Byte Me: the crypto reckoning

It was never going to last. Bitcoin has ended its three month holiday from volatility and begun to crash once more. The cryptocurrency market is looking for a new floor.

  • By Costas Mourselas, Lewis McLellan
  • 29 Nov 2018
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After spending three months locked in a tight range around $6,000, bitcoin has lost almost a third of its value in two weeks.

The market capitalisation of the cryptocurrency market was down a third on Thursday from mid November — and that includes a small relief rally that has taken place over the past week.

So why the sudden crash? As ever in the cryptocurrency asset class, there are no easy answers. 

Despite the fact that many crypto-traders and aspiring influencers allude to technical factors, graph patterns and “real value”, there is simply not enough data on what moves the cryptocurrency market to establish a model. 

Not that that has ever stopped crypto-twitter calling the next breakout.

But even if it’s hard to establish real value, there are plenty of potential causes for the latest crash.

First, despite bitcoin’s reputation as an asset apart from ordinary securities markets, it is more closely correlated to the performance of the US equity market than it used to be. Some reputable commentators are blaming the October correction for the similar move in cryptoland.

Sell-offs usually hit the riskiest assets hardest, so the idea makes sense, but the chronology is a little off. Bitcoin’s slump didn’t begin until mid-November, by which point the US equity markets had stabilised.

Second, there has been a schism going on that has rocked the crypto world.

Bitcoin cash, itself formed from an irreconcilable difference of opinion among bitcoin developers, has split to form bitcoin SV and bitcoin ABC.

The details behind the split are too technical to go into here, but they cause adherents of both sides to fly into unbelievable fits of outrage. The debates range from the incomprehensibly technical to the disturbingly religious, as parties break down ‘segregated witness protocols’ and argue about whose model is most true to Satoshi Nakamoto’s original vision.

Commentators are quick to point to the vicious debate as a drag on the price of bitcoin. While bitcoin cash’s hard fork should not have a direct impact on bitcoin itself, it seems to have had a contagion effect.

Third, and perhaps most convincingly, initial coin offerings have been an absolutely wild ride and, with the possible exception of alleged large scale fraud — may have had the largest single impact on the bitcoin price. ICOs allow individuals to raise capital for projects or enterprises by issuing cryptocurrency.

Bitcoin was used in so many of the transactions as a means of buying into these projects. The frothy excitement around the sensational returns posted by initial coin offerings was a huge component of what led to bitcoin’s precipitous price rises in late 2017.

The shine has well and truly rubbed off the initial coin offering. 

A number of ICO promoters have been prosecuted for fraud but, perhaps more importantly, in November, the SEC slapped two ICO sponsors with fines for selling unregistered securities and ordered them to return the funds they raised to investors.

This should not have come as a surprise to anyone — certainly not to any readers of Byte Me. 

The position of anyone who didn’t have something to sell was always “if it looks like a security, and smells like a security, you had best register with the SEC or they will be on you like white on rice”.

Bitcoin’s latest fall coincides rather neatly with the SEC’s decision, but ICOs have started to take their toll on the broader crypto world in another way.

It had become common practice for ICO issuers to retain sometimes as much as 80% of their tokens. Thus, if a company raised $20m with an ICO, the team had (at least theoretically) gifted themselves $80m. Over the past year, many of these retained holdings have been dropped back into the market. 

The increase in supply swiftly eroded whatever value the tokens still had. 

Statistics supplied by Smith and Crown, a blockchain research organisation, indicate that September and October were the worst months for ICO issuance since April 2017. October saw $340m raised with tokens, well below the $2.4bn peak we saw in February of this year.

Reality sets in

There is also an element of frustration by the cryptocurrency community that may have worsened the sell-off. If you bought bitcoin at the top of the market in January, when it was worth almost $20,000, you have seen your holdings depreciate consistently over the past year.

A lot of the logic driving amateur investors in the space is the belief that the technology will eventually win over society and that people will seize true financial independence. That is, freedom from governments and central banks.

But that theory hasn’t quite panned out. In fact, the rush to bitcoin at the end of 2017 was speculative fever at its finest, perhaps helped along by a deep ignorance of the technology.

More traditional financial assets with valuations that are looking stretched at least have underlying characteristics such as dividend payments or coupons that promise some kind of underlying value.

Bitcoin, we are told, is supposed to be a currency and a store of value.

Currencies are not meant to “go to the moon” in value, to borrow an expression from the cryptocurrency community. A store of value shouldn’t rocket to $20,000 and lose almost 80% of its value within a year.

That’s not to say bitcoin or other cryptocurrencies can’t eventually find some success and stability.

One school of thought in the crypto community states that until 2018, bitcoin was a growth currency, and it is transitioning to a value currency, like gold. But unlike gold, bitcoin does not have millennia of history as a valued asset.

Beyond this, there are some use cases for crypto. ICOs still have a lot of potential if properly regulated, and smart contract functionality afforded by cryptocurrency networks can be effectively used to create value.

Bitcoin itself can be a great currency and it, or a currency like it, will always have some value. Crisis zones such as Venezuela and Zimbabwe, with ineffective government, will create a need for alternative currencies. Dollars can work too, of course, but an online, decentralised currency is a great solution.

But we have no idea what sort of value floor these use cases imply. It could still be a long way below $4,000.

The idea that working people in relatively orderly countries with stable monetary policy would shift from currencies backed by government to a currency that has whipsawed in value to the degree bitcoin has is a fantasy.

As Byte Me has touched on before, fiat currencies controlled by a central bank have numerous benefits, and cryptocurrencies still have not provided an effective alternative to the complex decision making of a central bank.

Until people truly lose faith in government and some cryptocurrencies provide a viable, working alternative to fiat, the carnage will continue.

  • By Costas Mourselas, Lewis McLellan
  • 29 Nov 2018

All International Bonds

Rank Lead Manager Amount $m No of issues Share %
  • Last updated
  • Today
1 Citi 345,651.05 1349 8.09%
2 JPMorgan 341,748.87 1469 8.00%
3 Bank of America Merrill Lynch 306,869.45 1064 7.18%
4 Barclays 258,170.48 974 6.04%
5 Goldman Sachs 227,691.73 773 5.33%

Bookrunners of All Syndicated Loans EMEA

Rank Lead Manager Amount $m No of issues Share %
  • Last updated
  • Today
1 BNP Paribas 48,305.28 204 6.53%
2 JPMorgan 46,311.15 105 6.26%
3 UniCredit 40,488.91 181 5.48%
4 SG Corporate & Investment Banking 38,348.83 146 5.19%
5 Credit Agricole CIB 37,171.96 185 5.03%

Bookrunners of all EMEA ECM Issuance

Rank Lead Manager Amount $m No of issues Share %
  • Last updated
  • Today
1 JPMorgan 14,514.87 63 9.19%
2 Goldman Sachs 13,469.15 66 8.53%
3 Citi 9,971.36 58 6.32%
4 Morgan Stanley 8,572.10 54 5.43%
5 UBS 8,414.70 37 5.33%