The price charts resemble battlefields, with red arrows raining down relentlessly. Since the start of the year, the price of bitcoin has fallen by more than 50%, cutting more than $100 billion from its market capitalization. At the time of writing, Satoshi’s digital gold trades for around $6,400 per coin, a far cry from the $100,000 that some analysts predicted at the beginning of the year.
And it’s not just bitcoin. For instance, since recording an all-time high of more than $1,400 in January 2018, ether has similarly plunged. In the past month alone, ether has shed nearly $11 billion in market cap (that’s equivalent to 55,000 Lamborghini Huracáns). Ripple’s XRP, which once hovered near $4 per unit, has also succumbed to gravity, crashing some 90% from its January peak.
ICOs liquidating funds
Some have posited that blockchain and cryptocurrency projects might be converting their ether reserves into fiat currencies to meet financial obligations. At face value, this appears plausible, as startups incur many expenses during their growth phase. If a collection of companies liquidated the cryptocurrencies—mostly ether—that they raised in ICOs at the same time, they could exert downward pressure on prices.
Considering that some startups raised hundreds of millions of dollars worth of crypto, a single company could be responsible for a dip—though probably not one of this depth or duration. While it would be easy to blame large, naive actors, many of these teams are acutely aware of their outsize influence on the markets and they’ve specifically designed conversion strategies to limit their impact on prices. Instead of flooding exchanges with sell orders, they plan ahead, plotting small liquidations spread out over several weeks, if not months.
The ICO liquidation theory also fails to answer a basic question: Why now? We’re several months past tax season and some of the largest ICOs (like Tezos) have been converting their assets for quite a while.
Negative feedback loop
It’s possible that the price decline reflects a negative feedback loop, a combination of economics and psychology. As crypto investors sell their holdings, they see that prices are falling. This could spook them into selling even more. This is somewhat like a bank run, except investors lose faith in the value of cryptocurrencies rather than the viability of a financial institution.
In October last year, Timothy Lee at Ars Technica suggested that a positive feedback loop might be what inflated the cryptocurrency bubble in the first place. We may now be seeing the opposite force in action.
Cryptocurrency investors (and especially ethereum backers) may be disappointed (paywall) by the low usage of decentralized applications (dapps) like IDEX, Bancor, and CryptoKitties. These apps run on crypto tokens, and thus generate demand for the assets.
But when investors visit a cryptocurrency exchange, they aren’t presented with information about the daily active users on various dapps. They’re generally only presented with the price of an asset and a chart of its history. Crypto trading doesn’t usually incorporate nuanced cash flow analysis or acknowledge anything beyond the price of a token. Ultimately, these digital assets are worth whatever somebody is willing to pay for them, regardless of whether they have uses beyond speculation. These days, buyers aren’t willing to pay as much for cryptocurrencies as they were not that long ago.