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Algorithmic asset experiments continue to entice traders & developers

As the team behind Morph.Finance can attest, developing an algorithmic stablecoin project can be every bit as frustrating and thrilling as investing in one. 

While algorithmic assets have retreated from mid-December marketcap highs, the space has nonetheless continued to attract intrepid investors and developers aiming to position themselves at the forefront of a new financial vertical — though it remains an open question if such projects will ever achieve stability.

Largely formed in the mold of defunct 2018 project Basis, algorithmic assets are designed to automatically adjust the total circulating supply of a token based on preset conditions, such as time or price. While they’re ostensibly intended to hew to a peg, such as the US dollar, containing and mitigating volatility has proven to be a notoriously difficult problem to solve.

So far these assets have remained somewhat on the fringe of decentralized finance (DeFi), with the top three projects — Empty Set Dollar, Frax, and Dynamic Set Dollar — accounting for just half a billion in marketcap between them, per Coingecko. Yet traders keep lining up to take spins at the rebase casino, and there’s ongoing development into new products like BadgerDAO’s forthcoming DIGG — a synthetic asset meant to track the price of Bitcoin. It remains new, exciting, and largely unexplored territory.

A more stable stablecoin

In an interview with Cointelegraph, the anonymous developers of Morph.Finance — formerly Dynamic.Supply — recounted their story trying to build a sustainable project in the space, a story with just as many ups and downs as an algo stablecoin chart.

“Dynamic.Supply was a simple Basis fork with modified variables, which launched in early January,” said the team. “We tried to limit whale/bot accumulation by capping the maximum number of tokens per TX during the first hour of launch, but this was unsuccessful.”

The team explained that deep-pocketed ‘whale’ traders hoovered the tokens shortly after launch, and proceeded game the rebase parameters in their favor.

“There was no lockup on the boardroom initially, which opened us up to yield sniping, where users would buy and deposit large amounts of DSTR right before the end of an epoch, collect the rewards, then market dump everything before repeating a few hours later.”

The manipulation discouraged early community members and even some of the developers. Others, however, remained undaunted.

New features, new problems

As is often the case in startup stories, the obstacles led to ingenuity. In the case of Morph, the ingenuity came in the form of a Zapper contract allowing algorithmic stablecoin liquidity providers to quickly switch between other project pools to theirs. 

In the short term it bolstered liquidity, but in the long term it might also allow Morph to “introduce a market-wide LP zapper system that benefits all farms” — an innovation that could buoy the whole space.

But even the new on-ramps to the weren’t enough to stabilize the peg.

“Liquidity significantly improved, however our tokenomics were working against us,” the team said. “Emission of DST and DSTR were both far too fast, leaving us with insufficient time to get new arbitrage mechanics rolled out.”

In order to combat their overaggressive token emissions, the team deployed new contracts, rebranded, and asked the community to transfer their tokens — a process that led to significant griping about gas fees in social channels, as well as no small amount of anxiety that the team might be planning an elaborate rugpull.

Twitter trader @CryptoSpider1 was among those who held his stake through the migration to the new contracts, and said in a statement to Cointelegraph that “rugpull” risks are a part of being on the emerging frontier of the space.

“High risk = high reward, and the dev has shown he/she has no interest in rugpulling but creating something interesting that challenges the current model,” he said.

Next steps

As of 8 pm EST today, just a few weeks after launching as “Dynamic.Supply,” the project has reopened liquidity pools, completing Morph’s “metamorphosis” — converting DST and DSTR tokens to Morph Coin (MORC) and Morph Tracker (MORT), along with the new name, website, and emission rate. 

The Zapper feature — the first of what Morph hopes will be a series of contributions to the space — has also been carried over from the old brand.

A series of shuffles, tweaks, and innovations, all from a handful of devs and intended to push the algorithmic asset space forward.

It’s an open question as to if Morph’s changes will bring their asset stability, just as a similar concerns swirl around most, if not all algorithmic asset projects. But when asked about the future of Morph and projects like it, the Morph team already had further innovations on the mind.

“Utility! Without it, Morph, and all similar projects will eventually fizzle out. That’s not what we want, we’re aiming to build a sustainable ecosystem that we hope will bring real value to our users.”

Traders say Bitcoin price ‘needed pullback’ to maintain bullish momentum

Bitcoin’s parabolic increase well above its previous all-time-high has many experiencing déjà vu from 2017 and a number of analysts are concerned the market is overdue for a sizable correction. 

On Jan. 8 With Bitcoin (BTC) price reached a new all-time high at $41,940 and this week’s 28% collapse to $31,076 had professional and retail investors afraid that a strong trend reversal was in the making.

BTC/USDT 4-hour chart. Source: TradingView

Bitcoin’s historical data shows that rapid parabolic ascents are usually followed by equally catastrophic corrections like the one seen after the 2017 bull run. Because of this, the current market’s similarities to the euphoric mania of 2017 to 2018 bull run have not gone unnoticed.

Cane Island global macro investment manager Timothy Peterson recently pointed out that:

“Bitcoin’s risk is approaching 2017 levels. Investors that buy at this price can expect to lose 40% of their investment sometime in the future. However, the typical maximum drawdown is 30%, so this risk is only modestly elevated from the average.”

Bitcoin risk based on current valuation levels. Source: Twitter

In a follow-up private conversation with Cointelegraph Peterson noted that there remains a short term bull case for Bitcoin stating:

“For bitcoin’s valuation to reach 2017 levels, it would have to be at least $80,000. There’s a small chance that would happen, and if it did, it would happen quickly. High prices have a tendency to move even higher.”

Popped bubble or lower support retest?

There are some telltale signs that Bitcoin’s quick gains reflect a manic market on the verge of a correciton and the current bull versus bear debate centers around whether this week’s volatility is a healthy pullback to test lower supports before the price initiates the next move higher.

LookIntoBitcoin founder and Decentrader analyst Philip Swift recently made the case that Bitcoin’s recenet price action reflected a “needed pullback/slowdown” and he noted that several indicators were flashing red, indicating that the rate of BTC’s price appreciation was reaching extremes.

Swift said:

“Price has now pulled back below the x3 multiple where I expect it to stay for a while. As others have spoken about, price likely ran up to x3 (beyond x2) because we’ve had an earlier mania phase in the cycle vs last cycle with both retail+institutions buying.”

Bitcoin Golden Ratio Multiplier. Source: Twitter

Swift’s analysis indicates that BTC is likely to trade sideways and slowly ascend in the near term but at a slower rate “as some money/profit rotates into altcoins.” Recent price moves in altcoins, especially DeFi-related tokens indicate that this rotation might already be underway.

BTC bulls aren’t done yet

While analysts and chart watchers are calling for Bitcoin to take a breather, bullish traders may have indicated that they have different plans. At multiple instances this week, bulls defended retest of lower support by buying into each dip and there is also the expectation that institutional inflow into BTC will resume now that Grayscale has re-opened its GBTC family of products.

A look at the 30-day average daily sentiment score for Bitcoin shows that despite the pullback, the average score has only decreased slightly from recent highs and is well above the lows seen during previous downcycles.

Price vs. 30-day average sentiment score. Source: TheTIE

While few know the exact course Bitcoin’s price action will take this weekend, the strengthening fundamentals from a technical perspective, increased institutional inflow and positive announcements by government regulators suggest that the recent dips were nothing more than healthy corrections that were bound to occur before Bitcoin gears up to reach for a new all-time high.

The views and opinions expressed here are solely those of the author and do not necessarily reflect the views of Cointelegraph.com. Every investment and trading move involves risk, you should conduct your own research when making a decision.

BTC crash, DOT crushes XRP, man risks losing $262M: Hodler’s Digest, Jan. 10–16

Coming every Saturday, Hodler’s Digest will help you track every single important news story that happened this week. The best (and worst) quotes, adoption and regulation highlights, leading coins, predictions and much more — a week on Cointelegraph in one link.

Top Stories This Week

Bulls buy Bitcoin’s $35,000 support retest as altcoins push higher

Scream if you want to go faster. The crypto markets have been a rollercoaster ride this week — with Bitcoin’s price falling by more than $10,000 to lows of $30,549.60 on Monday.

Analysts maintained that the correction was “healthy and necessary,” with the sharp sell-offs prompting the total crypto market cap to fall by more than $200 billion

ExoAlpha CIO David Lifchitz said the crash “would purge the excessive growth of the past 10 days, allowing Bitcoin to build a new base toward $50,000 and above.”

And indeed, Bitcoin refused to die. Just three days after the sudden downturn, BTC reached $40,000 on Coinbase once again, amid fresh evidence of new large buys on exchanges. Tyler Winklevoss had a clear message: “Don’t listen to the noise, stay focused.”

Alas, it seems like $40,000 is now shaping up to be a tough nut to crack. Despite Joe Biden unveiling an eye-watering stimulus package worth $1.9 trillion, there was not a surge to be seen in Bitcoin’s price. Indeed, BTC actually fell under $35,000 at one point.

eToro warns users it is running out of crypto to trade due to unprecedented demand

An email sent out by eToro suggests that the exchange is struggling to keep up with users who are clamoring to snap up Bitcoin.

In a message to customers, it warned that “unprecedented demand for crypto coupled with limited liquidity” meant limits on crypto buy orders may need to be enforced over the weekend.

It seems the company has been a victim of its own success. The email came a day after eToro marketing manager Brad Michelson revealed that 380,000 users had opened accounts in the first 11 days of January — with crypto trading volumes running 25 times higher than they were last year.

Quantum Economics founder Mati Greenspan — formerly a market analyst for eToro — told Cointelegraph that the warning notice was “a symptom of a potential upcoming liquidity crunch” and advised users against trying to move funds off the platform.

An eToro spokesperson told Cointelegraph: “Our experience of the 2017 crypto rally means that we understand the possible consequences of extreme volatility in crypto markets. We want to ensure that our clients fully understand the possible risks.”

DOT flip: Polkadot overtakes XRP to become the fourth-largest cryptocurrency

There have been some big movers as the crypto market rally resumes and Polkadot’s DOT token is among them.

DOT has flipped Ripple’s XRP in terms of market capitalization following a massive gain of 29% over the past 24 hours. This makes it the new fourth-largest cryptocurrency, with a market cap of $15.6 billion at the time of writing. Over the past week, DOT has surged by an impressive 83.26%.

Polkadot is a fully interoperable platform that allows other blockchains to connect to the network, and it has been described as an “Ethereum killer” because of how it can process thousands of transactions per second.

The most recent update, which may be driving momentum, was the launch of its Rococo parachain testnet, which went live in late December.

Other factors driving momentum include the issues with DeFi on Ethereum as demand for scaling intensifies.

Programmer has two password guesses left to avoid losing $262 million in Bitcoin

Two gut-wrenching stories emerged this week — both with a similar theme.

One man told The New York Times that he has forgotten the password to a hard drive holding 7,002 BTC — a crypto haul that’s worth a jaw-dropping $262 million at the time of writing.

Stefan Thomas has just 10 guesses before the hard drive is encrypted forever… and so far, he has used eight of these attempts to no avail.

Meanwhile, on the other side of the Atlantic, a Welshman is offering the city of Newport a staggering $72 million for help in tracking down a hard drive storing 7,500 BTC. There’s just one problem: It was thrown away several years ago and is languishing in a landfill. Unfortunately for James Howells, the council has said it isn’t prepared to help over concerns that the search would be damaging for the environment. That means he’s going to miss out on a $280-million fortune.

Thankfully, it isn’t all bad news. A student has claimed that they have found private keys that they accidentally Hodled as early as 2011, unlocking $4 million in the process.

ECB president Lagarde renews calls for global regulation of Bitcoin

The president of the European Central Bank has doubled down on calls for Bitcoin to be regulated globally.

Speaking at the Reuters Next conference, Christine Lagarde said: “[Bitcoin] is a highly speculative asset, which has conducted some funny business and some interesting and totally reprehensible money laundering activity.”

During the interview, Lagarde did not reportedly refer to any specific instances of money laundering involving Bitcoin but alluded to her awareness of criminal investigations into illegal activities connected with its use. 

She told reporters: “There has to be regulation. This has to be applied and agreed upon […] at a global level because if there is an escape that escape will be used.”

Winners and Losers

At the end of the week, Bitcoin is at $37,271.25, Ether at $1,255.16 and XRP at $0.28. The total market cap is at $1,038,320,969,138.

Among the biggest 100 cryptocurrencies, the top three altcoin gainers of the week are HedgeTrade, Voyager Token and IOST. The top three altcoin losers of the week are Bitcoin SV, EOS and Verge.

For more info on crypto prices, make sure to read Cointelegraph’s market analysis

Most Memorable Quotations

“They said #Bitcoin died on Monday, but now it’s above 37k. Don’t listen to the noise, stay focused.”

Tyler Winklevoss, Gemini co-founder

“Did nocoiners really think #Bitcoin wouldn’t bounce back? This is the year of the Metal Bull. $100k is inevitable.”

Samson Mow, Blockstream CSO

“This whole idea of being your own bank — let me put it this way: Do you make your own shoes? The reason we have banks is that we don’t want to deal with all those things that banks do.”

Stefan Thomas, locked out of 7,002 BTC 

“The unprecedented demand for crypto, coupled with limited liquidity, presents challenges to our ability to support BUY orders over the weekend.”

eToro

“[Bitcoin] is a highly speculative asset, which has conducted some funny business and some interesting and totally reprehensible money laundering activity.”

Christine Lagarde, European Central Bank president

“I look at the asset value of Bitcoin versus the asset value of all things traded and Bitcoin is still a nothing burger — a giant nothing burger.”

Kevin O’Leary, businessman

Prediction of the Week

Pantera Capital CEO doubles down on $115,000 Bitcoin prediction for 2021

Dan Morehead has maintained his bullish prediction for 2021, with the Pantera Capital CEO claiming that Bitcoin is on track to have surged 800% by August and hit $115,000.

The exec initially made this prediction in August 2020, when Bitcoin was trading at about $11,600. At the time of writing, it is now worth $37,000.

Setting out why Bitcoin has plenty of room for growth, he added: “Is Bitcoin overvalued? I would say no. […] Bitcoin has spent three years well below its long-term compound annual growth trend line, it’s still below it, and although Bitcoin has rallied a great deal over the last six months, I think it is fairly valued.”

FUD of the Week 

British financial adviser calls on the government to ban crypto transactions

A veteran financial advisor has called on the British government to ban crypto transactions.

Neil Liversidge started a petition urging local financial authorities to stop Bitcoin payments in the United Kingdom.

He argued that digital assets have no intrinsic value, adding they can have a “destabilizing influence on society, and are often used for criminal activity.”

In an interview with Professional Adviser, Liversidge urged retail investors to cash out immediately, adding: “If the UK government takes a lead by banning transactions on cryptos as my petition requests, that will set off a chain reaction, crashing cryptos overnight.”

Liversidge needs 10,000 signatures for a response from the government. At the time of writing, he’s got just 112.

Ledger owners report chilling threats after 20,000 more records leaked

Ledger users are receiving threatening emails in the wake of the hardware wallet manufacturer reporting that 20,000 more of its customers have been affected by another massive data breach.

One Reddit user said his father, who owns a Ledger wallet, received a message including his name, home address and phone number. The extortionist demanded 0.3 BTC or 10 ETH, worth roughly $12,000, or he would face physical violence.

The Redditor wrote: “I know that those scammers sending emails by hundreds are just trying their luck by creating fear, but when it comes to the safety of your family it’s another story.”

In another email, the scammer wrote: “Are you able to imagine all the possible consequences that can occur to you and your loved ones? I hope you do not ruin every little thing for yourself by making the wrong choice.”

Bitcoin payments are the “second stupidest idea I’ve heard,” says Stephen Colbert

Stephen Colbert, the charismatic host of CBS’ The Late Show, isn’t holding back his punches or his jokes when it comes to Bitcoin.

He referenced a recent Vice report that revealed how hackers had taken control of internet-connected chastity cages — devices worn by men to prevent them from engaging in any sort of sexual activity — and demanded Bitcoin to unlock them.

With a wry smile, he said: “Getting paid in Bitcoin? That’s the second stupidest idea I’ve heard.”

Colbert first covered Bitcoin on his show in April 2014 when Bitcoin was fluctuating between $50 and $300. Since then, BTC has risen by more than 40,000%.

Best Cointelegraph Features

Bitcoin has become nothing but the new Che Guevara T-shirt

Cassio Gusson argues Bitcoin promised to create a new normal in finance, but it turned out to be nothing but the old normal with a new face.

Here’s how institutional investors ignited Bitcoin’s rally to $40,000

In this article by Benjamin Pirus, experts weigh in on the main events from 2020 that impacted Bitcoin’s price the most.

Strap in: New institutions wait for Bitcoin price rollercoaster to end

Bitcoin market volatility is scaring off new institutional investors, but meanwhile, old ones continue to buy up the BTC dips. Here’s Shiraz Jagati.

JPMorgan Chase execs weigh in on stablecoin regulation, crypto competition

During JP Morgan Chase’s Q4 2020 earnings call, CEO Jamie Dimon and CFO Jennifer Piepszak weighed in on the OCC’s recent approval of banks using stablecoins for payments, as well as whether or not the approval will have any impact on the development of JPM Coin. 

During the question-and-answers portion of the call, Portales Partners analyst Charles Peabody asked about the approval from the OCC for banks to use public blockchain networks for payments.

“That guidance enables an offering of stable going on a public blockchain. So that doesn’t impact JPM coin. JPM coin, you should think about as the tokenization of our customer deposits,” responded JPM CFO Jennifer Piepszak, according to a transcript of the call.

However, she did not rule out the possibility of a JPM-backed stablecoin if customers showed interest.

“So, it’s obviously very early. We will assess use cases and — and customers demand. But — but it’s still too early to see where this goes for us.”

JPM CEO Jamie Dimon was also quick to jump in and mention that the bank is “using blockchain for sharing data with banks already and so we are at the forefront of that which is good.”

Debuted in October of 2020, JPM Coin is largely used on the backend of JPM’s payments systems, helping to settle nearly $6 trillion in payments on a daily basis. On the call, Piepszak also described the JPM Coin project as “tokenizing deposits to make payments easier for client.”

Ultimately, Dimon seemed to imply to crypto payments settlement won’t greatly change how JPM operates.

“There is this talk about several banks having digital currencies and stuff like that, right?” Dimon concluded. “[…] So I — I do expect that stuff is coming and it may not change our world that much”

Dimon may be underestimating the impact crypto will have on the payments landscape, however. 

Paypal, one of the Fintech giants that Dimon mentioned by name as a payments competitor, confirmed that crypto payments will be available starting in 2021. The CEO — a former noted skeptic of cryptocurrencies — made it clear that payments will become an increasingly crowded and cutthroat field over the next decade:

I expect it to be very, very tough competition in the next 10 years. I expect to win. So help me God.

Ethereum competitor Near Protocol (NEAR) gains 106% as DeFi heats up

Near Protocol (NEAR) is a smart contract platform that uses parallel processing to scale the network. This technique, known as sharding, resembles what Eth2 is aiming to achieve and Near’s proof-of-stake consensus mechanism also allows token holders to stake their coins. 

In the past month, NEAR has rallied by 107% and this raises questions on whether the project is making significant strides in what has become an ultra-competitive smart contract industry.

NEAR/USDT (Binance). Source: TradingView

Compared to its competitors, NEAR is a relatively new project as the mainnet only launched in April 2020. Unlike Ethereum, NEAR’s consensus mechanism works towards fee stabilization and according to its website, the protocol aims to accelerate the development of decentralized applications.

Interestingly, Near’s ICO took place four months after its mainnet launch. A possible reason for this is that the team raised $35 million in private funding rounds held in July 2019 and May 2020. Among its investors are Andreessen Horowitz’s a16z Crypto Investments, Pantera Capital, Electric Capital, and Ripple’s incubator Xpring.

Over the past three months, Near Protocols’ network activity has increased significantly and information on the Near Blog shows there are a couple of exciting applications already live.

Near Protocol daily number of transactions. Source: explorer.near.org

One is Berry Club, a yield arming app/game that lets players draw with pixels and earn collectible tokens. Another application called Paras also allows users to interact with a NFT digital art card marketplace.

DeFi integration accelerates

On Nov. 24, 2020, 1inch.exchange-backed project Mooniswap revealed their plan to build Automated Market Making (AAM) features on NEAR.The decentralized exchange’s aggregator is designed to roll liquidity and pricing from all significant DEXs into one platform.

Sergej Kunz, CEO and co-founder of 1inch, stated: “By building on NEAR, we’ll be able to experiment with sharding and be prepared for the arrival of Ethereum 2.0.

On Jan. 19, Crypto.com also intends to launch a new pool offering $250,000 worth of NEAR tokens at 50% below the market price. Clients will need to stake CRO tokens and also meet the set trading volume requirements on the exchange.

One area of concern is there are open questions regarding how the community treasury is governed. A substantial number of NEAR tokens are being managed by a handful of people who are not required to abide by clear guidelines and rules.

NEAR Twitter user activity vs. price (USD). Source: TheTie

Data from TheTie, an alternative social analytics platform, shows that the recent price spike was accompanied by increased social network activity. Nevertheless, transfers and transactions on the Near Protocol mainnet began only three months ago.

Compared to its competitors NEAR protocol appears to be in an early development stage. Effectively delivering the Mooniswap integration will likely be an important milestone for the project and if successful, NEAR token could possibly see further upside.

The views and opinions expressed here are solely those of the author and do not necessarily reflect the views of Cointelegraph. Every investment and trading move involves risk. You should conduct your own research when making a decision.

Another court applies the Howey investment contract analysis to crypto

On June 25, 2020, the United States Securities and Exchange Commission brought suit in the Northern District of California against NAC Foundation LLC, also known as the NationalAtenCoin Foundation, and Rowland Marcus Andrade, the company’s CEO, alleging that the company had violated the federal securities laws by selling an unregistered, pre-functional version of an “Anti-Money Laundering BitCoin” token, to be known as AML BitCoin.

Unlike some of the other recent high-profile decisions applying the Howey Test, such as SEC vs. Telegram and SEC vs. Kik, the NAC lawsuit involved detailed allegations of fraud in connection with the sale of pre-functional tokens. Andrade was also indicted by the Department of Justice on charges of fraud arising out of the offering, and Jack Abramoff, a federal lobbyist, pled guilty to participating in the fraud.

On Jan. 8, 2021, Judge Richard Seeborg of the Northern District of California rebuffed NAC and Andrade’s motion to dismiss, finding that the SEC’s complaint had sufficiently alleged that there had been an unregistered sale of securities under the Howey investment contract test. NAC filed its motion to dismiss back in October of 2020, alleging misconduct by the SEC as well as advancing the legal claim that AML BitCoin tokens were not securities under the Howey Test because, among other things, the purchasers had been repeatedly told that they could not expect a return on their investment. The SEC responded colorfully arguing:

“If it looks like a duck, quacks like a duck, and has the genetic makeup of a duck, it is, indeed, a duck. It matters not if the seller puts a sign on the bird exclaiming, ‘this is not a duck.’”

The crypto offering

While many of the facts about the NAC offering are in dispute, some things appear to be settled. In October of 2017, NAC posted a “White Paper of AML BitCoin (AMLBit) and its Business Model” on its website. In this white paper, NAC stated:

“AML BitCoin rests on a privately regulated public blockchain that facilitates… anti-money laundering ‘know your customer’ compliance and identifies criminals associated with illicit transactions, while maintaining and strengthening the privacy protections for legitimate users.”

The white paper also explained that the “privately regulated public blockchain” was yet to be fully developed and that the original purchasers would be issued “ABTC tokens,” which could be exchanged one-for-one with AML BitCoin when the blockchain was finished. The ABTC tokens were, in all other respects, pre- or non-functional.

The white paper proclaimed that both ABTC and the eventual AML BitCoin could be traded “on participating exchanges and trading websites” and conceded there was the possibility of appreciation through speculation. A substantial portion of the white paper explains why, in NAC’s opinion, the AML BitCoins should not be securities.

The actual initial coin offering took place from October 2017 to February 2018, with some sales occurring both before and after that time period. Although the white paper indicated a goal of distributing 76 million ABTC tokens to the public in order to raise $100 million, the actual amount raised was approximately $5.6 million, attributed primarily to 2,400 retail purchasers in the United States. The ABTC thereafter traded on a number of online platforms, but at no time did NAC attempt to register the tokens with the SEC.

Applying the Howey investment contract test

Adopted during the Great Depression, the Securities Act of 1933 obviously does not include crypto or digital assets in the laundry list of things that are to be regulated as “securities.” However, the Securities Act, which requires securities to be registered or exempt from registration in order to be legally offered or sold, does include “investment contracts” within the scope of the securities laws. Crypto assets are generally regulated as securities if they fit within the definition of an investment contract.

In the case of AML BitCoins and ABTC tokens, both the SEC and NAC seemed to agree that the appropriate test for whether NAC had sold an investment contract (and therefore a security) was the one set out by the U.S. Supreme Court in 1945 in SEC v. W.J. Howey Co. As described in more detail elsewhere, the application of the Howey Test turns on the following questions:

  1. Did the purchasers invest something of value?
  2. Was there a common enterprise?
  3. Was the reason for their investment an expectation of profits?
  4. Were the purchasers relying on the essential managerial or entrepreneurial efforts of others?

All of those elements must be present in order for there to be an investment contract, although the Ninth Circuit (in which California is located) has collapsed the last two elements into a single factor.

As is true for most crypto sales, the NAC sales met the first element of this test. Since purchasers of the ABTC had either used fiat currency or other convertible digital assets to pay for the pre-functional tokens, they had clearly invested property of value. Instead of arguing that element, the issues raised by NAC in its motion to dismiss focused on its contentions that there were no allegations of a common enterprise in the complaint and that the ABTC investors had not purchased with a reasonable expectation of profits.

Commonality is admittedly one of the most complicated and confusing aspects of the Howey Test, with courts disagreeing about what is required to prove this element. Some courts look to vertical commonality, where the fortunes of the investors are tied to those of the issuer, often through a profit-sharing arrangement. Obviously, crypto offerings generally do not involve profit-sharing per se because purchasers acquire no stake or interest in the issuer’s business or profits. On the other hand, this is not necessarily the only way in which vertical commonality can be proven. For example, where the fortunes of an issuer and investors are tied together by a joint interest in the success and profitability of an asset that is yet to be developed, some courts have found vertical commonality to be present.

In addition, other courts look to horizontal commonality, which occurs where the fortunes of investors are tied together, even if the issuer’s profits are determined on some other basis. Such horizontal commonality is often proven by showing that investments are placed in a common pool from which profits are distributed on a pro rata basis.

In this case, NAC argued that this element was missing because investors were required to acknowledge that there was no pooled interest in any business or other common enterprise. Again, however, not all cases agree that a pooling agreement is necessary. Some courts have found that there is horizontal commonality where proceeds from a sale have been combined in a common fund. In its brief supporting its Motion to Dismiss, NAC pointed to a Ninth Circuit opinion that the foundation suggested required that the promoters “knew” their funds would be pooled together.

With regard to the expectation of profits from the efforts of others, NAC argued that that there was only a single mention in its white paper of the possibility that “tokens could ‘appreciate in value through speculative trading…’” NAC contends that this comment occurred in the course of explaining why AML BitCoin would operate like Bitcoin (BTC) in that profitability would “rely entirely on the expertise of the AML BitCoin’s holder.” NAC also pointed to other documents, such as the terms and conditions, which required purchasers to acknowledge that purchasers “expect no return on investment.”

The court’s ruling

Before considering the text of the Jan. 8, 2020, ruling, it is worth emphasizing that the decision was not on the merits. Because the court was responding to a motion to dismiss, the judge was required to determine whether the SEC had sufficiently alleged facts that would support a verdict if those allegations are eventually determined to be true. In other words, in making this ruling, the court assumed that the facts as stated in the complaint accurately recite what happened. The court was allowed to draw reasonable inferences from those facts in determining whether the action should continue but was not allowed to consider NAC’s opposing views as to what had been said and what happened.

The court, therefore, focused on whether the SEC sufficiently alleged that NAC had sold securities under the Howey investment contract test. The court considered both of the two elements identified by NAC: whether there was a common enterprise and whether the purchasers were expecting profits as a result of their investment. The court very quickly dismissed the argument that there was no common enterprise here, finding that both investors and the issuer would benefit from the development of the AML BitCoin system and that they would share proportionately in any future increases in value since the foundation retained the rights to a sizeable number of AML BitCoins. In the words of the court:

“The ‘fortunes’ of ICO participants—as measured by either the trading value of their ABTC tokens or the future trading value of AML BitCoin—were ‘linked’ to the ‘fortunes’ of defendants—as measured by the trading value of their ABTC tokens, the future trading value of AML BitCoin, or the general success of their enterprise…”

In a footnote, Judge Seeborg specifically noted that this result was consistent with the recent opinion in SEC v. Telegram, where the court found commonality based on the fact that every participant’s anticipated profits depended on the issuer’s success in developing the underlying blockchain.

With regard to whether the investors “reasonably expected profits based on the efforts of others,” the court concluded that the SEC had alleged “ample facts” to suggest both that there would be profits and that those profits depended on the issuer’s efforts. The profit motive was, according to the court, apparent from the fact that there was no use for the ABTC or AML BitCoin other than to hope for appreciation. Given that the demand for these assets would “rely almost exclusively on market perception of defendants’ work product” the court had no difficulty in concluding that the SEC’s complaint adequately pled that the assets sold by NAC were securities.

Conclusion

The ruling on the motion to dismiss in SEC v. NAC is not groundbreaking. It does not make new law with regard to when crypto assets should be considered to be securities. It does not involve anything like the amount of money at issue in either SEC v. Telegram or SEC v. Kik. It does not even dictate the final outcome in the case itself.

It is, however, an early indication in 2021 that the SEC still has crypto sales in its crosshairs, and it is further confirmation that the Howey Test is likely to control when crypto is regulated as a security, absent intervention from Congress or potentially a change in perspective from the SEC itself.

The views, thoughts and opinions expressed here are the author’s alone and do not necessarily reflect or represent the views and opinions of Cointelegraph.

Carol Goforth is a university professor and the Clayton N. Little professor of law at the University of Arkansas (Fayetteville) School of Law.

The opinions expressed are the author’s alone and do not necessarily reflect the views of the University or its affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.

Stacks’ announces major partnerships following mainnet launch

Stacks, an open-source network for building smart-contract and DeFi bridges to Bitcoin (BTC), has secured several major partnerships in the wake of its mainnet launch — sending a strong signal that industry players are keen to back new use cases for BTC.

The Stacks 2.0 mainnet officially launched on Thursday, bringing the promise of new use cases for Bitcoin based on the Clarity smart contract language. As Cointelegraph reported, Stacks 2.0 is attempting to broaden Bitcoin’s utility beyond the digital-gold narrative to include decentralized finance and smart contracts. That includes putting to work the roughly $700 billion in Bitcoin capital currently on the sidelines.

Foundry Digital, a Digital Currency Group company, has since announced that it will provide mining services for STX, the native cryptocurrency of the Stacks ecosystem. Foundry said the move sends a “clear signal to miners about the opportunity to mine STX.”

Foundry was one of several independent miners to launch the Stacks 2.0 network on Thursday.

Blockdaemon, a blockchain infrastructure platform, has also announced integration with Stacks 2.0, which will allow institutions and investors to become node operators.

“We are currently witnessing unprecedented institutional investment into the crypto sphere, demonstrating the need for enterprise-grade infrastructure to connect and scale blockchain networks,” said Blockdaemon CEO Konstantin Richter.

Regarding Stacks 2.0, he added:

“We’re aligned in our vision of building Web 3.0, and look forward to seeing the network deliver a truly decentralized and user-owned internet.”

Stacks 2.0 is based on a proof-of-transfer, or PoX, consensus mechanism. The novel mining system utilizes proof-of-work to create new blockchains that are rooted in Bitcoin’s security. Stacks co-founder Muneeb Ali said that PoX can incentivize network participation by offering Bitcoin rewards, something that wasn’t possible before the protocol was conceived.

Multiple DeFi mainstays crack top 20 in long-awaited ‘Great Repricing’

Hardcore decentralized finance (DeFi) adherents woke up today to a long-awaited sight on Coingecko’s top 100 rankings by marketcap: native tokens for popular DeFi platforms Synthetix and Aave have cracked into the top 20, an event DeFi observers have heralded as “The Great Repricing.”

DeFi investors, users, and builders have long argued that the sector writ large is wildly undervalued relative to other cryptocurrency projects given DeFi’s growing userbases, cash flows from protocol fees, and soaring levels of activity compared to “zombie chain” layer-1 networks scattered throughout the top of the marketcap rankings.

If the past week is any indication, the wider market appears to have finally woken up to the incongruities. SNX and AAVE are up 40% and 74% on the week, both topping $2.3 billion by marketcap and eclipsing layer-1s such as Tezos and Tron. 

The moves follow promising developments for both projects. Aave has a proposal in the works that, if approved by governance, will alter the $370 million Safety Module to potentially create a whole new insurance product line, while Synthetix has been buoyed by the launch of a layer-2 scaling solution

What’s more, some think this could be just the start for DeFi assets as a new “alt szn” dawns.

“While this is an important milestone, it is only the beginning of a trend we’ve been talking about for a while,” said Delphi Digital partner José Macedo in an interview with Cointelegraph. “[…] In terms of where this is going, the TAM for consumer finance is $3.2T. We see the value prop for DeFi as doing to finance what the internet did to data; transforming financial primitives into “Money Legos” and creating an open ecosystem that enables permissionless innovation across the stack.” 

It’s a long-term view that could have accomplishments like reaching the top 20 by cryptocurrency rankings seem like a pittance, but Macedo warns that the road to reaching such lofty goals won’t necessarily be a smooth one:

While the general direction is clear, it’s worth remembering that you cannot have massive upside without volatility. We are undoubtedly in for a bumpy ride, with regulation looming large and DeFi being declared dead many times over.

Polkadot gains 75% in one week — But can DOT price reach $20 next?

Bitcoin (BTC) has made significant moves already this year but altcoins are catching up. Once Bitcoin’s price starts to stabilize, the market environment becomes better for altcoins to begin their run. 

One of the strongest performers in 2021 is Polkadot, as this cryptocurrency has been making new all-time highs day in, day out. Polkadot’s price rallied by 85% in 2021 and 75% in the past seven days, surpassing XRP in market capitalization.

DOT price eyes $20 or higher after this rally

DOT/USDT 1-day chart. Source: TradingView

The daily chart of Polkadot shows a rounded bottom construction throughout the last quarter of 2020. Since then, a beautiful support/resistance flip took place at the $4.55 level, leading to more upside.

This upward continuation kicked off with a massive rally to $10, after which demand (grey box) held for support and new levels were able to be defined using the Fibonacci extension.

One of those regions was found at $14.25-14.75, and the second one is found at $16-17, as the chart shows.

DOT/USDT 1-day chart. Source: TradingView

The primary question currently is whether DOT has finished its current run. If that is the case, areas of interest for support/resistance flips are found at the 0.35-0.382 and 0.618-0.65 Fibonacci levels.

These Fibonacci levels are often used to predict where such corrections will potentially reverse course. In Polkadot’s case, these align heavily with previous support or resistance levels, namely the $13 and $10.50 areas. This is where traders should be watching for potential buy-the-dip opportunities.

Once again, Polkadot will most likely only correct when Bitcoin starts to drop significantly. Otherwise, Polkadot and many other altcoins are currently in a good position for more upside.

However, if a correction occurs and Polkadot bottoms out, new levels of interest can be defined on the charts for the next impulse move. In that case, Polkadot might continue its surge towards $23-24 and possibly even $32-35 at a later stage in the year.

DOT/BTC approaching critical resistance zone

DOT/BTC 1-day chart. Source: TradingView

The daily chart of Polkadot in the BTC pair shows a massive surge in recent days. However, this surge is approaching a significant resistance zone.

It’s common sense and should go without saying but it’s not advised to enter a trade right as the price moves into the resistance zone. 

The 0.00045000-0.00047000 sats area is a critical area to breakthrough as that would trigger another heavy impulse move upwards. If that area breaks and flips for support, continuation is likely toward price discovery for Polkadot.

However, the price will most likely fail to break upward here. In that scenario, a healthy correction is possible through traders should be watching the 0.00035000 sats region, but also the 0.00031500-0.00032250 zone.

The $15 support level is vital 

DOT/USD 2-hour chart. Source: TradingView

The 2-hour chart shows a heavy uptrend, but some critical levels must hold for this rally to continue.

In that perspective, the previous high at $15 has to sustain support. If that area holds, a renewed rally to $20 or higher is on the tables to occur for Polkadot.

Failing to hold the $15 area for support and a significant correction is on the table. The next areas for support are $12 and $10.75-11.25, which is a correction of 30-40%.

However, Polkadot shows that it has a lot of potential for the upcoming year with one of the biggest surges so far in 2021. 

The views and opinions expressed here are solely those of the author and do not necessarily reflect the views of Cointelegraph. Every investment and trading move involves risk. You should conduct your own research when making a decision.

Risk management in crypto: Aka ‘the art of not losing all your money’

Risk management is a vital element of success for any trader in any market. No matter the size of the capital you’re trading with or investing in, losses are going to be inevitable, particularly in highly volatile markets like cryptocurrency. Learning how to manage risk to minimize losses is vital. Yet, it’s also necessary to master risk management in order to ensure maximum gains. After all, the more you’re willing to risk, the greater the potential reward.

Risk management to prevent losses

Even experienced traders with impressive track records of reading the market can lose it all on one or two bad trades if they fail to employ proper risk management or let their emotions get in the way. The enticement of “hitting the jackpot” or chasing market sentiment can be too strong, allowing traders to become clouded or overconfident.

To prevent sweeping losses and allow traders to trade with a cool head, the very basic trading tools and forms of risk management must be used at the very least. These include establishing trading rules, such as market orders, limit orders and stop-loss orders, that allow traders to limit their losses by triggering an action when certain conditions are met.

With these types of mechanisms in place, traders can take a break from the screen and trade with confidence, knowing that they can limit their losses or take profit at an acceptable level. At what limit this is set will depend on the risk appetite of the investor and the amount of capital they are willing to lose on a given trade.

Another way of managing risk is, of course, the golden rule of always keeping a diversified portfolio spread out over several assets. This will allow you to gain exposure to more assets while hedging losses and ensuring that one bad investment doesn’t wipe out all your capital.

Risk management to maximize your gains

Last year in the cryptocurrency space, we saw astronomical growth with astounding gains from most major coins. Decentralized finance ignited a passion for yield farming and earning an attractive passive income on crypto assets, as well as enabling an entire ecosystem of borrowing and lending away from traditional finance. Against the backdrop of a struggling global economy due to the global pandemic and near-negative yield on cash savings, investors are turning to the crypto space in droves.

We’ve seen massive endorsements from institutional investors and major names, such as MicroStrategy, Guggenheim, PayPal and Square all lending legitimacy and fanning the flames of “institutional FOMO.” Bitcoin (BTC) has shot up like a rocket this year, blasting through its previous all-time high thanks to this action from institutions. MicroStrategy alone purchased more than 70,000 BTC last year, showing continued bullish support.

And as adoption from institutional investors grows, so does the need for more sophisticated ways of managing risk that go beyond basic market orders and allow professional and institutional traders to execute highly flexible and creative strategies that spread their risk across all assets and amplify the potential rewards.

Until now, such institutional-grade products in regards to risk management have been out of the purview of cryptocurrency exchanges. However, if we are to respond to the needs of this type of investor, serious exchanges must provide the infrastructure that institutions require, including the ability to cross-collateralize their positions and manage their risk more effectively.

Enhanced risk management for ultimate trading flexibility

Through features such as unified account management (otherwise known as Portfolio Margin), traders can manage all their accounts, trades and crypto assets from within one single interface. But more importantly, they can unify all their assets and trade with any instrument, using all of their purchasing power.

For example, let’s say a trader wants to enter an ETH/USD futures trade. With a unified account, they can do this efficiently without having to purchase Ether (ETH) and by simply using any of their existing crypto collateral. This is much more convenient for traders and also reduces the fees associated with buying altcoins with Tether (USDT) or BTC. It also allows them to take a much larger risk and position to amplify their earnings and substantially improve margin efficiency.

Risk management is probably the most important part of investing. If the crypto space is going to continue to grow and attract and retain the interest of institutional traders, we need advanced risk-management tools that can maximize gains for investors — and nudge the crypto market cap into the trillions of dollars where it rightfully belongs.

This article does not contain investment advice or recommendations. Every investment and trading move involves risk, readers should conduct their own research when making a decision.

The views, thoughts and opinions expressed here are the author’s alone and do not necessarily reflect or represent the views and opinions of Cointelegraph.

Jay Hao is a tech veteran and seasoned industry leader. Prior to OKEx, he focused on blockchain-driven applications for live video streaming and mobile gaming. Before tapping into the blockchain industry, he had already had 21 years of solid experience in the semiconductor industry. He is also a recognized leader with successful experience in product management. As the CEO of OKEx and a firm believer in blockchain technology, Jay foresees that the technology will eliminate transaction barriers, elevate efficiency and eventually make a substantial impact on the global economy.