This Week in Crypto: Three lessons from a Sea of Red

Baptism by correction to the newcomers


Let’s be clear from the start: what’s happening with the market at the moment is a correction. There is no doubt about that. As professionals in crypto trading, we welcome this correction as a reassuring event. The market was getting a little overheated since it took off at the end of November. Pumping the breaks a bit allows capitalizations to fall closer to current fair value. That being said, although the correction itself does not look problematic to us, the media’s reaction to seeing red has been a cause for concern. A small proportion of the headlines this week have been thoughtful and analytical, but, for the most part, media has been very hyperbolic about the week’s events. Phrases like “bloodbath” and “markets are getting crushed” are great for clicks and do well in the Twitterverse, but we find them to be unnecessarily sensationalistic and, frankly, quite irresponsible. If we take a step back from the drama, we can all learn something from the events of the past week. Here are our three key lessons from a week of unnecessary panic:

It’s paramount to understand what drives a liquidity event

We can tentatively pinpoint a number of reasons for this particular correction and most of them have been brewing for quite some time. Indeed, about a month ago, some astute players within the market made predictions about this happening. In the past week alone, there has been quite a bit of speculation surrounding the actions of Chinese investors ahead of Lunar New Year, the expiration of bitcoin futures this week and resulting market manipulation, Ripple insiders selling / cashing out, Telegrams buyers moving to fiat, the and how large investors are treating tax implications for 2018. Some of this speculation is factual. Some of it, well, just remains speculation. Secular events, such as the vertical price action of XRP in December, form another potential reason for this downward trend. This trend could have influenced market participants for January, meaning that profit-taking was certainly taking place and a resulting downward trend may have spooked novice investors.

It’s also important to touch upon a viral screenshot of the January market trends in years past. Although there does seem to be a historical trend for correction in January, we cannot ignore the fact that the market today is very different from the market last year and especially from the market two years ago. The market itself is larger. The average investor’s profile has changed significantly. And the liquidity of assets has grown considerably. These changes in the market could influence the fact that the volatility we see if more dramatic.

This market is global, so it’s important to think globally

Last week, Park Sang-ki, The Justice Minister of Korea made a statement outlining that the Ministry wants to act to close cryptocurrency exchanges operating in the country. Just hours after Park Sang-ki’s comments, a representative of President Moon Jae-in told Korean media that the Justice Ministry’s position does not reflect that of the entire government. Two Korean exchanges (Bitthumb and Coinone) were raided and many more limited certain features, such as deposits and registrations. Obviously, this is a time of great uncertainty for the Korean crypto market, not even Korean lawmakers are certain on how this situation will develop. Naturally, market sentiments are far from peachy, and this affects all geographies, not just Korea.

Having heard and analyzed the news, we anticipated a number of things happening as a result. We predicted that fiat entering the crypto market will be reduced, lowering demand and depressing spot and reference prices globally (Where are you Wall Street bonuses?). The market would cool for some time, both locally and globally, as fewer new traders participate due to perceived risks and less new money enters the market. Additionally, we a see a number of risks emerging from the situation: Korea might follow the Chinese model, shutting down all exchanges completely. A greater risk still exists if Korea shuts down exchanges and more countries follow suit. For example, some lawmakers in India have already called for such a ban. Although this is unlikely, the mere potential of this causes FUD in the market.

Regulation is catching up and it’s the main determinant of supply/demand catalysts

It goes without saying that one of the biggest risks to digital asset investing and trading is stricter and possibly punitive regulation. Numerous governments are taking a stab at this right now through structuring policies around what makes sense for them as a sovereign entity. Some are being open, while others are being more restrictive. How this all plays out for the different constituents in the digital asset world (miners, investors, traders, funds, etc) will beget certain actions which will beget changes in the short-term price of digital assets. We are paying exceptionally close attention to the changing regulatory landscape as a result.

We are operating within a nascent space, so there will always be some small degree of bad actors. The democratization of capital in a low-regulation space means that money, at times, can and will flow to people and companies that simply do not deserve it. We saw it. We’re seeing it. It will continue to happen. However, and this too shall pass. We believe the BitConnects of the world will be less prominent as time goes on. In part, this will be the direct result of stricter regulation and a smarter, more aware and self-policing community. However, natural corrections to the space could potentially have an even more important role to play.

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