CRYPTO: EOS liquidation of Ether reserves impacts markets


ICOs were the reason the crypto prices shot to the moon last year, and they are also (part of) the reason why we are now seeing a prolonged weak market. Maybe this is obvious to some of you, but it's worth pointing out the dynamic. When consumers became excited about token crowdfunding last year, they allocated cash and their Bitcoin capital gains to buying Ether, which allowed them to participate in token sales. This year, new consumer demand for Ether has been weak in light of regulatory and execution uncertainty. But the need to sell Ether has skyrocketed because of all the ICOs that have raised crypto assets, and now again need cash to pay staff in the real world.

The $16 billion or so of ICO proceeds, if not more when adjusted for market fluctuations, is a large chunk of Ether's $45 billion market cap. The asset has shed about $90 billion of value since its peak at $135 billion. Assuming ICO liquidations of $5 or so billion led to the continued pressure on the Ether price, the negative impact has been magnified 10-20x via sentiment and illiquidity. Again, this is not the only variable at play as correlations to Bitcoin and other large coins are around 90%, and speculation still prevails. But it is important to note the structural dynamics. If you have any idea how we can test this hypothesis, let us know!

As an example, take EOS and it's $4 billion of crypto currency. The project has hit community issues almost immediately out of the gate, needing to re-write the governance structure and creating negative sentiment in the space. But more damaging is when $100 million worth of Ether is sold by EOS in a single day on Bitfinex. The lack of institutional liquidity matters because the price is far more sensitive to large blocks in response. And when a company is able to raise money in the form of its top competitor's token, and then create ongoing selling of that token across thin markets, we don't think this create good market dynamics. Further, as more large ICOs are done privately -- see Tatatu's $575 million or Telegram's $1.7 billion closed pre-sales -- the demand to buy Ether in order to buy the ICO token is simply not there.

Source: Coinmetrics (chart), EOS (CoindeskCryptoslateTrustnodes), Coindesk (Tatatu)