Sunday, March 11, 2018

Clarity On The SEC "Crypto Crackdown" And The Bitcoin Misery Index

A few days ago some news came out that I've been expecting for quite a while, because the Securities and Exchange Commission has been telegraphing in no subtle way that they would do this: the SEC is moving to crack down on "Initial Coin Offerings" because in essence they meet the definition of a security.

That's not how the headlines read, of course. Typical of the obviously anti-crypto major financial media outlets, they cast it as a "cryptocurrency crackdown." And, naturally, crypto prices plunged.

As it usually goes with these media drive-by shootings, a day or two later and clarifying articles begin appearing, such as this one:

The government's crypto crackdown may not affect bitcoin: Blockchain venture capitalist
"The U.S. Securities and Exchange Commission on Wednesday released a statement saying digital assets that are considered securities must register with the agency.

The SEC uses the so-called Howey Test, or a test created by the Supreme Court, to determine which transactions are considered a security investment, Bogart said. To qualify as a security, investors must "contribute money to a common enterprise with the expectation of profit," primarily from the "efforts of others," he explained.

"In the case of bitcoin, that just never has been the case," Bogart argued. "There was nobody that launched bitcoin and said ... 'I'm going to sell you 20 percent of the coins for a specific price.'"

"The software was launched into the world. People started mining it, and it grew organically," he added. "There is no central enterprise that receives the money that investors pay for bitcoin and deploy." [emphasis added] -- K. Ell
This is an important distinction to make, because it's the difference between a currency, or a commodity, (Bitcoin) and a security (what in effect results from an initial coin offering, or ICO), and consequently what agency has jurisdiction over them.

The Securities and Exchange Commission has jurisdiction over what its name implies: securities. As the definition I linked to above at Investopedia describes, a security is a share of ownership in something, the ownership of which can be traded, with the thing owned being an enterprise operated by a third party. There are several different types of securities, different forms of them, but for now that basic definition will suffice.

This is specifically why I have never invested into any ICOs. I used to be a stock broker, having held the SEC Series 7 license (and a few other SEC licenses). When ICOs first started appearing, it appeared to me that they were by and large meeting the definition of a security (and that they were also running afoul of the "accredited investor" law in the way they were being offered). Some of them tried to obfuscate what they were doing by describing the fractional ownership they were offering in the underlying endeavor as "coins" or "tokens," but semantics are no defense against this kind of thing. I knew it was only a matter of time before the SEC would weigh in, so I've stayed out of this part of the crypto sphere; I think the result of this is going to be most, if not all, of these ICOs simply being crumpled up and thrown in the trash, taking their investor's equity with them.

This will be for two reasons. The primary one I think will be that most of these ICOs simply flouted the accredited investor rules, which among other things prohibit the offering of "unregistered securities" (not registered with the SEC, that is) to investors who fall short of the minimum criteria to be an accredited investor. Any operations that did so are likely to be attacked and mauled by the SEC in every case where they are found to have accepted funds from U.S. investors despite their lack of this key status. Before the SEC even sinks its teeth into these operations, investors in them the world over will dump their ownership, tanking the value overnight.

Some ICO creators were aware of this law, which is why a few out there refused to take funds from U.S. citizens during their offering periods. They did well by being aware of this regulatory reality and potentially avoiding a direct assault on their operations by the SEC, but they may be severely damaged, if not taken down, by the other aspect of this crackdown: the requirement that exchanges that offer trading in coins, tokens, etc. that resulted from these ICOs, with the particular structuring of a security, be registered with the SEC in order for U.S. citizens to participate. This could put a major chill on these platforms that offer such cryptos for trading, or these platforms might restrict trading to only "pure commodity cryptos" in order to remain accessible to the U.S. market, also destroying much of the value of the type of coins and tokens I'm discussing here.

"Pure commodity cryptos" is a term I just made up to distinguish the neo-securities that resulted from ICOs with cryptos that lack any such ensnaring features, such as Bitcoin, Litecoin, etc. This is where the bit I highlighted in the article above factors in: these cryptos, from the beginning and now, lack any central operating entity that took in money from investors to seed some productive activity, the ownership of which was represented by the coins. Bitcoin and others like it came into being as the thing to be traded in and of itself, the value of which is simply what a buyer and seller agree upon, the exchange of which confers no title to anything but the coins. If you own Bitcoin, you are not promised any share of mining activities, interest, anything like that at all. You are only promised absolute title over the Bitcoins you hold.

That is why the Commodities Futures Trading Commission (CFTC) in the U.S. has asserted for years that it is the proper agency to regulate the pure commodity cryptos, which a Federal judge agreed with just days ago. 
The being the case, Bitcoin, Litecoin, Ethereum, and others, are likely to continue trading just as we are used to them trading. Sure, with increased regulatory scrutiny and oversight some changes are likely to come, the potential change of most concern being access. But if the recent behavior of the CFTC on the subject of Bitcoin in regard to its own employees is any guide, not much is going to change for us. 
In fact, the biggest change might be what happens to scammers who try to operate in this sphere from now on, a big plus for the perceived value and security of cryptos like Bitcoin.

For now though this has dinged the asking price of Bitcoin and all other cryptos, as per the usual. Globally, this is still a very tiny market, and with fewer hands comes easier panics and more dramatic price moves. Since the major financial media outlets love to FUD the crap out of this market with deliberate misinformation, the effects come swiftly, given these factors. But looking at my charts this morning, it appears to me that the market may be realizing that this latest bit of panic selling was for naught (in the pure commodity cryptos, that is), and that this was actually something that has been sorely needed: the further elimination of regulatory uncertainty. With a big bit of that out of the way, this could be the launching point of the next major upswing in the crypto space. 

That said, I wanted to close with a novel technical indicator I came across this morning that can be applied to Bitcoin, the "Bitcoin Misery Index:"
"Tom Lee, Fundstrat Global Advisors' Head of Research, introduced a Bitcoin Misery Index, or BMI, on Friday. Lee describes the BMI as a proxy for how investors feel about Bitcoin’s “price action.” It is a numerical index that ranges from 0 to 100 and incorporates the win-ratio, or percentage of days that Bitcoin is up, and the upside less downside volatility...

...Lee’s trigger points for Bitcoin are 27 for a Buy signal and 67 for a Sell signal. The BMI is currently at 18.8, the lowest point since 16.2 in September 2011." -- C. Jones
Put all of this together, and maybe it is time to be buying...

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