ETH A Fall from Grace?

We will be writing a lot about the ICO phenomena and we plan to be soon participating ourselves. But as a former Investment Banker who has been actively involved in financial markets for decades (dare I say), we wanted to briefly talk about the current state of the ICO market, and what’s happening in the Ethereum (ETH) markets as we speak (July 25th, 2017).
ETH was getting the sh*t kicked out of it! Now it “appears” to be stabilizing. Why is this happening?
To understand this, it’s important to understand a bit about the market. ETH as traders like to say, went VERTICAL. Now if this were a normal market, certain things would be different, but this is not a normal market — it’s unique and was formed around a unique set of people who originally owned it and now that ownership base is changing. These original owners have ridden the currency from nearly zero to a peak of about $380 producing a market cap in the 100's of billions at one point, but most of that market cap was “air.” We would guess that if we spent the time figuring out the block transactions we could have a good estimate of the actual financial base of the money invested in ETH; but what is important is that it’s a much lower number than the total market cap (possibly 5-10% of the total). This means these “true believers,” as I like to call them, have massive capital gains — of this, there is no question. So why don’t they sell? Well, this goes to their true believer status — oh and they have been selling — just not for USD or EUR. As a true believer, they won’t be selling because they think it’s going a lot and a lot higher (and I very much agree), but they have been actually, whether knowingly or not, been “hedging,” and this is ultimately causing a massive dislocation in the ETH and coin markets in general.
The ICO craze has gone nutty in 2017. But the dynamics at play are the following. We don’t want to spend a lot of time discussing ICOs here, but for now, it’s clear to anyone following these that there are a huge number of parasites entering the market — creating ICOs really to get cash from those true believers I mentioned above. The true believers are funding all this for now and that is important because they are exchanging their ETH and BTC for new derivatives currencies, betting these will explode higher. As true believers, they are usually willing to buy and hold for months not worrying about selling out. However, they have transferred their ETH and BTC to non-believers — primarily into the ETH market; non-believers who either with good intentions or bad are taking their ETH and converting to real Fiat currency — we call these people the “weak hands” as opposed to the “strong hands” that make up a “true believer.” It’s well reported that there were over $500M in ICOs in the first half of the year through June, but recored ICOs are still happening (think Tezos) and hence we are likely to exceed $1B in 2017, in my guesstimation. Well, these non-believers need to sell their ETH (for Fiat, USD or EUR) to either develop their businesses or buy new Ferrari’s.
And that is exactly what they are doing! Selling ETH for Fiat — and they are having a hard time finding fresh buyers so they are having to get aggressive in their selling and it’s becoming a feeding frenzy!
The proof of this is what is happening to Bitcoin at the same time. While BTC took a hard dump along with ETH, it has recently soared by to the old highs, but look at the relationship between BTC and ETH:

Why is this? Because there has been limited distribution of the strong hands to weak hands phenomenon in BTC (sure some of the ICOs have accepted BTC and in some large amounts, but the vast amount of sales is in ETC).
But there is a “bright side” to all of this — while the true believers have been transferring ETH to forced sellers of ETH they have been collecting derivatives of ETH. Over all it has been a very bad exchange of value, but there have been a handful of incredible winners; take a look at the recent list at coinmarket cap. But while there have been some winners, the visual data suggests that its been a net losing proposition for the true believers! That said, what are their options? Sell for BTC and get out of the ETH coin business, sell out for fiat, ride the storm, or exchange for derivative ETH.
We think that the best proposition that ETH holders remains buying derivatives and hope/look for businesses that actually, a) create real economic value; and b) find a legitimate way to transfer that value back to the derivative holders. We are soon going to be launching our coin offering; it’s our mission to accomplish both these goals for everyone that supports us.
We are incredibly bullish in the Crypto markets. In general there are so many monetary tail winds that the future is bright, but the structural challenges that ETH is facing will take time to resolve — there will need to be more aggressive buyers bidding up ETH than there are sellers. Liquidity increases resulting from ICO sales is one significant positive that is benefiting ETH holders from the ICO boom. These new ETH holders are selling for cash and someone is buying, and the evidence is that it is people new to ETH — look at the growth in new wallet creations:

Oh and moreover, look at monthly liquidity:

ETH surpassed BTC in 30 day volumes recently. That’s good news, because increased liquidity will help the ICO sellers and may reduce volatility. A more liquid currency is a more valuable currency in my opinion and this is one big advantage of the volatility that the ICO craze is creating.
