A turning point is approaching

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Steve Sokolowski
Posts: 3814
Joined: Wed Aug 27, 2014 3:27 pm
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A turning point is approaching

Post by Steve Sokolowski » Wed Oct 23, 2019 1:44 pm

Introduction

Those who have been following cryptocurrency for a while have probably noticed that the present industry situation is very different than it was in January. Price is the only metric that is positive compared to nine months ago; all of the other indicators are sharply negative. Something has changed, and there are warning signs everywhere. In this post, I'll explain why a turning point is about to be reached, where a decision will be made between continued expansion of the industry and a long-term contraction that will result in a radically different landscape when it ends.


Examining the declines

Bitcoin and cryptocurrencies in general have seen significant declines across the board in many indicators. The Core developers of bitcoin like to look towards the Lightning Network as the future of the currency; however, the Lightning Network has seen month after month of contraction. You can view some basic statistics about the network's usage at https://bitcoinvisuals.com/lightning. With the exception of nodes, which anyone can run by installing the software, usage statistics are down across the board. There are fewer channels, there is less connectivity, and most importantly, there is less money locked up in the network than there was in January, at the lowest point in the cycle.

Exchanges are failing, or are showing signs of stress, across the board. https://data.bitcoinity.org/markets/vol ... r=week&t=b shows the volume of bitcoin traded over the past two years. As is clearly evident, the volume is close to the lowest point in the period and the trend is downward. The number of bitcoins traded is falling even as prices fall, indicating that the value traded is declining more quickly even than that chart indicates.

The stress of the decline in trade volume is manifesting itself in the exchange industry. Coinbase recently raised fees on its smallest customers. Poloniex, one of the largest exchanges with which we traded, recently announced a reduction of its services and sale to Asian investors. Poloniex is following a similar path to Novaexchange, a high-volume exchange which also sold itself to Indian investors in 2018 (and which itself announced bankruptcy this week.) This timeline of raising fees, then selling to foreign investors that prohibit US customers, and then finally declaring bankruptcy, has played itself out multiple times in the exchanges with which we do business. Exchanges can't remain in business when they box themselves out of the world's largest market, but by that time they have no choice because their business is already too unprofitable to process the paperwork.

Innovation in coins is on the decline. Ethereum, one of the coins that has distinguishing and innovative features, has seen losses of 80% of its value over the past few years. Like the Bitcoin Core, Ethereum's developers became focused on unnecessary features when the only major issue preventing its success - capacity - went unaddressed. Now, its developers have finally brought sharding to the forefront of development efforts, but even they do not have a timeline for its full implementation.

Miners continue to declare bankruptcy and leave the industry, and IPOs and fundraising for new ventures have been put on hold. Prohashing's daily revenue declined from $260,000 on February 13, 2018 to $11,250 in early October (it should be noted that some of this revenue was mistakenly paid as a result of bugs that are no longer present as the system has become more stable, so the actual reduction in profit is not proportional to the decline.) Litecoinpool.org's hashrate declined from 100TH/s to around 22TH/s today. We recently contracted a person to write a report whose job is to sell miners to large firms, and he said that almost all of his business today results from liquidations.

While it is difficult to obtain firm numbers from private companies, the indications are that payment processors are feeling the pinch too. Whereas I regularly obtained 33% discounts from Purse in January, I've had three orders sitting for five days with no movement. Bitpay published that they had $1b in volume in 2018, but hasn't issued a single press release since then. According to https://bitcoinfees.info/, one welcome effect of this decline is that bitcoin is again actually becoming useful to pay people, with transaction fees having declined to 11 cents for a reasonable six-block inclusion time. Nevertheless, these lower fees indicate lower demand for spending.


Why these declines are important

The statistics presented in the previous section are important not just because they are all trending down, but because they tell a story of an industry that is approaching a tipping point. The last such tipping point occurred in January 2014, when I stated that if prices fell below $200, most businesses would fail. Fortunately, that point was not breached - prices quickly recovered, and the cloud mining services that did shut down quickly reopened. A similar effect will be seen if prices remain below $6,000 or so during this cycle.

As time passes and cryptocurrency has developed, customers have come to expect better services. In early 2013, most people were happy to use Mt. Gox, despite it having no insurance. Coinbase now insures all the funds in its hot wallets, and people look at exchanges that don't provide insurance as suspect. There are a number of customers who mine with us solely because we comply with all regulations, and who would not mine at all because they were lost money with pools that even now violate the law, like Nicehash. In 2012, several sites stored private keys server-side for online wallets, and people were glad to use them. Now, blockchain.info processes all encryption on the client-side, and any service that stores server-side keys is viewed as a scam.

These improvements in technology and process come with significantly increased costs, and these costs are sustainable when the volume of customers is high. Critically, the number of customers required for an exchange with Coinbase's GUI to be profitable is far higher than the number of customers required for an exchange with the GUI of Graviex or Altility to remain profitable. More importantly, the number of customers required for regulated services to operate profitably is much higher than that required for an unregulated or scam service to operate in profit. Therefore, the price floor has risen higher than it was in 2014, or even in January of this year. I suggest that because a lot of money was invested into the industry during what many viewed as the start of a bull market, the price floor rose substantially since January such that we are closer to it now than we were back then.

Knowing that this price floor exists is critical because if it is breached, we should expect a much longer recovery time - so long that other investments will likely be a better choice in the meantime. If prices fall too low, we will see the largest and most professional companies fail first, because they have the highest expenses. Coinbase will fail before Altility will, for example. In such a devastating scenario, the businesses that survive will be inferior to those that exist now. They will have inferior interfaces, be unregulated, or be associated with criminal activity. There are many people who only got involved in cryptocurrencies because there was a high quality of service, so those customers will simply leave the space.

Innovation in coins will also suffer. If the Ethereum Foundation's fund gets depleted due to having to sell more and more coins at low prices, then they can't pay developers to do as much work. Miners' suffering would cause more and more coins to be sold to cover expenses or to settle bankruptcies.

It doesn't stop there, though. When a business fails, its wealth simply vanishes. Software that takes years to program is shelved, and becomes obsolete. Servers that took months to configure are wiped and sold. Offices are cleaned out. Employees go to work in other industries, move to new locations, and can't easily resume their old work in the case of an uptrend. Even if they can, the brain only holds so much data, and they get retrained for whatever they are doing now and forget things about cryptocurrencies. Training new employees takes months, and with a significant labor shortage currently, it would be difficult to hire people back. Plus, dependent companies, like all the people who use an exchange's API, have to spend money implementing a different exchange or decide the cost would be too much and give up too.

There's also a contributing factor to this decline that is unique to cryptocurrencies. If, for example, prices reach $2000, it would probably be better to sell whatever coin-related business you own for whatever you can get, and simply buy bitcoins with the proceeds. Why work for 80 hours a week to make coins after the bubble starts, when you could simply buy then now, do nothing at all, and sell them later for even more? At such low prices, if the industry fails, then your business and your coins are both worthless, but if the industry succeeds, then your coins are worth more than the business would have made, because the business would only make money after the appreciation. The expected value in this scenario clearly favors exiting even a moderately profitable business.

With prices higher than the tipping point, companies could either survive on reduced profits, or cut costs. If things deteriorate too much further, then we'll see a collapse. Cryptocurrencies aren't going away, but a "reset" will occur, and it's going to take years for things to rebuild. During that time, it will probably be better to invest in other things.


Conclusion

Unfortunately, every day continues to bring relentless bad news, and there isn't any reason to expect the bad news to outweigh the good anytime soon.

That said, this week there has been some more positive news in the troubles that the corporate stablecoin Libra is facing. Libra's backers have been abandoning the project in droves, facebook has delayed the project, and Mark Zuckerberg is at Congress taking heat from lawmakers. As I've said before, corporate stablecoins are the first true threat to bitcoin and the current batch of cryptocurrencies. People trust facebook with their data and use the site all the time, facebook has excellent marketing, and consumers would have no problem paying for things with Libra. With Libra in trouble, the probability that people would use Bitcoin Cash, Bitcoin SV, Dash, or a freely available currency to make everyday payments has increased, and the sci-fi world where corporations own asteroids and their employees pay for everything in "corporate scrip" would be averted. Continued troubles for Libra will bode well for the industry, and perhaps even set a precedent that other companies will not succeed by attempting to create their own stablecoins.

Additionally, there is the bitcoin halving, which litecoin shows will have no direct effect on prices but hype from articles and expectations from traders will. With litecoin prices beginning to increase about six months early in both cases, the bitcoin price would be expected to begin to rise any day if the expectations of the halving are to have any effect. But litecoin has never hit a new high after a halving event, and any effects on bitcoin are also likely to be underwhelming.

In conclusion, there is a high probability that difficult times are ahead, and we are close to a turning point. Watch for news of layoffs and rumors of unprofitability that would appear before the first companies fail. While it might sound counterintuitive, I'll look to sell out if prices are below $6000 or $5000 a few months from now. Such a valuation would indicate that an industry collapse is imminent, and it would be a long time before the rebuilding process has finished.
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psylocyber
Posts: 18
Joined: Sat Mar 24, 2018 6:26 pm

Re: A turning point is approaching

Post by psylocyber » Tue Oct 29, 2019 2:27 am

Hey,
Just a quick clarification; when you are talking about "prices" as in
If, for example, prices reach $2000, i
and
in January 2014, when I stated that if prices fell below $200
, you are talking about just the btc price, is that correct? I was a little confused because price(s) (plural) sounds like multiple prices or a price index like the S&P 500 or something.

BTW I just bought another miner today, just before I read this. (And I've been waiting on 2 others to be delivered). Thanks Steve. Why didn't U make me read this last week? JK
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