Flipping cryptos

  • Stopping losses…stomping gains
  • The flippening
  • ICO fever

Last Wednesday, the cryptocurrency Ethereum crashed…big.

In a matter of minutes, the price plummeted from US$320 to…US$0.10. That’s right, you read that correctly, for a few minutes ethereum was worth just 10 cents.

That’s a 99.9% loss!

As we keep telling you, cryptocurrencies are not for the fainthearted. They are a wild ride.

Ethereum’s price recovered, quickly. By closing time it was once again up to US$359.46.

Yet the flash crash damaged many investors. Coinbase, a major exchange, was down most of the day. Investors could not access the exchange to buy or sell at the most crucial time…and it still took another four days to fully recover.

How did this happen?

I’ll get back to that in a second. But first, a look at the markets.

Markets

Over the weekend, the Dow Jones Industrial Average lost 2.53 points, or 0.01%.

The S&P 500 is up 3.80 points, for a 0.16% gain.

In Europe, the Euro Stoxx 50 is down 12.08 points, or 0.34%. Meanwhile, the FTSE 100 lost 0.20%, and Germany’s DAX index retreated 0.47%.

In Asian markets, Japan’s Nikkei 225 is up 18.03 points, or 0.09%. China’s CSI 300 is up 0.88%.

In Australia, the S&P/ASX 200 is up 5.52 points, or 0.10%.

On the commodities markets, West Texas Intermediate crude oil is US$43.45 per barrel. Brent crude is US$46.01 per barrel.

Gold is trading for US$1,255.84 (AU$1,657.17) per troy ounce. Silver is US$16.71 (AU$22.07) per troy ounce.

The Aussie dollar is worth 75.78 US cents.

Stopping losses…stomping gains

Last year Coinbase, one of the largest exchanges in the cryptocurrency market, rebranded its Coinbase Exchange to Global Digital Asset Exchange (GDAX).

The point was for the company to have two different exchanges, each easily identifiable. Coinbase became the place for consumers to buy, sell and store digital currency. GDAX is now an exchange market geared for professional traders to buy and sell digital assets.

Both markets operate similar to a stock exchange, even allowing users to set up stop losses. That is, if the price of a crypto falls below a certain point, the system is set up to automatically sell the asset.

Well, last 21 June someone — no one is very clear on who — placed a multimillion Ethereum sell order on the DAX exchange. The order was set at market price. That is, the trader would sell Ethereum at any price the bidders were willing to offer — no matter how low it got.

Ethereum’s price instantly fell by 30%.

But it didn’t stop there.

The quick fall triggered around 800 investor stop loss orders, which started a massive sell off, down to just 10 US cents.

The surge in traffic overloaded Coinbase, which went down for the day and had limited performance for the next four days.

The computers kept on selling automatically as they had been told to do, and all investors could do was watch as the computers sold off Ethereum for as low as ten cents, unable to stop it.

But not everyone lost. Actually, some investors made out like bandits.

That is, the ones who had in place orders to buy when the price went down to a certain price point. Anyone who had been hopeful that the price would go down as low as 10 cents, could have spent US$300 to purchase 3,000 coins, and would have gained a whopping US$1 million in a few minutes. Bargain!

GDAX initially didn’t take on responsibility, and made all trades final.

In recent days it has changed its tune and has said it will be using company funds to credit customers who lost money in the flash crash. The truth is that they are not interested in users losing confidence in the system now that cryptos are gaining momentum.

The ones who made money by buying at a ridiculously low price…can keep their money.

As we have been saying, anything can happen when investing in cryptos. Anything.

The flippening

21 June was a big day for Ethereum. The flash crash was not the only thing happening in that space.

On that same day, Status launched its Initial Coin Offering (ICO). The messaging app raised a whopping US$100 million in 24 hours. In fact, it raised so much money so quickly that it clogged the Ethereum network, causing transaction delays.

What’s Status?

It is an open source platform that allows interaction with decentralised applications running on the Ethereum network. Basically, it wants to offer a service similar to WeChat, the Chinese chatting app that also allows you to do more than just chatting, like payments or setting up a doctor’s appointment. People could exchange 1 ether for 10,000 Status Network Tokens (SNT) to access the community.

Status is quite a big deal.

You see, its goal is to make smartphone users more familiar with the ethereum network, something that is very alien to most non-tech people. It is the first implementation of the ethereum network on iOS and Android.

As cointelegraph reports:

These projects are likely to do well in the market considering, particularly, their propensity to benefit hugely from the expected increase in the number of global smartphone users in the coming years.’

ICOs like Status are the reason why bitcoin, the world’s first crypto, is losing ground against ethereum, and the reason why ethereum’s price has soared from US$8 to US$300 since the beginning of the year. Many of these new ICO’s are happening on the ethereum network and, as you can see below, bitcoin is starting to lose market cap against other altcoins, particularly ethereum.



chart image

Source: coinmarketcap
Click to enlarge


This year Bitcoin leadership has been falling off, even though the price has been climbing.

In fact, people in the crypto space are eagerly watching for ‘the flippening’ to happen. That is, the day that Bitcoin is no longer the dominant cryptocurrency.

And leading the charge is Ethereum.

There are fears around a bitcoin scaling issue. That is, the ability of bitcoin to keep up with an increase in transactions as it becomes more popular. Initial bitcoin investors are now starting to diversify into other altcoins to protect themselves against a bitcoin fall.

Don’t get me wrong, I think bitcoin is still here to stay. But this shift will mean that bitcoin is not at centre stage, and the crypto market will become more competitive.

ICO fever

Interest in ICOs is growing. As you can see in the chart below, startups have raised about US$650 million, mostly in the last three months.



chart image

Source: Bloomberg
Click to enlarge


Differently from a company’s Initial Public Offering (IPO), an ICO does not offer a stake in the company or a percentage of future profits.

Instead, they offer coins, to be traded for services in apps, etc.

The ideas is that the more the technology is used, the higher the value of the coin will go.

And people are lapping up ICOs in search for the next tech big start-up, like Airbnb or Tesla [NASDAQ: TSLA] at cheaper prices.

Oh yes, we hear you. It is all big speculation. That’s what makes it such an attractive and dangerous place to invest. You could win big, and you could lose even bigger.

You can see why the US Securities and Exchange Commission (SEC) are getting a bit tee’d off with all of this; ICOs are starting to meddle into their territory.

The SEC rejected a crypto and a bitcoin ETF earlier this year as they do not believe they have enough regulations and procedures in place. But, no matter, cryptos are setting up their own funds and indices.

There is the Cryptocurrency Index.

Crypto Fund AG, a Swiss company, has just launched the first diversified cryptocurrency fund, which will be based on the Cryptocurrency Index.

And there is even the Alt19 Index, based on 19 cryptos, and the Alt100, based on 100 of them.

ICOs will only keep gaining popularity, even if the crypto frenzy dies out, as it is an inexpensive way to raise money. And new companies are raising crazy money.

Take Gnosis, for example.

Gnosis is a prediction market application based on the Ethereum blockchain. It allows you, for example, to bet on the market or on an election outcome. On 24 April the developers released only 5% of the tokens during the ICO. The rest were kept by the developers.

It ended up raising US$12.5 million…in less than five minutes.

The company has no revenue. But you could say the same about Tesla.

The thing with ICOs is that there is basically no paperwork. No list of requirements such as a minimum amount of shareholders, appointing advisers or a detailed prospectus.

All that ICOs require is a white paper describing what the crypto intends to do.

That’s it.

That’s why entrepreneurs are loving it. They can raise money online quickly.

But that’s why there are many scams out there. And there is the added danger that cryptos can be hacked.

It’s why many will fail. And only a few will win.

If you dream of turning $8 into $300 (who doesn’t), this is one of the few sectors that can make that dream come true. But there are risks. Big risks. Don’t try to navigate this ‘Wild West’ of the investing world alone. Before buying a single crypto coin, go here.

Regards,
Selva Freigedo