The differences between bitcoin (BTC), ether (ETH) and ripple (XRP) are manifold. The simple fact that few have been able to reach consensus on whether various cryptoassets are a commodity, a currency or a security, suggests that these assets are not all the same. Some argue each of these represent, respectively, a commodity, a currency and a security. So far, just CFTC is on record saying certain cryptoassets are commodities, a view upheld earlier this year by a US federal judge, who upheld that cryptos are commodities, while the SEC has said BTC and ETH are not securities. So official designations have been murky at best.
So why do these ‘cryptocurrencies’ trade in tandem if they may in fact represent different asset classes? What needs to happen for the world to see each as having its own tradeable characteristics? When a decoupling does occur, will it happen naturally over time, or will it be a momentous event?
“There are multiple answers to this,” notes Zane Tackett, head of OTC sales at cryptocurrency market maker, B2C2. “One, is that they don’t always move in perfect tandem. What you see a lot of times is like a rubber band effect where bitcoin would move up a lot and then start to slow and even go down, and then ethereum would shoot up. We saw that a lot during 2017 and then Ethereum would cool off and bitcoin would go crazy. But they still do move more or less in tandem.”
The saying, ‘a rising tide lifts all boats’ may be a good aphorism. “As bitcoin starts to get more air time, people start to look into cryptos. Although it’s not sound logic, people look at bitcoin and say, ‘it’s trading at $7,000 – that’s too expensive – I’ll go buy the cheaper coin’. So bitcoin is the one that got them into the space, but then they don’t end up putting money in bitcoin. They end up going elsewhere,” notes Tackett.
He adds that there’s another factor at play. “Very little of the value in crypto currencies comes from actual usage, the vast majority of it is just speculation. Because of that, if someone gets spooked on one crypto, they generally get spooked on most cryptos because it’s not, ‘oh, that one has a problem and mine has better technology’. It’s more like ‘this thing is going down, the market’s going down, everybody get out’. But if it was based more on fundamentals, I think we could definitely see a decoupling, but that isn’t how it works right now,” Tackett says.
In the fiat world, certain currencies are considered safe havens, even when that designation might defy comprehension – such as when the Japanese yen rose sharply on the back of the news that the Fukushima nuclear plant was melting down after the tsunami there in 2011 (at the time, the rising yen was generally attributed to a repatriation of cash to cover disaster-related costs). There are also economic or political reasons why one country’s currency might be valued stronger than another’s, but such factors don’t seem to apply in crypto world.
Yet some sources feel that this actually does occur, albeit on a much smaller scale, in crypto. “If you look lately, the price of cryptos across the board started going down, while the altcoins went down much quicker and at larger amounts than bitcoin did. You’ll also see the opposite happen when altcoins move up – they often have a much higher move to the upside than bitcoin. Bitcoin is seen as the reserve asset or the safe haven asset of cryptos,” notes Tackett.
Could an event such as a wildly successful hard fork of Ethereum to a Proof of Stake-based blockchain cause a decoupling of ether from bitcoin? “I think we’re very far from that. What is needed for that is for the price to be based on the technology they use – the adoption of the currency – not hype and speculation. But I don’t see the speculative side of crypto losing its dominance for a very long time,” says Tackett.
“Historically, some of the most profitable trades have been taking the right side of a macro decoupling,” says Michael Moro, CEO of Genesis Global Trading. “Fundamentally, what it will take for BTC to succeed is different than for ETH or any DApp platform. The path to BTC value accretion is more well defined – becoming a truly sovereign store of value – compared to ETH, which might become a store of value pending DApps are used on the platform. There’s also a chance that DApps are 10 years out instead of the two-to-five-year horizon everyone likes to believe.
“Ultimately, if anything were to decouple, it would be BTC from everything else,” Moro continues. “I don’t see how this would be forced by any event, but rather, it would happen over time. If DApps are as promising as they make themselves out to be, we will likely see them trade based on ETH/USD to some degree, as they have historically. Even if there are fundamental DApp-specific metrics, like active users and transactions, driving value to DApps, ETH will still provide the backbone base ledger level, and DApp tokens and platforms will ride on the success of ETH.”
“There are maybe five tokens that offer something interesting or unique and these should in theory trade a bit more independently in the future,” BitMEX Research tells Profit & Loss. “Most tokens offer nothing but hype and buzz. However, the valuation of all tokens is very high – and none are cheap. Therefore, we think tokens may trade in line for several years to come.”
Bitcoin and Ethereum are considered stable protocol layers, while the application layer is where the use case comes to life, explains an industry source, pointing to such up and coming protocol layers as EOS, Cardana, Dfinity and Zilliqua, which are attracting applications.
“Ether is the underlying for the ERC20 tokens, but to me, the arms race is not won at the protocol level, it will be at the application level, and this is really going to be about the robustness of the protocol level to process transactions. So the refinement and innovation at the protocol layer will define how these things adopt at the application level,” says the industry source. “Right now, Ethereum is so slow that nothing can adopt. Whoever addresses the speed, ability to process transactions seamlessly and have simpler and smarter contracts, is going to win, and I don’t think it will be one, it will be multiple winners. So, as the ecosystem matures, you’ll see a number of stable protocol layers with which applications will be built on top – and that’s where adoption should be.”
“So why trading is correlated is directly tied to adoption,” the source adds. “How many application layer tokens have adopted use cases? Very few – they’re all at various stages, so we haven’t seen dispersion yet.”
“The world doesn’t need 70-100 protocol layers, it needs a smaller subset,” the source continues. “It will look more like the metals market, where you’ve got platinum, palladium, gold, silver, copper, tin, iron ore, etc. They all have different use cases, and all have different volatilities. I think the different protocols will do that as well – the tokens will be more designed for specific use cases.”
Right now, we have thousands of ERC20 tokens being developed, but at the protocol level there will be a stable subset that everything builds on and we don’t know what that team photo will look like, but I suspect there’s a number of protocols like Dfinity and Zilliqua that nobody heard about a year ago, that are going to step into that team photo and you’ll have a Bitcoin and an Ethereum, a Dfinity and an EOS, and all the new apps will build on top of these,” the source says, adding, “Why is trading correlated? How many application layer tokens have use cases? Very few. They’re all idea stages, so there’s not much to differentiate between them right now.”