Cryptocurrency and tokens are like any market; when money flows in, the price goes up, when money flows out, the price goes down.
Right now the money flow is out of cryptocurrency and into fiat.
Ethereum is being particularly affected as all those initial coin offerings (ICOs) funded in Ethereum have to, and are right to, sell their crypto-funding and get it into fiat. Sadly, it’s hard to pay salaries in crypto and impossible to pay rent, etc. in anything but fiat.
ICO companies are not hedge funds. They must take their fiat and run. This is and will be a drag on Ethereum while crypto is in a bear market, it is a vicious circle that can only bottom when money flows back into the market sufficiently to balance the money flow out of crypto into fiat. It is anyone’s guess when and at what level this might be.
[Ed note: Investing in cryptocoins or tokens is highly speculative and the market is largely unregulated. Anyone considering it should be prepared to lose their entire investment.]
Minable cryptos have a similar but different problem. Miners make coins and increase the money supply. A coin without a purpose therefore suffers an increased money supply but no increase in currency use. Without a use case, a purpose for the coin, only savers of the coin can mop up the new supply. This, too is a vicious circle as new supplies dilute the value of the coin lowering the price and making the saving HODLers lose money and less keen to buy more.
Coins with an expanding use case mop up their new supply for the coin’s application. Their circulation increases and the result is the value is not diluted. New use cases for coins create demand and increase price. Sadly, most cryptocurrencies do not have an application so are doomed to fall when little money is flowing in from fiat to buy and bury the new money supply.
This is the state now. Crypto is being liquidated for fiat and prices are slumping because most coins have no application to boost circulation, while tokens need to be sold for fiat to pay for business development or promoters’ yachts so that a vicious circle of liquidation is in place driving prices down.
Meanwhile, bitcoin is holding up extremely well while most crypto is slumping.
Bitcoin’s resilience is very interesting and it underlines its brand strength and how key the bitcoin franchise is to the whole market.
A slump is always a great time to go searching for tomorrow’s giants.
The cryptos to look out for are those, however small, that are bucking the trend. These coins are likely to have uses beyond just being coins to hoard. A coin I’m involved with, Plus1coin, is a good example. It has a purpose, social validation of content, and an increasing userbase, so its value is rising while almost everything else without an application is cratering. Dogecoin, which I have written about a few times, is getting an exciting new cross blockchain functionality, so it is rocketing because it is adding functional value to its blockchain and thereby its coinbase.
Value is all about utility. The more utility a coin has, the more circulation, the more coins needed to circulate, the higher the value of that blockchain’s currency.
If a coin can rise against a heavily falling market tide that is a candidate for investment when the worst is over.
Yet what about bitcoin? Can it keep above $6,000? To me it is remarkable that it has and I await a final capitulation to offer me my buying entry point. Yet it hasn’t happened. While the other coins and tokens have been cratering, bitcoin has held relatively steady. It’s remarkable.
While altcoin mining rewards are yet more pitiful than when I pointed out that coin values were bound to follow the crash in mining rewards, the bitcoin price remains firm. Until bitcoin capitulates I do not think this crypto bear will be over. Meanwhile, the altcoins will continue to be driven lower as the crypto to fiat liquidations continue.
When we read the ‘bitcoin is dead’ headline it will be time to buy, but that doesn’t seem near.
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Disclosure: I own bitcoin and several altcoins, including plus1coin.
Clem Chambers is the CEO of private investors Web site ADVFN.com and author of Be Rich, The Game in Wall Street and Trading Cryptocurrencies: A Beginner’s Guide.