While headline numbers look devastating this week, investors might take some solace in knowing that cryptocurrencies found their bottom at roughly $189.8 billion in market cap—that was the low point. Since then, investors put more than $20.0 billion back into the market.
During the rout, Ethereum broke below $300.00 and XRP fell below $0.30, marking yearly lows for both tokens. The same was true down the list of the top 100 biggest cryptos.
Altcoins took the brunt of the hit. BTC Dominance, which reveals how tightly investment is concentrated in Bitcoin, rose from 42.62% to 53.27% in just one month, showing that investors either fled altcoins at higher rates or some of them fled to Bitcoin for safety.
The situation has turned, however, and we have seen double-digit returns since cryptos reached that bottom. Judging by current momentum, it is possible for the rally to extend through the remainder of August.
Overstock Raises $134.0 Million in ICO
Initial coin offerings (ICOs) don’t make the front page like they did in Q1, but that doesn’t mean the market has dried up. Just look at tZero, the blockchain arm of Overstock.com Inc (NASDAQ:OSTK), which revealed that it raised $134.0 million from its token sale. (Source: “Overstock Blockchain Spin-Off Raises $134 Million – With Millions More Committed,” CoinDesk, August 9, 2018.)
The ICO took place earlier in the quarter, but we only just found out through Overstock.com’s quarterly results. It makes tZero one of the best-capitalized blockchain companies in the world, especially when you add in the $270.0-million equity investment from GSR Capital.
GSR will own roughly 18% of the company. Extrapolating from those data points, we can see that tZero’s total valuation would be approximately $1.5 billion. It is officially a unicorn—a startup company with a valuation of over $1.0 billion.
How do we reconcile this ICO with the general feeling of despair in the cryptocurrency market? I am not entirely sure. But on the whole, I will side with real-world deals over emotions. So try to ignore the pessimism and instead focus on the opportunities.
Vitalik Buterin Doesn’t Care About ETFs
It is important to remember what kickstarted the crypto crash: Bitcoin ETFs. The U.S. Securities and Exchange Commission (SEC) rejected a Bitcoin exchange-traded-fun (ETF) proposal and, by consequence, launched the industry into a death spiral. But one crypto guru believes that Bitcoin ETFs are not as important as everyone seems to think.
I’m talking, of course, about Vitalik Buterin.
Buterin is the wunderkind of crypto-land. He founded Ethereum before his 20th birthday and continues to provide guidance to developers across the platform. His word is gospel in the crypto community.
Now, Buterin is using his platform to remind investors that mass adoption is the end goal of cryptocurrency, not an exchange-traded fund. So while it would be nice to get those sophisticated financial products approved by regulators, the industry should not live or die by them.
“I think there’s too much emphasis on BTC/ETH/whatever ETFs, and not enough emphasis on making it easier for people to buy $5 to $100 in cryptocurrency via cards at corner stores,” he tweeted in late July. “The former is better for pumping price, but the latter is much better for actual adoption.”
I think there's too much emphasis on BTC/ETH/whatever ETFs, and not enough emphasis on making it easier for people to buy $5 to $100 in cryptocurrency via cards at corner stores. The former is better for pumping price, but the latter is much better for actual adoption.
— Vitalik Non-giver of Ether (@VitalikButerin) July 29, 2018
I agree, for the most part. Investors are being a little dramatic about the SEC rejection, particularly because there are nine more proposals for an ETF that will be reviewed over the next two months. The odds of success are very high.
Other Gurus Remain Bullish as Well
Even though I believe markets are overreacting to the Bitcoin ETF rejection, there’s no denying that an SEC approval would send cryptos through the roof.
That’s why it was nice to hear that Tyler Winklevoss, an early investor in Bitcoin (who presumably lost a lot of money in the recent crash), is still pushing forward with his proposal for Bitcoin ETFs. (Source: “Tyler Winklevoss: ‘It Will Take Time’ for Wall Street to Make Crypto Jump,” CCN, August 15, 2018.)
“Wall Street is taking cryptocurrencies seriously,” he said. “However, the vast majority of Wall Street firms are still not participating in the cryptocurrency market, which remains primarily a retail-driven market. This will change over time, but it will take time.”
Winklevoss has skin in the game. He and his twin brother have not bailed on the cryptocurrency market, despite having billions at stake. Perhaps that means regular investors should not either.
Cryptos Still Have a PR Problem
A recent study published by the National Bureau of Economic Research shows that cryptos do not behave like normal investments.
The factors involved are completely different, according to the paper’s authors, Yukun Liu and Aleh Tsyvinski of Yale University. (Source: “Risks and Returns of Cryptocurrency,” NBER, last accessed August 17, 2018.)
Traditional ways to value an asset—the capital asset pricing model (CAPM) or discounted cash flows (DCF)—simply do not apply. Investors are much more preoccupied by visibility and momentum, which incidentally means that cryptos are uncorrelated from most financial sectors.
In the short-run, this poses a problem.
For example, the research shows that fewer Bitcoin searches on Google led to a drop in Bitcoin prices. This suggests investors are trading cryptos based on their visibility rather than their fundamental strength. That is a PR problem. And it’s a failure on the part of the media—myself included—that should be educating the public on how these tokens work.
In the long run, however, this detachment from other financial markets is great. It’s known as “alpha.” And it’s what hedge funds were made for. So don’t be surprised if you see a lot more hedge funds dabbling in the cryptocurrency space.
At the time of writing, cryptocurrencies are on their third day of consecutive gains. That’s pretty remarkable considering the damage of the last few weeks.
We’re going to monitor these developments. Also, we’re going to look at momentum factors, such as trading volumes, that could give us a clue as to how long this rally will persist. Stay tuned.