Crypto Capitulation – Why are Prices Falling?

November 22, 2018 10:53 am

Crypto Chris


at Cryptonomos

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A number of narratives have emerged to explain the recent violent downwards movements in prices across the cryptoasset market. Today we’ll examine a few of them.

First up: Prices are declining because ICO projects are being panicked into selling all of their ETH reserves.

Let’s explore this one in more detail.


ICO projects raised funds in Ether. Those who conducted their ICOs early in the run saw the value of their treasuries climb throughout the bull market. ICOs still need to pay the bills in fiat, so at some point they need to sell large portions of their ETH reserves.

But crypto’s market volatility put ICO projects in a difficult spot: Should we sell our ETH on completion of our ICO? Or should we hold onto some of our treasuries in order to sell at the highest possible price?

Twitter is full of anecdotal evidence that this is true for some projects, such as this from Ran NeuNer, a crypto fund manager:

“Spent the morning with an ICO (not to be named) they raised $30m usd with a solid roadmap, they raised when ETH was $1200. They panicked and sold their remaining ETH last night – they have $4m left.”

However, closer inspection of the evidence suggests that this isn’t the case at all. Larry Cermack, Head Analyst at @TheBlock_, explains why:

"Despite the decline in ETH price, the selloff hasn’t been as drastic as many analysts anticipated. In the past two months, treasuries of projects that held ICOs liquidated (or moved) 172,00 ETH, or ~4.6% of total holdings...Out of the 57 companies I tracked, 50% didn't move any can assume that most projects have significant enough cash reserves that they haven't had to sell cryptocurrency reserves yet"

So, it’s unlikely that this is creating the current downwards move. However, some thinkers believe that ICO projects will eventually capitulate – selling their ETH reserves – and that this will create downward pressure on price in the future. Meltem Demirors, of @coinshares, MIT and Oxford University, explores why:

"(In view of the state of the current crypto market) what’s an issuer likely to do? Sell the assets they can and hoard cash like it’s going out of style.
What’s an investor likely to do? Sell the assets they can, take the hit, and free up mental and emotional energy to focus on generating a return for their investors.
Add these two up, and we get capitulation — the action of surrendering or ceasing to resist an opponent or demand."

So, this could happen yet. But it probably hasn’t so far.

The second narrative we’ll examine, and a more likely candidate, is the recent Bitcoin Cash hard fork.

Bitcoin Cash is the result of a scaling dispute within the Bitcoin community that led to a hard fork of the main Bitcoin blockchain in August 2017. The most notable change that BCH implemented was an increase in the block size limit, aimed towards improving transaction capacity that proponents said more closely aligned Bitcoin with its original vision.

Just over one year later, the Bitcoin Cash community is now splitting into two camps again. First there’s Bitcoin Cash ABC, which is the original Bitcoin Cash client that split away from Bitcoin. BCH ABC main proponents include’s Roger Ver and Bitmain’s Jihan Wu. 

Second there’s Bitcoin Cash SV (Satoshi’s Vision), led by Dr Craig Wright – the controversial Australian computer scientist who claimed (likely falsely) to be Satoshi Nakamoto and was later called a fraud by Vitalik Buterin. Wright wants to restore Bitcoin to its original protocol, increasing its block size limit and even perhaps bringing “lost” coins back into circulation.

The Bitcoin Cash hard fork matters because it’s creating a hash war.

While most service providers, social media and crypto exchanges favour BCH ABC, Bitcoin SV is supported by all of the biggest Bitcoin Cash mining pools.

Hashpower, conferred by miners, is an important indicator of security – and therefore legitimacy – in the cryptocurrency space.

Craig Wright has explicitly stated that the BCH SC community will use any hash power under their control to 51% attack the BCH ABC chain

"If we see an exchange sell (BCH), we will reject the transaction. Miners vote with hash. We will run ABC and we will make sure no trade ever happens, so there won't be anything. You want to know what (BCH) is? It's a corpse."

This has led to an expensive hash war in which each chain is trying to outspend the other in terms of hashpower until one of them runs out of money. This has led some to speculate that some large players are selling their BTC reserves in order to fund their mining activities, creating downward pressure on prices that has resulted in the most recent downturn.

For others the effect of the BCH hard fork on market prices is a less direct one, and has more to do with the resulting uncertainty at a time when there’s already pressure on ICOs from SEC enforcement. For those less invested in crypto, now simply doesn’t feel like a good time to deploy one’s capital within the space.

So, ICOs selling their ETH reserves probably isn’t causing the recent price drops but the Bitcoin Cash hard fork may well be. 

The third narrative we’ll examine relates to the wider macro-economic picture.

When one takes a step back from crypto to look at the broader picture, it becomes clearer that the current bear market may have little to do with crypto at all. The US and China are entering a lose-lose trade war, tech stocks are down 20-40% from their all time highs and many analysts are warning of impending debt crises. 

From the depths of the financial crisis in 2008 to late-summer of 2018 represented the longest bull run in the stock market ever seen. Events within the crypto community can move the needle and determine exact timing of price moves, however, the broader macroeconomic context has a far larger effect.

Returning to Meltem Demirors for a moment for an explanation of the wider investment context:

"We are starting to see the fraying around the edges of the global investment community. Blackrock, the world’s largest asset manager with $6.4 trillion in AUM, just experienced its first quarter of net outflows in three years."

With that being the case, it’s likely that the bear market continues for some time. Things could get worse before they get better. Investors must stay focused on the long term vision for the space, and stay tuned with Cryptonomos to keep on top of the latest developments!