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Cryptocurrency crash: Is this the big one?

Posted: 21 November 2018 6:43 pm
shutterstock stock exchange cryptocurrency 450x250

The cryptocurrency markets are getting dangerously interesting.

To recap: the cryptocurrency spaceship suffered an internal explosion late last week, then outright burst into flames at the start of this week and experienced a sudden loss of altitude.

Sources describe day traders hastily patching up their old spacesuits to margin trade around the burning craft, and the constant jettisoning of stablecoin escape pods.

"Only the cold, dead vacuum of fiat space was able to extinguish the flames," explained one trader. "The fires still burn in my heart though," they added.

Are we there yet?

So, have the markets bottomed out yet?

The total cryptocurrency market cap has bounced up from a low of about $140 billion twice now, but it's clear that the bulls and bears are still wrestling for control of the spacecraft. Clearly the in-flight dangerous-animal petting zoo was a mistake.

The struggle is still kicking up some very high trading volumes, and they don't seem like they're about to settle. It looks like a lot of people are thrilled to see the volatility return to bitcoin and are splashing around the place.

Have the markets hit the bottom? By all appearances, it seems too early to say. A better question might be how you'll know when they've reached the bottom.

How to know whether we're there yet

"Because of the big drop we made since the 6K broke, we really need that relief rally (big V shape rally) to even start to think of a low being set," explains a dude going by the name botje11 on TradingView. "Many people are hedging their crypto assets by shorting Bit(coins). Until these start to close these shorts, we can't say that the low has been set."

"How can we know when this will happen, if we start to see a very big, fast and high volume rally up."

Essentially, one might not be able to definitively say that the bottom has been reached until after there's a very distinct rally back up, which may not be terribly helpful.

Alternative metrics

Bitcoin hasn't been this volatile, and its prices haven't been this low, in a significant while. As such, it's also a good time to start looking at how else the bitcoin network changes when prices do this kind of thing – and some of the changes are getting wonderfully ugly. In some cases, they might also be related to the BCH hash war, but overall, they're probably more symptomatic of the falling prices.

"From" transactions drop off even as total transaction volume increases

The solid line below shows the number of total transactions on the bitcoin network. They seem to have increased considerably since the start of November. The dashed line showing number of transactions being sent from unique wallet addresses seems to have grown and then dropped off sharply though.

The above lines show the seven-day moving average of these figures, so with the current crypto crash having run for about a week, the very tail end of the chart might be a good indicator of the overall impact of the crash.

So, the number of unique wallet addresses making transactions has dropped off significantly as prices drop. This might be because there was an initial rush of people moving funds out of their bitcoin wallets to sell, which decreases sharply as everyone who's going to sell off sells off. It could suggest that the market is running out of sellers, which might bode well for prices.

Growing average transaction value

At the same time, the total USD transaction volume and the average transaction volume have grown considerably as prices fall. This suggests there might be an unusual amount of big movers out there right now, cashing out and exerting a lot of downward pressure in the process.

This might also be partly down to the returning volatility. The traders who know how to profit from hyper-volatility might have started swinging back into action. There are definitely a lot more people than usual blowing their margins on BitMEX, and presumably even some people making money there.

Miners getting wrecked. Or rekt, if you will

Bitcoin's hashrate is also down considerably. This might be more directly due to the ongoing BCH kerfuffle, but perhaps not entirely. BCH has taken an outsized hammering this crash and is down about an extra 35% beyond bitcoin, and 30% beyond ETH, over the last seven days.

This has also severely impacted its mining profitability, and BCH is now only returning about half the returns of bitcoin mining. The hashrate cards have probably already fallen into place, and if miners can't turn a profit from BTC at current prices, they definitely can't profit from BCH. At this point, it seems to no longer be about the profits, except as a gamble on higher prices in the future.

This, unsurprisingly, suggests that a lot of miners are being directly pushed out of the market by the falling bitcoin prices. At this point, it looks like a lot of miners are getting pretty close to being utterly boned.

Back in March, Fundstrat estimated that the more efficient BTC miners wouldn't be bailing in droves until prices hit about the $3,000 range, at mid-March mining difficulties. But right now, mining difficulty is much higher and bitcoin prices are much lower than they were back then.

Accounting for the changing BTC mining difficulty and price since then, it's now slightly more than half as profitable to mine bitcoin as it was in March, according to data provided by Bitcoin Wisdom. So, assuming those old estimates hold true, almost all BTC miners are now well and truly getting into the mining-at-a-loss range.

It's not gospel though. Serious miner behaviour is extraordinarily difficult to read into, and Fundstrat's old estimates are still just old estimates.

At the same time, the information available suggests that this situation risks getting exceedingly interesting if prices keep dropping. By some appearances, bitcoin is getting down to the wire. Big money is moving, volatility is back and miners are getting thrashed much harder than they ever have.

Bitcoin has crashed many times before – and has crashed much harder and faster than this – but never with so much hashrate and such skewed mining profitability. If prices keep going down, one might have to start taking the possibility of a 51% attack against bitcoin semi-seriously.

Additional factors

The Bakkt bitcoin futures launch was just delayed, as spotted by CoinDesk on Twitter. It was meant to kick off on 12 December, but has now been pushed back to "provide additional time for customer and clearing member onboarding prior to the start of trading and warehousing of the new contract" Intercontinental Exchange says (PDF).

juicy crypto words

Maybe people aren't exactly queuing up to board the burning SS Bitcoin, and the delay will give some time to assess the damage.

Tether is also back in the limelight, as Bloomberg reports that the US Justice Department is investigating potential Tether-based market manipulation. There are no new smoking guns – just the same old ones – but it does seem to be getting to the market.

Tether is still mostly below its $1 peg, even as other stablecoins rise above their own dollar mark. According to LiveCoin Watch, Tether's been as low as 96 cents within the last 24 hours, while its competitor TUSD has been between $1 to $1.13, and PAX has been from $1 to $1.09.

That Tether's flagging, even at a time like this, suggests confidence in the coin is still far from restored. For those who do swear by the old theory that Tether is propping up bitcoin prices, this crash could be seen as evidence.

It's almost certainly not the cryptocalypse. And even if it is, it's primarily only bitcoin's future on the line. It's an exciting time either way though. The markets are still thrashing vigorously, and with things as tight as they are, the next big break one way or another could have a profound impact on the crypto markets.

Disclosure: At the time of writing, the author holds ETH, IOTA, ICX, XLM and BTC.

Disclaimer: This information should not be interpreted as an endorsement of cryptocurrency or any specific provider, service or offering. It is not a recommendation to trade. Cryptocurrencies are speculative, complex and involve significant risks – they are highly volatile and sensitive to secondary activity. Performance is unpredictable and past performance is no guarantee of future performance. Consider your own circumstances, and obtain your own advice, before relying on this information. You should also verify the nature of any product or service (including its legal status and relevant regulatory requirements) and consult the relevant Regulators' websites before making any decision. Finder, or the author, may have holdings in the cryptocurrencies discussed.

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