State of the Market III: November 2018

The NeonVest Insights on the Crypto Market.

Macro summary (Nov 2018):

From CoinMarketCap, as of Nov 31, 2018

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Bitcoin’s price crash is not that relevant

By far the biggest news this month, was Bitcoin’s massive price crash that reverberated across crypto markets. The cryptocurrency had been trading rangebound between about $6000 and $7000 since September to mid-November, until it dropped to $5600, and then continued a free fall for the rest of the month. It ended November at $4000 (see below). As of the time of writing, prices haven’t stabilized.

Source: CoinMarketCap

The Bitcoin Cash Cold War

The catalyst for the sudden crash was the scheduled hard fork of Bitcoin Cash on November 15th, which separated into two rival factions — Bitcoin ABC and Bitcoin SV. Bitcoin Cash itself was created from a hard fork of Bitcoin, on August 1, 2017, resulting from a push from some members of the community to increase the block size of a Bitcoin to make it more amenable for transacting, rather than a digital investment.

The Bitcoin Cash internal strife was started by two camps with opposing schools of thought. Bitcoin ABC, or the “Adjustable Blocksize Cap” camp, led by Roger Ver (“Bitcoin Jesus”) and Jihan Wu (Founder of Bitmain), proposed to cap the blocksize at 32MB. Bitcoin SV, or “Satoshi’s Version”, led by Craig Steven Wright, who claims to be part of the original Satoshi team and billionaire Calvin Ayre, proposed to cap it at 128MB. Due to the fundamental nature of the disagreement and the strong mindedness of both camps, the best solution was deemed to be a hard fork in the cryptocurrency.

On November 15th, the two camps scheduled a hard fork in the BCash chain to form one new currency (Bitcoin SV), while Bitcoin ABC would remain on the same chain. Both cryptos have traded down significantly post the split.

Contagion in crypto

For multiple reasons, the Bitcoin Cash split was the catalyst to bring to the fore a wave of negative sentiment that had been brewing in Bitcoin, and cryptocurrencies in general for the past few months. The split, and subsequent Bitcoin crash, caused a wave of contagion across alt coins.

Bitcoin’s market cap declined below $100bn, a feat that had only previously been achieved one year before in October 2017. Bitcoin prices declined below $5500, despite much speculation from analysts that its floor was $6000, based on fundamentals. It has since become clear that fundamentals matter little in crypto, at least in the short-term. But look, we already knew that from the stock market.

It’s not that relevant

This crash that we keep referring to, is the crash of Bitcoin prices relative to fiat currency. It’s like saying that the Dollar saw its quickest depreciation in history during Dec to Jan, when the cost of 1 Bitcoin rose from $10,000 to $19,000. The point is that these relative comparisons don’t make sense when dealing with two mutually exclusive, and intentionally separate systems. It makes sense when comparing the Japanese Yen to the Indian Rupee, or Ethereum to Nano. The Cryptocurrency system and the Fiat currency system operate as separate entities, with separate operators and backups, hence the only useful comparisons to make are with entities that are in the same system and operate by the same rules.

The reason we make this comparison in the first place is twofold:

A) Community: Users of cryptocurrency almost always use some mode of fiat currency as well, hence just from a comparison standpoint it’s easier to think of Bitcoin’s price in dollars rather than as an absolute.

B) Investment / Speculation:Anyone looking to profit from a crypto investment is looking for their return in some type of fiat currency, which will give them real-world value. Few people would choose to become millionaires in crypto, if they had to keep their profits in crypto.

Has Bitcoin actually diminished in value?

Let’s take a look at some other statistics to give us a better perspective.

Bitcoin Dominance: 54.1%

In fact, Bitcoin has actually gained dominance in the market over this period — while the price has fallen significantly relative to the Dollar, other altcoins have fallen even more, causing Bitcoin to actually increase its market share as measured by market cap.

Source: CoinMarketCap

The price chart between Ethereum and Bitcoin (see above) represents the conundrum that we are dealing with. Both prices essentially halved relative to the dollar during the month, but their price relative to each other changed less than 15%. Imagine if some external force put severe negative tension on every fiat currency in the world, causing them all to lose 50% of their value. Relative to each other, they have not lost any value. In a similar line of thinking, most of the large cryptocurrencies have stayed stable relative to each other, but the market as a whole has suffered a crash relative to fiat currencies.

Change your perspective

Crypto is a closed system. It doesn’t relate in any way to the fiat currencies we have operating in the world today, apart from the fact that its users will dabble in both types of currencies. As a user or investor, you shouldn’t look for correlations between crypto and fiat, because even if they do exist, they will most likely be circumstantial.

A popular one to talk about is the correlation between the VIX and Bitcoin price. The VIX index measures volatility in stock markets. The hypothesis is that when there is lots of volatility in the stock market, there will be positive sentiment in crypto. There’s not much data to back this up, but people have found ways to justify the correlation.

As a buyer, you should look to buy crypto in order to use it for some purpose. Perhaps there is a service you want to use that only accepts crypto. Perhaps you need crypto to transfer money to someone in a remote location, or you want to make a secure, private transaction. Perhaps you think the value of the particular crypto will rise relative to other cryptos. There are still many reasons to use crypto, but buying crypto in order to convert it back to fiat at a certain point in the future is the one that you should think long and hard about.