Ethereum Myths Debunked

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Ethereum is the world’s first and largest platform used by organizations all over the world to raise funds with Initial Coin Offerings (ICOs).

Here’s how it usually works: You’re running a start-up. You want to sell your tokens to the public. So you offer them in exchange for Ether, the native coin of the Ethereum platform. And unless you trade it off, you naturally accumulate lots of Ether in your wallet.

The numbers have been staggering: $5 billion raised in 2017 during the Bitcoin boom … and then another $15 billion raised so far in 2018, despite the Bitcoin crash.


This illustrates the tremendous potential of ICOs — eclipsing the global market for venture capital and, in the future, possibly emerging as a serious competitor with Initial Public Offerings (IPOs) of stocks.

Starting on May 6, however, the price of Ether turned down sharply. It has plunged from US$829 to US$289, down 65%. Against Bitcoin, it’s down 52% in the same period.

What happened? Is there something fundamentally wrong with Ethereum and the ICO marketplace? Or is this just another of the many crypto crashes that have come and gone in recent years?

As usual, market sages and naysayers favor the former. They try to find a boogeyman or create a bogus theory to explain the decline.

When Bitcoin crashed back in January, the popular conspiracy theory of the day was that the trustee who managed the failed Mt. Gox exchange was dumping in huge amounts.

Plus, a raft of other “experts” declared, for the umpteenth time, that “Bitcoin was dead.”

This time, they’ve come up a whole new theory to explain the “end of Ethereum.”

Supposedly, ICO teams have been dumping their Ether in large amounts, panic-selling all the way down. And this, in turn, seems intended to imply that ICOs — the primary use-case for Ethereum — are losing faith in the entire concept. (See, for example, Peter Saddington and Arthur Hayes, CEO of BitMEX.)

Is this true? As I’ll explain now, the answer is a flat “NO!”

Here’s proof that ICOs are not dumping Ether!

The single source of the latest anti-Ethereum theories is a single website, which tracks the movement of Ether out of ICO wallets.

Trouble is, they’re looking at the wrong numbers: Instead of using the aggregate totals, they’re looking exclusively at a select group of sellers and ignoring the rest.

They point to ICO projects like Cobinhood (COB), which has sold 24,000 Ether in the last 30 days. Or they highlight Atonomi (ATMI), which has sold 13,000. They then portray these kinds of stats as “evidence” that there’s a big Ethereum exodus underway.

But all it takes is a quick glance at the total picture to reach an entirely different conclusion:


In the chart above, the green line is the price of Ether in U.S. dollars.

The red vertical lines show the movement of Ether out of individual wallets.

And the area highlighted in blue shows the period when most of the selling presumably occurred — between April and June of this year.

Now, here’s the key: During that period, the price of Ethereum was down, up and down again. It ended the period at approximately the same level as it began — near the $600 level.

This means there’s no correlation whatsoever between the selling and the price of Ethereum. If anything, nearly all the “big selling” was offset by equally big buying.

Thus, the reality behind the Ethereum plunge is far less exotic than certain creative imaginations might suggest, namely that …

Liquidity has taken a cliff-dive.

When markets are liquid, prices tend to be more stable. This doesn’t stop them from rising or falling. But it does usually prevent extreme price explosions and crashes.

When markets are illiquid, however, price movements are often greatly exaggerated.

That’s the perennial story so far with cryptocurrencies, even among the more actively traded coins like Bitcoin and Ethereum.

And that’s what largely explains the price crashes we’ve seen most recently in altcoins, including Ethereum. No surprise here! It happens all the time.

Another Big Disconnect

The “ICO dumping” theory also fails to explain why most other altcoins are also seeing their price collapse in tandem with Ethereum.

Could it be argued that ICOs are also dumping Cardano, EOS, NEO, XRP or NEM too? Hardly! Most ICO teams don’t even hold those coins to begin with.

To put some meat behind this point, I ran some correlation stats comparing Ether price movements to those of other altcoins. For the two-month period corresponding to the latest round of price drops, here’s what I found:

EOS, XRP and NEM had a 96% price correlation with Ethereum. NEO’s was 93%. And Cardano’s price movements, despite a bump due to speculation about it getting added to Coinbase, were still 83% in sync with Ethereum’s.

Thus …

Statistically speaking, there’s no significant difference between the price behavior of Ethereum and other altcoins!

So how do you explain the price decline?

It’s not by concocting fairytales. Rather, the primary reason for the fall in the altcoins is, again, far simpler: the lack of liquidity combined with a negative overall sentiment toward crypto markets.

And this negativity is nothing more, nothing less than the mirror image of last year’s irrational exuberance.

Markets move in cycles, and illiquidity creates a neverending merry-go-round of fear and hope.

Too much optimism leads to excessive pessimism. Excessive pessimism, in turn, is typically the precursor of new bull markets.

The solution:

More liquidity = more stability

To bring this point home, I have compared two metrics:

Metric #1. Liquidity relative to Bitcoin (left axis in chart below)

Metric #2. Price stability (bottom axis)


Bitcoin, in the upper left of the chart, is the most-liquid and also the most-stable. That’s not a coincidence.

NEO, in the lower left, is among the least-liquid and the least-stable. That’s also not a coincidence.

And Ethereum is in between, proving my thesis: Ethereum’s decline has nothing to do with ICOs. And it also doesn’t mean Ethereum is dying.

With markets continuing to be illiquid, all it does mean is that the next price rise is bound to be just as dramatic as the recent price decline.

Best,

Juan

Comments 8

Ray August 29, 2018

I thought all of the full time players in the crypto space were on top of their game. Evidently, not! Juan, your explanation is so well put together, I am surprised the rest of the guru’s couldn’t figure it out.

Mark August 29, 2018

You talked about the correlation between bitcoin and Ether plus the other alt coins. I have an account with Coinbase and when I look at the daily charts of the 5 coins they list I have noticed the charts move up and down almost in the same patterns. You could switch the names on the charts and almost have an accurate chart. It would be interesting to find out why the coins track each other most days of the month on the 24 hr charts from Coinbase.

Bob Schubring August 29, 2018

The principal reason why an ICO-funded startup would expend any capital it raised (whether as crypto, fiat, or bushels of wheat/bales of cotton), is that the startup needed to pay employees and acquire tools and other capital assets. So the analysts who see the post-ICO sales of Ether as evidence that Ether is permanently losing value, simply ignore the realities of why startups need to raise capital in the first place. The drop in liquidity creates a sort of self-fulfilling prophecy: If any startup, thanks to this drop in Ether liquidity, cannot complete it’s initial growth to profitability by spending the Ether it raised in an ICO to buy the capital assets it needs to begin operating profitably, that startup may be compelled to reach out to venture capital investors for additional funding. A smart move for any startup caught in this liquidity trap, would be to raise a venture capital funding round and hang on to the Ether, until Ether prices rise again.

I think the revelations last winter and again last month, that Tether promoters may have pumped the value of Bitcoin last year to raise the dollars that back Tether, probably contributed mightily to that loss of liquidity. Speculators whose dollars ended up backing Tether, while taking a 20:7 haircut on the Bitcoin they bought, are likely waiting for Bitcoin to recover significant value before spending any of it. Trading the devalued Bitcoin for even-lower-valued Ether would make complete sense, if one was buying into some Ether-denominated ICOs that stood a good chance of earning a profit.

I concur with Juan. The fact that Ether dropped in price and is now holding in a trading range, does not argue that Ether is catastrophically devaluing to zero. If it were doing that, it would not trade in a trading range but would continuously drop in value like a German Mark in 1919 or more recently a Zimbabwe Dollar or a Venezuelan Bolivar today.

Gerhard August 29, 2018

Can You ive us an udate on latest tax rules?If we trade bitcoin with another coin, do we need to report taxes on the bitcoin traded AND the new coin when sold?

E.R. Lake August 29, 2018

I learned a long time ago that God does control everything, ideas come and go, humans create
cycles. So as we created them we study cycles and we understand who we are and how predictable we have become.
But once in a while God likes to throw in a change up.
We can look at the past and try to figure out how to handle something new, currencies of course are not new, but these are different, you always had something you could more or less hold. And the average person could understand. I think this new currency is here to stay.
But until the average man can understand it, it is just going to continue what we have seen the pass year.

Andrew August 30, 2018

Juan; you are a legend. I have been struggling with this concept for months. Thanks for the clarification and insight.

Courtenay August 30, 2018

NEO is on the right (not left) side of the graph. Great article as usual. Cheers Juan!

William Henwood September 2, 2018

Information like this justified the cost of my membership