a cascade represents the effect of sequential fall of events decoupling from fundamentals

The rise and fall of cryptocurrencies: what comes next?

This week I wanted to write a technical piece about the RigoBlock protocol: why standards are important, what we aim to achieve by creating a protocol for asset management, i.e. creating a standard, a base framework which developers and platforms can use to create applications for asset management with flexibility and speed of execution.

Instead, I believe a veteran of financial and crypto markets can give a bigger contribution at this particular moment in history, by analyzing the current dynamics of the market. I never stop getting fascinated by the patterns repeating themselves and the impact of greed and fear on the markets.

Justifications for a market’s drop are easily found with the benefit of hindsight: you can already find dozens of articles telling you why Bitcoin or Ether or some other crypto dropped, blaming a non-approval of a Bitcoin ETF, regulatory uncertainties about tokens, this or that hack. Let me tell you, none of this really matters.
 
In fact, the justifications count very little and I want to focus on the bigger picture. Just as the economy is cyclical, cryptocurrency markets themselves are cyclical, too. Further to that, these markets are at a very early stage which results in much higher volatility. Furthermore, living mostly outside of existing regulation, there is no government support (the opposite, actually). Normally, with big drops in the traditional markets, trading gets halted: exchanges and banks might close for days.

In cryptos, we have 24/7 liquidity. One might argue whether that is a positive rather than a negative, as the market can be easily manipulated during hours of thin trading, and they are. Therefore, we could think that: manipulation drives short-term fluctuations; speculation and mass psychology drives medium-term fluctuations; fundamentals drive long-term fluctuations.

What we are testifying these days is prolonged massive selloffs, which are technically called “capitulation”, normally the last phase of a major market correction, identified by 4 core phases: 1) the first correction; 2) bull-trap spike and further correction with initial denial, then realization; 3) fear and panic selling; 4) capitulation, which is a phase where the market collapses beyond any rational expectation.

Let me tell you that it is very very difficult to time the market on turns. Also, you never know when a capitulation phase finishes and how low the price can go. Further to that, the spike from the low is typically very sharp and fast, so it’s really difficult to make any prediction regarding that.

One good news is that a few days ago I started reading posts about companies that recently raised Eth, panic selling their holdings. One example is a company that raised 30 million USD in January and was left with only 4 million USD a few days ago. This, among other similar events, is the part of panic selling. The following part is capitulation and is normally the most difficult to stomach. I believe we are not in this last phase.

What I can say is that, over the course of the last few months, I saw the quality of projects on blockchain decrease, with the quantity multiplying. I saw an explosion in the number of companies offering advisory services to projects, mostly unqualified or underqualified service providers. Further to that, the growth in the cryptocurrency sector attracted startups from the tech world seeking alternative finance.

In April, give the already more challenging market conditions, I did not expect new entrants to be attracted to cryptocurrency markets. By contrast, the number of projects exploded and the pace at which new ways of attracting capital were engineered accelerated towards an unsustainable path. Projects entirely based on hype were favored over projects focused on product.

Luckily for the health of the industry, the perception has shifted to the exact opposite, with projects mostly reliant on marketing being worth close to zero, and projects based on working products with evaluations of hundreds million USD to more than a billion USD.

Each cycle serves as a preparation for the next cycle. So if we put this bear market into the context of the bigger picture, we see how this is the last part of a cycle which started in around 2017, which is part of a bigger cycle which started in 2015.

Many more people are aware of cryptocurrencies now, which opens the doors to mainstream adoption, so I can only see a bright future for blockchain startups over the years to come. Actually, I am glad we had this type of correction, as it forms the base for a solid growth phase.

The sharp increase in volatility, instead, should act as a warning to the main public as to what is going to happen to traditional financial instruments when governments and central banks won’t be able to keep printing money without causing a major disruption into the financial system and massive inflation in the economy. Cryptocurrencies, in this context, are your only hedge against that. I mean guys, the biggest scam of all is quantitative easing, eventually, the fundamentals will prevail.