previous bottom formation that bitcoin will be derailed soon as soon as regulatory crunch appears closer.“Selling pressure at the moment is intense as there has been nothing but bad news for bitcoin bulls of late. Trying to catch the falling knife is a risky game,” he told the Guardian.

At the same time, there are plenty of finance professionals that have come out in support of bitcoin’s short-term prospects.Jürgen von Hagen of the Universität Bonn believes the success of any decentralized asset is proportional to the limitations of conventional currencies.

”Cryptocurrencies would become attractive if central bank issued currencies became very unstable. Their widespread use in the financial system would be a result, not a cause, of instability.”

Barry Silbert, founder, and CEO of Digital Currency Group, a venture capital firm, said after bitcoin established its bottom in June that the cryptocurrency could not go any lower.

“As an asset class, it is here to stay… I’m 100% confident a decentralized, non-fiat form of money is here to stay,” he said.

Featured Image from World Economic Forum/Flickr

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Here’s a prediction. ETH — the asset, not the Ethereum Network itself — will go to zero. Those who already think that ETH will not see real adoption — thanks to a failure to scale, to adopt more secure contract authoring practices, or to out-compete its competitors — don’t need to be convinced that a price collapse would follow as a consequence.

But, if one believes that Ethereum will succeed beyond anyone’s wildest dreams as a platform then the proposition that ETH (as a currency) will go to zero will take a bit more convincing running a substantial share of the world’s commerce securely.

So here’s how Ethereum ends up succeeding wildly but ETH becomes worthless. Ethereum’s value proposition, as given by ethereum.org, is as follows:

Build unstoppable applicationsEthereum is a decentralized platform that runs smart contracts: applications that run exactly as programmed without any possibility of downtime, censorship, fraud or third-party interference.

çThese apps run on a custom built blockchain, an enormously powerful shared global infrastructure that can move value around and represent the ownership of property.

This enables developers to create markets, store registries of debts or promises, move funds in accordance with instructions given long in the past (like a will or a futures contract) and many other things that have not been invented yet, all without a middleman or counterparty risk.

If Ethereum succeeds on its value proposition it will therefore mitigate external risk factors for decentralized applications.



İstanbul, Turkey – January 28, 2018: Close up shot of Bitcoin, Litecoin and Ethereum memorial coins and shovels on soil. Bitcoin Litecoin and Ethereum are crypto currencies and a worldwide payment system.

No Future for ‘Gas’

There’s no value proposition for ETH in the official description. Perhaps this omission is because ETH’s value seems so obvious to the Ethereum Foundation that it is hardly worth mentioning: $ETH fees (dubbed ‘Gas’) is how you pay for all this.If the concept of gas isn’t immediately obvious, let’s expand the metaphor:

The Ethereum network is like a shared car. When a contract wants to be driven by the shared car, the car uses up fuel, which you have to pay the driver for. How much gas money you owe depends on how far you had to be driven, and how much trash you left in the car.

Gas is a nice metaphor, but the metaphor is insufficient as an argument to support non-zero $ETH prices. Gasoline actually burns inside an internal combustion engine; an internal combustion engine will not work without a combustible fuel. $ETH as Gas is a metaphor for how gasoline is consumed; there is no hard requirement for Gas in an Ethereum contract.


(Photo by Manuel Romano/NurPhoto via Getty Images)

Buying the “BuzzwordCoin”

Suppose we’re building a new decentralized application, BuzzwordCoin. By default, following a standard ERC-20 Token template, every transaction on BuzzwordCoin will pay gas in $ETH.

Requiring every BuzzwordCoin transaction to also depend on ETH for fees creates substantial risk, third party dependency, and artificial downwards pressure on the price of the underlying token (if one must sell BuzzwordCoin for ETH ahead of time to run a BuzzwordCoin transaction, then the sell-pressure will happen before the transaction requires it, and must be a larger sale than necessary to ensure sufficient funds to cover the transaction).

Instead of paying for Gas in ETH, we could make every BuzzwordCoin transaction deposit a small amount of BuzzwordCoin directly to the block’s miner’s address to pay for the contract’s execution. Paying for Gas in a non-ETH asset is sometimes referred  to as economic abstraction in the Ethereum community.

The revised BuzzwordCoin contract has no functional dependence on ETH. We’re able to incentivize miners to mine transactions without paying any fees in ETH whatsoever.

If the BuzzwordCoin contract has non-transactional contractual clauses — that is, a functionality that should be regularly called by any party for tasking like computing and updating cached statistics in the contract — we can specify that the miner performing those clauses receives coins from an inflation or shared gas pool. In the shared pool, all fees for user’s transactions in a specific contract are paid to the contract’s wallet.

A fee dispensing contract call performing the non-transactional clauses releases the fee to the miner (this bears some semblance to Child Pays for Parent in the Bitcoin Ecosystem).

Battling the economic abstraction

There are four main counterarguments to economically abstracting Ethereum: the lack of software support for economic abstraction; difficulty in pricing many tokens; the existence of contracts not tied to tokens; and the need for ETH for Proof-of-Stake. While nuanced, all four arguments fall flat.

Software Support: Currently, miners select transactions based on the amount of Gas provided in ETH.

As ETH is not a contract (like an ERC-20 token), the code is special-cased for transactions dealing in ETH. However, there are efforts to make Ethereum treat ETH less special-cased and more like other ERC-20 Tokens and vice-versa. Weth, for instance, wraps ETH in a 1:1 pegged ERC-20 compliant token for trading in Decentralized Exchanges.

Detractors of economic abstraction (notably, Vitalik Buterin) argue that the added complexity is not worth the ecosystem gains. This argument is absurd. If the software doesn’t support the needs of rational users, then the software should be amended. Furthermore, the actual wallet software required for any given token is made much more complex, as the wallet must manage balances in both ETH and the application’s token.

Market Pricing: To mine on Ethereum with economic abstraction, miners simply need software which allows them to account for discrepancies in their perceived value of active tokens and include transactions rationally on that basis.  Such software requires dynamically re-ordering pending transactions based on pricing information, gleaned either through the miner’s own outlook or monitoring cryptocurrency exchanges prices.

Vlad Zamfir argues that the potential need to monitor market information on prices makes economic abstraction difficult.However, miners requiring pricing information is already the status quo — rational actors need a model of future ETH prices before mining (or staking) to maximize profit against electricity costs, hardware costs, and opportunity costs.

Non-Token Contracts: Not all contracts have coins, or if they do, they may not be widely recognized, valuable, and traded on exchanges. Can such contracts pay fees without ETH?

Users of a tokenless contract can pay fees in whichever tokens they want. For example, a user of Tokenless Contract can pay their fees in a 50/50 mix of LemonadeCoin and TeaBucks. To ensure liquidity between users and miners with different assets they would pay or accept fees with, a user can simply issue multiple mutually-exclusive transactions paying with fees in different assets.

Specialized wallet contracts could also negotiate fees with miners directly .  A miner could also process transactions paying fee with an asset they do not want if there is an open Decentralized Exchange (DEX) offer to exchange the fee asset for something they prefer —  it is possible to create DEX orders for paying fees which allowing only a block’s miner to fill a user’s offers in proportion to the fees that a user has paid in that block preventing the case where a user’s fee diversifying offers are taken by non-miners.

Proof-of-Stake: Without ETH, a modified version of Proof-of-Stake with a multitude of assets could still decide consensus if each node selects a weight vector for the voting power of all assets (let’s call it HD-PoS, or Heterogeneous Deposit Proof Of Stake). While it is an open research question to show under which conditions HD-PoS would maintain consensus, consensus may be possible if the weight vectors are similar enough.

Proofs of HD-PoS may be possible by assuming a bound on the pairwise euclidean distance of the weight vectors or the maximum difference between any two prices. If such a consensus algorithm proves impossible, the failure to find such an algorithm points to a more general vulnerability in Ethereum PoS.

Assuming a future where ETH’s main utility is governance voting, why wouldn’t all the other valuable applications on Ethereum have a say in the consensus process? Rolling back actions in a valuable token contract by burning ETH stake could be a lucrative business; if HD-PoS is used such attacks are impossible.



Vitalik Buterin (Ethereum Foundation) at TechCrunch Disrupt SF 2017

ETH’s ethereal value

If all the applications and their transactions can run without ETH, there’s no reason for ETH to be valuable unless the miners enforce some sort of racket to require users to pay in ETH. But if miners are uncoordinated, mutually disinterested, and rational, they would prefer to be paid in assets of their own choosing rather than in something like ETH.

Furthermore, risk-averse users would want to minimize their exposure to volatile assets they don’t have to use. Lastly, token developers benefit because pricing in their native asset should serve to reduce sell-pressure. Thus, in a stateless ecosystem, replacing ETH is a Pareto Improvement (i.e., all parties are better off). The only party disadvantaged is existing ETH holders.

• The author holds Stellar and Bitcoin,  but has relatively little holdings in other cryptocurrencies. He has previously done a Virtual Lapel Pin Sale (like an ICO) for his cause, “Fuck Nazis”, on top of Ethereum which faced both government censorship and censorship from the Ethereum community.