A SHORT ANALYSIS ON THE BLOODBATH ON THE CRYPTO-MARKETS

The bloodbath on the crypto-markets

Crypto markets: For investors who entered the cryptocurrency space after Q2 2017, the development of Bitcoin & Co is frustrating and eye-watering. Over the last 48 hours, we experienced a price slide with high trading volume sending the Bitcoin (BTC) south to below USD 5,600. Thus the level of October 2017 has been reached. The peak of just under USD 20,000 was reached by mid-December 2017. The sky seemed to be the limit for the prices of BTC, ETH, and the other cryptocurrencies. The bullish times are over though. The bears dominate the crypto-space and will perhaps do so for a few more months.


Institutional exiting crypto markets?

The forces driving the bearish crypto-markets
The forces driving the bearish crypto-markets

Investors who entered the market in November 2017 and subsequent months are deep in the red and currently need a lot of faith and patience. Late entrants also include institutional and professional investors. They did not want to miss the crypto train and were caught by the FOMO virus. According to one hypothesis, the exit of institutional investors may have contributed to the price slump. However, there is also the opposing hypothesis assuming that US institutional investors, in particular, are interested in a correction of the price level in the expectation of an imminent entry after SEC regulation.

In addition, a lot of “black money” pushed into the crypto scene during the months of high prices. Billions of FIAT money were exchanged into Bitcoin. It could easily be that some of these “black cryptos” are now coming onto the market. The hope for a short-term price recovery of Bitcoin & Co has evaporated in this investor segment.

The fall in the price of cryptocurrencies sent their overall market capitalization below USD 200 billion to USD 185 billion. According to CoinMarketCap data, over the last 48 hours the respective 24-hour trading volumes at Bitcoin (BTC up to $8.3 billion), Ether (ETH up to $3 billion) and Tether (USDT up to  $5.5 billion) were exceptionally high (status: Nov 16, 2018, 13.00am UTC). This indicates the sale of larger packages on the public exchanges.  Additionally, we have to take into account the (private) OTC trading volumes. Institutional investors act mainly through the large OTC traders such as Circle Trading. Even without panic, up to USD 12 billion a day is traded OTC, 2-3 times as much as on the crypto-exchanges. In this respect, we can assume that in the last 48 hours the actual BTC trading volume alone has been between USD 40 to 60 billion.

The Bitcoin Cash Hard Fork

The U.S. SEC has repeatedly stressed that one of the reasons why it has not yet approved a crypto ETF is that crypto markets are intransparent. These would be susceptible to manipulation and fraud by large players. The SEC is right. The last example of these manipulations and games is the hard fork from Bitcoin Cash (BCH) that happened on Thursday. This is not a necessary innovation, but merely a power game of influential market players such as Roger Ver or Bitmain. Since cryptocurrencies have become a new asset class on the stock markets, there have been players like the former Wall Street trader Barry SILBERT and his Digital Capital Group (DCG). SILBERT was one of the driving forces behind the hard fork and the creation of Ethereum Classic (ETC) – a good report here on Reddit. Allegedly, SILBERT wanted to gain control over ETC and control the market for his own financial advantage.

Similar political games can currently be seen around Bitcoin Cash. We will report on this in more detail shortly.

The Tether Question

Another major source of uncertainty is the Stablecoin Tether (USDT). For weeks now, rumors have been circulating that there are massive problems with the cryptocurrency. In theory, every Tether (USDT) issued should be backed by a US dollar in Tether’s bank account. So far, however, the tether people have not submitted any confirmation from an auditor. Tether is closely related to the Bitfinex crypto-exchange, which in turn recently had problems with its banks and with customer withdrawals. According to CoinTelegraph, the Bitfinex owners are also the beneficial owners of Tether Ltd.

The Tether was actually conceived as a safe haven for crypto investors, but recently the investors fled the currency. Tether is the eighth largest cryptocurrency with a market cap of $1.7 billion (Nov 16, 2018). It used to be the second most traded cryptocurrency. Should the alleged problems surrounding Tether and Bitfinex prove to be true, a further significant correction of the cryptocurrencies seems unavoidable.

Regulative thunderclouds – the failure of the secondary market?

Another reason for the bloodbath on the crypto markets could be the rumor that the U.S. Securities and Exchange Commission (SEC) will intensify its action against unregulated and unregistered crypto exchanges in the near future. This will affect the ERC20 tokens in particular. In the past, the SEC has repeatedly stressed that it is inclined to regard these ERC20 tokens as securities, which means that trading these tokens would only be permitted on registered exchanges. If the SEC closes some of these crypto exchanges, then the owners of ERC20 tokens would probably choke on their investment. The vast majority of ERC20 tokens were purchased in Initial Coin Offerings (ICO) by investors with speculative intent. The ICO investors speculated on value appreciation and profits when selling the tokens on the secondary market. Without stock exchanges, the secondary market would disappear and with it potential speculative gains.

If the SEC were to take action against crypto exchanges and issuers, this would probably also be the possible end of the Ethereum blockchain as an unregulated launch pad for ICOs.

What happens next with crypto markets?

Cryptocurrencies are still a new phenomenon. Technically, they have existed since 2009, but as an asset class, they are 2 or 3 years old. Therefore, neither regulators nor issuers or investors have a complete picture of where the journey could take them. As with any new phenomenon, it takes time to develop the framework conditions and realistic expectations. In this respect, we are at the beginning. It will take another year or two before we can speak of a functioning set of rules for dealing with crypto assets. Until then, everything is speculation.

Keep in mind: after the last major correction of the Bitcoin (BTC), it took around 39 months before it returned to their pre-correction level. This could also be the time we need for the current consolidation phase.