The Secret Behind What’s Driving Cryptocurrency Prices

What’s been driving crypto prices? During a period roughly between May 23rd and last weekend, crypto prices were holding a steady course and then suddenly within a brief 24 hour period both bitcoin and Ethereum lost over 12% of their value.  During that same period virtually all of the 100 largest cryptos were also falling at double digit rates.

Weekend trading can sometimes be misleading but this time seemed different. First came the headline from Cointelegraph: “All of Top 100 Cryptocurrencies See Red Amidst CFTC Price Manipulation Probe”.  This was followed by “South Korean Exchange Suffers a Hack, Sending Crypto Markets Tumbling”  written by Hacked.com’s own Gerelyn Terzo.

As these observers so correctly pointed out, over the course of just 24 hours more than $20 billion in crypto value just evaporated.  How was that possible considering that prices were already depressed by over 60%? What was it in those two news headlines that was so damaging to the fortunes of crypto investors?

When you take a close look and the CFTC stuff or the South Korean hack, it is obvious that the headlines aren’t worth the loss of $10 billion in crypto value.  This is not to dispute the accuracy or the quality of these writers. It is just darn difficult to reconcile the impact of either event. Please stick with me while I explain.

The CFTC Is Your Friend

Government regulation over financial markets is a fact of life and if cryptocurrencies are ever going to reach mainstream acceptance, regulators will be involved.  By mainstream, we are talking about assets that can be used for something other than tax evasion or nefarious purposes. As an investor, having the CFTC looking to protect your interest is an absolute benefit.

Even though 100 of the top cryptocurrencies got hammered when the CFTC news came out, trading records related only to bitcoin are involved.  The focus on bitcoin of course stems from the fact that a futures market exists that offers crypto investors the opportunity to hedge their risks.  This is a big plus.

Perhaps the most absurd part of the market’s reaction is how little is new or even surprising. The four exchanges in question, Bitstamp, Coinbase, itBit and Kraken, have been providing data to the CFTC as part of the original futures listing agreement.  For whatever reason, that agreement was not highly specific and thus the various parties are jockeying over legal issues. In the end, the CFTC will prevail because they have to power to do so.  End of story.

Korean Exchange Hack

Over the weekend Bloomberg reported the South Korean crypto exchange Coinrail had uncovered evidence of a hacking attempt.  Obviously, this is never a welcome event but is it enough to significantly affect the overall market by $10 billion? Well, consider this.

Coinrail is a tiny exchange that barely makes the list of top 100 doing only about $2.5-$3.0 million in daily trading in a market worth over $300 billion. Of the three affected coins – NPXS, NPER and ATX – only the later held any real value at $46 million according to CoinGecko.  NPER is worth less than $6 million while NPXS is quoted a zero. Is this the sign of a major Eastern European hacking ring destine to disrupt the crypto investment world or a couple of college kids on summer vacation?

The Secret Behind What Is Driving Crypto Prices

Hats off to Cointelegraph for citing the so-called bitcoin evangelist Alistar Milne survey of his Twitter followers on what caused the weekend price calamity.  Only 9% blamed in on the Coinrail hack. Something like 10% pinned it on the CFTC subpoenas. The overwhelming 81% majority checked the box “Crypto iz ded” or “Aliens”.  We are going to assume that Alistar’s followers are above average in the knowledge of crypto.

Clear Signs Of An Oversold Market

When investors dump securities out of fear or frustration, it is a sign of capitulation.  Back in March a similar sell-off lead to the surge in prices during April. This is the sort of thing that appears to be happening all over again.  Sometimes capitulation occurs during a fundamentally scary period like the financial crisis of 2008. Other times capitulation takes place with less drama when investors simply throw in the towel and sell from fatigue.  My guess is this is what is happening these days. Only the Aliens know with certainty. As for the rest of us, I am a buyer.

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.