Crypto: Assessing the Damage

A Tornado Hit

Oklahoma in the springtime has been hit with more tornadoes than about any region. We have all seen the videos of the devastation. The landscape is barely recognizable, wreckage spewed everywhere, a truck sitting on the roof of a building and crowds of displaced citizens looking lost and frightened.

The first of one of those tornadoes hit the crypto markets back in December.  But, instead of hitting hard and then quickly blowing through, this cryptonado has been hitting hard and hanging around.  From just before Christmas until today the combined value of cryptocurrencies has lost over $400 billion. That is more destruction than all of the tornadoes and hurricanes in the last century.

Thursday seemed to embody all the signs of capitulation.  It would not be unusual for a sharp rally to follow. Even if this good fortune was to take place, a certain amount of damage has been done.  Here are a few quick thoughts.

Of the leading cryptos, Ethereum and Ripple XRP appear least fundamentally challenged.  Bitcoin on the other hand could have a longer road back to $20,000.

Store of Value

Bitcoin’s image as a store of value has been tarnished.  There are those critics that will quickly claim that bitcoin never deserved to have that status.  Others believe that bitcoin was a better storehouse than gold. To be a true alternative it helps to remember that gold serves two roles: storage as well as industrial and consumer applications.

Bitcoin’s loss in value and subsequent volatility makes a strong case for the critics.  While it was soaring 7,000%+ in 2017 it was easy to buy bitcoin and store it away for the long term. There is a sense of comfort and security to help you sleep at night.  But when prices fall 50%, the storehouse empties out pretty quickly. Yes, bitcoin supporters can point to gold’s volatility. But for centuries, gold has had underlying demand as well as a medium of exchange.  This later function is critical to long term Bitcoin strategy.

The collapse of bitcoin pricing will require quite a while to reestablish credibility as a storehouse of value and this might conceivably make bitcoin less attractive to investors than other cryptocurrencies.  Time will tell.

ICOs

Regulators are taking aim at ICOs.  March 7 was a day of reckoning. That is when the Federal District Court judge ruled that cryptocurrencies are commodities and thus under the jurisdiction of the Commodities Futures Trading Commission(CFTC).

On the same day the Securities and Exchange Commission issued an order flexing their regulatory muscle over registering cryptocurrency traders.  

While you have to like the idea of regulators cleaning up the number of ICO scams, government tactics can be powerful and intimidating.  

According to Bloomberg News, the SEC Office of Compliance Inspections and Examinations has issued subpoenas to a number of cryptocurrency hedge funds.  I believe this is just the first step in their pursuit of violations related to ICOs.

Either way, you can expect more of this type of activity in the future.  Neither the CFTC nor the SEC has every issued a top 10 list for the most admirable members of Wall Street.  Their sole responsibility is to keep agents busy creating and pursuing bad guys. So along with the benefits of better enforcement will come more and bigger headlines.

Ethereum

So what does that mean for Ethereum?  At last count, Ethereum was the platform of choice for 80% of all ICOs.  If the CFTC and SEC are making headlines, no doubt there will be fewer ICO.  

So far this risk isn’t proving to hurt demand for ether.  Through the first two months this year, ICOs have raised nearly $2 billion in capital a 50% year over year gain.  This total amounts to almost half of last years total.

How should this be interpreted?  Perhaps investors are becoming more selective choosing the larger offerings.  There may be other reasons but this is the most plausible explanation.

Assuming this to be the case and the data on capital raised by ICOs is accurate, then a huge amount of the price collapse in Ethereum is nothing more than investors reacting to headlines.  If ICOs continue anywhere close to the current monthly average of $1 billion, neither the CFTC nor the SEC will be able to stop Ethereum.

Ripple:  In the Crypto Space at the Wrong Time  

The price of Ripple makes no sense.  It is not part of the ICO syndrome, no one ever claimed that it was a storehouse of value and its adoption by retailers is immaterial.  The XRP isn’t even available on one of the largest exchanges, Coinbase. And yet, Ripple has suffered the largest percentage decline of any crypto: nearly 80%.  

Just the other day, I ran across a reader who was bashed on Facebook for investing in bitcoin because of the excessive and wasteful energy consumption in bitcoin mining.  The Ripple Network uses a fraction of that of most cryptos.

Ripple’s worst feature is having to sell their seamless global payments network to slow moving governments and financial institutions.  But does that warrant losing nearly 80% in value practically no time? I don’t think so. So for fans of XRP, it will pay to be patient.

Featured image courtesy of Shutterstock.

Author:
James Waggoner is a veteran Wall Street analyst and hedge fund manager who has spent the past few years researching the fintech possibilities of cryptocurrencies. He has a special passion for writing about the future of crypto.