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Cryptocurrency market decline or elimination of amateurs?

Jan 11, 2019 - 11:37 AM
Andrew Rozhkov, Senior Affiliate Manager of AMarkets

2018 turned out to be a very turbulent year for the cryptocurrency market, which caused tons of rumors. Throughout the year, a seemingly endless bearish trend prevailed in the industry. Crypto enthusiasts were eagerly waiting for the end of this stagnation period. Each bullish daily candle was perceived as a signal for reversal. However, the trend prevailed. There was little positive news, and the situation seemed to be threatening not only for Bitcoin but also for the entire crypto industry. ICO projects, hugely popular just a little while ago, were now of no interest to investors, it was considered bad manners even to mention such projects in the community. Fraudulent schemes flourished. BitConnect now looked like a Sunday-school picnic compared to such schemes. The income of smart contract developers dropped significantly... Bitcoin had a tough time in November when its price broke through a very important price level of $6100-6200. The price had been rebounding from this level for almost half a year.

This market profile chart indicates that it was at this level that daily trading mostly took place and the biggest volumes entered the market. After the price broke through this support level, there was a dramatic decrease in price in relation to the market volatility over the past couple of months. The interest of private investors in Bitcoin hit its lowest level, and despite the fact that the number of Google searches for “bitcoin” and “etherium” at that time was almost as high as it was in November-December of 2017, the bearish trend prevailed.

What is happening in the cryptocurrency industry in general? Let's try to understand the current situation and draw some long-term conclusions relating to your trading strategy. First of all, let's find out what seems to be the most popular thing among crypto traders and what has had such a tremendous impact on Bitcoin.

Stablecoins. Why should anyone care?

Stablecoins were designed as a tool to peg highly volatile cryptocurrency assets to stable fiat currency. This would make investing in cryptocurrencies a much easier and more accessible process for beginning investors and would also help the state to take the first steps towards neutral regulation. In essence, stablecoins function as follows: each token in circulation is supported by a fiat asset of corresponding value held on a special account. Initially, this idea was not taken seriously, since there was concern about the regulation and audit of such projects. However, these projects gained popularity in 2017. As a result, stablelcoins began to occupy a fairly large niche as a universal exchange tool, an alternative to the fiat dollar. The events that began about a year ago, in November 2017, can be considered the starting point. It was then that USDT token began to be actively traded on cryptocurrency exchanges. USDT (or Tether) was not the first stablecoin in the industry, but it was the first one to have a major impact on Bitcoin and its value. In November, Tether's capitalization was less than $700 million. Given the price and capitalization of Bitcoin at that time, Tether looked like an average altcoin back then. What seems to be of interest to us, however, is the growth of Tether’s capitalization and the concomitant change in the price of Bitcoin.

The blue line in the chart represents capitalization growth. To put it simply, the total number of coins in circulation (we are talking about stablecoins) and their value are often pegged to the price of a certain fiat currency. In the case of USDT, it is the US dollar. Indeed, the price of Tether mostly complied with this rule. The most interesting part of this scenario started exactly when the price of Bitcoin reached its historical maximum and began a gradual downward movement. At the same time started a regular increase in USDT capitalization. Since it is not a cryptocurrency asset in the ordinary meaning of the word and due to the fact that it is not obtained through mining, but by means of emission (essentially controlled by a small group of individuals), an issue arose as to whether Tether company had an equivalent amount of cash in the form of reliable US dollars to back USDT. Or maybe USDT is not secured at all?

We can see in this chart that Tether’s capitalization was gradually increasing throughout December. After the great collapse that began in January, the infusions reached several hundred million dollars at a time. More than half a billion USDT was issued on one of the last days of January! Just think about this figure! By the way, the Federal Reserve System (FRS), which controls the issue and turnover of US dollars in the global economy, usually issues no more than 450 million dollars a day.

Given the price of Bitcoin, it was a very memorable day for the crypto community. However, we must admit that it was a well-planned action. Rumors and scandals began to spread on the network. The community wanted to know who was behind that, who was the beneficiary, and why no one prevented such arbitrariness in a promising market? The perpetrators were found quite fast; a large number of facts on the network pointed to the fact that Tether company was affiliated with Bitfinex exchange – the leader in terms of turnover at the time. Bitfinex didn’t deny this fact either. At the same time, Bitfinex claimed that Tether’s balance sheets were absolutely okay and that the company was holding one US dollar per each USDT coin in some unknown bank. By the beginning of February, the number of USDT tokens in circulation reached two billion! Tether, however, refused to undergo an audit hiding behind some fake reports.

This puzzle looks quite simple, and we can draw the following conclusions:

- USDT was supposed to become a popular coin for conversion transactions. The preparation period continued for six months.

- A group of influential people in the industry issued more than a billion of unsecured "candy wrappers" in less than a month and used them to keep Bitcoin in the steep downward movement (which, in turn, began due to the launch of non-deliverable futures).

- And, finally, another half a billion coins were issued in one day to buy Bitcoin at a very attractive price.

Even though the above-mentioned scenario may sound like some kind of conspiracy theory, the facts suggest otherwise. Blockchain is becoming part of our life and, especially, the finance industry; therefore, we can track the entire transaction history, including the issuance of Tether tokens, as well as their infusion and withdrawal from the exchanges. This scenario is in line with the following principle: “Everything that happens on the market is aimed at getting the maximum benefit for an entity with the maximum leverage”. Bitfinex exchange – or rather the entire corporation where the exchange is just the tip of iceberg – perfectly fitted the description of such an entity with the maximum leverage at that time.

What happened in the end? The bubble did not burst, and the price entered a long bearish trend. It was just one of the several key points for Bitcoin in 2018. Many people believe that it is a natural process that will allow us to create a regulated crypto market infrastructure or, in other words, to repeat the path of any other new asset class. However, we don’t know yet whether the situation will develop this way.

In our next article, we will describe the factors that had the biggest influence on the price of Bitcoin and how you can use this information to make money.

Senior Affiliate Manager of AMarkets CFD&Forex Online Broker
Andrew Rozhkov