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Crypto isn’t just having a bad month—this is a full-on crisis

There’s an even problem bigger than market manipulation

Bitcoin fire

Bitcoin on fire in a bad way (via Shutterstock).

When history looks back at crypto years from now, the end of November 2018 will go down as a dark period.

The drop in values over the past couple of weeks has been astounding, especially given what happened just before. Bitcoin started the month at $6,341, according to data from CoinDesk. The markets seemed content with prices remaining around that level. “Bitcoin volatility sinks to lowest in nearly two years,” proclaimed a Reuters headline on November 6. To be sure, weekly volatility—that is, standard deviation of prices—was at roughly 32 percent on an annualized basis, noted the piece. That was significantly lower than the 140 percent it experienced in February as the cryptocurreny’s prices were coming off their all-time highs. At the end of October, daily volatility was half that of the S&P 500. Theoretically, at least, it seemed Bitcoin was less fickle than U.S. stocks, at least for a few days.

Then the world was reminded just how wild crypto can get, and not in a good way.

On November 13, Bitcoin began falling, dropping to $5,525 or 12 percent in 24 hours. This coincided with the fight over control of Bitcoin Cash, but it seemed something else was afoot. As Modern Consensus first reported, volume surged on Bitfinex, the controversial exchange with an equally controversial stablecoin, Tether. As our sources told us, it was the result of sizable traders trying to work around 3 percent fees imposed by the exchange to pull out fiat just three days before.

“One way around it for some traders has been to use tethers to buy bitcoins on Bitfinex, transfer the bitcoins to another exchange, and sell the bitcoins for U.S. dollars that can be redeemed,” we wrote at the time. Indeed, since then, Bitfinex’s share of trades grew as volumes spiked on most exchanges.

Bitcoin volume by exchange

Bitcoin volume by exchange (via Bitcoinity)

A week after the first big price drop of the month, Bloomberg confirmed that the Justice Department was looking into the use of Tether to manipulate Bitcoin prices. Yet by the time the story was released, Bitcoin had already broken below the $5,000 mark.

As we noted, that particular piece should not have come as a surprise; we speculated that there was some connection months ago. Perhaps it wasn’t the case then. Or maybe it’s just that the heat turned up recently. Nonetheless, one can’t help but find it more than coincidental that trading volume jumped on the one exchange reported to be in the DoJ’s crosshairs.

Meanwhile, over in the Tetherlands, issuances are back. After taking in several hundred million tokens—and “burning” 500 million of them on October 24, Tether began recirculating about 150 million of them; 50 million each time on November 17, 20, and 25.

An online advocate of Tether/Bitfinex, who goes by the Twitter handle @IAmNomad, noted that 16.7 million of the most recently issued lot went to other exchanges outside of Bitfinex, including 2.2 million directly to Binance. Of the remaining 14+ million, 45 percent went to a customer wallet on Huobi and 40 percent went to a customer wallet on Binance.

Jackson Palmer, father of Dogecoin, posted a tweet on Tuesday with a message from Binance:

The rather cryptic, poorly phrased message at least offered some idea of why Binance would want some tethers but that accounts for, at most, roughly 10 million out of 50 million that were recently circulated.

What of the rest? That’s an open question for now.

While @IAmNomad tweeted on November 20 that “It’s only manipulation if the price goes up,” such need not be the case; perhaps he/she was just kidding, given his/her seemingly knowledgeable understanding of markets After all, unscrupulous short sellers have a few tools at their disposal, as many a conspiracy theorist will be glad to explain.

It’s helpful to note that in the case of spoofing, a large, slightly under market order is placed, giving the illusion that a buyer sees value near current prices. Other buyers jump in and are filled by a seller who turns out to be the one behind the spoof order—which gets pulled should prices get too close to the order. In a matter of seconds, the price collapses.

Indeed, there were occasional spikes in Bitcoin prices when the issuances happened and if the purpose was to prop up prices for the long term, then it hasn’t worked out that way. As of this writing, the cryptocurrency is trading around $3,700.

But there’s at least one group of people among whom Bitcoin’s drop is having an affect—miners. Older mining equipment is being taken offline now that their profit margins are approaching $0 or below. As reported by CoinDesk:

“Between 600,000 and 800,000 bitcoin miners have shut down since mid-November amid declines in price and hashrate across the network, according to the third-largest mining pool…

[Mao Shixing, founder of F2pool] “said there are multiple factors that contributed to the shakeout among miners, including the recent market decline that followed the bitcoin cash hard fork on Nov. 15; an increase in electricity costs in China; and the fact that Chinese manufacturers are still racing to upgrade their products, making older machines increasingly uncompetitive.”

Interestingly, the hashrate for Bitcoin’s blockchain—best thought of as the amount of power running it—was continuously climbing long after prices fell from their near $20,000 peak a year ago. That began changing in early October and since the start of November, it has been in a precipitous downturn.

Bitcoin hashrate Nov. 2016 to Nov. 2018 (via Blockchain.info)

Bitcoin hashrate Nov. 2016 to Nov. 2018 (via Blockchain.info)

Yet more ominous for Bitcoin and other crypto is a pestering statistic. As Reuters reported on November 20:

“Despite that growing stability, the value of bitcoin payments collapsed to $96 million in September from a December high of $427 million, the data from Chainalysis shows.”

A key argument made for crypto isn’t just its use as a store of value but its function as a medium of transactions (its use as a measure of accounting would presumably follow those other two, thereby rendering it a full-on currency). And it’s happening less and less as time goes on.

A lack of confidence in the integrity of its trading markets can only discourage the general public from feeling safe in holding Bitcoin for anything other than short-term trades. More than a drop in prices or a decline in hash power, the lack of mass adoption is ultimately Bitcoin’s biggest obstacle.

Lawrence Lewitinn, CFA is editor in chief of Modern Consensus. Disclosure: Lewitinn owns no cryptocurrencies in his portfolio.

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