Regardless of whether you are a crypto-enthusiast or a “nocoiner,” you can’t deny that the crypto market is in a protracted tailspin. Cryptocurrencies all across the board are steadily heading down after reaching a historic high of around $20,000 in December 2017.
To trace the processes that led to such a long-term fall, let’s first move to June 2017. Bitcoin is worth about $2,600 at the time, and the market is waiting for new growth triggers. At this time an analyst of Forbes, Panos Mourdoukoutas, said in his article that bitcoin has not yet passed the transition phase from the “pioneers” and “early adopters” to the “early majority.” Here’s how he characterized the process:
“That’s when the demand for Bitcoin reaches a cascade and turns into mania as a critical mass of investors rush to buy’ hot ‘ Bitcoins for the promise they hold, not for the fundamentals they display.“
This is exactly what happened in the last quarter of 2017. It was a time when a huge number of ordinary people heard about Bitcoin and other cryptocurrencies from the media. They also heard about the super-profits that cryptocurrency brings to their owners: at that time bitcoin could easily rise by $1,000 in a few hours (for example, look at the BTC chart on the 13th of November here).
We would like to thank the team at XchangeRate for their contributions to the design and implementation of the research and to the analysis of the result.
The expectation of fantastic profits has generated an explosive demand for cryptocurrency. To understand this better, it is enough to merely look at the information provided by the search engines. Here you can see the correlation of the Bitcoin price with the corresponding search requests on Google:
A person familiar with cryptocurrencies is unlikely to Google “What is Bitcoin?” right? Such bursts of interest tells us precisely about the huge influx of “recruits” in the crypto world.
However, this correlation does not imply causation. To make sure that the mass interest of small investors really caused the explosive growth of cryptocurrencies at the end of 2017, we will refer to the data on BTC’s blockchain.
This is how the number of transactions per day was changing over time from Sept. 2017 to Jun. 2018:
This graph oscillates periodically, however, the growth of the number of transactions in Bitcoin’s blockchain during its rally in Q4 2017 is obvious. On its peak, in December 2017, the number of transactions was four times higher than it is now! This resulted in a dramatic increase of BTC’s mempool and, consequently, extremely high transaction fees (up to $55 per transaction). But what was the size of these transactions?
This graph shows the change in the size of the transaction in the BTC blockchain over time. What do you notice? Right, nothing. Occasional bursts of transaction size does not relate to overall market growth; there is no correlation with BTC price at all. During the period of the greatest excitement around BTC, the amount of funds transferred in one transaction remained low.
What can be deduced from this? The crypto market had a huge number of small investors inspired by the super profits that Bitcoin promised them. They were most likely all beginners who were unfamiliar with the technological side of the asset in which they invested in.
This theory is indirectly confirmed by the data from the exchanges: Binance and other exchanges suspended the registration of new users in connection with the uncontrolled influx of new crypto investors. This was done while Coinbase announced the registration of 100,000 people for three days (same as for the whole June).
Thus, it was exactly what Mourdoukoutas had warned about: a lot of people who had no idea about the technological side of the product and wanted only one thing – quick and easy profits – entered the cryptomarket.
It’s worthwhile to note that in December, contradictory to the euphoria of investors, Vitalik Buterin wrote his famous post that criticized the community for greed and neglecting the technology for the sake of personal enrichment.
There is no need to say that the current correction is not the first in the history of Bitcoin. But it was the first correction based on the massive disillusionment of unskilled investors. Let’s take a look again at the relationship between the BTC price and Google request trends, but this time on a larger time scale:
It can be easily seen how quickly the decline in the price of BTC caused a drop in the interest of investors. In turn, the decline in interest led to the decrease in trading volume and market capitalization (from an all-time-high of approximately $800 billion to $250 billion at the time of writing this article).
It was the disappointment of hasty investors, many of whom managed to jump right into the crypto train at the end of 2017, that became the main reason for the correction, which we have seen for more than half a year now.
We’ve created an infographic to better explain this idea to you:
Bad market gives good opportunities
So, the cryptocurrency market is in a protracted decline since January 2018. You can easily understand the despair of people who bought Bitcoin at the peak and saw it gradually fall by almost 400%. Fortunately, investor opportunities today are not limited to a simple “buy and hold” strategy.
So, what tools does an investor have in such an unpleasant bear market?
1. You can make profit from shorting crypto, as well as from betting for growth. Most traders start by learning margin trading on BitMEX exchange. However, for people with capital starting from 5 BTC, future contracts for CME and CBOE are suitable, too.
You should keep in mind that shorting BTC and other cryptocurrencies may be a good idea on a bear market, but it will turn to a complete failure when the global trend changes. Shorting is not just about “when crypto will go to zero, that’s unavoidable”. It means, for example, that “BTC price will fall by $200 in 3 days, and here are the reasons why”. So you should be quite confident that your trading ideas worth risk.
2. Analyze new projects and participate in ICOs. This area is a lot like looking for a diamond in the rough: top projects appear rarely and are difficult to invest in, while scams and non-professional crypto startups are everywhere.
Some say that investing in ICOs is no longer profitable in 2018 due to the market crash. However, such projects like QuarkChain contradict this point of view. Having 10x profit is still possible, as it happened with QKC after its Binance listing, but it becomes more and more difficult for simple investors to participate in top ICOs (remember Fantom’s lottery, for example)
Nevertheless, it’s common knowledge that the majority of ICO’s are a failure in the long term. Please be extremely cautious when pursuing this course of action.
3. Use trading robots. Allowing the computer to make decisions instead of a human may remove the psychological factor in trading, which is extremely distracting sometimes. In the end, profitable trading is obtained from the mathematical difference between successful and unsuccessful trades, and a robot is the best-suited solution for non-emotional trading strategies. Projects such as XchangeRate aim to provide a trader with different tools for algorithmic trading, such as an arbitrage between different exchanges, etc. One may use a robot looking for pumps, the other may try managing with high-frequency algorithmic trading – the possibilities of robots are nearly endless.
As soon as it became clear that Bitcoin will no longer make 20, 30, or even 50% profits per day, the flow of “fast money-thinking” people dried up, and all of the investors who bought BTC near the all-time-high point became holders against their will. Some of them got rid of their crypto assets regardless of the huge losses, however, both of these categories didn’t affect the demand on crypto exchanges, which remained low due to market depression. The majority of Q4 2017 investors were not blockchain enthusiasts, and as Forbes contributor Peter Chir said, “While prices are going down, skeptics will be unlikely to add positions.” Thus, Bitcoin gradually returned to the price where it, again, became interesting to a wide range of investors.
The crypto market is most likely waiting for a new wave of organic growth, based primarily on the desire to invest in technology and not on the thirst for rapid, speculative profits.