Collapse of Cryptocurrencies in Q1: Even the Biggest Crashed 67% to 88%..
But nothing goes to heck in a straight line.
I don’t think there has ever been an entire sector that skyrocketed as much and collapsed as quickly as the cryptocurrency space. The skyrocketing phase culminated at the turn of the year. Then the collapse phase set in, with different cryptos choosing different points in time.
It doesn’t help that regulators around the world have caught on to these schemes called initial coin offerings (ICOs), where anyone, even the government of Venezuela, can try to sell homemade digital tokens to the gullible and take their “fiat” money from them and run away with it. There are now 1,596 cryptocurrencies and tokens out there, up from a handful a few years ago. And the gullible are getting cleaned out.
And it doesn’t help that the ways to promote these schemes are being closed off, one after the other.
At the end of January, Facebook announced that, suddenly, “misleading or deceptive ads have no place on Facebook,” and it prohibited ads about ICOs and cryptos.
On March 14, Google announced that it will block ads with “cryptocurrencies and related content,” including ICOs, cryptocurrency exchanges, cryptocurrency wallets, and cryptocurrency trading advice. Its crackdown begins in June.
On March 26, Twitter announced that it would ban ads of ICOs, cryptocurrency exchanges, and cryptocurrency wallet services, unless they are by public companies traded on major stock markets. It will roll out its policy over the next 30 days.
On March 29, MailChimp, a major email mass-distribution service, announced that it will block email promos from businesses that are “involved in any aspect of the sale, transaction, exchange, storage, marketing or production of cryptocurrencies, virtual currencies, and any digital assets related to an Initial Coin Offering.” This broadened and tightened its policy announced in February that promised to shut down any account related to promos of ICOs or blockchain activity.
The overall cryptocurrency space, in terms of market capitalization, peaked on January 4, when market cap reached $707 billion, according to CoinMarketCap. Less than three months later, market cap has now plunged by 65% to $245 billion. $462 billion went up in smoke.
Here’s how the top five cryptos did over the past few months. Together they account for 76% of the total market cap of the space:
Bitcoin plunged 67% from its peak of $19,982 on December 17, to $6,573 at the moment. In just over three months, its market cap collapsed by $225 billion, from $336 billion to $111 billion. But as this chart shows, nothing goes to heck in a straight line (chart via CoinMarketCap):
Ethereum plunged 74% from its peak of $1,426 on January 13, to $367 at the moment. Market cap collapsed by $102 billion, from $138 billion to $36 billion (chart via CoinMarketCap):
Ripple plunged 88% from its peak of $3.84 on January 4 to $0.47. Over the period, its market cap went from $148 billion to $18 billion. On March 28, when I last wrote about the collapse of Ripple, it was at $0.57, but has since plunged another 18% (chart via CoinMarketCap):
Bitcoin Cash plunged 85% from its peak of $4,138 on December 20 to $632 at the moment. Market cap dropped from $70 billion to $10.8 billion. It was split from Bitcoin last August. On November 12, I featured Bitcoin Cash, in an article subtitled “Peak Crypto Craziness?” I was observing, practically in real time, how it quadrupled in two days to $2,448. It is now back where that quadrupling had started out:
Litecoin plunged 70% from its peak of $363 on December 19, to $110 at the moment. Curiously, its founder admitted on December 20 that he’d wisely cashed out at or near the peak by selling his entire stake. The true believers who bought the tokens have been eating losses ever since. Market cap went from $19.7 billion to $6.2 billion.
EOS plunged 71% from its peak of $18.16 on January 12, to $5.30. Market cap went from $11 billion to $4.1 billion: I pooh-poohed it on December 18 with “The Hottest, Largest-Ever Cryptocurrency ICO Mindblower.” The purchase agreement that buyers in the ICO had to sign – which was not offered in the US due to legality issues – stated explicitly that holders of EOS have no rights to anything related to the EOS platform, and that they get nothing other than the digital token. Here is what the chart of this scam looks like:
And the blockchain technology (the distributed ledger technology) has nothing to do with cryptos. Cryptos merely use it. There have been a number of efforts underway for years to find large-scale commercial use for blockchain, outside of the crypto space. Those efforts have yet to bear fruit, though they may someday. All we have for now are small-scale experiments. Even if blockchain finds large-scale use, it will do nothing for these collapsing cryptos.
But the ancient theory that nothing goes to heck in a straight line still holds true, borne out by the charts above, and we can expect sharp volatility and a good amount of whiplash on the way there.
And here is an update on the hated “fiat” currency, the US dollar that cryptos were supposed to annihilate or at least obviate.
What Could Dethrone the Dollar as Top Reserve Currency?
Central banks seem leery about the Chinese yuan.
What will finally pull the rug out from under the dollar’s hegemony? The euro? The Chinese yuan? Cryptocurrencies? The Greek drachma? Whatever it will be, and however fervently the death-of-the-dollar folks might wish for it, it’s not happening at the moment, according to the most recent data.
The IMF just released its report, Currency Composition of Official Foreign Exchange Reserves (COFER), for the fourth quarter 2017. It should be said that the IMF is very economical with what it discloses. The COFER data for the individual countries – the total level of their reserve currencies and what currencies they hold – is “strictly confidential.” But we get to look at the global allocation by currency.
In Q4 2017, total global foreign exchange reserves, including all currencies, rose 6.6% year-over-year, or by $709 billion, to $11.42 trillion, right in the range of the past three years (from $10.7 trillion in Q4 2016 to $11.8 trillion in Q3, 2014). For reporting purposes, the IMF converts all currency balances into dollars.
Dollar-denominated assets among foreign exchange reserves rose 14% year-over-year in Q4 to $6.28 trillion, and are up 42% from Q4 2014. There is no indication that global central banks have lost interest in the dollar; on the contrary:
Over the decades, there have been some efforts to topple the dollar’s hegemony as a global reserve currency, which it has maintained since World War II. The creation of the euro was the most successful such effort. Back in the day, the euro was supposed to reach “parity” with the dollar on the hegemony scale. And it edged up for a while until the euro debt crisis derailed those dreams.
And now there’s the ballyhooed Chinese yuan. Effective October 1, 2016, the IMF added it to its currency basket, the Special Drawing Rights (SDR). This anointed the yuan as a global reserve currency.
But not all central banks disclose to the IMF how their foreign exchange reserves are allocated. In Q4, the allocation of 12.3% of the reserves hadn’t been disclosed. These “unallocated reserves” have been plunging. Back in Q4 2014, they still accounted for 41% of total reserves. They’re plunging because more central banks report to the IMF their allocation of foreign exchange reserves, and the COFER data is getting more detailed.
So among the 87.7% of the “allocated” reserve currencies in Q4 2017, the pie was split up this way:
Disappointingly for many folks, the Chinese yuan – the thin red sliver in the pie chart above — didn’t exactly soar since its inclusion in the SDR basket. Its share ticked up by a minuscule amount to a minuscule share of 1.2% of allocated foreign exchange reserves in Q4. In other words, central banks seem to lack a certain eagerness, if you will, to hold yuan-denominated assets.
The Swiss franc, with a share of 0.2%, is the black hair-thin line in the pie chart.
Note that the euro’s economic area, the Eurozone, has a large trade surplus with the rest of the world, which, along with other factors, disproves the assertion that a country that issues a reserve currency, such as the US, must always have a large trade deficit with the rest of the world. It can go either way.
The chart below shows the percent share of various reserve currencies since 2014. The black line with the red dots at the top is the hegemonic US dollar, whose share has edged down a tiny bit. The euro (blue line) is stable at around 20%. The dollar and euro combined accounted for 82.9% of the allocated foreign exchange reserves in Q4 2017. Each of the rest of the currencies was an inconsequential also-ran. As a memo entry and not part of the percentages, I added the descending purple line to show the rapid disappearance of “unallocated reserves.” The Chinese yuan is the bright red line at the very bottom, just above the Swiss franc:
Since 1965, the dollar’s share has fluctuated sharply, and the current share of 62.7% remains in the middle of the range. The chart below shows the dollar’s share at year-end for each of the past 52 years:
The dollar’s low point was in 1991 with a share of 46%. Starting in 2001, the euro, which had replaced the Deutsche mark and the currencies of four other Eurozone member states as reserve currencies – now expanded to 19 – made a visible dent into the dollar’s hegemony. But the Financial Crisis did not.
And the Chinese yuan, on which all recent hopes had rested that it could pull the rug out from under the dollar, well, it’s barely above the level of a rounding error. In other words, folks who’ve been eagerly waiting for the death of the dollar or similar fiascos will have to learn how to be very patient.
Not that there isn’t enough going on that could raise doubts about the dollar, with trillions flying out the window so fast, they make your eyes water.