HELLO CRYPTO ICE AGE
The Mastodon in the Living Room
Who is still alive?” Ivan on Tech, YouTube
When a 3-mile wide comet exploded over North America 13,000 years ago, it scattered debris from the Arctic Tundra to Machu Pichu and East as far as Syria. Three-fourths of the large mammal species became extinct during the Ice Age that followed.
It took years for researchers to piece together this puzzle.
Crypto is cloaked in mystery, as well, but I believe market historians will at least agree that the Crypto Ice Age began in January 2018, but silently… amid tremendous optimism and self-satisfaction.
After all, the largest financial bubble in history, percentage-wise 45 times larger than its Dot Com predecessor and with 42 times more investor participation, had just been successfully engineered.
Of course, doubts began to surface early in 2018 around Tether’s role.
“It could mean that a lot of the rally over December and January might not have been real.” Joey Krug, Pantera Capital
But the Crypto pump was a massive and carefully orchestrated project with many other powerful players.
Today, most Crypto stakeholders recognize the bear market and the various reasons for persistent selling pressure, but 77% are nevertheless optimistic about a perky recovery in 2019 or even sooner.
That’s a problem.
I traded equities professionally for a large financial newsletter through two bull-bear cycles. I used investor sentiment for market timing, but in reverse. A high level of optimism is extremely bearish in a downtrend.
Others have pointed out this sentiment paradox as it applies to Crypto.
Unfortunately, it means we are still very early in the corrective process, which is why I expect a prolonged extinction event.
And although I believe that Bitcoin will eventually play an SOV role as Digital Gold, given the unprecedented pump, the bullish sentiment and certain technical considerations presented at the end of this article, Bitcoin is likely to bottom around $200 and no sooner than 2020.
That 99% correction in the flagship Crypto will discourage most HODLERS, but I expect ‘smart money’ will consider it a low risk entry and start a new bull cycle. I discuss that at the end of this article.
A Short History of Herding
Crypto maximalists reject the idea that this is a deflating Bubble because they love the good things about Blockchain tech, idealize its future and are reluctant to contemplate the busts that naturally follow from euphoric excess.
Plus, nobody likes to admit they were fooled.
But bubbles and busts are endemic to financial markets. The technical term in Behavioral Finance is Herding. Herding is a feedback phenomenon that occurs when specific market conditions converge.
Novelty: The concept/product/project is unique.
Hyperbole: Promoters get involved so it’s not just New… it’s Revolutionary! Disruptive!
Mystery: The technology is difficult for laymen to understand. Details are sketchy, but sound intriguing.
Authority: Credible Influencers/Experts enthusiastically endorse it.
A Small Window of Opportunity promotes FOMO and motivates action.
Additionally, a preponderance of retail interest and the asset being difficult to sell short enhance the Herding effect.
In the 1990’s almost 300 tech and Internet-related stocks met these criteria and this chart shows the stampede.
This Matterhorn-like chart pattern (almost vertical on an arithmetic scale) is the signature of bubble phenomena. Some Internet darlings ran 10X in the final two years creating the hyper-exponential exhaustion spike.
The Dot Com pump attracted approximately 6 million online investors, with participation from 70+ registered U.S.-based hedge funds, which is why its market cap reached $5 trillion.
I know it from memory because I went all in. It was my first market rodeo.
The crash was triggered by insider selling once the post-IPO lockups expired, which generated herding in the opposite direction.
GOING VIRAL
The 10X Nasdaq bubble, which took 10 years to complete on dial up, was six times larger in terms of market cap than the Crypto bubble because it was a Wall Street-sanctioned and manufactured event managed by major brokerages and a half-dozen U.S.-based online exchanges.
Twenty years later, after 13 iterations of Moore’s Law, the investing landscape was massively global and interconnected. The average Internet user’s tech stack was now 8,000 times more powerful than during the Dot Com era and instantly accessible on two billion handsets.
No wonder the Crypto pump went viral.
Google Ads, social media and 1.5 billion people on secure messaging apps disseminated the Crypto investing virus worldwide in a matter of months.
Data from a Berlin-based research organization indicates that by March 2018 the number of cryptocurrency owners worldwide surged to more than 255 million.
The Dot Com bubble was a bona fide Wall Street product start to finish. The Crypto pump was anything but. More than 100 unregulated exchanges sprouted up to shill Crypto, mostly in Asia where gambling is rooted in the culture.
This chart shows the Alt Coin pump, which ran up three times faster and 45 times higher than the 10X Dot Com bubble.
Light the Match, Disavow the Fire
When it comes to Alt Coins, the key phrase is ‘unregulated.’
In unregulated markets cons and collusion, hype and hypocrisy are SOP. The most common con in finance is the Pump and Dump because it’s simple to execute and hard to prove.
P&D was a slam dunk strategy for Crypto. The opportunity was exceptionally attractive because at the end of 2016 Bitcoin and Ethereum were like Forex refugees without a country; Hansel and Gretel in the dark currency forest.
“If there’s fraud or manipulation in a market it can leave tracks in the data. The tracks in the data here are very consistent with a manipulation hypothesis.”
John Griffin Univ. of Texas
During the Pump phase, exchange operators carefully craft the illusion of demand so that actual demand is kindled, effectively disguising the trick.
Because Bitfinex was the largest exchange at the time, the Tether Team possibly played a leading role, but one that nobody will ever be able to prove or precisely quantify.
No regulation, no records. How convenient.
The Perfect Shill
By the way, the chart below suggests that the prime target for the Crypto pump wasn’t Bitcoin (the light blue line) or even Ethereum (purple line).
It was Ripple (XRP).
During the first six months of 2017, Bitcoin rallied just 3X, while Ethereum’s price shot up 48X due to demand from ICOs. But Ripple’s price soared 70X and that was just the prelude to the master-pump late in the year.
It makes perfect sense, though, because unlike any other pump candidate, by the end of 2016 Ripple had already raised $95 million in five VC rounds from respected firms, had developed an “alliance” with numerous banks and had billions of tokens on hand priced at less than $0.01. (No pesky miners to sell into the rip.)
It was the perfect coin to shill because the Cover Story was so darn good.
Crypto on the Couch
Shilling works because money is a psychoactive drug.
In a windfall situation, or even a near miss, recipients are gobsmacked by dopamine, our endogenous reward drug that keeps us at the casino longer than we should be.
An overdose of this addictive neuro-cocktail induces a semi-permanent state of edgy optimism; always looking for the next big thing. It’s called the Peak Effect.
As any recovering addict will confess, it’s bad if you don’t find the next high, but worse if you do. Like cocaine, regular jolts of dopamine generate feelings of invulnerability and entitlement that eventually backfire.
I have a friend who has all his savings tied up in Ripple and no intention of ever selling. And he means ever. When I told him that my target for Ripple is $0.01 I saw small daggers in his eyes.
Crypto has that effect on some people. Like the Stockholm Syndrome, you want to marry your captor, adopt the Manifesto of the cult and then defend it with your life.
Reality Check
Crypto has an inspiring cover story, a revolutionary tale of freedom and disruption, but in reality, the killer app for Crypto was, is and perhaps always will be speculation.
In 2017 Crypto was largely an entertainment app for young adults who liked to gamble and trade. How else do you explain the fact that qualified leadership, rational business models, functional products and an active user base were generally lacking in ICO projects, but no one cared?
By way of comparison, in 1996, the year before it went public, Amazon grew its revenue 2900% to $15 million and IPO’d at a market cap of just $50 million or 3.3X sales.
At the bottom of the bear market in 2002 when everyone was skeptical about Amazon, it had fallen 94% and was valued at $4.4 billion. But the company had $3 billion of trailing 12 month revenue.
Lacking revenue and a user base, even the very best Crypto projects will fall 99% from peak. Divide the peak price by 100 and that’s a working target price for the Ice Age survivors. (Ethereum’s technical target, however, is $3.60)
And for the rest, most if not all ICO money will either be clawed back by regulators or otherwise depleted before any viable business is ever created. In the ERC 20 space, the Ice Age has already begun. There’s a race to liquidate into fiat or a trusted stable coin like TrueUSD, whose market cap is soaring.
Crypto Meets Cryptonite
“Black Kryptonite… could split a Kryptonian into two separate entities: one good and the other evil.” Wikipedia
Bitcoin, the original Crypto Hero, has always fought against villains who want to co-opt it or destroy it. The Marvel comic mentality is endemic to Crypto culture, as evidenced by the splash screens of young YouTube gurus promoting their daily commentary.
CryptoLand is a video game that overlaps with real life. The players don’t see themselves as ordinary people; they are Heroes opposing the entrenched Forces of Evil who persecute, prosecute and punish the rebel Freedom Fighters. And they are more than willing to fight fire with fire.
Until recently, regulatory agencies in the U.S. have been relatively tolerant of Crypto projects because they lacked defined legal mandates and/or were short-handed. Justice Department enforcement actions are still focused on violations prior to 2017.
But that’s about to change.
As the dark cloud of disillusionment spreads, millions of disgruntled investors will look for ways to hold Crypto pumpers and dumpers accountable. That sentiment shift will give regulators and law makers a popular mandate to green light a more aggressive regulatory agenda.
According to Wall Street veteran and Wyoming blockchain promoter Caitlin Long, a Crypto Exodus has already begun in North America. Startups are fleeing the U.S. due to fears of running afoul of the SEC and the Treasury Department.
Once the U.S. turns fully to the ‘dark side,’ the ice sheet will grow thicker and thicker, choking off green shoots.
The End Game
There’s already a chill in the air.
Good news no longer moves the needle.
Crypto “assets” have morphed in liabilities.
HODLERS are feeling like bag holders.
Moreover, the oft-promised institutional cavalry is not coming to the rescue.
Institutions are looking for new ways to sell Crypto short (Bakkt is the latest) and prepare to embrace tokenized real-world assets, a derivative game for qualified investors that Wall Street understands all too well.
We have had two equity bear markets in the last 18 years, so most experienced traders are familiar with the capitulation process, which is both technical and psychological.
At $200, Bitcoin’s “SOV” story will seem ridiculous and Mr. Roubini will be gloating about “Digital Lead,” which will satisfy the psychological end-of-days requirement that people must believe Crypto is dead.
But I’ll be looking to buy that 99% dive.
The Crypto Apocalypse in one Simple Chart
99 is not a Fibonacci number.
Nor is it a normal equity bear market retracement target, like 76% or even 88%. It’s a number derived from a log chart of Bitcoin, which needs some explanation.
If you are a trader, relax, I’m not an Elliott Wave fanatic. But the theory is useful in broad strokes in unhedged markets because it mirrors key features of investor psychology.
This chart has a log scale because Crypto is an exponential and sometimes hyper-exponential creature. Log scales smooth out the drama and reveal true trend behavior.
Bitcoin fell 79% after the Mt. Gox crisis (2014–2015). Most market technicians would define that as a “bear market.”
In equities yes, but in Crypto No.
Wave analysis suggests that the 2015 low around $231 was a W4 low, which was a period of extended consolidation. Bitcoin then went on to make a new high.
Bull markets complete in “5 Waves” and we probably have that now in Bitcoin, although the break of the red trend line has not happened yet. If the December high was the end of W5, then this will be the first Bitcoin bear market ever.
In a sense it is “uncharted” territory, but not exactly.
According to EW theory, bear markets always take out the W4 low. That’s the technical reason I believe BTC will be trading at $200 or lower before the bear is over, because the W4 low was $231.
The numerous other factors discussed above support this prediction from a fundamental, psychological and forensic perspective.
If Crypto was the largest Pump (percentage wise) in financial history and the largest mania ever by a factor of 42X, it’s going to be the largest Dump as well, because the natural corrective process is symmetrical.
The Thaw
It’s 2020. Let’s look around.
Almost all unregulated exchanges have closed and a few former owners are in jail. Micro countries like Malta have become isolated Crypto havens.
There is active speculation in hundreds of security tokens at regulated exchanges.
Coin mining is almost entirely decentralized and operates like a public service utility accessing spare CPU capacity on smartphones. Crypto lovers volunteer to mine their favorite coin like fans of a sport team.
Bitcoin has survived without being hacked or hijacked and institutions are accumulating because supply is scarce.
Privacy coins securely and deniably hide money for the wealthy.
Legitimate stablecoins have supplanted Tether. They function as universal, cross border, gray market digital cash, which can be sent P2P, loaded into a Starbucks app or converted to fiat at an ATM for 0.1%, a fraction of what banks charge.
We now take it for granted that anyone, anywhere can send and receive stable USD-pegged money from their phone instantly, privately, without a bank account or a credit card, without asking permission or paying exorbitant fees.
This fulfills Satoshi’s original vision of a global digital cash system. Regulators have decided to tolerate it, just like they tolerate paper money.
Overall, the world is not much different than in 2018, except that the Internet of Value, which was supposed to change everything, is now functional.
But hardly anyone notices.
FD: I have no crypto positions. I plan to buy Bitcoin around $200.
