Shutterstock photo Bitcoin has been the trailblazer for the cryptocurrency market, but in recent days that’s not such a compliment. The flagship of digital blockchain currencies is down sharply, trading below $5,000 for the first time since October 12, 2017. Ripple and Ethereum, the second and third largest cryptos, are also posting heavy losses. On a macro scale, a look at CoinWatch.com shows that the total market cap of the cryptocurrency sector is down from $828 billion back in January to $148 billion now.
What is going on in the crypto markets?
The crypto watchers have not been shy about posing possible answers. Suggested reasons for the rout run from last week’s ‘hard fork’ when Bitcoin Cash split into two new cryptos, to news from semiconductor manufacturers that orders for crypto mining computer equipment is declining, to new oversight and investigations from the US Justice Department and Securities and Exchange Commission.
All of that may be impacting the cryptocurrency markets, but before we start picking and choosing answers, let’s see what’s happing with the trading prices.
Quantifying the Crypto Rout
Here are the details: On November 13 and 14, Bitcoin ( BTC ) slipped from $6,300 to $5,700. At the same time, Ethereum ( ETH ) fell from $206 to $182. BTC was still at $5,600 on Nov 18, bus is down to $4,600 today. Ethereum has fallen to $137.
During the same time this was happening, Ripple ( XRP ) has dropped from its Nov 6 peak of $0.55 to today’s price of $0.46.
In terms of market capitalization, the three biggest cryptocurrencies are down significantly, all near or past one-year low points.
BTC’s market cap of $78 billion is the lowest since October 2017, while XRP’s $44 billion is the lowest since December 2017 and ETH’s $13 billion is an 18-month low point. It’s absolutely fair to say that cryptocurrencies are facing a crisis.
Dismissing some Theories
Of the main competing theories purporting to explain the crypto crash, the ‘hard fork’ is the easiest to dismiss. Last week’s 10% drop in Bitcoin did coincide with the split of Bitcoin Cash into Bitcoin Cash ABC and Bitcoin Cash SV, but there was no reason for that to spark a selloff. The actual split was based on technical disagreements among the coin miners and code writers. No other crypto had any connection with the matter.
A second theory links the drop in cryptos to recent reports from Nvidia ( NVDA ) and Advanced Micro Devices ( AMD ) that they are experiences declines in their crypto segment sales. Cryptocurrencies depend on blockchain miners to expand supply up to the predetermined limits.
The miners use sophisticated computer servers to calculate complex equations that define the links in the blockchain. It’s not likely that a slowdown in crypto mining would affect prices to the drastic extent we have seen recently; all it would do is slow down the rate at which new crypto coins enter existence, in a system which the users already know is inherently limited.
This brings us to some recent US government actions. Both the Justice Department and the Securities and Exchange Commission are opening investigations into various aspects of the crypto industry. Justice is focused on whether market manipulation was responsible for the massive rise in Bitcoin last December, when peaked near $20,000. The SEC is accusing the operators of at least two ‘Initial Coin Offers’ of dealing in unlicensed securities.
While neither development is good for the cryptocurrency market, both are only in the starting phases and, given the pace of Washington’s bureaucracy, are unlikely to show any results for at least a year. Their real significance is in showing that US financial regulators are starting to take a closer look at crypto.
A Possible Answer to the Question?
Two recent comments – one from Big Four accounting giant KPMG, and one tweet from tech guru Sam Gellman – may seem unconnected but taken together point to a reason for the sharp drop in cryptocurrency trading prices.
Constance Hunter, the chief economist of KPMG, recently said this in an interview: “Consider for a moment extending a person or entity a loan in a cryptocurrency. The value is too unstable at the moment to be assured repayment.
Under these conditions, neither lenders nor borrowers would be willing to take the risk of transacting in cryptocurrencies.
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Gellman tweeted this: “After $30bn invested in the past two years in ICOs there still isn’t a single crypto app with a real user base for anything other than speculating on crypto. The BTC price movement is tough, but the lack of real user base for anything they’re investing in is tougher.”
Together, they describe the biggest problem with cryptocurrencies: they are only used by cryptocurrency speculators. Hunter points out that currency, for economic use, requires stability; Gellman points out that stability, in economics, requires a critical mass of users.
The crypto markets are running into both of these truths right now.
Is there a Solution for Cyrpto?
There is an obvious way out, and in fact, it is already in limited us.
Tie crypto currencies to a known – and stable – store of value. There already exist a number of ‘stablecoin’ offerings that are pegged to the US dollar – Tether ( USDT ), Paxos ( PAX ), and Dai ( DAI ) come to mind. All are linked to the US dollar on a one-to-one basis, and require convertibility to dollars. Over the last five days, as Bitcoin and its ilk have been plummeting, PAX has traded between $1 and $1.02, while DAI has stayed between $1 and $1.04.
USDT has shown more volatility day to day, but its trading range is just as narrow: between $0.98 and $0.
96 since November 10.
You can follow the movements of the cryptocurrency markets with the tools at CoinWatch.com .
Author: Michael Marcus
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