Cryptocurrencies have been massively rewarding for both early investors and savvy traders. Take bitcoin for example. All those who invested before 2017 have seen returns greater than 550%. Traders on the other hand greatly benefit from bitcoin’s significant volatility: one day of bitcoin volatility is nearly equivalent to volatility of an interval of roughly . For traders, volatility brings opportunity. 23 trading days for the S&P 500 In this article I will focus on the reasons behind a grim outlook for crypto investors, at least in the short-term. Sections: Valuations Usage Demise of the ICO Plunge Protection Team Retail Demand Institutional Demand A Bitcoin ETF Natural Sellers: Miners, Exchanges & ICOs What’s Left? Valuations Most cryptocurrencies can’t be valued by traditional means ( ) as they . Models for valuing cryptocurrencies require a great number of . discounted cash flows lack associated cash flows made up inputs Take for example fantastic hypothetical model by . Here the author attempts to value a token by borrowing the from monetary economics. The valuation requires coming up with an imaginary value for a token’s (i.e. the number of times a token changes hands in a year) as well as with an Adoption Curve. In that model, changing the time adoption goes from 10% to 90% from 15 years to 30 years reduces the value of the token from $0.12 to $0. Readers can find more details on that valuation approach on . this Burniske Equation of Exchange Velocity one assumes this article In short, from the perspective of a fundamental investor, the whole asset class could go to zero. Valuations provide no floor. Usage Cryptocurrencies are barely used for anything aside from speculation. Take ETH for example. Ethereum’s main uses are DApps and ICOs. However DApps have barely any users: on Aug/22/2018 there were a total of (more data available on ). At the moment of writing, the well-known prediction market Augur has had a whopping in the prior 24 hours. The market capitalization of Augur’s token, , currently stands at — with only 52 users. 15,689 users this website 52 users $REP $200 million Meanwhile the amount of . Furthermore, in 2018 ICO investing largely stopped generating fiat inflows as investors started recycling pre-existent crypto holdings into new ICOs. What does that leave? Speculation! Usage provides no floor. money raised by ICOs has nosedived (Readers can look into ICO numbers using — although their numbers incorrectly list the mammoth EOS ICO as conducted in June 2018 — or ) Coindesk’s ICO Tracker Icodata.io Demise of the ICO In from 2017, I covered in detail how flawed most tokens are and how . this article ICOs were driving crypto prices higher Picture Pether Block (pun intended), a sharp entrepreneur seeking to raise funds. Imagine Pether raises funds not by issuing equity (stocks) or legal promises to pay funds back (loans, bonds), but instead by giving out pretty bits of paper with no legal backing saying he plans to pay back. Now imagine Pether actually gets funding by giving out pretty bits of paper that do not even promise to pay back. Furthermore, imagine a case where Pether is actually anonymous, he did not even have to disclose his identity to raise funds. This is happening in some ICOs. abound. is the most famous uncovered Ponzi scheme. Bitconnect, a cryptocurrency that offers (assuming daily reinvestment) plus variable returns generated by a “volatility trading bot”, is in my humble opinion the most striking Ponzi scheme of present times. Ponzi schemes OneCoin guaranteed 149% annualized returns Eventually economics caught up with hype and most over 80%-90% from their January highs. The by driving the message that ICO tokens were in most cases unregistered securities. ICO prices collapsed SEC helped along the way . Readers can find details on the great number of dead ICOs on . Over half of ICOs dies within four months of token sale Deadcoins.com “I accept figures I have seen that , and 10 percent lacked substance and failed shortly after raising money. Most of the remaining 10 percent will probably fail as well.” 80 percent of ICOs were frauds The average ICO investor was stubborn and uninformed. Most , nor were aware their tokens provided them with absolutely no rights, even though they believed they were acquiring participation in the success of a project. did not even read the whitepapers or offering documents Here’s a great example of an ICO scam promoted by an intricate web of fake LinkedIn profiles: Or even better: drug lord Pablo Escobar’s brother launching his own cryptocurrency called as an alternative to bitcoin. This scam is . Just wait for it to hit some exchange and see it go to zero. Not convinced yet? What about , “Your Lifelong AI Love Advisor” … because of course we all want to have our dating history permanently stored in a blockchain. Diet Bitcoin happening right now Viola.ai This one is hilarious, from China, happening at this very moment: Plunge Protection Team Crypto has no “ ”, which is often interpreted as a party or set of parties that buys to stabilize or prop a market, a and savior. US assets including the US Dollar can count on the Federal Reserve and the US Treasury if things get extremely dicey. Commodities can count on corporate/industrial demand (consumers of physical commodities) if commodities get too cheap. Equities can count on companies’ treasury departments buying shares back when shares get too cheap — they are the ultimate legal insider trader, as they buy with full knowledge of cash flows and pipelines, and can thus better assess when their stock has become too cheap and they would rather exchange it for cash. Who can crypto count on? Miners? Exchanges? . plunge protection team white knight Cryptosphere whales are structurally inclined to sell cryptocurrencies rather than buy Retail Demand Retail demand has been crashing together with prices. Widespread losses are the cause. The average retail investor invests in assets that are fashionable, following recommendations and word of mouth. FOMO. The base audience is the hardcore libertarians and so-called “ ”. This pocket of demand is in my opinion almost fully tapped. . Austrians That leaves the Average Joe, who is no longer interested in crypto “I guess I thought we were ‘sticking it to the man’ when I got on board,” Mr. Herman said. “But I think ‘the man’ had already caught on, and had an exit strategy.” The word of mouth in crypto is “I lost over 60% of my investment in just a few months”. The following polls are from July 2018 — crypto market cap has since dropped another 25%. On the high net worth individuals side, the situation is similar. From what I gather, no more than 2% of private banking clients are asking about bitcoin these days. That number was in the 50%-70% range back in December. The sharp drop in bitcoin trading volumes has been remarkable. The following chart shows the BTC/USD volume for Coinbase measured in USD ( ). source It should take time for retail investors to forget their pain. They’ll be back! Institutional Demand Smart money generally invests in assets that are (with upwards momentum). Cryptocurrencies have been falling like a knife. Why, then, would an institutional investor buy crypto? Well, if crypto were cheap. Yet as already covered, institutional investors can’t actually value cryptocurrencies, and therefore they can’t determine when cryptocurrencies are cheap. Furthermore, these assets . either cheap, or trending up produce no cash flows Why would then institutional investors buy crypto? There’s one last possibility: to . Cryptocurrencies have been consistently . That could add some demand. However there’s one thing that is MUCH better for diversification than no correlation: . Sovereign bonds offer better diversification than crypto — and provide with regular cash flows! diversify portfolios uncorrelated with risk assets negative correlation A Bitcoin ETF A bitcoin ETF is seen by many as the ultimate savior for cryptocurrency prices, the one thing that will bring about an enormous influx of institutional investors. I covered the subject in detail in . this article The SEC recently . One ETF is still on the table: the . The marketplace is awaiting the SEC’s decision to approve or reject this ETF proposal. Per the SEC, when markets are not demonstrably resistant to manipulation, the ETF’s listing exchange must have surveillance-sharing agreements with regulated markets of “significant size” (in order to deter manipulation). rejected the proposals of 9 bitcoin ETFs VanEck SolidX Bitcoin Trust proposed by the CBOE Given that the SEC believes bitcoin markets are not demonstrably resistant to manipulation, the key variable for the ETF’s approval becomes the size of the bitcoin markets with which the ETF’s exchange has surveillance-sharing agreements. Are they of “significant size” or not? In the aforementioned article I cover how Bitmex, a fully unregulated Hong Kong based bitcoin derivatives platform registered in the Seychelles, has a . I furthermore show how the Trust’s chosen counterparties have a , depending on the calculation method employed. 40% market share of bitcoin/USD volume market share ranging between 3% and 15% To emphasize the importance of Bitmex, on Aug/21 it went off-grid for an hour for . On the Bitmex shut-down, bitcoin’s price was pumped by at least one large market participant, resulting in a +7% lightning breakout. Adding insult to injury, on the Bitmex re-open Bitmex’s XBTUSD moved an additional +4%, for a total of +11%. A few hours later the #BitmexMaintenance move had reversed in full. scheduled maintenance precise minute Regardless of the those involved with the CBOE filing from the CBOE/VanEck side may express, the probability of an ETF getting approved in the near term close to . Although I will never be surprised by the power of lobby. optimism should be zero An ETF will eventually be approved — it should just take longer than expected. Natural sellers need to sell their coins to fund their operations. These market participants represent natural sellers. Miners, exchanges and ICOs Miners & Exchanges At current prices, the top 5 Proof of Work coins (BTC, ETH, ZEC, BCH, LTC) are creating about , USD 8 billion a year. Bitcoin represents 56% of that total, while ether represents 30%. Given current depressed prices, it is safe to assume almost all are being sold. USD 22 million in coins every day The break-even of a professional bitcoin Chinese miner depreciating capex in one year can be currently estimated at $8700 all-in, while its (based on an electricity cost of $0.06/kWh and an Antminer S9 at $720). Note that break-evens will change (up and down) with , equipment and personnel costs, and are more flexible than for physical commodities (for which mining difficulty does not adjust down with overcapacity). break-even excluding depreciation would be $4700 mining difficulty It should be noted that . For commodities, a price drop below breakevens leads to miners shutting production off, which leads to diminished supply, reduced inventories, and to price bouncing. This is related to . Bitcoin is different. For bitcoin, a price drop below breakevens leads to miners shutting production off, which leads to diminished hashing power, which leads to reduced difficulty, and . Therefore, while for commodities breakevens do serve as a soft floor (soft! — prices do fall below breakevens), for bitcoin this floor is considerably more porous. breakevens are not as relevant for bitcoin as they are for commodities eventually commodities’ Boom & Bust cycles supply remains unchanged On the , Bitmex is making about 325 BTC a day in fees, or USD 2 million at current prices. Assuming an average trading fee of 0.30% (maker+taker), exchanges listed on Coinmarketcap (excluding Bitmex, US Futures, and Transaction Mining exchanges) are receiving USD 46 million in coins as fees every day (calculations ). So exchanges receive a total of USD 48 million in coins per day. What percentage are they selling every day? Let’s assume 50%: that’s . exchanges’ side here USD 24 million every day That would make the combined daily selling pressure from miners and exchanges USD 46 million, or . And that excludes ICOs. Is there over USD 17 billion of fresh fiat coming into crypto, to counter the natural sellers? Consider as well these outflows represent a staggering 8% of the . The imbalance is notable. USD 17 billion per year current market cap ICOs ICOs are akin to startups that received all required funding for developing their product (and oftentimes much more) upfront — with the added twist of not having provided investors any equity. Most of that funding was received in the form of BTC & ETH — mostly the latter. ICOs generally hoarded token sale proceeds in crypto form. ICOs are in the business of developing a product, not in the business of speculating with the value of cryptocurrencies in their treasury holdings. Given that most of their liabilities are denominated in fiat currencies, they should have sold a considerable percentage of those cryptoassets, to match their liabilities, soon after raising the funds. This is called . It represents Corporate Finance 102. ICOs should have hired a Treasurer or Asset Manager to hedge their crypto exposure and maintain the USD value of their assets. Most didn’t. Asset Liability Management Some ICOs started selling their treasury holdings once the market crash was well underway. I . expect most ICOs to eventually unload most of their token sale proceeds ETH in particular could be at considerable risk. Now at $275, it could easily continue falling on the back of miner sales as a potential develops among ICOs. They are all positioned in a delicate : given the 80% crash from January highs, everyone would be better off by cooperating and hoarding their remainder ETH. Yet collectively agreeing to hold is practically impossible — even more so given operational needs. Recall as well that the ICO market of 2017 was already in bubble mode with ETH at $200. rat race to the bottom Prisoner’s Dilemma According to , (25% of their database) have a visible balance of ETH 3.3 million, or USD 900 million at current prices. ETH 135K were transferred out in the last 30 days. Funds transferred out does not necessarily mean spent — could have been transferred to addresses also controlled by the ICOs. Assuming 70% of those funds are sold in exchanges ( ) and an additional 10% were sold OTC, this would result in these ICOs selling ETH 107K per month. That’s about . Furthermore assuming those funds suffice to cover monthly capital requirements, and assuming steady prices, that would provide ICOs with about . That is plenty of time. Santiment’s database ICOs for which Ethereum wallets are known source 3% of their total balance three years to develop a self-sustainable product How about the selling pressure coming from ICOs? Assuming a) 90% of token sales proceeds were in the form of ETH, b) average selling price for the last 30 days of $312, c) ICOs in the database for which there is no data sell similar amounts (there’s data for only 25% of ICOs in the database, so the baseline number needs to be multiplied by 4), and d) ICO universe is 25% larger (Santiment’s database does not include all ICOs), that results in — a fraction of estimated coin sales coming from Miners & Exchanges. USD 6 million in daily selling pressure coming from ICOs Interestingly, in Santiment stated that the average monthly selling of ETH in 2018 by ICOs for which Ethereum wallets are known has been ETH 312K i.e. selling has recently. Re-doing the prior calculations using ETH 312K rather than ETH 135K results in a) ICOs having only left to develop a self-sustainable product, and b) coming from ICOs. a recent article slowed down considerably 15 months USD 14 million in daily selling pressure Using the aforementioned assumptions puts the current ETH ICO treasury holdings at ETH 18 million (18% of circulating supply) and (at current prices). That leaves ICOs plenty of room for increasing the pace of their sales. total current ICO treasury holdings at USD 6 billion What will ICOs do with their remainder BTC & ETH treasury holdings? for the time being. Some heavily invested parties such as and are expressing concern and trying to defend prices, each in its own particular way. Meanwhile talk of ICOs cashing out has been increasing as of late over , , and private channels. Some are holding steady Vitalik Buterin Consensys news articles tweets (The Natural Sellers selling pressure analysis is heavily dependent on its . Many of these are highly contentious. Readers can download this and modify it with their own assumptions.) assumptions spreadsheet What’s left? What is left is an asset class for which (yes, that’s bearish). An asset class for which valuations and usage provide no floor. Bitcoin in particular is a wildly volatile asset that can go from $1,000 to $10,000 and back to $1,000. Traders’ paradise. Gamblers’ promised land. Investors’ hell. selling pressure is significant and constant, buying pressure is temporarily subdued, and longs should not be expected to spike for a while I am bullish in the long-term prospects of bitcoin, a few select protocol tokens, some specific blockchain applications, and in security tokens going mainstream. I reserve the bullish analysis for another occasion. Before you go… If you enjoyed reading this, please consider showing your support by clicking on the Clapping Hands button — the more the merrier, it increases visibility. 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