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WTF is happening to crypto?

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Four days ago the crypto markets were crashing hard. Now they’re crashing harder. Bitcoin, which hasn’t fallen past $6,000 for months, has dumped to $4,413.99 as of this morning, and nearly everything else is falling in unison. Ethereum, flying high at $700 a few months ago, is at $140. Coinbase, that bastion of crypto stability, is currently sporting a series of charts that look like Aspen black-diamond ski runs.


What is happening? There are a number of theories, and I’ll lay out a few of them here. Ultimately, sentiment is bleak in the crypto world, with bull runs being seen as a thing of a distant past. As regulators clamp down, pie-in-the-sky ideas crash and shady dealers take their shady dealings elsewhere, the things that made cryptocurrencies so much fun — and so dangerous — are slowly draining away. What’s left is anyone’s guess, but at least it will make things less interesting.

The bag holder theory

November was supposed to be a good month for crypto. Garbage sites like FortuneJack were crowing about bitcoin stability while the old crypto hands were optimistic and pessimistic at the same time. Eric Vorhees, founder of ShapeShift, felt that the inevitable collapse of the global financial system is good for folks with at least a few BTC in their wallets.


Others, like the Binance CEO Changpeng Zhao, are expecting a bull run next year and said his company was particularly profitable.

Ultimately, crypto hype moves the market far more than it has any right to, and this is a huge problem.

So who do you believe, these guys or your own lying eyes? That’s a complex question. First, understand that crypto is a technical product weaponized by cash. Companies like Binance and Coinbase will work mightily to maintain revenue streams, especially considering Coinbase’s current level of outside investment. These are startups that can literally affect their own value over time. We’ll talk about that shortly. Ultimately, crypto hype hasn’t been matching reality of late, a major concern to the skittish investor.

“I think that the downturn is due to things not going up as much as people had wanted. Everyone was expecting November to be a bull month,” said Travin Keith, founder of Altrean. “When things indicated that it wasn’t going that way, those who were on borrowed time, such as those needing some buffer, or those in the crypto business needing some money, needed to sell.”

Tether untethered

Tether has long been the prime suspect in the Bitcoin run up and crash. Created by an exchange called Bitfinex, the currency is pegged to the dollar and, according to the exchange itself, each tether — about $2.7 billion worth — is connected to an actual dollar in someone’s bank account. Whether or not this is true has yet to be proven, and the smart money is on “not true.” I’ll let Jon Evans explain:

What are those whiffs of misconduct to which I previously referred? I mean. How much time do you have? One passionate critic, known as Bitfinexed, has been writing about this for quite some time now; it’s a pretty deep rabbit hole. University of Texas researchers have accused Bitfinex/Tether of manipulating the price of Bitcoin (upwards.) The two entities have allegedly been subpoenaed by US regulators. In possibly (but also possibly not — again, a fog of mystery) related news, the US Justice Department has opened a criminal investigation into cryptocurrency price manipulation, which critics say is ongoing. Comparisons are also being drawn with Liberty Reserve, the digital currency service shut down for money laundering five years ago:

So what the hell is going on? Good question. On the one hand, people and even companies are innocent until proven guilty, and the opacity of cryptocurrency companies is at least morally consistent with the industry as a whole. A wildly disproportionate number of crypto people are privacy maximalists and/or really hate and fear governments. (I wish the US government didn’t keep making their “all governments become jackbooted surveillance police states!” attitude seem less unhinged and more plausible.)

But on the other … yes, one reason for privacy maximalism is because you fear rubber-hose decryption of your keys, but another, especially when anti-government sentiment is involved, is because you fear the taxman, or the regulator. A third might be that you fear what the invisible hand would do to cryptocurrency prices, if it had full leeway. And it sure doesn’t look good when at least one of your claims, e.g. that your unaudited reserves are “subject to frequent professional audits,” is awfully hard to interpret as anything other than a baldfaced lie.

Now Bloomberg is reporting that the U.S. Justice Department is looking into Bitfinex for manipulating the price of Bitcoin. The belief is that Bitfinex has allegedly been performing wash trades that propped up the price of Bitcoin all the way to its previous $20,000 heights. “[Researchers] claimed that Tether was used to buy Bitcoin at pivotal periods, and that about half of Bitcoin’s 1,400 percent gain last year was attributable to such transactions,” wrote Bloomberg. “Griffin briefed the CFTC on his findings earlier this year, according to two people with direct knowledge of the matter.”

This alone could point to the primary reason Bitcoin and crypto are currently in free fall: without artificial controls, the real price of the commodity becomes clear. A Twitter user called Bitfinex’d has been calling for the death of Tether for years. He’s not very bullish on the currency in 2019.

“I don’t know the when,” Bitfinex’d said. “But I know Tether dies along with Bitfinex.”

Le shitcoin est mort

As we learned last week, the SEC is sick of fake utility tokens. While the going was great for ICOs over the past few years with multiple companies raising millions if not billions in a few minutes, these salad days are probably over. Arguably, a seed-stage startup with millions of dollars in cash is more like a small VC than a product company, but ultimately the good times couldn’t last.

What the SEC ruling means is that folks with a lot of crypto can’t slide it into “investments” anymore. However, this also means that those same companies can be more serious about products and production rather than simply fundraising.

SEC intervention dampens hype, and in a market that thrives on hype, this is a bad thing. That said, it does mean that things will become a lot clearer for smaller players in the space, folks who haven’t been able to raise seed and are instead praying that token sales are the way forward. In truth they are, buttoning up the token sale for future users and, by creating regulation around it, they will begin to prevent the Wild West activity we’ve seen so far. Ultimately, it’s a messy process, but a necessary one.

“It all contributes to greater BTC antifragility, doesn’t it?,” said crypto speculator Carl Bullen. “We need the worst actors imaginable. And we got ’em.”


One other interesting data point involves Bitmain. Bitmain makes cryptocurrency mining gear and most recently planned a massive IPO that was supposed to be the biggest in history. Instead, the company put these plans on hold.

Interestingly, Bitmain currently folds the cryptocurrency it mines back into the company, creating a false scarcity. The plan, however, was for Bitmain to begin releasing the Bitcoin it mined into the general population, thereby changing the price drastically. According to an investor I spoke with this summer, the Bitmain IPO would have been a massive driver of Bitcoin success. Now it is on ice.

While this tale was apocryphal, it’s clear that these chicken and egg problems are only going to get worse. As successful startups face down a bear market, they’re less likely to take risks. And, as we all know, crypto is all about risk.

Abandon all hope? Ehhhhh….

Ultimately, crypto and the attendant technologies have created an industry. That this industry is connected directly to stores of value, either real or imagined, has enervated it to a degree unprecedented in tech. After all, to use a common comparison between Linux and blockchain, Linus Torvalds didn’t make millions of dollars overnight for writing a device driver in 1993. He — and the entire open-source industry — made billions of dollars over the past 27 years. The same should be true of crypto, but the cash is clouding the issue.

Ultimately, say many thinkers in the space, the question isn’t whether the price goes up or down. Instead, of primary concern is whether the technology is progressing.

“Crypto capitulation is once again upon us, but before the markets can rise again we must pass through the darkest depths of despair,” said crypto guru Jameson Lopp. “Investors will continue to speculate while developers continue to build.”


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The old advice to keep politics and elbows off the dinner table may need to be updated to include bitcoin this year.

Last year at this time, the cryptocurrency was just entering its hot streak, soaring in price because retail investors were buying. But it's likely to be a sore subject for people who bragged during last year's holiday feast about their new investment idea.

Your relatives who took the smug brother-in-law's advice, and bought $1,000 worth of bitcoin during the week of Thanksgiving 2017, have lost about $450 of that investment. Those who waited to buy until the week after Thanksgiving 2017 have lost $550. And those who resisted temptation to buy until the week before Christmas last year have lost around $763 of that $1,000 investment.


Bitcoin first topped $10,000 in the last days of November 2017, and by mid-December was worth almost $20,000, according to data from Contrast that to this Thanksgiving: Bitcoin's price has sunk back below $4,300 for the first time in 13 months.

Kyle Asman, partner and co-founder of crypto advisory firm BX3 Capital, began using cryptocurrency in 2013 for online gambling. He was shocked when bitcoin came up at his own dinner table.

"Before that it was more of a closet thing," Asman said, though he did notice the price started spiking last year around the holiday. "I remember that was the only time I had talked about it at my Thanksgiving table — some described it as digital gold, others as a new form of money."

In the weeks after Thanksgiving, the price moves became even more exaggerated. Asman recalled being at a holiday party, going into the restroom when bitcoin was $9,000, and returning minutes later to have a friend tell him it was trading at $11,000.

Fear of missing out

The cryptocurrency's run-up last year granted it sudden pop-culture status and ushered in retail investors thanks to what many call "FOMO," or "fear of missing out."

"It's easy to dismiss crypto as some sort of fake money that's only useful for criminal enterprises, but at some point when the price went up by so much, so quickly, people had no choice but to peek under the hood and see what was going on," said Steve Ehrlich, the chief operating officer at Wall Street Blockchain Alliance.

Another phenomenon that took off alongside bitcoin was a new fundraising method called initial coin offerings. ICOs, as they're known, have attracted billions of dollars from investors, often without a live product. Many have been outed as outright frauds, and others have settled with U.S. regulators for not registering as securities.

"These companies raised insane amounts of money and had no pressure to ever deliver," said Ehrlich, a former Citi fintech analyst. "Since then, a lot

Before popular U.S. exchanges like Coinbase, Ehrlich pointed out that bitcoin was complicated and nearly impossible to buy unless you had a computer science or coding background. Coinbase, most recently valued at $8 billion, at one point was signing up 50,000 new customers a day at the height of the crypto boom last year, CEO Brian Armstrong said at the Bloomberg Players Technology Summit in San Francisco this summer.

But it wasn't all dinner-table hype that led to the epic price rise.

The rapid spike also coincided with the introduction of a bitcoin futures market. Peak prices lined up with the day the Chicago Mercantile Exchange, or CME, introduced bitcoin futures trading on December 17. The Chicago Board Options exchange, or CBOE, opened a futures market a week earlier.

Until futures existed, it was extremely difficult, if not impossible, to bet on the decline of bitcoin prices.

This week, bitcoin futures products hit their lowest level since they were introduced. Research from the San Francisco Federal Reserve suggests bitcoin futures were partly to blame, as investors finally got the option to bet against the cryptocurrency.

U.S. regulators have flagged other, potentially nefarious reasons for bitcoin's stratospheric rise last year.

The U.S. Justice Department is reportedly looking into whether traders used tether, a controversial cryptocurrency that founders say is backed one-to-one by a U.S. dollar, to prop up bitcoin during its record-breaking rally, according to Bloomberg News, which cited three people familiar with the matter.

Some academics are also skeptical. University of Texas finance professor John Griffin, who has a 10-year track record of spotting financial fraud, and graduate student Amin Shams published a study in June that said at least least half of the jump in bitcoin was due to coordinated price manipulation.

At key moments when bitcoin was declining, they said tether was used to buy bitcoin to help "stabilize and manipulate" the cryptocurrency's price.

Despite the massive losses this year, Asman think his own family members remain curious and open to the conversation. But this year the theme might be less about the "crazy euphoria" of last year and more about looking ahead to 2019.

"A lot of people are going to wonder what happened, and what comes next," Asman said.

Edited by bostonangler

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Worst Crypto Week Since Bubble Burst Takes Loss to $700 Billion

(Bloomberg) -- The great cryptocurrency crash of 2018 is heading for its worst week yet.

Bitcoin slipped closer to $4,000 and most of its peers tumbled on Friday, extending the Bloomberg Galaxy Crypto Index’s decline since Nov. 16 to 23 percent. That’s the worst weekly slump since crypto-mania peaked in early January.

After an epic rally last year that exceeded many of history’s most notorious bubbles, cryptocurrencies have become mired in a nearly $700 billion rout that shows few signs of abating. Many of the concerns that sparked the 2018 retreat -- including increased regulatory scrutiny, community infighting and exchange snafus -- have only intensified this week. Even after losses exceeding 70 percent for most virtual currencies, Oanda Corp.’s Stephen Innes has yet to see strong evidence of a capitulation that would signal a market bottom.

“There’s still a lot of people in this game,” Innes, head of trading for Asia Pacific at Oanda, said by phone from Singapore. If Bitcoin “collapses, if we start to see a run down toward $3,000, this thing is going to be a monster. People will be running for the exits.”

Innes said his base-case forecast is for Bitcoin to trade between $3,500 and $6,500 in the short term, with the potential to fall to $2,500 by January.

The largest cryptocurrency retreated as much as 7.6 percent on Friday, before paring losses to 3.7 percent at 9:04 a.m. in New York, according to Bloomberg composite pricing. At $4,266, it’s trading close to the lowest closing level since October 2017. Rivals Ether, XRP and Litecoin all declined at least 4.5 percent. The market value of all cryptocurrencies tracked by has sunk to $139 billion, down from about $835 billion at the market peak in January.

The rout’s biggest casualties: individual investors who piled in just as prices peaked, and companies like Nvidia Corp. that supplied the crypto ecosystem. The California-based chipmaker has lost nearly half its value since the start of October as demand for its cryptocurrency mining chips collapsed and results in its gaming division disappointed.

The economic impact of the crypto collapse has so far been limited, in part because most major banks and institutional money managers have little to no exposure to virtual currencies. For most investors, recent declines in equity markets have arguably been far more important: the $700 billion slump in digital assets since January compares with $1.3 trillion lost from the market value of global shares just this week.

While some crypto bulls have argued that Bitcoin and its peers would act as havens from turmoil in traditional financial markets, this year’s losses have undercut those claims. Gold, a traditional haven for investors, has climbed in the past two weeks as virtual currencies tumbled.

“I don’t think coins are going to be anywhere near as attractive as some of the other cross-asset plays,” Innes said. “Gold prices are going to jump considerably higher and there’s an inverse relationship we’re starting to see with gold and coins.”




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