Notes From the Brink: Reasons Behind the Crypto Bear Market

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Crypto is notoriously a “tough neighbourhood,” as even evergreen Bitcoin bull Tom Lee has put it. After a week in which double-digit losses wreaked havoc on many high-profile cryptos, and Bitcoin (BTC) momentarily fell through the $6,000 support, pitiless bearish sentiment has been circling, with some accusing the top coin of being “exhibit A” in a “permanently impaired or even game‐over” market.

While Bitcoin may have posted 2018 lows, Ethereum (ETH) also plummeted to an eleven-month low to trade at around $254, falling by as much as 20 percent on August 14 alone. That same day, total market cap collapsed by $13.2 billion — back to late November 2017 levels.

VC investor Tim Draper told Cointelegraph in an email that these vertiginous swings are exactly “why [he] made [his] prediction for 2022:”

“The long term trend is way up, but I expect many short-term swings in the market along the way. Fundamentally, the world needs Bitcoin, and that demand will only increase in the coming years as Bitcoin finds more and more uses and applications.”

Even more unflappable, “Bitcoin Jesus” Roger Ver, told us:

“I’m not sure what crash you are talking about. BTC is up 58% for the last year, and 1048% for the last two years. That feels like the opposite of a crash to me.”

As both of these remarks imply, the week’s cataclysm had in fact disproportionately impacted altcoins, leaving BTC relatively unscathed, as Coin360 data shows:  

Crypto market visualization. 15 June - 15 August historical data. Source: Coin360.

BTC dominance — or Bitcoin’s percentage of total crypto market cap — continues to break 2018 highs. As of press time it is at 53.3 percent, levels not seen since mid December 2017, just before the coin hit industry records to trade at $20,000.  

With alts undeniably ravaged, others have been puzzling why — even at a time of international currency crises, Bitcoin itself is yet to rally — this, surely, should be a bullish time for the top crypto? However, Bitcoin has notably failed to hold a recent breakthrough in late July when it was trading just shy of $8,400.

Bitcoin’s brief spike upwards in late July, since which it has tumbled. Source: Bitcoin Price Index

So — even if today’s flush of green has been a sight for your sore eyes, you’d be forgiven for continuing to feel skittish.

Is there method to this madness? Cointelegraph examines five of the most popular explanations for the week’s tumult to find out.

US Regulators Dithering Over Bitcoin ETF Approval

E-T-F — three letters anyone who’s been plugged in to the cryptosphere has probably had swirling around their head in recent weeks.

CryptoCompare CEO Charles Hayter yesterday proposed that the week’s market decline was a ricochet off the back of U.S. regulators’ recent decision to shelve a high-profile application for Bitcoin exchange-traded-fund (ETF) until September. He said:

"[This has been] momentum-based selling following the ETF kickback and the usual gyrations of a market in a depressed mode."

Hussein Sayed, chief market strategist at FXTM, meanwhile suggested that:

"If an ETF doesn't see the light in the coming weeks expect to see a further selloff, as it suggests regulators will continue to fight against bringing cryptocurrencies into the mainstream."

If you’ve heard these three letters too many times by now, yet still can’t account for their mysterious powers to stir markets, let’s unpack this.

ETF stands for an exchange-traded-fund, which is a type of mutual investment fund that divides ownership of an underlying asset — a commodity, an index, bonds, or a basket of assets —  into shares.

The fund tracks the value of the asset(s) and is traded on exchanges, with shareholders entitled to any positive returns. A Bitcoin ETF can therefore offer an indirect way of purchasing BTC, where the investor only holds the corresponding security without having to hold the actual coin.

Crypto-based ETFs have long been discussed as a potential “holy grail” for the crypto industry that would herald major Wall Street adoption and allow for broader investor participation. They’re viewed by some as a less risky bet than investing directly in crypto on spot markets.

But as a marketable security that requires oversight by government authorities, their current regulatory status remains unclear. Several recent high-profile cases have demonstrated just how price-impactful ETF-related announcements from the U.S. Securities and Exchange Commission (SEC) can be.

First, in mid-July, a market rally kicked off, bolstered by news that the $6.3 trillion asset management heavyweight BlackRock –– the world’s largest provider of ETFs –– was beginning to assess potential involvement in Bitcoin.

But just two weeks later, the markets turned, taking a sharp tumble in response to news that the high-profile Winklevoss twins’ Bitcoin ETF appeal had been denied, with a dizzying $12 billion wiped from total market capitalization.

At the beginning of August, the SEC delayed its decision over another Bitcoin ETF application –– this time filed by VanEck & SolidX for trading on the Chicago Board Options Exchange (CBOE). Notably, instead of proposing a BTC-futures-based fund, T plans to go with a physically-backed model involving owning actual BTC. The firm also prices the fund’s shares at $200,000 a pop, eyeing major institutional players.

The SEC’s fickle position has dampened hopes –– even the likes of Charlie Shrem had expected that regulators would have been more likely to grant a stalwart mainstream institution such as CBOE the right to trade an ETF, if not the Winklevoss’ Gemini exchange. EToro analyst Matthew Newton told British newspaper The Independent:

"A green light for the Bitcoin ETF would fire the starting gun on a race among institutional investors to cash-in on this new product, so the market is rightly frustrated by the delay to the decision."

And –– as The Independent notes –– it’s not just “digital gold” that sees its price fortunes tied to these fabled three letters: the first ever ETF to be backed by gold, which launched in 2003, is reportedly credited for skyrocketing the precious metal's price up by over 300 per cent in the following decade.

ICO Sell-Off: Developers Are Liquidating Funds Raised Through Token Sales

This theory “soft-forks” three ways.

One

Bloomberg has suggested that developers of Initial Coin Offerings (ICO) are now cashing their holdings into fiat that they can then spend on developing their products. Bearing in mind that most token initiatives are ECR20 projects built on the Ethereum (ETH) blockchain with funds raised in ETH, this could account for the recent shattering price weakness in the Ethereum market. Biswa Das of crypto hedge fund BloomWater Capital told Bloomberg:

“These startups [raised] a lot of funds but they don’t have treasury management or enough cash management experience, so they’re selling too early and causing a lot of pressure in the market. It was fine last year but right now the the market is so fragile that it causes a lot of pressure.”

Das added that those projects that raised ETH during the market’s peak will “be most compelled to sell,” which CoinFi CEO Timothy Tam echoed when he remarked that “ICOs that raised a lot of money are really feeling a lot of pain” as the value of their crypto holdings plummets.

Bloomberg cites July figures from Autonomous Research that suggest that ICO liquidations worth around $5 billion have been driving down ETH’s price, an impact that has been “magnified due to deteriorating sentiment and low liquidity.” It also points to data from research website Santiment, which estimates that ECR20 projects “have spent over 110,000 ETH in the past 30 days.”

Back during the height of Ethereum’s allegedly ICO-driven rally in 2017, the altcoin soared to almost 32 percent dominance of the total cryptocurrency market, compared to Bitcoin’s roughly 39 percent at the time, as data from CoinMarketCap shows.

Ethereum’s burgeoning market cap share in June 2017. Source: CoinMarketCap

The turning tide in summer 2017 sparked talk of a so-called “flippening,” with some claiming that Vitalik Buterin’s brainchild would soon take the lion’s share of overall crypto market capitalization.

With Ethereum’s dominance now dipping as low as 13.5 percent August 14, Timothy Tam took the measure of fortunes as now doubly reversed, emphasizing that “the big story in the market [this week] is the huge weakness in Ethereum,” and noting that “Bitcoin has held up relatively well versus Ethereum,” even as it saw a dent in its chart against the dollar.

Ethereum co-founder Joseph Lubin in turn hit back, saying that he does not see the recent price collapse as a constraint to further growth. In a discussion with Bloomberg, Lubin attributed the market volatility to “trader types,” i.e. speculative investors, saying that it is not necessarily an indicator of underlying infrastructure enhancement:

“ ... we build more fundamental infrastructure, we see a correction, and the potential gets even more impressive…we are probably two orders of magnitude bigger as a developer community than we were eight or 10 months ago.”  

Lubin added that the value surges of the past year were just another bubble like the previous “six big bubbles, each more epic than the previous one, and each bubble is astonishing when they’re happening.”

Two

Meanwhile, Yahoo Finance's Jared Blikre has claimed that unconfirmed rumors from insider sources allege that the SEC is about to come out with new rules for ICOs in September. This, he said, could be fuelling “a scare that ICOs are disappearing,” but “who knows if it’s true.”

Three

The starkest version of the sell-off theory held that the “extinction-level event” for crypto assets –– which saw droves of double-digit losses among altcoins –– was a deserved comeuppance for projects that had failed to deliver on the goods. Blockstream Corp.’s Samson Mow suggested that “most cryptocurrencies have been overvalued for a very long time” –– or as financial broadcaster Max Keiser told Cointelegraph in an email:

“Crypto markets are shaking out the excess capacity of having more than 1,800 coins with no use case. Before 2017, the only reason new coins were created was to replace coins that had died. The expectation was that all non-Bitcoins would go to zero. Then 2017, and that equation was turned on its head. In 2018 we’re back to coin suicide watch for all but a few; Bitcoin, Litecoin, Monero, EOS, DASH, and a few others.”

Keiser added his Bitcoin-maximalist prediction that “by 2019, Bitcoin’s preeminence as a store of value will reassert itself and we’ll see new all-time-highs. 20 or so coins will make the cut and see new highs. The rest will go the way of virtually all software, gone and forgotten.”

The week’s carnage notably extended well beyond fledgling tokens and ECR20 projects to major contenders such as Ripple (XRP), Litecoin (LTC), EOS, and Cardano (ADA), as Coin360 historical data shows:

Crypto market visualization. 13 August - 14 August historical data. Source: Coin360.

Eyes bleeding, Digital Currency Group CEO Barry Silbert offered up a poll to gage the sentiment of the crypto twittersphere:

Out of 19,871 respondents, 73 percent thought the tumult isn’t over. But, as Fundstrat analyst Tom Lee quipped in response, the poll could likely be a “contrarian indicator”:

“Interested to see result but because crowds are influenced by price action (hence, not independent...no bottom majority probably means bottom in place.”

To Conquer Fear Is The Beginning Of Wisdom

This brings us to the golden thread that wove through all three versions of the sell-off theory and spins off into its own self-fulfilling spiral. EToro analyst Matthew Newton told the Express that it’s not just ICOs that are liquidating, but investors themselves that have “hit panic mode”:

“Investors seem to be increasing liquidations of their ICO holdings, with significant drops in price and increased volumes.This has had a knock-on effect on the rest of the altcoin market, with Bitcoin also momentarily dropping below $6,000 late last night. With prices hanging in the balance, emotions will be running high among traders.

Or, as Samson Mow noted, this “feels like the opposite of last year when money piled in as people felt FOMO. Now it’s piling out as they sense panic.” This theory has been echoed across the crypto space, with Blockchain Capital LLC’s Spencer Bogart alleging investor “disillusionment” with tokens and ICOs, and BKCM CEO Brian Kelly saying that "investors that were in it, and maybe caught the hype in November and December, are now panic selling out."

ThinkCoin chief analyst Naeem Aslam shared his technical analysis with Cointelegraph in an email, suggesting that the market picture is showing signs of strained stamina in a protracted bear market:

“There are serious concerns that we may actually make another new low for the year because of the sturdy bearish sentiment […] traders have been waiting for the bull rally since early June […] but in actual reality, bears have shown their brutal strength over the bulls […] the only reason that we are seeing […] selling off so badly is that traders are losing hope of a bull run […] as long as the price keeps on having a stab at the lows of this year $5,791, we are not out of woods.”

Aslam’s email was penned during yesterday’s market respite, so he qualified his analysis to note that with Bitcoin “breaking [the August 14th] high of $6,298,” there is “a strong hope” for a bull run to continue if downward momentum stops short of forming a new 2018 low. In this scenario, the week will prove to have been a “false alarm,” he wrote. Aslam gave three key levels to keep in mind which show just how far the technicals intersect with sentiment:

“November 13th low: $5,605

October 18th low: $5,109

Psychological level: $5,000”

Although EToro’s Newton did stress that "keeping things in perspective, Bitcoin is still range-bound for now between $5,700 to $8,000 [and] in line with how it has traded over the past few months,” market panic –– as all these commentators suggest –– runs by its own logic.

Alleged despair and disillusionment also means we’re not just on coin suicide watch, but investor suicide watch, as the popular r/cryptocurrency forum on Reddit saw users on August 14 sharing helplines and site links for the US Suicide Hotline and the National Alliance on Mental Illness.

The Indomitable Futures Interaction Argument

We’ll keep this one short, and let you yourself judge whether or not this is a coincidence, remembering that Bitcoin was by no means the largest casualty of the week’s market havoc.

Earlier this summer, Fundstrat’s Tom Lee –– echoed by others –– had attributed the “gut wrenching” price weaknesses of Bitcoin to futures contract expirations, based on analysis of compiled data for the six expirations that have occured since CBOE launched its BTC futures contracts in December 2017.

CNBC’s Brian Kelly yesterday tweeted a graph accompanied by a statement implying that this week’s price tumble may have something to do with August 15 being the date of BTC futures expirations on CBOE:

“Today is CBOE Bitcoin Futures Expiration. This chart comes from one of the best crypto traders I know; who wishes to remain anonymous. I will call him "Pocket Full of Crypto" #bitcoin tends to recover after expiration.”

In a separate tweet, Kelly further noted that “$BTC shorts are still rising toward April highs...hmmm…,” accompanied by a second graph:

In his own comments on the week, Jared Blikre had also noted the transformational impact of futures trading on the Bitcoin space, saying that,

"I think Wall Street is gearing up for Bitcoin in a big way ... but in the short term, we could have a washout, we could go down to $5,000, to $4,000, because the character of Bitcoin, the way it trades, has changed since last December’s introduction of futures.”

The Unexpected Fiat Interaction Argument

Blikre this week joined others in proposing what might be an apparently unusual argument for a crypto market analyst, given that many deem crypto assets’ price performance to be immunized from wider economic factors and capital markets. As James Quinn, head of markets at blockchain investment advisory firm Kenetic, told Bloomberg this week:

“Correlations historically have been extremely low between cryptocurrencies and other asset classes, which is one of the reasons why there is interest in this space.”

Nonetheless, in the wider landscape, emerging market economies — the Turkish lira, the South African rand and the Indian rupee — have all tumbled against the greenback this week.

Blikre –– speaking August 14, when Bitcoin was trading 30 percent down over the three week-period –– suggested:

“30 percent is a crash right. The issue is, Bitcoin is a currency, and when we quote on our screen it’s BTC/USD, that’s a symbol. So like other currencies it trades against the US dollar. The US dollar’s on a tear, it’s up 4.5 percent this year, over the last three days it’s up 1.5 percent. That’s a big move for the dollar, and there’s not a lot of overhead resistance, so it could go even further.”

EToro analyst analyst Mati Greenspan mirrored Blikre in a tweet today, saying that “the buck is simply crushing everything in its path. He proposed that the apparent carnage “may well be a side effect” of dollar strength:

“This is the best explanation I can think of for the crypto decline given all the positive developments we've been seeing in the industry.”

Max Keiser for his part offered the following chart as evidence of what he termed the “damage [the] rising dollar is having around the world”:

Bloomberg notes that Bitcoin’s slide against the dollar this month is “almost as big as the Turkish lira’s 25 percent slump” –– “putting paid to the notion” –– as chief analyst at Markets.com Neil Wilson told Business Insider –– “of cryptos as a safe haven play." Wilson added that "ultimately USD and US Treasury notes are the only real safe harbour.”

Before you arch your brows, this week has interestingly seen the exact opposite argument from renowned US economist Peter Schiff, who is credited for predicting the 2008 housing market meltdown. While it’s worth noting that Schiff is not exactly a Bitcoin bull, in his recent interview with Salon he scathingly anatomized what he considers to be an inevitable impending economic collapse in the fiat-denominated world:

“I think the U.S is in worse shape than Europe [...] not that Europe and Japan are not in trouble, they are. But I just think we’re in more trouble  [...] There are a lot of bubbles. The bond market is a bubble. The stock market, housing, the whole U.S. economy, really, is one gigantic bubble [...] We’re going to have to deal with a lot of defaults, [and] a lot of debtors are going to go broke.”

Schiff further predicted that the Fed’s go-to solution of quantitative easing would wreak yet further havoc for the dollar. With the post-2008 bailout measures, he said, we’ve “actually compounded problems” and postponed “consequences to a later date –– we're headed to that later date.”

Divinatory Practices

Whether you don a chartist’s hat or sift through proliferating white papers to make your investment judgements, commentators of all stripes continue to devise new strategies to interpret crypto-specific market signals.

A research group from Yale recently proposed a system intended to gage the “risk-return trade-off” of major cryptos, identifying a “strong time-series momentum effect” among major assets such as Bitcoin, Ethereum, and Ripple. Yale’s research also found a correlation between price and investor attention, which they deduced via social media and search engine trend analyses.

Fundstrat’s Tom Lee, for his part, has developed a “contrarian index” that lets investors know how “miserable” Bitcoin holders are based on current prices — dubbed the Bitcoin Misery Index (BMI) — which he launched at a time of comparable crypto market woes.

If eye-popping volatility appears –– until now –– to remain something of a paradoxical constant in the crypto space, this summer has seen significant developments, the impact of which is arguably yet to be understood.

Earlier this month, Intercontinental Exchange (ICE) –– the operator of 23 leading global exchanges including the New York Stock Exchange (NYSE) –– unveiled its plans to create a global ecosystem for digital assets that would cover the spectrum from federally regulated markets and warehousing to merchant and consumer needs.

While some have proposed this is the “biggest Bitcoin news of the year,” implying forthcoming bullish price moves as qualified custodian solutions are offered to institutional clients at scale, others propose that leverage-based financialization could hit at Bitcoin’s “algorithmically-enforced scarcity,” with adverse implications.

But –– as this latter argument notes –– this will depend on how HODLers choose to negotiate the new bridge with the traditional financial world. Until then –– we’re in for interesting times.

Cointelegraph would like to thank Helen Partz for her research contributions to this article.