The bloom is off the rose for wilting cryptocurrencies

The bloom is off the rose for wilting cryptocurrencies
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In recent weeks, cryptocurrency prices have plummeted with no bottom in sight. No one should be surprised, nor should they have any expectation that crypto prices will ever recover.

Not only is the bloom off the rose, its pedals have long since disappeared into the ether. Oblivion is not far away.

The most valuable cryptocurrencies, in terms of the market value of their outstanding coins, hit their peak prices early this year, and then began their painful downhill tumble. 

As of 7 AM Tuesday, the most valuable crypto, bitcoin, was down 82 percent from its peak price of $20,089 on Dec. 17, 2017, according to data from www.coinmarketcap.com.

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After trading in the $6,000 price range since early August of this year, on Nov. 15, bitcoin punched through that level and has been dropping steadily since then, to $3,701 at 7 AM Tuesday.

Ripple’s XRP, the second-most-valuable crypto, is down 91 percent from the peak price it hit on Jan. 4, while ether, the third-most valuable crypto, is down 93 percent from the peak price it reached on Jan. 13. And so it goes across the board.

The price drops in recent days have been accompanied by sharp increases in daily trading volume — double and even triple the volume of even a few weeks ago — another sign of panic selling.

As of Tuesday morning, these three cryptos dominate the cryptocurrency marketplace, accounting for 74 percent of the estimated market value of all cryptos.

No one should be surprised by these price plunges, yet many are, as they hope and pray that the crypto pricing madness of a year ago will return. That’s pure wishful thinking.

Several factors supposedly are driving down crypto prices. The first, and most likely, is that more and more owners of cryptos are panicking and selling some or all of their cryptos before their price drops further, while prospective crypto speculators have become unnerved by the continuing slide in crypto prices.

Those who purchased cryptocurrency before the huge price run-up at the end of last year are still in positive territory, although they do not hold as much of a gain as if they sold their position even a month or two ago.

For example, bitcoin’s price Tuesday morning is back to where it was in early August of last year. Anyone currently holding bitcoin purchased within the last 15 months is sitting on a paper loss, a loss that will grow as bitcoin prices continue to drop.

The same phenomenon holds true for XRP. Its price is back to where it was on Dec. 12, 2017, while the price Tuesday morning of ether, the third-most-valuable crypto, was back to where it was in mid-May 2017.

From a global perspective, the loss in the aggregate market value of all cryptocurrencies is even more dramatic — from a peak of $835 billion on Jan. 7 to $121 billion as of 7 AM , Eastern Time, Tuesday morning — a loss of over $700 billion, or 85 percent!

Recent trends suggest that the crypto price decline is accelerating. In just the last 116 days, bitcoin’s price has dropped by half, while ether’s price has halved over just the last 14 days. XRP is not falling as fast, but it is still sinking.

Given the enormous unrealized losses most cryptocurrency speculators are facing, another factor supposedly driving down prices is tax-driven selling — locking in a loss for tax purposes by selling before the end of the calendar year.  However, many cryptocurrency speculators live outside the United States and thus do not have that motivation to sell.

The recent drop in stock prices, rising interest rates and weak oil prices are other rationales offered to explain declining crypto prices, in the belief that cryptocurrencies are just another asset class with price movements that reflect economic fundamentals. 

That rationale, though, is nonsense since cryptocurrencies, with the possible exception of some cryptos sold in initial coin offerings, have no intrinsic value; there is nothing of substance that gives most cryptocurrencies, including those with the highest market value, any real value whatsoever. There is no “there” there!

Finally, it has become increasingly evident that cryptocurrencies have no inherent value, for they have flopped as an efficient way to make payments, except for illicit purposes, while their price volatility — mostly down — had undermined any assertion that they are a reliable store of value.

The interesting question is what happens next; where will crypto prices be three or six months from now? Given their complete lack of substance, there is no reason why crypto prices will not continue to decline as speculators sell their cryptos and look elsewhere to make a quick buck.

As crypto prices continue their downward slide, more and more cryptocurrency “miners” — who steadily increase the supply of bitcoin and other cryptocurrencies by performing seemingly endless computer calculations — no longer will find it profitable to do so.

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Nvidia, a major supplier of the chips used by cryptocurrency miners, reported earlier this month that “demand for these chips has evaporated as a sell-off in digital currencies like bitcoin, Ether, and XRP prompted a drop-off in cryptocurrency mining activities.”

An interesting question is what will happen to cryptocurrency prices as more and more miners close up shop. The resulting slower growth in the quantity of cryptocurrencies is unlikely to put a floor under crypto prices.

The crypto world is moving into uncharted waters filled with rocks, shoals and sharks that will end up sinking all cryptocurrencies except those that can demonstrate genuine economic value. Which of those cryptocurrencies will be profitable is anyone’s guess. Perhaps there will be none.

Bert Ely is the principal of Ely & Company, Inc., where he monitors conditions in the banking industry, monetary policy, the payments system, and the growing federalization of credit risk. Prior articles by Ely on banking issues and cryptocurrencies can be found here. Follow Ely on Twitter: @BertEly