How are cryptos doing?
I last wrote on the valuation of cryptos, based on the currency use case, and found them to be richly valued, and over due for a correction. Back then the BitCoin, BTCUSD, was $67,400. Since my note of 11/11/2021, the price has fallen to $54,600, a price drop of nearly 23% in a matter of 3 weeks. Far from thanks, I got a lot of flak for the analysis. But that’s life.
Since then, India has joined China in ruling out the cryptos as currency, further weakening the fundamentals of the currency use-case. As I said years back, the currency use-case was never really on for any of the cryptos because no sovereign was ever going to handover its currency printing press to the private sector, leave alone one that could not be policed.
And once you had a family of cryptos, no longer tethered to the upper limit of 21 million virgin coins, the use-case for currency was really fiction. More so because every sovereign can start blockchain ledgers of its own to create its own digital currency. But then markets would not be markets but for the crowds that make price discovery possible. After digital tulips too have a price!
The total market cap of all cryptos on 11/10 was $3.01 trillion. It has since dropped to $2.449 trillion, a drop of some 21%. With global GDP at $85 trillion, the market cap to global GDP ratio stands at 2.8%. If the cryptos were currency, you would expect that ratio would be around 10% or a market cap of $8.5 trillion. What the market cap says is that the cryptos, all told, assume some 28.81% of all currency transactions are already priced into the currency use case, while the reality is less than 1%. The premium on use-as-currency model of valuation is mind boggling. So a steep correction is in order for all cryptos, some more, some less but only marginally.
A chart of the BTC-USD is given above. A chart of ETHUSD follows. What both chart show is that in the very long term, the charts of cryptos are very bullish. In the intermediate term, spanning next 6 months to a year, the outlook is very bearish.
The fact is the all the Cryptos have had a dream run-up on the charts. BTC-USD has run up from $4000 to a top of 67,500. That bull-run culminated into a double top of sorts in early November this year, when I began warning of a correction. The charts show BTC-USD should head for a level of $4000 before this correction is over. However, there are important supports on the way, firstly at $48,000 followed by another support at $41,500. But my guess is we will see at least a 50% correction from the top, and I expect to see a price of $35,000 before this correction ends. Bur once a downside starts, prices go to the other extreme, and in a 100% speculative asset like the cryptos, there are really few fundamentals to go by.
ETHUSD should have no scarcity value. Therefore you can roughly use a VISA or Mastercard as a model for its valuation. ETHUSD market cap is currently $483 billion, compared to that of VISA at 430 billion and Mastercard at $318 billion. ETHUSD use as currency market share is not even 10% of these two digital payment system. So ETHUSD current price of 4062 is pure speculation. Its price mimics BTCUSD for some mysterious reason although the coin falls outside the 21 million virgin coins that can possibly be discovered in the case of BitCoins. A 50% correction from the top would therefore be the least that one expects to see.
The first test for my theory of price correction for BTC-USD is at 40,000 to 38,000. A breach of that level could presage a serious erosion in values down to 15,000 levels. All drops will not be one way. Use counter-rallies to lighten up if you are still in digital tulips.
11-28-2021.
A Deep correction in Cryptos has begun.
My two pennies Worth: Compare with Gold, Oil, Other Assets classes...not as a currency...it will replace all the currencies... and stop these Mints and Money printing Fiascos. It will work alongside normal money for purchases and payments.
The US, mainly with a view to harness it for taxation, has classified it, not as currency, but a “Money Services Business” (MSB). It already operates legitimately in the US “Derivatives” market. The American Internal Revenue Service (IRS) or taxation arm, classifies Bitcoin as “property”. And where the US goes, most of the free world must follow.
Canada calls Bitcoin a “Commodity”. Australia classifies it as an “Asset”. The EU also allow its use, and has exempted it from Value Added Tax (VAT). Britain has put Bitcoin under some tax regulations. Germany is regarded as the crypto capital of Europe. Many of its stores have been accepting Bitcoin for several years now. Recently, Germany has passed a law to allow special funds to allocate 20% of their capital in crypto assets. India is about to try regulating them, with a view to taxing them as assets, put in protective provisions to safeguard the unwary, and perhaps try to popularize the sarkari offering by banning private cryptocurrencies. Cryptocurrency is here to stay. It has already knocked a few spots off the concept of sovereignty, and will only advance its game in the future. Blockchain works. So does mining. We may be headed towards a World Currency. All one can do is join the fray and try to duck it out in the free market in the interim. They banned Porn, alas, the rapes didn't stop... Banning should be banned ! TAKE CARE (I enjoy your stuff....very well researched...needs deep reads :)
in my humble and slightly informed opinion: many bitcoin cheerleaders have been effectively pyramid scheming a ponzi-like investment vehicle. no conversation with these bitcoiners is ever complete without the same spiel of someone who knows someone who invested nearly nothing and is now stinking rich. most such bitcoin pumpers have very little to say about the asymptotic limits of blockchain and/or distributed ledger performance.
the underlying point is simply that the blockchain spiel so far has been "buy and hold; one day you will be rich, so dont be a fool and sell". so a lot of bitcoin speculators are sitting on the fences wondering when its time to sell.
if these speculators panic and start saying "thats peak bitcoin", the scars will last a long time.
if on the other hand, the plug gets pulled (which is theoretically possible), it will leave the hoi polloi high and dry and unable to cash out.
realistically, the sensible majority will probably switch to other digital currencies that may use better tech than crypto. this will probably leave bitcoin as an international money laundering mechanism used by the nefarious.