Wolf Richter: Cryptocurrencies Collapsed

By Wolf Richter, a San Francisco based executive, entrepreneur, start up specialist, and author, with extensive international work experience. Originally published at Wolf Street

A “collapse” isn’t when something edges down 1% in value or even 10% or 20%; it’s when something plunges 50% in a short time.

Ethereum has collapsed 52% in four weeks. The second largest cryptocurrency by market capitalization had surged from $0.95 at the end of 2015 to $8.21 by the end of 2016; a gain of 764% in one year. Then it surged to $400 by June 13, according to CoinMarketCap; a gain of nearly 5,000% in less than six month. Over the 18-month period, it multiplied by 421 times. That’s a 42,000% gain. No wonder hedge funds have piled into this madhouse. But in the four weeks since then, it has collapsed by 52% to $193.

And its market capitalization plunged from $37 billion to $18.2 billion. In other words, $18.8 billion, over half of that $37 billion in imaginary wealth, has been left behind in the imagination.

To be honest, a lot of “investments” these days are like this, but the dynamics here are on steroids, condensing the entire experience from years into weeks and days.

Ripple has collapsed 57% in seven weeks. The third largest crypto coin had surged from $0.006 on March 17 to $0.42 on May 17, to a market cap of $16.2 billion, having thus multiplied by a factor of 70. For percentage lovers, it skyrocketed by nearly 7,000% in just two months. Today it’s at $0.18. Down 57% in seven weeks! Its market cap has plunged to $7.1 billion – down $9 billion in seven weeks.

Bitcoin has plunged “only” 21% in one month. The granddaddy of crypto coins had soared to just about $3,000 by June 12, and a market cap of $48.5 billion. Since then, it has plunged 21% to $2,366 and a market cap of $38.9 billion. Another $9.5 billion down the drain in just a few weeks.

Between these top three crypto coins, about $35 billion in “wealth” has returned to the ether in two months.

However, Litecoin, the fourth largest crypto coin, is on a different schedule. Like Bitcoin, it already experienced a dizzying spike and subsequent collapse from October 2013 through May 2015, skyrocketing 2,500% in one month, from $1.90 to over $50 by November 28, 2013, only to collapse 99% to $1.40 by May 2015.

Then there was another spike, but smaller and briefer. And since March 2017, all heck has once again broken loose. This time, it soared from $3.80 on March 1 to just over $50 by June 20, then plunged, then recovered, then wobbled, and now is once again falling. Currently at $45.09, it’s down only 10% from its peak. Given how things went after the prior two spikes – total collapses toward nothingness – caution might be in order.

EOS collapses 70% in eight days. Another illustrative example further down the list, the 11th largest crypto coin by market cap came out of nowhere on July 1 via an “Initial Coin Offering” – similar to an IPO but without regulations, required disclosures, filings, etc. It’s a free-for-all. Unlike an IPO, an ICO offers no ownership of the company. The tokens are all you get.

Here’s a good analysis:

EOS is going to be one of the hottest ICOs on Ethereum network. Even though, Ethereum is just a place for EOS to fund (EOS will have its own blockchain like Omise Go), I expect Ether price will be supported because EOS will conduct its crowdsale for the whole year! Due to its crowdsale model, I expect that everyone who wants to buy tokens, will be able to do this. The most important promised feature of EOS is its scalability. The numbers are really amazing.

EOS shot up from $1 on July 1 to $5.40 on July 3. That day, there was this interesting analysis:

Block.one, the developer of EOS, has been great with marketing, as even Reuters and the New York Times wrote about the token. These factors have helped the cryptocurrency nearly become one of the top 10 biggest cryptocurrencies by market cap, as according to data from CoinMarketCap, EOS is currently number 9 with a $747 million market cap, each token being worth $4.68.

Now it’s at $1.61, a collapse of 70% in eight days.

The hope is that dip buyers will soon be piling into all these tokens and make current holders whole again.

These price movements are like those of numerous highly regulated and even more highly touted IPOs. It just doesn’t play out over months and years, but over a few days. It’s a very concentrated form of nerve-tingling addictive fun that gets people to check their apps furtively every few minutes during even important meetings – and some of them disappear to the bathroom to vomit.

But the company behind EOS raised $185 million in real money. That’s serious business. EOS was the largest ICO ever. Days later it was surpassed by Tezos ICO, which raised $200 million in four days and continues to raise money but hasn’t started trading yet.

Whatever the company might be doing, buyers of ICOs are not getting any ownership in it. They’re getting the tokens and the hope that those tokens will fund their retirement and that they don’t ever have to sit through another shitty meeting again. Meanwhile, the company gets their real money.

There are now 970 of these tokens – 812 “currencies” and 161 “assets” – according to CoinMarketCap. Over 100 of them have been added over the past two months, as everyone and his dog can do ICOs and issue new crypto coins for others to buy with their real money. Getting people to buy them is another story, as attested to by hundreds of now worthless or nearly worthless crypto coins in the pile.

But once the hype takes, particularly if you get some googly-eyed writers at the mainstream media to fawn over it, it’s a miracle to behold.

Given the rocket-like price appreciation when there is concentrated buying, hedge funds are now touting their crypto coin investments. Throwing a few million real dollars at one of the smaller crypto coins can produce price surges of thousands of percent. And a few hundred million thrown at larger crypto coins, along with the requisite hype, can unleash real fireworks.

But trying to get those millions or billions (?) of dollars out? Big players have a hard time selling these coins in large quantities for real money: there are no market makers, and liquidity evaporates when the selling starts. Just as large buys cause price surges, large sales – as these buyers are trying to get out – reverse those surges. Hence the enormous swings, where billions of dollars in “wealth” are created in just days that then evaporate nearly as quickly.

But those who got in early and get out in time walk away with huge gains, at the expense of the later arrivals whose money allowed the early comers to exit. In this too, these tokens aren’t all that different from other overhyped investments. It just happens in a much shorter time-frame with much higher percentages. Since the tokens trade all the time, the nerve-tingling fun is 24/7, so you can get your shot of adrenaline in the middle of the night. And when your tokens get crushed, there’s always the hope that next time you look, they’ll be back up.

There are some factors in the stock market that are like a tsunami siren that should send inhabitants scrambling to higher ground. But this one will be ignored until it’s too late. Read…  Stock Market Tsunami Siren Goes Off

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24 comments

  1. Disturbed Voter

    Two things …

    Volatility isn’t a bug, it is a feature. Some guy made $200 million in Ethereum.

    Mt Gox … where did the $500 million there go?

    Non-State issued monetary instruments … including Dark Finance … is a tool for crime, fraud and Deep State money laundering. This is why the State tolerates it … because they use it. But they want to control it as well, so that only State connected criminals can use it for crime and fraud.

    1. Katsue

      Minor nitpick time here. It wasn’t Mt Gox, it was M:tG Ox – Magic: the Gathering Online eXchange.

      The website was initially set up in order to provide a secondary market for virtual collectible cards.

  2. Sutter Cane

    My initial thought was “I don’t really understand crypto currency” so I was reading this to better understand. Then, I got to this line:

    But those who got in early and get out in time walk away with huge gains, at the expense of the later arrivals whose money allowed the early comers to exit.

    …and I realized that I guess I understand it just fine after all.

    1. Steve Roberts

      Pretty much the definition of a Ponzi scheme when the underlying asset has no intrinsic value.

      1. DH

        They are backed by the full faith and credit of drug lords, terrorists, gun runners, human traffickers, and computer hackers. What do you mean it has no intrinsic value? Just think of all of the intellectual and real assets these people have backing these currencies.

  3. BenLA

    I have a few friends that have done fairly well getting in on the ground floor of these cryptocurrencies. BUT, I don’t see how any currency not being sanctioned by the US would not be seen as a threat to the US dollar hegemony, and don’t see the long-term viability. If you see short-term investment value so be it.

  4. Anonymous

    Using these numbers to prove that cryptocurrencies have “crashed” is disingenuous. Yes, Bitcoin is down 21% on the month, it’s also up 130% since January. Ethereum may be down 50% from it’s peak, but it is still up 2000% on the year.

    Unsure what direction this post is trying to criticize the field. Of course there’s volatility, it’s a young market, and one no one really understands yet. There is also lot that goes on in cryptocurrencies that makes me uncomfortable, and the whole thing may turn out to not work. On the other hand, there is some very interesting technology being developed here, the ability to convert large centralized systems like payment networks into decentralized ones is interesting and potentially valuable.

    I wouldn’t count them out because it’s been a reversion month.

    1. melior

      For those keeping track at home, a google search places this as #140 on the alltime bitcoin obituary count.

  5. Robert NYC

    crypto currencies will never truly succeed; money is the legal prerogative of governments and if crypto currencies ever become successful, governments will simply shut them down. Furthermore as the MMTer’s will tell you money is TWINTOP, “that is which is necessary to pay taxes” and since cryptos are not issued by governments they will never be TWINTOP.

  6. saurabh

    I was reflecting the other day on how these things are basically the anti-Bretton Woods. Easy to understand as a Ponzi scheme, but I can’t fathom the ideologues who believe these will produce positive changes in the world, as if they are gazing out at the world and somehow concluding that the world needs more unregulated currency speculation, not less.

    1. Mr. R2712

      Except the fact that they already produce positive changes in the world. Also, the real technological breakthrough is the tech behind the coins (blockchain) and it’s real life use in various fields. We should also remember that Thomas Watson, the president of IBM said in 1943: “I think there is a world market for maybe (maybe!) five computers.” And look where we are now.

  7. Sean

    At the moment cyptos have near non-existent cost of carry while interest rates are so low. So while the cost holding a lot of the (sucker) money will stay in the system. The problem for the Fed is – the longer it keeps interest rates low, the longer the cyptos mania continues. And the risk that it solidifies and becomes a serious money conduit outside its control. This will become more likely as ‘cash-out/cash-in’ liquidity increases.

    Cryptos are a huge bubble and 99% of people are gunna get burnt. That’s a given. Reminds me of the speculative mining boom of 1970’s – anyone remember Poseidon?

    And for all the prophesies of Bitcoin doom by ETH holders, Bitcoin may come out of this stronger. Because it is not how better the tech is but whether there is acceptance by the broader community (think ‘hats’ in the TF2 Steam community – Dogecoin is a classic example of this dynamic).

    Also, no matter how smart the contracts, there seem to be a lot of dumb people out there. A contract that can’t be enforced is not a contract. Some idiots gave supposedly Russian miners $250MM in return for some ‘Zr’ tokens..

    1. Sean

      should be $25MM. If it wasn’t a scam and assuming the mine works – what the hell are you going to do with zirconium dioxide kgs that your tokens entitle you too?

  8. Sue

    Wall Street is the speculative site par excellence. My rookie and naive nephew monitored shares from a company last year. They were trading at about $10 each. Very little volatility and volume was the steady norm for the shares of that company. One day, and all the sudden out of the blue, he saw that in a period of 15 minutes the price per share went up 100% with an unusual volume of transactions for that stock. He thought the bidding had to be taken place under sweet information the other buyers knew about. So, my nephew purchased right away shares at $20. As soon as his order executed the price per share started to plunge. In a matter of 20 minutes they went down to $9.5. The price, low volatility and volume have remained since then as they had always been before. Poor guy had legally been hustled! On top of this he was trading through a regular E-trade options house account or similar, which means that by the time he spotted the movement and the order was placed and executed the short party was over.

  9. RBHoughton

    Wolf’s comment towards the end of his article about market making brokers shows an aspect of the casino that I often overlook.

    Without the regulatory function of the market-making broker controlling the timing of buys and sells share price movements would terrify anyone, just as they are doing with digital currencies.

  10. William

    You all are missing the point. People are searching for a “dollar” that the gov’t can’t depreciate. Is unable to control. If I offered you a ‘dollar’ that had extremely low volatility, even appreciated over time would you not save in that dollar. Crypto’s offer that possibility. Gov’t look for ways to destroy that because that takes away their ability to steal from everyone. Crypto’s will continue to grow in strength until govt’s stop stealing from their people. That simple.

  11. Scott Dunn

    I find it interesting how the perspective of the article focuses on addiction and the high of speculation. Sure, there are some people who are in it for the speculation. But as William noted above, some people would like a medium of exchange that actually works for them, not against them.

    I notice also, a complete lack of interest or knowledge about the conflicts within the Bitcoin developer community, and that such conflict is a source of uncertainty in the cryptocurrency markets. Not a single mention of the changes ahead, due on August 1st. Not a single mention of the debate among the miners and developers about the rift between them and the potential for Bitcoin to split into two or more digital currencies. Not a single quote from a programmer, developer or miner, either. I guess if I were looking for bias, I found it.

    Do you want a medium of exchange with a value determined by a few old white guys smoking cigars in the backroom, or do you want a medium of exchange where a large group of people, even an entire nation, can have some say about how the medium of exchange should work for all who use it?

    That’s what the discussion should be about. Digital currency is not going away. As long as there are central banks with board members and chairmen and women keen on giving the power to create money to their friends, there will always be people seeking a fairer, more dignified medium of exchange.

    One comment above also mentioned that the creation of money should be in the hands of the government. if that’s so, why do we give private banks this privilege when they make a loan?

    I really appreciate Naked Capitalism. I can appreciate your desire to go after the addicts and the gamblers of Wall Street and high finance. But please, try and take a more balanced approach to this topic and talk to the people who are building the digital currencies and exchanges. Talk to people like Dan Larimer (Steem), Satoshi Nakamoto (Bitcoin), or Vitalik Buterin (Ethereum). Without talking to the people who built it, you might have trouble seeing the problems they were (or are) trying to solve.

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