Crypto Runs! & Smart Contract Platforms

November 25, 2020

Welcome to the Thanksgiving Holiday edition of Crypto: Decrypted and, as anticipated, the crypto markets are truly shaping up nicely.  Bitcoin is on an historic run and, as of the writing of this, just broke through $19,300, surging 39% this month and nearing the all-time of $19,783 set in December 2017.   We see a couple of reasons for this.

Run Crypto, Run!

We were anticipating a crypto run once uncertainty was pulled out of the market and, through the course of November we’ve seen this happening, especially in the political arena.   As soon as electoral results were being tallied in early November this run began, with steady, consistent growth happening after Biden was declared the winner of the presidential election. Now, with legal cases being dismissed in battleground states over the past weeks and, just this week, Trump authorizing the beginning of the presidential transition, the outcome is getting clearer – more certain – and we’re seeing bitcoin break into all-time high territory.

It wasn’t just politics however, as PayPal’s crypto arm went live.  With over 300M users now able to buy, sell and hold select crypto assets on PayPal, we believe retail adoption is imminent.  Not surprisingly, it is suspected that PayPal has actually bought 70% of new bitcoin since it opened up this service in late October.  This is a watershed moment.

Alternative Crypto Assets: Intro to Smart Contract Platforms

While all the attention is on bitcoin let’s not forget that its acceptance, adoption and growth paves the way for other crypto assets which provide different value propositions. This month, while we’ve seen a great run in bitcoin, we’ve also seen other crypto assets like ether (the token for the Ethereum blockchain) up almost 60% and YFI (the token for the DeFi product Yearn.Finance) up a whopping 122%.

We believe it is important to understand the entirety of the crypto-verse and its asset classes, so I’ll now take a minute to explore one known as platforms.  (Note that this is only intended to be an introduction, a toe in the water so to speak.)

Platforms are layer 1 blockchains that allow distributed applications (called “dApps”) to be created, which provide deeper functionality versus just a store of value. Much like traditional software applications, these applications could be games, supply chain management, financial products – almost anything. Platforms will be the foundation for the next level of technological implementation in our world and there are many platforms with different strengths and weaknesses. Ethereum was among the first platforms to popularize blockchain development and implement the use of programs called “smart contracts.”

Smart contracts are a fancy way of stating that when one event happens, another event will automatically happen without the need of a third party to validate the event.  Let’s take a (simplified) example of how the sale of a house works today.  A buyer puts money with a third party, generally an escrow agent.  The seller then transfers ownership of the house to the buyer.  Once this is done, escrow releases funds to the seller.  This, however, is a manual process, requires a third party and, as you know if you’ve ever bought or sold a house, is often far from elegant.  This could really be as simple as a case where, as soon as funds were received by the buyer, title is automatically sent to the seller with no third party involvement. Voila!  This could be handled in a smart contract and is a simple way to consider them.

This now leads us to innovation, and one of the new fields that is being established in the crypto-verse is called decentralized finance or “DeFi.”  Yearn.Finance is just one example of a DeFi product built on the Ethereum platform.  Yearn.Finance allows its users to deposit funds – think of principle in a bank account – and then generates interest based on the deposit.  What Yearn.Finance does that is unique, however, is optimize the placement of funds into different interest producing vehicles, constantly looking for the best way to produce optimal return.  This would be ridiculously hard to do manually.  This is just one example of what is possible.

Summary

So, our crypto asset class platforms allow us to establish new types of applications, and these applications can do things that are truly groundbreaking.  Perhaps this is why both ether and YFI have outgrown bitcoin this month.

We believe that what’s happening now could well be a precursor to what’s going to happen in December as, with Covid vaccines on the horizon, another stimulus shaping up and, importantly, electorates being cast on Dec 14, a lot of uncertainty is poised to be pulled out of the market.  When there’s more certainty, markets tend to respond favorably.

Of course, there’s no definite crystal ball but we expect it’s likely for this bull trend to continue and extend well into 2021, with significant new highs.

There’s always way too much to explore so I’ll put a pin right here for the moment.  Enjoy your holiday, please stay safe, and we’ll continue to Decrypt: Crypto for you!

About the author James Diorio

James is the Principal and Chief Executive Officer of Tradecraft Capital.