Cryptocurrency Bear Market of 2018 Intensifies.

Bitcoin Wipeouts Have Been Frequent.

While Bitcoin (BTC), along with the entire Cryptocurrency Sector, has suffered massive declines this year, large drawdowns have occurred regularly (https://www.ccn.com/bitcoin-crash-the-history-of-bubble-bursts/).  At its current price of $4500, BTC has lost 82% from its peak last December.   

Other large capitalization Cryptocurrencies have suffered similar fates.  Ethereum (ETH) has lost 91%, Ripple (XRP) 87%, Bitcoin Cash (BCH) 93%, Litecoin (LTC) 91%, Monero (XMR) 87%, Digital Cash (DASH) 93%, and Miota (IOTA) 94%!

The frequency of recurrence of these collapses is surprising.  Cryptocurrencies have made little to no penetration in main stream commerce, after a decade of existence.  They have no assets nor cash flow to support value.  Their usefulness remains embarrassingly limited.

Crypto Fans Point to Ripple as the Future.

Ripple may be an exception.  It has once again surpassed Ethereum for the number 2 position in the industry.  There is some excitement that Ripple’s payment network will facilitate money transfers via Money Gram or Western Union.  “Ripple’s Triple Gives New Hope to Crypocurrency Investors (https://markonomics101.com/2018/09/24/ripples-triple-gives-new-hope-to-cryptocurrency-investors/).

But not everyone is a fan of Ripple.  Co-founder and CEO Taavet Hinrikus of TransferWise has severe reservations.  TransferWise conducts money transfers among more than 70 countries.  While interested in the technological possibilities created by the blockchain, Hinrikus sees no cost or operational advantage.

TransferWise processes cross-border transactions at high speed for as little as 1.5 percent commission.  They are already less expensive than conventional wire transfer protocol, SWIFT (https://www.ccn.com/transferwise-we-wont-use-blockchain-until-more-banks-use-ripple/).

33% of Market Value Erased in 7 Days.

The Slideshow below shows some of the financial carnage befalling the Cryptocurrency Sector.  This time Bitcoin (BTC) was a leader on the downside and unable to hold the $6,000 level.

A number of large capitalization Cryptocurrencies have lost 90% or more from peak to trough.  The questions are why such a large move and why now?

Have Cryptocurrencies Bottomed?

At a total market capitalization of $140 Billion, the Cryptocurrency sector has registered an 83% loss in just 11 months.  Nonetheless, the sector is still benefitting from the deployment of new investment capital.  If the sector was completely without value to someone, it is highly unlikely that IPO’s would be planned: (https://www.ccn.com/crypto-bank-silvergate-files-for-50-million-ipo/).

The key issue boils down to who benefits from a “home run” in Cryptocurrencies, if that should ever come to pass.  Even in a scenario where Cryptocurrencies are everywhere, they may not have any investment value.  Perhaps, if they could directly contribute to a higher standard of living, they could be seen as having “value”.  So far, they haven’t.

There is some good news for this sector.  The population of Cryptocurrencies, believed to be between 2,000 to 3,000, continues to grow.  The commitment shown by the continued stream of start-ups is a good endorsement.  On the other hand, almost all of these projects will soon fail.  The world does not need 3000 new currencies.

At this point, it would appear very unlikely the Sector has bottomed, especially in light of how many offerings are expected to fail in the next 12 months.  Keep in mind, that a handful may survive and EVENTUALLY reach even higher valuation levels.  Amazon fell from 50 to 8 during the “DotCom” bust.  That $8 stock recently sold for $2,000.

What Caused the Decline?

The Collapse in Cryptocurrencies was so swift and sudden that it caught analysts off guard and without a good explanation.  It was especially surprising in light of the dampening of volatility in the sector.  Mr. Market lulled all the participants to sleep with an extended period of quiet trading.  Then, before they could pay for their double latte, they were down 33%.

One explanation was the “Contentious Hard Fork” of Bitcoin Cash (BCH).  That sounds fishy even if you don’t have the foggiest idea of what it means.  Once you do, it’s really fishy.

The “Hard Fork” Theory.

To keep things simple, a “hard fork” is a type of software upgrade and a “spinoff”.  The software is altered to permit one entity to then operate as two.  Holders of BCH continue to own the same proportion of both, now separate entities, doing their own business.  When a “Hard Fork” occurs, no one loses a thing.  Bitcoin Cash is now in two pieces and holders own both.

Let’s say you bought 1 Bitcoin 5 years ago and have held it since.  You’d own Bitcoin, Bitcoin Cash, Bitcoin Cash’s spinoff, Bitcoin Gold, and Bitcoin Diamond.  The splits occur because of conflicts among various parties including “miners” and the blockchain.  “Miners” are processors of transactions which form the Blockchain.  The Blockchain is no more than a transaction ledger.

Five Bitcoins also make it hard to argue for a “one world currency”.

Today there are 5 different Bitcoins.  More forks can occur without limit.  A good and more detailed analysis of the Bitcoin Cash “Hard Fork” can be found here:(https://www.fxstreet.com/cryptocurrencies/news/bitcoin-complex-under-pressure-amid-bch-hard-fork-ripple-outperforms-201811220538).

Bitcoin has forked 4 times.  Ethereum has spawned Ethereum Classic.  NONE OF THESE WERE FINANCIALLY DESTRUCTIVE.  

The BCH Hard Fork had been known to the marketplace for weeks.  Bitcoin Cash’s value was no more than 4 percent of the market.  Does it make sense to ascribe a 33% collapse to such a small player?

The Shakeout in Crypto.

A more likely reason for the drop in Cryptocurrencies has to do with declining economics.  A top five miner, “Giga Watt”, just filed for Chapter 11 bankruptcy in Washington.  The firm had been in business since 2012 (https://www.zerohedge.com/news/2018-11-21/crypto-mining-firm-giga-watt-files-bankruptcy-faces-eviction-washington-county).

There is certainly going to be a violent shakeout in Cryptocurrencies.  Most (at least 95%) will become worthless.

That said, every disaster has its rainbow.  Once the dust settles, there may end up being an entity which could become the next Bitcoin.  We’ll look for the possibility.  On the other hand, this sector may go the way of the Dodo Bird.  Either way, it may be best to let others take the risk for now.

 

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