We will be writing a lot about the ICO phenomena and we plan to be soon participating ourselves.  But as a professional currency trader who has been actively involved in financial markets for a long time, we wanted to briefly talk about the current state of the ICO market, and what’s happening in the Ethereum (ETH) markets as we speak (July 11th, 2017).

ETH is getting the Sh*t kicked out of it!  Why is this happening?

To understand this, it’s important to understand a bit about the market.  ETH has gone what we like to say as traders, VERTICAL.  Now if this were a normal market, certain things would be different, but this isn’t a normal market – it’s unique and was formed around a unique set of people who originally owned it.  These people have ridden the currency from nearly zero a peak of about $380 producing a market cap in the 100s of billions, but most of that market cap was “air.”  We’d guess if we spent the time figuring out the block transactions we could have a good estimate of the actual financial base of money invested in ETH, but what is important is that it’s a lot lower number than the total market cap (possibly 10% of the total).  This means these true believers have massive capital gains – of this, there is no question.  So why don’t they sell?  Well, this goes to their true believer status – oh and they have been selling – just not for USD or EUR.    As a true believer, they won’t be selling because they think it’s going a lot and a lot higher (and I sort of agree if you can handle the volatility), but they have been “hedging” and this is ultimately causing a massive dislocation in the ETH and coin markets in general.

The ICO craze has gone nutty in 2017.  But the dynamics at play are the following.  We don’t want to spend a lot of time discussing ICOs here, but for now, it’s clear to anyone following these that there are a huge number of parasites entering the market – creating ICOs really to get cash from those true believers I mentioned above. The true believers are funding all this for now and that is important because they are exchanging their ETH, BTC for new derivatives currencies, betting these will explode higher. As true believers, they are usually willing to buy and hold for months not worrying about selling out. However, they have transferred their ETH and BTC to non-believers – those who either with good intentions or bad (mostly I believe) are taking their ETH and converting to real Fiat currency – we call these people “weak hands” as opposed to the “strong hands” owners that make up a true believer.  I have read that there were over $500M in ICO in the first half of the year through June, but I can count on my hand that a number of big ICOs in the last 45 days, so we are already past the $1B mark in 2017 in my opinion. Well, these people are non-believers and they need to sell their ETH (for Fiat, USD or EUR) to either develop their businesses or buy new Ferrari’s (I suspect a lot of these will be bought in the Ukraine and the FSU countries soon by 20 some things cashing in).

And that is exactly what they are doing!  Selling ETH for Fiat – and they are having a hard time finding fresh buyers so they are having to get aggressive in their selling and it’s becoming a feeding frenzy!

You can see this in some of the “lesser” cryptocurrencies which are less liquid – Ripple (which has been used in some ICOs) has been cut in half!

Now there is only one way to counter this activity and that is for new buyers to exchange Fiat (at the new higher prices) and invest in ETH, BTC and other crypto markets; and, there simply hasn’t been enough new (equally aggressive) demand to offset the rush to sell by the ICO funded players.  And it’s causing obvious problems…

As I will discuss later, the current system does not always create enough motivation for miners to promote purchases – the mathematics didn’t consider that miners would have costs beyond mining – that there would be a real need to drive prices higher by creating demand to push those prices higher (instead new mining is just assumed to stop until prices adjust – creating a sell adjustment mechanism); the problem is these are starting to become real stores of wealth, just like any current Fiat currency.  The current system was designed (sort of) assuming demand would increase naturally.  So without something pushing new demand in the crypto, there is little there to support prices when they fall hard suddenly.  The ripple model should in the short run support demand – Ripple founders have a windfall and they should be using a large portion of that windfall to support the currency and crypto in general – and they do advertise – but nowhere near enough – as it should be mainstream TV advertising for the kind of wealth they have created for themselves; it should be in their own self-interest to promote ALL crypto investment – unfortunately, that isn’t happening enough.

When will this stop?

It’s not going to stop until either new aggressive buyers come into the crypto market OR the non-believers stop “aggressively” selling at a rate greater than new demand – it’s economics 101.

As these markets have a lot of “air” in them due to the vertical run up there is an additional risk that we could see a real crash in prices if the ICO non-believers panic (the true believers won’t panic and to the extent, they can buy more they will try to support the market).  This said the rise and fall plus the ICO craze has driven attention to the sector like never before. On a recent trip to NYC, I heard the words Ethereum all over the place – the same goes for London. In my next post, we will talk about current and future demand that will likely continue to push prices higher once things stabilize.

Impact on ICOs

Yes, that’s the good news, this should begin to cool the ICO market, although I would expect that some derivative currencies may gain from this overall (and some have gone up during the same time that ETH and BTC have fallen) – in some respects some of the new ICO currencies have become temporary safe harbors for true believers.

It doesn’t matter, there is going to be continued demand for “quality” ICOs, but if prices drop much more, say below $150 ETH, we are going to see a temporary drop off in new successful big ICOs – I have already seen at least one large ICO delayed a month; although they gave “other” reasons, it’s obviously related to the falls in the crypto markets and their worry it will impact ICO sales (which it is doing).

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