The Crypto Bear Market Manifesto
Since peaking at $819 billion market cap of cryptoassets on January 4th, the crypto market has shed nearly $506 billion to its current market cap of $313 billion.
In my opinion there are four major factors behind the recent tumble:
- Mt. Gox Trustee Liquidation
- Undefined Regulatory Landscape
- Tax Liability Sell-Off
- Shock to US Equity Markets
Mt. Gox Trustee Liquidation
The once goliath of crypto exchanges, Mt. Gox went bankrupt in 2014 amid claims of insolvency. Mt. Gox nearly brought the crypto market to its knees back then and is continuing to have a profound impact on the crypto market today.
Part of the bankruptcy process has involved liquidating the cryptoassets held by Mt. Gox. A published report on March 7, 2018 from the bankruptcy trustee outlines that the entity has liquidated nearly $400 million worth of Bitcoin over the previous six week period. Unfortunately this is just the tip of the iceberg, with the trustee still sitting on ~166,000 Bitcoin worth approximately $1.3 billion.
Like any market for a scarce resource, the Bitcoin market value is governed by the principles of supply and demand. During the mania periods of November and December, the price for cryptoassets was able to skyrocket due to: 1) overwhelming demand (new money), and 2) Lack of supply (investors prefer to hold than sell). When an influx of new supply (like the $400 million of Mt. Gox Bitcoin) hits the order books, it effectively halts any positive momentum to the upside.
Like any of the other factors listed below, the current bear market cannot be attributed to any single factor. However, I believe the ongoing liquidation of the Mt. Gox warchest has had an outsized effect on the markets.
Undefined Regulatory Landscape
Investors hate uncertainty. The regulatory landscape surrounding ICO & token sales is an absolute mess right now…“uncertainty” would be putting it nicely.
Over the past three plus years, thousands of such public token sales have been marketed, most of which have violated one or more existing securities law frameworks. For example, a significant number of projects claimed “utility token” status when in fact the token is absolutely a security. Many of these projects will need to face the music for their actions.
For the time being, the rules appear to be uncertain. However, I have noticed a drastic shift in the sophistication and legitimacy of token sales over the past few months.
I view the regulatory concerns as more of a secondary concern for cryptoasset investors. Still headlines like “SEC Sending Supooenas in Expanded ICO Crackdown” tend to dominate the media headlines and muddy the outsider view of the ecosystem.
Tax Liability Selling
April 15th, also known in the United States as Tax Day.
A sizeable number of investors realized significant capital gains during 2017, either by selling their cryptoassets directly for fiat currencies or swapping for a newly minted ICO. These gains were realized during 2017 but are not payable until tax day. Unsurprisingly, most people will wait until the last possible moment to cash in, meaning a majority of the action came in the past couple of weeks.
Let’s also consider the effect of the market collapse. The amount of cryptoassets that need to be sold to cover cash tax liabilities becomes exponential. An investor who has a $15k tax bill, now needs to sell 2 BTC to cover this bill, rather than 1 BTC when the market peaked. Yet, another factor adding to the supply side of the equation.
Shock to the US Equity Markets
Here in America we are 10 years into the biggest bull market in history. In line with this bull market, the US has been creating massive amounts of new capital (creating new dollars), a practice known as Quantitative Easing (“QE”).
The creation of new capital that happens in an aggressive QE environment has a direct impact on asset values. You’ll notice below, as new capital was introduced into the system it embedded directly into the equity markets.
Earlier this year there was a huge spike in volatility (see chart below) and the US equity markets have been on shaky ground since. I think there are real fears around being in the latter stages of a QE cycle.
So what does all of that have to do with the crypto markets? In my mind there is a distinct carryover effect. When the US market gets shocked like this, everyone takes notice and many investors begin to reign in their riskiest assets. As an emerging technology, cryptoassets clearly fall into the “high-risk” bucket of every investors’ portfolio.
The magnificent rise of the cryptoasset class in 2017 has experienced an equally mind-boggling tumble over the past few months. The combination of: Mt. Gox Trustee sell-off, tax-related selling, uncertain regulation and the recent US equity market turbulence have all played a part in the recent cryptoasset crash.