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Fintelegrams hypotheses for the status of the crypto market in August 2018:

  • The ICO-hype triggered the price spike in 2017;
  • The hype is over, market consolidates and builds substance;
  • Grey FIAT exodus via OTC provided sufficient liquidity for months, but no longer;
  • Exchange-traded index funds (ETFs) could advance the crypto-market;

After the end of the ICO-hype, the crypto-market is consolidating. The ICO hype has ignited the adoption of crypto and forced regulators across all jurisdictions to act. Regulatory measures combined with new and urgently needed regulated financial instruments now could foster the market and prepare it for new growth. However, the time of “crypto is completely different” is definitely over. Instead, crypto is about to be integrated into established (but to be advanced) regulatory frameworks.

Structure and dynamics of the crypto market

BTC trading volume with ICO spike
BTC trading volume with ICO spike (Source: Blockchain.info)

Today, on August 12, 2018, BTC oscillates around USD 6,300, which means that the leading crypto is still up by more than 70% year-on-year. In between, a brief explosion to almost USD 20,000 took place in the second half of 2017. This outbreak could be qualified as an irrational exuberance triggered primarily by euphoria, inflationary demand and speculation around the global (unregulated) ICO hype.

The ICO-hype is gone which is partly due to many regulatory and executive measures taken by supervisory authorities and enforcement agencies. Consequently, BTC and the other cryptocurrencies have been going downhill, the air escapes from the bubble. The hype has done its important job and created the socio-economic fuel to pass the point-of-no-return and lay ground for the further development of the crypto market.

The crypto market is not only bitcoin (BTC) and ether (ETH), but by now consists of a multitude of different coins and tokens. A basic distinction is made between

  • coins with decentralized networks running their own blockchains and/or transactional infrastructure like BTC, Monero, ZCASH, Ether
  • tokens without osn blockchain and/or transactional infrastructure, generated by centrally governed organizations.

The intrinsic value of coins is typically higher compared to tokens. Native coins transacted on their own blockchains such as BTC, Ether (ETH), EOS, or Ripple (XRP) can be regarded as native assets of complete transaction systems. Cryptographic tokens, on the other hand, are a kind of cryptographic “derivative” piggybacking on blockchains such as Ethereum as a techno-organizational runtime environment. Most of the tokens have been issued via Initial Coin Offerings (ICO) during the last two years. Accordingly, their share in the total crypto-market capitalization increased relative to the coins. This has changed significantly with the crash in the crypto-prices.

Vanishing of the Tokens

At the peak of the ICO-hype, BTC lost ground to tokens and other coins and accounted for only around one-third of market capitalization. In the aftermaths of the ICO-hype, most tokens issued in ICOs correct significantly stronger and hence lose relatively more value than leading coins like BTC or ETH. Apart from the many “dead tokens” and “shit tokens“, even tokens with promising projects backing them have also lost more in market capitalization relative to BTC.

With declining crypto-prices BTC regained significant market share: with a market capitalization of around USD 109B,  BTC accounts for almost 50% of the total crypto-market capitalization of USD 216B (as of August 12, 2018). The Top 10 coins alone account for USD 182.4B or 84.4% of the total crypto-market cap, i.e. 1.2% of the coins provide 84.4% of the market value. It’s a big boys game again.

Currently, tokens have a remaining market capitalization of only USD 15.4 billion or 7.1% as of August 12, 2018 (and are still inflated though!)

[table id=21 /]

According to data available on CoinMarketCap the 989 listed tokens are marginalized and can be regarded as the “penny stocks” of the crypto-scene. Some of the strong tokens will prevail on (regulated) crypto exchanges of the future and will remain listed, some will probably have to be traded in the grey market but the majority will simply disappear. That said, it should be noted that a lot of tokens issued in ICO’s are not listed on CoinMarketCap. Hence, the token graveyard is much larger as the table above suggests.

Within the tokens, the Top 100 represent approximately USD 12 billion or 77% of total token capitalization. It has to be noted that the US-Dollar-backed so-called stable coin (token) Tether alone accounts for USD 2.4B or 1.1% of the total crypto-market cap which further dwarfs the remaining tokens down to a mere 6%. For some 200 tokens, no market capitalization is given at all. Like penny stocks, the worthless or low-capitalized tokens are the subject of market manipulation and speculation. The Wall Street Journal just recently published a comprehensive report on the “Pump and Dump Schemes” around those marginalized tokens (read here on FinTelegram).

FIAT exodus via OTC

Crypto-OTC market segments
Crypto-OTC market segments

Stimulated by the ICO-hype, massive “black” and “grey” FIAT funds, in particular, were transferred into the crypto market in over-the-counter (OTC) tradings. Against the background of the 5th EU-AML Directive (5AMLD), which became effective  in July 2018, the exodus of FIAT towards crypto has been fired up. 5AMLD widens the EU’s regulatory perimeter and expressly brings providers of exchange services between virtual currencies and FIAT currencies (i.e. crypto-exchanges) as well as wallet providers into scope. Lawmakers and regulators have recognized that crypto’s and ICO’s are used for money laundering purposes and terror financing activities and combat them with 5AMLD.

These billion-dollar OTC movements have gone largely unnoticed by the public, but have led to the development of a corresponding infrastructure of OTC traders, specialized lawyers, and private banks.

The flagships of the OTC market are the major US traders such as itBit, Circle Trade, Genesis Trading, which, due to their proximity to the traditional financial system of Wall Street, carefully observe regulatory regulations and conduct their operations in compliance with existing legal frameworks. Crypto-whales and institutional investors trade through these OTC traders (articles worth reading here on Blockonomi and here on Bitcoin.com). According to a Reuters report, these large OTC traders move several billion dollars in trading volume every month.

Below these large OTC traders, there is a huge grey market with many smaller OTC traders, with Dubai and Zurich playing an important role as centers. These “grey” OTC traders operate largely without observing regulatory requirements and according to their own (local) standards. Existing investment consulting and real-estate brokers, in particular, have tried their hand at OTC, but also large sports marketing organizations. In the OTC retail sector, organizations such as Local Bitcoins, operators of crypto-ATMs and numerous Bitcoin clubs or Meet-Ups have been around for years.

The OTC conditions of traders vary accordingly and business transactions are subject to significant legal, financial and sometimes physical risks. In OTC, demand from FIAT traditionally focuses on BTC. In some cases, up to 50% of the stock exchange price for BTC are paid, especially if these were cash transactions. There are no statistics for this grey market, but we can assume that well over USD 20 billion was moved in 2018. On the seller side, there were also Bitcoin whales, diversifying their portfolio towards FIAT and off-blockchain assets.

In view of further falling prices, the OTC segment has also cooled off recently. Many of the new BTC owners are deeply in the red and are hoping for higher prices – and thus for the approval of the ETF’s by the SEC.

SEC, Desperately needed Bitcoin ETF’s, and Liquidity

At present, there is a lack of liquidity in the crypto-market due to the absence of large buyers. The exchange rate of the cryptocurrencies is moving south with declining trading activity as you can follow on Bitcoinity.org.

6-months BTC Trading statistics
6-months BTC trading statistics (Source: Bitcoinity.org)

However, these statistics only include the trading volumes on the included crypto-exchanges, but not the OTC volumes.

The last major drop below USD 7,000 was a result of the US SEC decision published on August 7, 2018. It was announced that the decision on the admission of the Bitcoin ETF requested by the US Cboe BZX Exchange would not take place until September 30, 2018. Actually, the market has hoped for a positive decision instead. In addition, shortly before the SEC rejected the requested Bitcoin ETF of the Winklevoss brothers and the BTC price fell accordingly.

The crypto market is currently in urgent need of fresh liquidity. Not only to ensure that prices develop but also to ensure that crypto develops towards “mainstream” and gains acceptance in the financial industry.

The crypto-ETFs are desperately needed to channel institutional investors’ money into crypto. Most institutional investors are only allowed to invest in regulated securities, such as the shares of a listed ETF. So far, investors can only buy bitcoins and other cryptocurrencies with larger volumes through OTC traders and thus in unregulated and non-transparent markets. Due to this lack of transparency is prone to manipulations but the only possibility to buy larger volumes (an article worth reading is here on medium).

Regulation and Adoption

We assume with some certainty that the SEC will approve crypto ETFs in the coming weeks and months, thus enabling the entry of institutional US investors. Such approval of crypto ETFs would go beyond the actual case and sustainably develop the entire crypto market. The approval of crypto ETFs would also implicitly imply far-reaching regulation of the crypto market because the largest market participants are thus acting under regulatory supervision. These, in turn, have to make sure that their unregulated partners act compliantly, which will hopefully trigger corresponding regulatory domino effects.

Other financial market regulators could also follow the SEC and permit crypto-based financial instruments. This would ensure the future of Bitcoin & Co as a regulated asset class as well as investor acceptance. In this respect, the share price and market capitalization of Bitcoin should again move correspondingly northwards.

This assessment is not an investment recommendation, but only a cautious estimate of the possible future development of the crypto market. Comments here or on our social channels are welcome.

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