Cryptocurrencies update

The self-perpetuating cycle has gone in reverse and it is clear now that the majority of holders were not willing to hold it for long term - i.e. they were only holding it for ST gain. Once the prospects of ST gain started to evaporate, the buyers disappeared as well.

Price drops were not only the result of selling, but an unwillingness of buyers to step in at market prices - they were only buying on much lower dips. This hurts the value for LT holders, as a lack of new buying activity has the net effect of depressing the price.

ETH and XRP are not getting the 'fundamental' boost from their ability to change things in finance, and it's clearer now (given BTC's resilience) that in the world of crypto, perception of status is more highly valued than potential of the coin, at least for now.

Going forward, the impetus for the coins remain to be seen translated into prices, and with the lack of hype, price gains will be difficult. It thus remains in the speculative and volatile category of assets, more fit for trading ST and too much uncertainty to be held LT.

State of the cryptocurrencies


  • BTC has suffered the most and ETH seems to have held up the best
  • I still see longer term declines in BTC as likely as investors and speculators revise down their expectations
  • My bet is on ETH and to a lesser extent XRP - their catalysts being the surfacing of their fundamental strengths (potential to change things in the financial sector), and for a POW-to-POS price boost for ETH
  • Volume has become duller as the hype fades - duller volumes and flat prices have been the better times to enter the market; peaking prices and volumes the better times to exit
  • Not expecting fever pitch craziness like end 2017 again, but a weaker second wave is likely when fundamental strengths surface

Cryptocurrencies 2018 Scenario Analysis

Scenario analysis using market capitalization

* Assumption of supply slightly increasing:
ETH +10 mil per year
XRP +5,000 mil per year

Historical Market cap (m) Supply (m) Price
BTC peak cap 320000 16 20000.00
ETH peak cap 135000 100 1350.00
XRP peak cap 150000 38740 3.87
Scenario A Market cap (m) Supply (m) High
BTC 320000 16 20000.00
ETH 320000 110 2909.09
XRP 320000 40740 7.85
Scenario B Market cap (m) Supply (m) Mid
BTC 100000 16 6250.00
ETH 100000 110 909.09
XRP 100000 40740 2.45
Scenario C Market cap (m) Supply (m) Low
BTC 50000 16 3125.00
ETH 50000 110 454.55
XRP 50000 40740 1.23

Scenario A - the prices of ETH and XRP if they reach the market cap of Bitcoin at its peak. This is a ceiling estimate, since it's currently not likely that massive amounts of new funds come into this space. Likely there will be some cannibalization into Bitcoin.

Scenario B - an arbitrary market cap of 100,000 million, the lower end of the average scenario if the crypto market spreads out evenly, divesting from Bitcoin the most, and some flows going into the other altcoins not mentioned here.

Scenario C - an arbitrary market cap of 50,000 million, lower than current market cap, a bearish scenario.

I use market capitalization to estimate fund flows, though it must be noted that it is not a 1-to-1 relation - (FF x Liquidity Factor = change in Market Cap) - where liquidity factor is a measure of the unwillingness of buyers or sellers to put their coins up for trade - the more unwilling they are, the more fund flows will affect prices and thus market cap.

Increase of supply is estimated by simple linear extrapolation of implied circulating supply, derived from (market cap / closing price).

Outlook on Ripple

Below post is work in progress as I think through

Following the post comparing the three main coins, this post will look at factors that may affect its price going forward, with the initial conclusion that it will likely end the year higher, though the gains will not be as spectacular as other crypto rallies that we have seen.

Introductory comments: Ripple (XRP)

  • Aims to facilitate FX transactions; acts as an intermediate global currency, especially in less liquid currencies
  • Potentially has practical applications in a big market (FX), and so it if becomes successful it could be a big deal
  • Banks in the FX space have direct and practical use for it

Factors

Fundamentals - it potentially has great practical uses (greater than Bitcoin), so as the market matures, XRP could be one of the beneficiaries of a shift out of BTC. However, if other coins promise something better, XRP may not benefit much from the shift. This is unlikely as XRP is already near the front of the race and therefore should likely be one of the main beneficiaries of the shift as people would naturally gravitate to the coins they are aware of and know better and/or has been around for a while, even if its prospects aren't as great as other less well-known coins.

Decoupling - Ripple is actually a company that has a coin, and so the price of XRP may not be tied to the company's success. However, I anticipate a good amount of people would not bother about the difference and thus a correlation between the company and the coin should remain fairly strong. Stakes in Ripple cannot be bought (privately held) and so investors will turn to its coin for exposure. There is a small chance that Ripple does horribly and the coin goes down with it as well, but most firms in this space that are as large as Ripple tend not to collapse - at worst they don't deliver on their promises, which usually leads to a slump and not a crash.

Market cap - as of now, it stands at 117b and ETH at 97b versus BTC 300b. These are huge amounts and it's hard to imagine how much more money needs to be pumped in such that prices can rise substantially. XRP has about 40b coins in circulation, which is one of the reason why prices aren't as high as the other 2 in nominal terms. However, it does not require the entire circulation to participate / respond to inflows. Inflows that are met by limited supply will see prices rise. If supply is thin (which I estimate it to be thinner than most other liquid financial assets), prices can rise substantially. However, once this happens, there is good reason to believe that supply will become thicker as more holders of XRP become more willing to sell their holdings.

Ripple's actions - Ripple plans to release coins gradually, somewhat like monetary easing and inflating the money supply. When this occurs in the fiat world, the currency tends to depreciate in nominal value.