Bitcoin Tests 2016 Highs as Investors Seek Privacy

Markets Weekly is a column analyzing price movements in the global digital currency markets, and the technology's use case as an asset class.

In this special monthly edition, CoinDesk analyzes movements and developments in the digital currency markets for the month of October.

It may seem ironic, but privacy dominated the public digital currency discussion in October.

Spurred by a growing awareness that bitcoin is not as anonymous as it has been advertised by banks and regulators, innovators and speculators are now seeking to capitalize on what they see as an opportunity to create new products for developers and new value for investors.

Propelling this debate to the forefront was the debut of a long-in-the-making blockchain project called Zcash, which generated significant visibility (not to mention market activity) by leveraging claimed advances in bleeding-edge cryptography.

The currency, which uses zero-knowledge proofs called zk-SNARKs to help users verify transactions without exchanging information, has made progress toward providing users with new levels of optional anonymity.

As a result of effective outreach, the Zcash markets saw a speedy boom and bust after launch.

Zcash's ZEC tokens surged to roughly 3,300 BTC (more than $2m) as they started trading on 28th October, Poloniex figures reveal. However, they fell back to below 1 BTC by the 30th.

Amidst this backdrop, market analysts continued to express concerns that the digital currency's early success may be largely based around hype.

Petar Zivkovski, director of operations for leveraged bitcoin trading platform Whaleclub, has not shied away from espousing his view that Zcash is still in its infancy.

He emphasized on 3rd November that the digital currency had very little supply, and its market capitalization had only reached a few million dollars (ZEC's market capitalization neared $2.8m at the end of October).

Winners and losers

But the market didn't just begin to consider Zcash as a privacy-preserving option.

Rival cryptocurrency Monero, which harnesses a technology called Ring Signatures to reduce the chances that the two parties in a transaction can be revealed, saw an uptick in attention, if not investment.

This month at least, ZEC may have won out, as its 28th October launch generated significant visibility, while XMR, Monero's token, fell more than 35% in October from $7.59 to $4.88, Poloniex figures reveal.

Cryptocurrency fund manager Jacob Eliosoff credited this to the significant hype around Zcash's launch.

Whether you believed in the technology or not, he argued, it was still a mustn't-miss opportunity for speculators.

"It was predictable that the craze for ZEC might lead to a drop in XMR, since they share many of the same potential buyers,” he told CoinDesk. "So some of those buyers would have been paying for ZEC by selling some of their XMR, resulting in ZEC up, XMR down."

Eliosoff further stated that these price movements point to a broader trend.

"This is a specific instance of the more general theme that some pairs of cryptocoins are positively correlated, some negatively," he said.

There was also a sense that the hype was bolstered by the fact that Zcash is backed by some of the digital currency industry's leading investors.

Riccardo Spagni, lead developer for Monero, for example, credited this with the loss in value of his project's cryptocurrency.

"ZCash has a small cabal of private investors, many of whom are well-known in the cryptocurrency space, and who were thus responsible for a lot of the hype," he told CoinDesk.

ETH and ETC run the gauntlet

Elsewhere, no matter which ethereum you prefer, neither was safe for investors this month.

Ether (ETH) and classic ether (ETC) both suffered notable losses in October, with ETH/USDT falling 17% to $11.02 and ETC/ETH dropping 14.4% to 0.0809, Poloniex revealed.

The two respective blockchains for these digital currencies, ethereum and ethereum classic, suffered some highly visible technical difficulties.

The former experienced a hard fork on 18th October, while the latter underwent the same process one week later. Both were in some ways forced to make the move to address denial of service attacks that had hindered transactions and blocked creation of new tokens.

Joe Lee, founder of leveraged derivatives trading platform Magnr, acknowledged that both technologies now suffer from a visibility problem as a result of the issues.

"Confidence in ETH has taken a huge knock since the attack left the network slow and unresponsive for days at a time while fixes were being implemented," Lee said.

Lee shed further light on the situation, speaking to how the price movements of ETH and ETC were both impacted by these challenges.

"The drop in ETC echoes the drop in ETH as much of the original codebase is still shared. Regardless of the forks, ETC still shares much of the same DNA as ETH, and by virtue of their close relation, the same problems," Lee told CoinDesk.

Zivkovski said that both currencies need to overcome current challenges.

"ETH and ETC need to find their purpose and find a way out of the mess (hard forking, hacks, etc) they are currently in," he said. "They also have an image problem (mostly negative), especially after the massive $100m DAO hack."

Bitcoin booms

Perhaps now the less-exciting elder of an increasingly diverse market, bitcoin enjoyed notable gains in October as the spectre of past hacks faded.

Bitcoin prices rose close to 15% for the month, according to the CoinDesk USD Bitcoin Price Index, an increase that coincided with robust trading on the China’s exchanges, continued devaluation of the Chinese yuan, and reports that the People’s Bank of China is currently testing systems for monitoring off-balance-sheet wealth management.

Three Chinese exchanges – OKCoin, Huobi and BTCC – accounted for more than 98% of the roughly 112 million bitcoins traded in October, Bitcoinity data reveals.

Indeed, analysts recognized that trading increasingly depends on trends from Asia.

“During October, trading volumes in bitcoin were primarily led from trading activity based on Chinese exchanges,” said Lee. "The BTC/CNY currency pair’s trading volume has been higher over the 30-day period during October then the average monthly trading volume of the last six months."

This robust activity took place as the yuan experienced continued declines during the month. It is now on track to suffer its largest monthly drop in more than a year against the dollar as of 28th October.

The USD/CNY finished the month up 1.65%, Google Finance data shows.

The relationship between bitcoin prices and USD/CNY fits into a broader trend, as the two have roughly followed each other over the last year, according to an ARK Invest analysis of Bloomberg data.

China connection cemented

Huobi COO Zhu Jiawei cited the devaluation of China’s currency as the single greatest cause of bitcoin's October rally.

Many have recognized the digital currency as a store of value following the fluctuations in the yuan's exchange rate, he asserted. As a result, currency fluctuations can have a notable impact on bitcoin prices, said Zhu.

Lee provided similar input on the matter, telling CoinDesk:

"This reinforces the message to Chinese investors that bitcoin as a hedging tool is becoming a force to be reckoned with."

While several market observers emphasized the key role played by currency fluctuations, Ryan Rabaglia, head trader for Octagon Strategies Limited, took a similar tack.

He noted that while claims of the yuan's devaluation and it's effect on bitcoin prices are warranted", adding:

"There’s no denying the connection of the country's restrictions on capital outflows and bitcoin."

Zcash image via Shutterstock