Why is the Sky Falling with Ethereum and Bitcoin Prices?
If you have been following the financial news cycle in the past few days, (other than the numerous reports on Donald Trump, Jr’s email chain with the Russians) you will notice headlines claiming the demise of cryptocurrencies, or the end of Ethereum (ETH) and Bitcoin (BTC) are upon us. Please take little heed on such trifling headlines, or at least read the whole article for more insight before making any quick judgments on the state of cryptocurrencies. The current ETH and BTC market correction has absolutely nothing to do with the technological trajectory of cryptocurrencies, which will be in our daily lives in the not-so-distant future. Instead, the correction has more to do with knee-jerk reactions of crypto-newbies, who are “panic” responding to transient negative sentiment, and something a lot more fundamental in financial markets and economics: Companies need to pay their bills.
Gotta Pay the Bills
Perhaps, the biggest contributor to the current Ethereum and Bitcoin price correction is that big Initial Coin Offerings (or ICOs), such as Bancor, Civic, and TenX, are cashing out on their fundraised holdings to pay the bills. Some of these organizations legitimately need to sell their fundraised ETH and BTC now for immediate operational costs. Some large ICOs, like Status, pledged to liquidate a portion of their current holdings sometime in the near future, and others are quietly converting their holdings to cash via over-the-counter (OTC) exchanges to minimize the effect on the market. Even those these organizations use cryptocurrencies to conduct business, many of the vendors they deal with still only accept fiat currency as a form of payment. So, these ICOs have to sell their ETH and BTC to get cash for bill payments.
Of course, having said the above, we must mention something about crypto-scammers. The reality is that some ICOs are just outright scams. In fact, a majority of them will end up having nothing to show for their fundraising, other than a lot of hot air and hype…just like many of the dotcoms in the late 90’s. Many of these ICO scams are raising funds, denominated in ETH and BTC, in the hopes that they can dump their fundraised cryptocurrencies for a profit and run away with the capital gains. However, as the price of ETH and BTC declines, many of these scammers will just exit the ICO market sooner than later due to high risk with less reward. So, the current price correction in Ethereum and Bitcoin is not necessarily a bad thing because it’s cleaning out many of the scammers in the ICO market.
Do Not Bet Your Life Savings
Cryptocurrencies are still in their infancy stage of development. There is going to be a lot of growing pains in this new asset class. If you think Triple-Leveraged-ETFs are volatile, crypto’s make them look like child’s play. It’s definitely going to be a bumpy ride, not for the faint of heart. At the end of the day, it’s a gamble…an educated gamble. But then again, isn’t almost everything in life a gamble? The best we can do is to take in as much info as possible and place our bets. Cryptocurrencies, right now, seems like a risky but good bet.
Originally published at Henry Kwong, CPA.