Disclaimer: I am a professional blockchain assets trader and I’m long Bitcoin and Ethereum. Don’t take anything I wrote as a trading or investment recommendation.
By mid June Bitcoin as well as Ethereum and most other blockchain assets where trading at all time high levels having increased in price multiple times. Bitcoin started this year at $1000 and touched $3000. Ethereum bull run took it from $8 to $400 in that same period and the story is more or less the same for all top cryptocurrencies and tokens. One month after we are now in deep correction territory with Bitcoin and Ethereum having shed 35% and 55% of its value respectively as of writing. So is this the tulip mania like bubble exploding as many have suggested? Is it the end of cryptocurrencies? Well I don’t think that this is the case at all. There are some very clear drivers behind the recent price action. Let’s take a look at them.
Uncertainty on Bitcoin’s scaling outcome.
Markets are information discounting systems and do not like uncertainty usually reacting with sell offs whenever it is not clear how a significant event will play out. Bitcoin markets are no exception and August 1st is showdown time for Bitcoin’s “civil war” on scalability. I will not get into the details of this years long debate as well as the motives behind the contending factions. There are plenty of authoritative resources on both camps. The relevant thing to consider price wise is hat there are many possible scenarios after August 1st which include Bitcoin forking into 2 or maybe even 3 blockchains. Another issue is that transacting on Bitcoin’s blockchain after that date will be risky with the real possibility of financial loss due to replay attacks or chain reorganizations. Many cautious traders are cashing out of Bitcoin ahead of these events adding downwards pressure to the price or moving their crypto holding into cold storage taking out liquidity from the markets and hence exacerbating volatility.
ICO mania fallout.
One of Ethereum’s main features is the possibility of issuing blockchain tokens on its Turing complete platform. Couple this with Ethereum’s implementation of smart contracts and an alternative way to raise capital is born. In cryptoland this is called an ICO or initial coin offering to paraphrase IPOs in the legacy financial system. ICOs have the peculiarity that capital is contributed exclusively via a cryptocurrency and not fiat money. During the first months of 2017 many projects launched their ICOs. Some of these are interesting project but lack an actual product while other are outright scams. Most successful ICOs so far have raised capital in excess of 100 MioUSD sometimes in a very short period of time. So how does this impact cryptocurrencies prices? Well it turns out that many of these ICO are selling their cryptocurrency holdings to build fiat currency reserves putting downward pressure mostly in Etehreum. In some cases this conversion of crypto to fiat money is openly stated in the ICO prospectus. Case in point is the ongoing Tezos ICO which most probably will set a new record having raised so far circa 200 MioUSD.
I personally like the ICO mechanism very much even though I have never invested in one myself. Always preferred to buy the token in the secondary market if I felt it was still a good investment. The fact is that ICOs have lot of potential and I believe that some day will be the de facto standard for start-ups to raise capital. ICOs could even displace traditional IPOs once decentralized or semi-decentralized financial markets become common place. We are years if not decades away from this vision and right now ICOs are a juvenile technology and risky investment proposition where scammers can operate at large and fool naive investors. To paraphrase the great Jesse Livermore ICOs right now are where fools and their money get separated.
Profit taking and low liquidity.
With the bull run in cryptocurrencies seen until June some degree of profit taking was to be expected particularly as we draw closer to the summer in the northern hemisphere. July and August have seen lower trading volume during the last years and hence lower liquidity.
So what’s next?
I do expect cryptocurrencies markets to recover eventually but at this point in time it is almost impossible to say how and when this will happen. It mostly depends on how will Bitcoin’s scaling standoff will end.
If Bitcoin scaling debate sees a clean result with a technological alternative clearly becoming the wining chain recovery could be fast. Extremely fast. Keep in mind that almost all main cryptocurrency exchanges have seen dramatic growth in their user base in the last few months. Awareness about cryptocurrencies has also grown dramatically. I think there are many people with capital in the sidelines waiting for confirmation of the next bull run to jump in. The scene is set for stronger upward movements in the future. Furthermore there is a very strong development pipeline full with very interesting technological innovations in Bitcoin, Ethereum and many other blockchains. Regardless of short term price development the blockchain technology industry will continue to grow and deliver new products and functionalities that will impact many industries. Make now mistake, Blockchain technology and cryptocurrencies are here to stay.
On the other hand if the scaling debate doesn’t end with a clear winner and both camps start attacking each other’s chain things could get nastier and price recovery will be much much slower. In this scenario having to wait until the next Bitcoin halving in 2020 to see a new all-time-high is not completely out of the question.
In summary if you are planning to invest in blockchain assets the coming weeks and months could offer superb entry points however be mindful of technological risk as well as scammers in the ICO markets. Furthermore only invest money you can afford to lose and invest with a time horizon beyond Bitcoin’s next halving.