Crypto Pricing: Still Searching For The Bottom

It seems like this entire year has been devoted to rational thinking people searching for rational answers. Why are crypto prices so consistently under such unrelenting selling pressure? There has been no shortage of explanations.  Unfortunately most of them fall far short of the task.

We all remember all those rational thinkers at the San Francisco Federal Reserve who teamed up with Stanford University in a study that concluded that the CBOE was responsible.  The thinking goes that creating a futures market for Bitcoin lead to the collapse.

That study was grossly misleading.  During the first month of Bitcoin futures trading, there were fewer than 900 contracts traded, most of which remained open contracts.  That is less than 0.01% of Bitcoin’s daily volume. Come on folks, you can’t be serious.

More recently on a rainy weekend,  I came across an article noting how short sellers were ganging up on Bitcoin. True, the short position had about doubled in just one month from something like 16,000 to 28,000 coins. Frankly, I was surprised that the short position was so small given the collapse of Bitcoin.

This amount of short selling is far too small to account for more than $300 billion in lost Bitcoin value.  Bitcoin trades over 500,000 coins on any given day. That means that short selling volume over that month was 0.0008% of Bitcoin volume: totally inconsequential.

Something to remember, every short sale at some point will have to cover.  The only way is to buy into Bitcoin. So at this point, a gigantic short position would be good.

Blame It On ICOs

And there are those who pin the blame for crypto prices on Ethereum based ICOs cashing out. Even though it comes nowhere close to explaining the loss of $600 billion in total crypto losses, there may be some truth to this point. Since the beginning of 2017, according to ICOWatchList, tokenized startups have raised a total of $8.5 billion of which about $3.7 was accounted for last year.

Recent studies have concluded that 75%+ of last years ICO were scams. This is a highly debatable point but it is likely to be a conservative measure for the number of failures of last year’s crop of crypto financed business startups.  But even here there is a limit. At its peak in January ETH was valued at $133 billion. Currently that value is $100 billion+ lower than just eights months ago.

There is no question that ICOs influenced ETH speculators but what that doesn’t begin to explain the loss of more than $600 billion in aggregate losses for all crypto assets, nor does it explain how closely matched has been the difference in price performance between Bitcoin and Ether during the last six months of this year.   

Where Is The Market For Crypto Spenders

During the current threat of global trade wars, crypto may prove to be a haven for citizens of China, Turkey and other countries.  But the real problem is the the world’s 7 billion inhabitants have almost no place to spend their Bitcoins and still fewer places to spend their altcoins.

The drop in crypto prices this year has done nothing to encourage its acceptance as a medium of exchange.  The CBOE claims that the presence of Bitcoin futures helps reduce the notorious volatility. This is supported by July showing the lowest volatility in more than a year. It will take more than one month of calm to make a difference.

The fact remains that most ICO, whether they succeed or not, are geared more toward speculation than anything else. Only 2% of capital raised is for commercial/retail projects while over 20% went to financial projects like crypto exchanges.

While certain financial projects like cryptocurrency merchant processors helps limit volatility risk for retailers. Most major outfits that did accept the cryptocurrency have stopped citing volatility concerns. None the less this hasn’t helped crypto adoption by business.

According to Chainalysis, merchant processing over nearly the past year has dropped 85% for all crypto.  Projects like Bitwala, Wirex and TenX, that serve as a consumer bridge between crypto and fiat currencies, are just getting started. The crypto world needs more major brands than just Overstock.com, Expedia, Subway and PayPal to accept a full range of crypto not just Bitcoin,  before speculators are replaced by crypto spenders.

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.