15 December 2018

Bitcoin in the News : 2018-11 Deeper

In my first 'Bitcoin in the News' post this month, 2018-11 Price, I noticed 'three distinct downward price shifts' and identified their start times. In my second post, 2018-11 More++, I collected November stories from two mainstream financial news services, CNBC and Forbes, with an eye on finding an explanation for the price drops. For this third post, I located three stories from each service that were published around the time of the drops.

CNBC:-

All three stories were by Kate Rooney, 'Markets Reporter'.

Analysts attributed bitcoin's continued sell-off to technical levels and stop orders in the market kicking in after bitcoin fell below $6,000. "The next logical level of support is at $5,000 but if that doesn't hold, the next logical support level isn't until $3,500," eToro analyst Mati Greenspan said in a note to clients Monday. "With all the falling prices lately, this definitely fits the definition of a buyers market."

$5000 didn't hold; $3500 didn't hold. As I write this, mid-December, the bitcoin price is around $3250. Those 'support levels' turned out to be imaginary. As for 'buyers market', that assumes there is real value in cryptocurrency. The article continued,

Others pointed to a split in the cryptocurrency bitcoin cash. That digital currency split into two versions last week -- "Bitcoin ABC" and "Bitcoin SV" -- which analysts said added to uncertainty in broader crypto markets.

U.S. regulators made good on promises to regulate non-compliant cryptocurrency projects last week. The Securities and Exchange Commission announced its first civil penalties against crypto founders Friday as part of a bigger regulatory and legal crackdown aimed at abuses and outright fraud in the growing digital currency industry.

The 'bitcoin cash' fork/split argument is the tail wagging the dog. The 'regulators' argument is plausible, but the threat has been there since shortly after the invention of bitcoin. Why would a crackdown on dubious crypto players affect the price of established currencies?

Some analysts blamed a "fork" in the cryptocurrency bitcoin cash for that initial drop below $6,000. That digital currency split into two versions in mid-November and diverted what's known as "hash power," which some say dragged down the broader crypto markets. Both sides appeared to be selling bitcoin to "fund mining operations to win the battle," Brian Kelly, CEO of BKAM, told CNBC. The $6,000 level could have been a key exit point for some traders. Bitcoin going below it likely triggered "stop losses" which could have exacerbated the selling. Those bitcoin support levels were broken as the cryptocurrency continued to hit lower lows.

Regulatory crackdowns have also weighed on prices.

Fork, stop losses (= support levels), regulatory crackdowns. Same old, same old?

These lower lows are marking key exit points for some traders. Bitcoin going below $4,000 likely triggered "stop losses", predetermined trading levels that often exacerbate the selling. Those bitcoin support levels were broken as the cryptocurrency plunged to new lows.

In recent weeks, regulatory crackdowns have also weighed on prices. The Securities and Exchange Commission announced its first civil penalties against cryptocurrency founders last week as part of a wide regulatory and legal crackdown on fraud and abuses in the industry.

Last week, Bloomberg News reported that regulators are investigating whether bitcoin's rally to almost $20,000 last year was the result of market manipulation. The U.S. Justice Department is investigating whether tether, a controversial cryptocurrency that founders say is backed 1:1 by the U.S. dollar, was used by traders to prop up bitcoin, according to the report, which cited three unnamed sources familiar with the matter.

The first two paragraphs are familiar territory, but that last paragraph deserves further investigation.

Forbes:-

It was not immediately clear what had triggered the sudden sell-off today but tensions in the bitcoin sector are high ahead of a fork of the bitcoin cash cryptocurrency, expected tomorrow. Bitcoin cash, which split from the original bitcoin blockchain last year, will tomorrow split in two again, creating a third cryptocurrency. The two digital currencies will go by the names Bitcoin ABC (core Bitcoin Cash) and Bitcoin SV (Satoshi’s Vision). Bitcoin cash has been highly volatile in the run up the fork, rising as much as 50% over the last few weeks before falling sharply more recently.

I have a small amount of bitcoin cash. In quantity, it is the same amount as my bitcoin, because I received it after last year's fork. In value, it is a small percentage of bitcoin, in the low single digits. I have trouble believing that it has any impact on the wider market.

Fundamentally speaking, the current sell-off is due to two main reasons; regulatory pressure and disagreement within the coin developer community, one of the biggest threats. The SEC reminded the crypto world that it has the final say over anything that smells like a security. The department issued civil penalties against two cryptocurrency companies because they failed to register initial coin offerings as securities. Investors will be given their refund and the firms will have to face fines. The fear is that the SEC may not stop here and might take similar action against several companies that adopted a similar path.

The community needs to stick together and work towards a more meaningful fork. This is because developers, on the one hand, try to convince the world that the supply is limited and, on the other hand, they keep looking at ways of triggering another kind of forks. Forking has become so common that it puts at risk the notion of limited supply altogether.

That last sentence implies that forking is equivalent to dilution. That makes some sense, but it still doesn't explain how a problem with bitcoin cash (BCH) spills over into bitcoin (BTC) or the other cryptocurrencies.

The bitcoin price falls over the weekend do not appear to be linked to any particular fresh news but a continuation of the sell-off sparked earlier this month by the fork of the bitcoin cash cryptocurrency that ignited a civil war between the bitcoin rival's two factions. Low trading volumes over the holiday weekend, however, mean the market is more vulnerable to so-called "whales" moving large amounts of bitcoin, ripple (XRP), or ethereum. When a major coin holder sells it can trigger automatic computer controlled sell orders leading to sudden sell-offs.

After reading those stories, I looked at another article, also from Forbes, specific to the bitcoin cash fork.

Thursday was a volatile day on the cryptocurrency markets with Bitcoin Cash forking into two different currencies, BCHSV and BCHABC creating considerable hash wars which are ongoing.

That was the lead sentence, after which there were no further mentions of BCH. Instead there were a number of cheerleading statements from people whose destinies are tied to the crypto markets. The writer of the story closed by saying,

All very positive but what most of these people seem to forget is that the market has been sinking for a long time and absolutely no signs of an uptick are present. Price levels are, in many cases, 90% down from their all-time highs just a few months ago. Use cases are bountiful but is there any mass adoption going on out there? In most cases, it seems that cryptocurrencies and blockchain are being used in countries where the economy is totally broken, such as Venezuela and Palestine. Adding to the dubious prevalence of money laundering schemes and scams in eastern European countries such as Belarus (who incidentally are also legalizing cryptocurrencies), the future looks pretty bleak.

When I checked my account to see the quantity/value of BCH vs. BTC, I found three new currencies available for trading: 0x (ZRX), Basic Attention Token (BAT), and Zcash (ZEC). I looked at a few external pages to find out what they were, then bought a small quantity of each. The best way to learn about the crypto markets is by participating, although always with non-essential money.

Before closing this post, I looked at that mention of 'market manipulation' in the last CNBC story quoted above. I found another CNBC story linked from my '2018-11 More++' post, also by the same writer as the other three:-

As bitcoin continued its downward slide Tuesday, U.S. regulators are reportedly looking into whether its record-breaking rally last year was the result of market manipulation. The U.S. Justice Department is investigating whether traders used tether, a controversial cryptocurrency that founders say is backed 1:1 by a U.S. dollar, to prop up bitcoin, according to a report from Bloomberg News, which cited three people familiar with the matter.

As for the mechanics of how that might have happened, I will leave that for another time.

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