Partner, Business Development & Head of Trading
Last month’s gains are starting to look like a mirage — as the crypto market continues to hemorrhage following a second straight week of double digit losses. Bitcoin fell 10% to $6300 last week, while the overall Crypto market cap declined by another $40B (not an insignificant number considering the entire asset class now represents just $213 bn in value).
The carnage started on Tuesday when the SEC extended the deadline of the VanEck ETF proposal to September 30th, causing Bitcoin to drop $500 intraday, and the rest of the market reacted in kind. We did not expect the SEC to approve the Van Eck filing in August nor do we expect an approval in 2018. The downward price action continued throughout the week, accelerating into Thursday and Friday. We believe we have entered a “Capitulation phase”, where many retail investors have given up on trying to recoup gains and have sold off their portfolios at a loss, unable to cope with the daily stressors of the market. This is historically the tail end of a bear market.
It is perhaps curious that Bitcoin has such a perceived dependence on the SEC’s looming decision. Cryptocurrency was the brainchild of a group of people disheartened by how ‘money’ was controlled by banks and regulatory agencies — yet here we are in 2018, nearly 10 years after the Bitcoin Whitepaper was written, watching as a regulatory agency’s decision (or lack thereof) dominates the price action of the whole market.
Elsewhere, other large cap tokens such as Ethereum (ETH), Litecoin (LTC) and Eos (EOS) were hit much harder than Bitcoin, falling between 20–40% on extremely thin volumes (more on volumes below). Ethereum is particularly interesting to watch. The majority of ICO projects raised funds in Ethereum, but these project owners have no need to hold ETH, especially in a declining market. As a result, there is a consistent overhang from these project owners looking to offload ETH in order to secure enough funds to keep operations afloat. An example of this was seen in EOS, which sold their remaining ETH in June and July of this year — a position that had initially been as high as 3 million ETH. From what we can tell, almost all of the selling pressure at these depressed prices is coming from short-sellers looking to push prices lower until they find resistance, and ICO project owners.
At this point in time, we want to remind our readers that the Arca Funds team has decades of experience trading illiquid assets, like high yield bonds, distressed bonds, emerging markets debt, and reorg equities. It is not uncommon to buy a distressed bond on the way down at 80 cents on the dollar, 60 cents on the dollar and 40 cents on the dollar… in the same day. News comes out, prices adjust, and market participants must react to new prices that may or may not be transactable (i.e. it takes time to get to a market equilibrium where there are equal buyers/sellers on both sides).
Bringing this back to crypto, just because crypto exchanges allow anyone to see real-time prices does NOT mean that any trading is actually happening at these levels. This is an extremely immature market that is lulling people into a false sense of liquidity by showing constantly available prices that appear to be transactable, but really aren’t. Crypto is largely an OTC driven market — and that can mean very wide Bid/Ask spreads as buyers and sellers are miles apart. As a result, liquidity is thin in crypto right now. Prices of many crypto assets are falling dramatically and swiftly on little to no volume. Most of these tokens, including some of the ones that are perceived to be liquid, are moving lower without sellers. Market makers are like casino bookies — they don’t care which side wins, they just want to find a level where there is even action on both sides (so they can make their money on higher volumes). We believe illiquidity was a primary contributor to last week’s price action. The selling largely stopped two weeks ago, but there just were not enough buyers to bring the market to equilibrium — so market makers continue to test the market lower to see where the buyers will step in. When they finally step in and we touch a “floor”, there will be very little volume traded down at the bottom either as we quickly bounce back up to see if any sellers are still there at these lower levels. It takes a different approach and discipline to invest in volatile, illiquid markets — one in which we’re very comfortable.
We have been tracking several macro trends that we believe have an impact on crypto, and markets in general. The first trend is inflation and how higher commodity prices will impact digital assets (See our thoughts on commodities and oil here). Inflation is of high concern and the primary mandate for central banks who are preparing for battle by raising rates, first in the US by the Fed, and now by the ECB, as described here. Higher rates have an effect on Emerging Market economies, as their borrowing costs are more reliant on the Fed Funds rate and LIBOR than their own local rates. Hawkish policies by the Fed, ECB, and BoE have hurt Emerging Markets, as demonstrated by the recent depreciation of the Turkish Lira (-20% last week) and the South African Rand (-10% yesterday). Onerous tariffs have also been a catalyst for this move. We have been tracking correlations between crypto and other risk assets, such as EM equities, but we believe that hyper-inflation and currency volatility will drive more adoption into cryptocurrency.
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The overall market fell an astonishing 21% last week, on the heels of a 15% loss the week before. Very few assets were safe in crypto, with a few exceptions and notable movers.
And that’s Our Two Satoshis!
Thanks for reading everyone! Questions or comments, just let us know.
- The Arca Portfolio Management Team
Steven McClurg — Chief Investment Officer
Jeff Dorman — Head Trader
Sasha Fleyshman — Trader
Katie Talati — Head of Research
Disclaimer: This commentary is provided as general information only and is in no way intended as investment advice, investment research, a research report or a recommendation. Any decision to invest or take any other action with respect to the securities discussed in this commentary may involve risks not discussed herein and such decisions should not be based solely on the information contained in this document.
Statements in this communication may include forward-looking information and/or may be based on various assumptions. The forward-looking statements and other views or opinions expressed herein are made as of the date of this publication. Actual future results or occurrences may differ significantly from those anticipated and there is no guarantee that any particular outcome will come to pass. The statements made herein are subject to change at any time. Arca Funds disclaims any obligation to update or revise any statements or views expressed herein.
In considering any performance information included in this commentary, it should be noted that past performance is not a guarantee of future results and there can be no assurance that future results will be realized. Some or all of the information provided herein may be or be based on statements of opinion. In addition, certain information provided herein may be based on third-party sources, which information, although believed to be accurate, has not been independently verified. Arca Funds and/or certain of its affiliates and/or clients hold and may, in the future, hold a financial interest in securities that are the same as or substantially similar to the securities discussed in this commentary. No claims are made as to the profitability of such financial interests, now, in the past or in the future and Arca Funds and/or its clients may sell such financial interests at any time. The information provided herein is not intended to be, nor should it be construed as an offer to sell or a solicitation of any offer to buy any securities. This commentary has not been reviewed or approved by any regulatory authority and has been prepared without regard to the individual financial circumstances or objectives of persons who may receive it. The appropriateness of a particular investment or strategy will depend on an investor’s individual circumstances and objectives.
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