Market at the crossroads: why the initial idea of bitcoin appeared to be turned inside out
Cryptoindustry is one of the most dynamic industries of our time. A rare phenomenon in the world of high technology attracted so much attention, issued so many disputes and disagreements. Currently, the cryptocurrency market has a rather negative image due to periodic reproaches in its highly speculative and volatile. Let's try to find out what awaits us in the future and why we should not be afraid of market fluctuations.
Blockchain technologies were created as a basis for larger-scale projects designed to replace economic institutions, transform transactions, simplify access to project support, decentralize data storage of transactions, etc. The blockchain was supposed to shift the main governmental institutes, such as banks, stock exchanges, corporations, and even the state itself, but instead became a part of them. Why?
The idea of Satoshi Nakamoto (the founder or founder group of Bitcoin) initially was behind markets, rates, volatility, and regulators. Everything was subservient to strict mechanics and mathematics: the more power you use to operate the network, the more you gain.. At the same time, you rely on two pillars - decentralization and trust.
Isolated startups and companies use blockchain as an integral part of their development and business processes, issuing tokens to provide fiat funds — sort of free shares.
But all ideas faded before the number of speculators who tried to profit from other users and cryptoinvestors.
"Uncontrollable and insane" cryptomarket
High cryptocurrency rate volatility migrated from more traditional spheres. Initially, it provoked high demand on cryptocurrencies, Bitcoin in particular, which raised its rate to the maximum values in the entire history and then led to its decline to the current value. This incident did not strengthen confidence in the digital currency and allowed critics to say that this idea would not last long.
By the middle of 2018, the market reached its equilibrium point (based on supply and demand). The shortage of equipment has disappeared, and the opportunities for novice miners to enter the market have returned. Altcoins ( there are over 1.6 thousand, by the way) demonstrate the same problems as recently Bitcoin has. Their price rise sharply, attracting investors and miners, and then, as usual, disappear.
This gave rise to the claim that the entire cryptocurrency market is built on speculative market scenarios. It is only part of the truth. Such scenarios has appeared due to excessive users’ activity and lack of market control by the government. However, the market soon leveled off and got back to the beginning of a new phase of growth. And now it becomes clear that the further strengthening of the market is inevitable.
For illustrative purposes, here are the graphics of the five most popular cryptocurrencies. A common pattern is continued growth in the long term.
Expansion for speculators
Money from “nowhere” attracted a significant number of speculators to the cryptosphere.
Any serious process, especially in the field of innovations, is promoted by investments. In other words, there is a certain set of market signals, which makes it clear that the project is long-term and worth to be invested in.
However, the blockchain environment showed some distinctive moments. There were speculative investments in any specific coin in order to artificially increase its demand and value for further sale at the maximum price. On the stock exchange, this is called a “bull” strategy (players drive up the value of an asset, like an angry bull, which throws a sacrifice on its horns). Such ICO are created only for short-term profits and rapid enrichment. Most of the community will lose their investment, after the crypt returns to its real rate, not inflated by schemers.
Such speculations have led to situation when large investors are afraid of investing in new ICO-projects. This affects the development of really promising ISO-projects which turns into uncertainty of the developers themselves.
As a result both developers and investors are afraid of a failure.
Anyway such negative aspects promoted cryptocurrencies into the masses. It attracted new users, investors and developers. And enriched the old ones.
The main distinguishing feature of the cryptocurrency market is the existence of "Whales" or big fishes. Bitcoin whales are those bitcoin owners or associations, who influence its rates. According to the latest data out of 11 million coin holders, about 1 thousand own 35% of the total value.
The largest, although still anonymous, Bitcoin owner is Satoshi Nakamoto - the founder of the blockchain and Bitcoin itself. There is over 1 million bits in his money box . Satoshi’s wallet is a kind of guarantee of the main cryptocurrency stability. However, in case of sharp sale of all the coins, there are risks of market meltdown. Around 120 wallets control about 20% of the total value of the main global cryptocurrency.
The overall capitalization of the cryptocurrency market is shown below:
What techniques do “whales” use to raise capital?
- "Bear" strategy came from the world of finance. In this case, a whale-trader brings to the stock exchange a significant number of coins at at a lower rate than on the market. This causes panic among small holders, who also sell coins, being afraid of the further fall or market collapse. In this case the whale waits and then buys a larger number of coins at a rate well below the market. As a result the exchange rate drops below the equilibrium.
- Bluffing on stock exchanges. Some players place on the sites applications for the purchase or sale of coins at prices different from the common exchange rate. The emergence of such proposals provokes panic in the market and destabilizes the course.
- Transactions on the shadow exchanges. Large players sometimes use services of "dark pools". They acquire a large number of coins without causing panic in the markets.
Reducing the role of bitcoin whales
Despite the fact that the major players partially influence the currency formation, their role is gradually decreasing. This is facilitated by a number of factors:
- New players involvement. As the market develops, the number of participants is growing, which means that even more coins will be required to achieve the dominant position. But with the increase of decentralization, the amount of cryptocurrency in the hands of a particular consumer will rather decrease;
- Major players attract the regulators’ attention. The state tries to protect citizens from speculative operations and, if necessary, puts cryptocurrency operations outlawed, or monitors the legalization of income received from gambling or mining;
- Improving the educational level of blockchain networks users. Now users are exploring mining in detail, including its economics. Soon users will be able to distinguish fraudulent projects from real ones.
Back to basics
The current situation in the market will allow to eliminate speculative investors (their interest has disappeared) and speculative projects (crazy financing has ended). This will grant access to new technologies and investors interested in long-term investments.
Wallet owners are confident that "whales" will not be able to influence on the currency fluctuations significantly. Aaron Brown, a former Managing Director and Head of Financial Market Research at AQR Capital Management, agrees with them. Yes, large sales can cause imbalance in the market, but what is the amount of injections needed for this massive act - 1,000 or 10,000 thousand bitcoins? There is no consensus on this point, and therefore the probability of a market “collapse” by the most interested stakeholders is extremely low.
The difference between the blockchain network and the central bank is impossibility of “printing” bitcoins. Therefore, even if at the initial stage large holders tried to regulate the course, the system itself and the scaling of the network would return the original meaning to Bitcoin.
Now the balance necessary for the further formation of a stable market has been established. It is difficult to say how long this will last and whether it will get rid of the human factor (infusions from interested parties). Anyway, participants of blockchain projects must accept potential risks.
Saxo Bank investors, who predicted the fall of Bitcoin in early 2018, are confident in the new wave of growth. Jacob Pouncy connects it with investor security and focus on cryptocurrencies as an alternative to financial instruments.
Ultimately, stable participants, aimed at the long-term perspective, will remain in the cryptocurrency market. Hamsters, who run into the market only for the sake of profit will disappear. This will relieve the market from collapses and guarantee profit in the long term.