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The Burst of the Bitcoin Bubble: An Autopsy

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Marcello Minenna is the director of the quantitative analysis and financial innovation unit in Consob (Italian Companies and Exchange Commission), —Italian government’s authority responsible for regulating the Italian securities market — as well as an adjunct professor of stochastic finance at the London Graduate School of Mathematical Finance and at Luigi Bocconi University of Milan. He is an economic and financial columnist featured on leading Italian and international publications.

The views and opinions expressed here are solely those of the author and do not necessarily reflect the views of Cointelegraph.com.

Sixteen months after from a peak value of $19,100, bitcoin is now hovering around $5,000. Despite its wide distance from the historical maximum, today’s price is good news for the market, as the recent rise could be the end of the collapse produced by the violent explosion of the digital currency bubble in 2018. From December 2017, the price of every digital asset has fallen, on average, 80%; for bitcoin, it has been the second collapse ever recorded, a violent fall even for an unconventional asset that has historically shown very marked boom-and-bust cycles. In 2011, the price declined by 93% — to $2 from a maximum of $39 — while in 2013, in just a few weeks, the price exploded to $1,151 to decline later to $177 over a 12-month period.

It is not certain that, this time, the bottom has been touched, despite the encouraging developments of the last weeks: Historically, the phase of rapid decline is followed by a stagnation of the price that can even last years, named in jargon as a “crypto winter.”

In the context of a widespread speculative bubble that the so-called “altcoins” have turned out to be, apart from any technical evaluation, simple variants more volatile and less liquid than bitcoin, almost perfectly correlated with each other. This feature made any attempt to diversify the risk between different crypto-assets futile.

BTC and ETH Price Behavior

1-year Rolling Correlation

Among altcoins, a specific mention should go to Ethereum; this is the digital currency classified as second in terms of capitalization that has been exploited as a technical platform for the proliferation of the initial coin offerings (ICOs). These ICOs have been exploited to cover real public purchase offers by collecting financial resources sheltered from regulators and by financing dubiously weak or shady projects. Most of these initiatives have invariably destroyed economic resources or turned out to be real scams in which investors’ defensive capabilities were substantially nullified.

Ex-post, the price pattern during the bitcoin bubble closely followed the asymmetric behavior of its historical cousins, starting with the Tulipan bubble of 1637, passing through that of the South Sea Company up to the most recent burst of the dot-com bubble of 1999-2000.

After a phase of moderate rise, a very rapid manic phase of vertical price growth of about nine months followed, with a final buying hysteria in December 2017 — the month in which the price more than doubled, starting from an already very high base. The summit was touched with a classic “double peak” in January 2018, synchronized — not surprisingly — with the achievement of the maxima on global stock markets and with the peak of liquidity released into the global economy by the main central banks. Since then, the price of bitcoin has had an almost uninterrupted decline, with very rapid collapses, and shorter and less convincing recoveries, with descending relative maxima.

What is the floor of this incredible descent?

On the subject, we must consider that bitcoin, its clones and the rest of the digital currencies do not have their own intrinsic value. Prices are simply determined by the intersection of demand and supply on individual exchange markets; these are often highly illiquid prices, differing from each other by hundreds of euros without effective arbitrage between the various markets due to the structural limits of bitcoin and settlement platforms. Therefore, it is very difficult to think of determining what the fair value could be.

Often for traders operating on these markets, the technical analysis is the only tool for interpreting price movements. This paradoxically means that the price dynamic, determined by the collective actions of the traders, sometimes follows the forecasting patterns of the technical analysis.

Under this overall picture, it is worth trying to isolate the main drivers of the rise and fall of bitcoin and other altcoins. The role played by the stablecoin tether has been predominant in the phase of the rapid price increase between March and December 2017.

A stablecoin is a digital currency anchored with a fixed exchange rate to a fiat currency traded on the forex market, such as the dollar or the euro. Its existence is justified by the fact that, at present, the conversion between fiat and digital currencies is still slow and cumbersome, given that it requires a funds transfer from traditional banks to crypto exchanges via cross-border banks’ payment systems, whose settlement may require several days.

The conversion between digital currencies is instead instantaneous and allows traders to protect themselves by using stablecoins from the very high volatility of bitcoin’s and altcoins’ prices. Of course, 1 tether is not equivalent to $1 because it cannot be freely converted, although the company itself has always declared to hold a reserve of dollars corresponding to the quantity of tether issued and circulating on the exchanges. However, for traders, tether performs the same function of the dollar, so it is irrelevant whether there is or is not full or partial convertibility.

In April 2019, there are at least eight different stablecoins on the market offering the same tether service, but in 2017, tether substantially managed a monopoly that heavily influenced the price trend on the various exchanges, as evidenced by a statistical analysis made by the University of Austin, Texas. What’s happened has a lot to do with the fact that the company that issued tether was de facto controlled by the largest crypto exchange in Asia, Bitfinex.

BTC Price and Techer Capitallization

Rolling Correlation : BTC Price/ USDR Capitalization

By examining the data (see figures above) we can observe how the price behavior of bitcoin (and of the other altcoins) in the “pump” phase of the bubble is perfectly correlated with the issuing of new tether on the exchanges. As the aforementioned research shows, it is statistically probable that the Bitfinex exchange has artificially fueled the manic buying of digital currencies through the issuing of increasing amounts of tether. In a phase of exponential price rise, the issuing of tether without adequate coverage in dollars is a profitable strategy. In fact, speculators could buy digital currencies with newly minted tether, counting on being able to resell them at a higher price later and replenish the dollar reserves. The signal of strong price increases in increasingly accelerated times contributed to the growth of the media hype on digital currencies, which attracted retail investors with little experience in digital assets, often unaware of the enormous risks related to the terminal phase of a speculative bubble.

The long price contraction, perhaps not yet completed despite the recent recovery in prices, was caused by two main factors operating in two distinct time phases. Between January and April 2018, the decline was demand-driven and therefore determined by the flight of frightened speculative investors, highly exposed to losses due to the purchases made at very high prices. In this classic panic-selling, it can be noted that the support of a growing issue of tether was also lacking on the exchanges. In fact, since February, the growth of tether in circulation has slowed down and flattened out; this is indicative of the fact that, in a declining market, the strategy of issuing uncovered tether was no longer profitable.

In June 2018, the price apparently found a floor at around $6,000, a level still over 10 times greater than the price that bitcoin had at the beginning of 2017. At this point, the majority of speculative investors has already disappeared, and the volatility of digital currencies was drastically reduced as trades gradually became thinner (see figure below). Many analysts believed that, at this stage, $6,000 was the minimum level necessary to offset the energy costs of the miners that were digitally “coining” the new crypto assets. Until then, the need of a widening population of miners to catch cover rising production costs was a force that supported the price growth of digital assets.

1 year Rolling Annualized Volatility of Some Digital Assets

However, this fragile balance did not hold. In November 2018, the announcement of another hard fork between digital currencies that aimed to coin a new bitcoin clone without substantial innovations caused a price earthquake that broke the fragile equilibrium achieved. In this deteriorating framework, the determining factor of the price decline seemed to be offer-driven and related to the digital currencies mining community. In fact, a substantial share of miners abruptly shifted its computing power (or hash rate) from bitcoin toward clone-currencies in the hope to reap risk-free profits from the blockchain fork, as already happened several times in the ascending phase of the bubble.

But at the end of 2018, things were changing: The anomalous shift in computing power took away support for bitcoin and dragged the price of digital assets in a downward spiral, including the clone currencies on which the miners had heavily invested. As a consequence, a part of the miners, which was already operating at a loss before this downturn, has been thrown out of the market, causing — for the first time ever — a decline of the overall computing power of the bitcoin network, which collapsed by 50% in just a few weeks (see figure below). In this short period of time, bitcoin and the altcoins went in a free-fall never experienced in the demand-driven phase of the bursting of the bubble, suffering losses in the order of 70%.

Bitcoin Mining Computational Power

In 2019, the “Darwinian selection” of miners seems to have stopped, as testified by the recovery of the overall network hash rate — albeit at a more moderate rate. The bitcoin protocol provides an automatic mechanism of autoregulation such that the cost of currency’s mining tends to fall in the face of a decline in the network computing power. This periodic adjustment allows marginal operators to return to the market at lower costs.

In the early months of the year, cryptocurrencies slowly regained value, but the real surprise came on April 2, when, in just one hour, bitcoin spiked by almost $1,000, surpassing $5,000 — a new resistance that has basically held up over the weeks since.

It is not clear what the reason for this jump was (perhaps an algorithmically generated order or a liquidity squeeze connected to bitcoin derivatives followed by a forced buy-in on market makers’ quotes). After all, recently, various analysts had forecast a surge in the short term, and knowing the trigger event matters little. The real question is whether the market is heading back into bull mode. Multiple factors support an affirmative answer: the gradual recovery of the market capitalization of some stablecoins — tether first (see figure below) — the wear of the resources available to the bears, the albeit moderate return of various central banks to an accommodating monetary policy and the uncertainty linked to relevant phenomena on a global scale (the Libyan crisis, trade tensions, the Brexit conundrum and forthcoming European Union elections) that increases the appeal of digital currencies.

Bitcoin Price Versus Tether Capitalization

2019 could prove to be a new starting point for digital currencies, given the slow recovery of investors’ interest. Investments in technological innovation and infrastructure have never stopped, and the interests of institutional investors go beyond the short-term speculative frenzy. Regulators are also gradually intervening in the reorganization of these frontier markets. The crypto winter may be less long than expected.

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Game Changer for Bitcoin? VanEck ETF Decision Tomorrow –  All You Need to Know

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One of the events the entire cryptocurrency community has its sights turned to is the VanEck/SolidX Bitcoin ETF proposal. It was published in the Federal Register back on February 20th, giving the SEC a legal timeframe of 90 days to make a further decision. This means that the Commission must come up with a decision tomorrow, May 21st.

May 21st – An Important Date for Bitcoin

The saga around VanEck/SolidX Bitcoin ETF proposal has been going on for quite a while now. Last year, their application was withdrawn after being delayed on multiple occasions by the US Securities and Exchange Commission (SEC). However, shortly after that, the application was submitted again, reigniting hope among those who believe that a Bitcoin ETF would catalyze a further increase in the price of the cryptocurrency, as well as further adoption.

The new application was filed with the Federal Register on February 20th, giving the SEC a binding term of 90 days to come up with a decision to approve, deny, or delay it. Interestingly enough, another Bitcoin ETF application was also filed with the Register on February 15th – that of Bitwise. The SEC delayed its decision on the latter, while even deciding to use the full 90 days term to make up its mind on the application of VanEck and SolidX. This is why May 21st is an important date to expect.

According to famous legal expert among the cryptocurrency community, Jake Chervinsky, however, the chances of a delay or denial are much higher than the chances of approval.

He bases his merit on the fact that the SEC is unlikely to approve the first-ever Bitcoin ETF without taking the full 240 days period that it legally can. Moreover, he also finds it rather unusual that the Commission didn’t delay the VanEck Bitcoin ETF together with that of Bitwise.

The lawyer also cited some of the reasons for the delay of the application of Bitwise, which include:

  • The nature of the market for Bitcoin
  • The efficiency of that market
  • The susceptibility of that market to manipulation
  • How the market is similar to markets for other commodities
  • Reports that a large percentage of reported volume is fake

Chervinsky pointed out that if VanEck has any chance of approval, then the SEC “would need to delay & aks all these same questions to them as well.”

What Does This Mean For Bitcoin?

While it’s anyone’s guess how a potential approval of a Bitcoin ETF would impact Bitcoin’s price and whether it would surge, the majority of the cryptocurrency community is undoubtedly sure of it.

According to Josh Roger, a well-known cryptocurrency trader and investor, the different scenarios will have different impacts on the price.

The upcoming VanEck ETF decision could certainly have a serious impact on BTC price.

Denial = Pull back the current price regardless of how good it looked this weekend.

Approval = push the price to new yearly high and create mass FOMO buying.

Delay = Expected & likely little change.

Be the first to know about our price analysis, crypto news and trading tips: Follow us on Telegram or subscribe to our weekly newsletter.


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Game Changer for Bitcoin? VanEck ETF Decision Tomorrow –  All You Need to Know

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One of the events the entire cryptocurrency community has its sights turned to is the VanEck/SolidX Bitcoin ETF proposal. It was published in the Federal Register back on February 20th, giving the SEC a legal timeframe of 90 days to make a further decision. This means that the Commission must come up with a decision tomorrow, May 21st.

May 21st – An Important Date for Bitcoin

The saga around VanEck/SolidX Bitcoin ETF proposal has been going on for quite a while now. Last year, their application was withdrawn after being delayed on multiple occasions by the US Securities and Exchange Commission (SEC). However, shortly after that, the application was submitted again, reigniting hope among those who believe that a Bitcoin ETF would catalyze a further increase in the price of the cryptocurrency, as well as further adoption.

The new application was filed with the Federal Register on February 20th, giving the SEC a binding term of 90 days to come up with a decision to approve, deny, or delay it. Interestingly enough, another Bitcoin ETF application was also filed with the Register on February 15th – that of Bitwise. The SEC delayed its decision on the latter, while even deciding to use the full 90 days term to make up its mind on the application of VanEck and SolidX. This is why May 21st is an important date to expect.

According to famous legal expert among the cryptocurrency community, Jake Chervinsky, however, the chances of a delay or denial are much higher than the chances of approval.

He bases his merit on the fact that the SEC is unlikely to approve the first-ever Bitcoin ETF without taking the full 240 days period that it legally can. Moreover, he also finds it rather unusual that the Commission didn’t delay the VanEck Bitcoin ETF together with that of Bitwise.

The lawyer also cited some of the reasons for the delay of the application of Bitwise, which include:

  • The nature of the market for Bitcoin
  • The efficiency of that market
  • The susceptibility of that market to manipulation
  • How the market is similar to markets for other commodities
  • Reports that a large percentage of reported volume is fake

Chervinsky pointed out that if VanEck has any chance of approval, then the SEC “would need to delay & aks all these same questions to them as well.”

What Does This Mean For Bitcoin?

While it’s anyone’s guess how a potential approval of a Bitcoin ETF would impact Bitcoin’s price and whether it would surge, the majority of the cryptocurrency community is undoubtedly sure of it.

According to Josh Roger, a well-known cryptocurrency trader and investor, the different scenarios will have different impacts on the price.

The upcoming VanEck ETF decision could certainly have a serious impact on BTC price.

Denial = Pull back the current price regardless of how good it looked this weekend.

Approval = push the price to new yearly high and create mass FOMO buying.

Delay = Expected & likely little change.

Be the first to know about our price analysis, crypto news and trading tips: Follow us on Telegram or subscribe to our weekly newsletter.


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PSA: Bitconnect ‘2.0’ Triggers Countdown to Resurrect Greatest Crypto Ponzi Ever

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By CCN: In 2016 a cryptocurrency project named BitConnect came along offering 1% daily compounded interest for those who purchased and staked its token.

When the BitConnect (BCC) bubble inevitably burst, the owners, as expected, made off everyone’s money. The BCC token price sunk by 99.9%, and a previously $2.5 billion valued project became worthless.

Now, the greatest scam ever sold is back. Enter BitConnect 2.0.

Hey, Hey, Hey: BitConnect 2.0 Arrives for a Second Bite at the Cherry

A website and Twitter profile advertising the arrival of BitConnect 2.0 appeared in the last few days. The website shows a countdown to the rebirth of one of the worst cryptocurrency scams of all time.

Bitconnect countdown

The Twitter profile contains just two posts – one is a link to the new website; and the other is a Binance referral link with the directive ‘Buy Now’.

Of course, there are no BitConnect tokens (either 1.0 or 2.0) hosted on Binance. If we take a look at the domain registrar details for the new website – BitConnect.io – we see some strange peculiarities.

Despite the Twitter post promising a July 1st launch, the website’s domain name is set to expire two weeks before that date. The domain, which differs slightly from the original BitConnect.co website, was registered in 2017.

bitconnect domain

Scamception: A Scam Inside a Scam

All of this adds up to what looks like a scam inside a scam. Assuming the site domain isn’t renewed before the expiration on June 19th, then perhaps what we have here isn’t BitConnect 2.0 at all.

Rather, it appears someone with an old domain name is attempting to squeeze as much money out of their Binance referral link as possible before the site expires. The Twitter profile shows almost 1,000 followers already, despite the first post not appearing until one day ago. However, the new website is also registered in the same geographic location as the original – Panama.

One person who was able to see the funny side of the BitConnect revival was former BCC front-man, Carlos Matos. Famous for his exuberant and dramatic on-stage sale pitch, Matos continues to post memes about the BitConnect saga. Recently he revived his infamous ‘Hey, Hey, Hey…’ slogan to comment on BitConnect 2.0; which he apparently has no part in.

[embedded content] [embedded content]

Matos even posted this meme expressing a skeptical take on the project’s revival.

bitconnect grand theft auto meme

Too Late for Skepticism

Ultimately, the same skepticism would have been useful several years ago, before gullible investors were taken for all they had. From the ICO price of $0.17, the value of BCC tokens shot up to $509.99 in one year – marking ridiculous gains of 299,894%.

bitconnect charts

Of course, those gains were never cashed out. When the exit scam hit in January 2018, the value of BCC dropped like a stone. Data for the token price continued to be tracked up until August 2018, when it held a value of just $0.263786, before being removed from all exchanges.

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EOS Price Prediction Today: Daily (EOS) Value Forecast – May 20

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34-Million-EOS-Officially-Burned

34-Million-EOS-Officially-Burned

  • On the upside, if the price is sustained above the EMAs, the bulls are likely to retest or break the $6.60 and $6.80 resistance levels.
  • However, if the bulls fail to break the resistance levels, the crypto’s price is likely to fall back to the range bound zone.

EOS/USD Medium-term Trend: Ranging

  • Resistance levels: $ 6.80, $7.0, $7.20.
  • Support levels: $6.20, $6, $5.80.

Last week the price of EOS was in a bullish trend. On May 16, the crypto’s price tested a high of $6.80 and was resisted. The market fell and was in a downward correction to the support level at $5.80 price level. On May 19, the crypto’s price was in a bullish move but was resisted at the $6.60 price level. The crypto’s price is above the 12-day EMA and the 26-day EMA which indicates that price is likely to rise.

On the upside, if the price is sustained above the EMAs, the bulls are likely to retest or break the $6.50 and $6.80 resistance levels. However, if the bulls fail to break the resistance levels, the crypto’s price is likely to fall back to the range bound zone. Meanwhile, the market is at the overbought region of the daily stochastic but below the 80% which indicates that price is in a bearish momentum and a sell signal.

EOS/USD Short-term Trend: Ranging

On the 1-hour chart, the price of EOS is in a bearish trend zone. On May 19, the crypto’s price reached a high of $6.52 but was resisted. The crypto’s price fell and was in a downward correction. The bears have broken the 0.236, 0382 and the 0.50 Fib. retracement levels.

The price is in a downtrend zone but the 0.618 retracement level is likely to hold. In other words, the price may fall to the $6.19 price level. Meanwhile, the market has reached the oversold region of the daily stochastic but below the 40% range. This indicates that the price of EOS is in a bearish momentum and sell signal.

The views and opinions expressed here do not reflect that of BitcoinExchangeGuide.com and do not constitute financial advice. Always do your own research.

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Bitcoin Has Soared Above Intrinsic Value During Latest Rally, JPM Strategists Claim

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Strategists from United States banking giant JPMorgan Chase (JPM) have argued that bitcoin (BTC)’s recent rally has ostensibly soared past what they calculate to be its intrinsic value. Their analysis was reported by Bloomberg on May 20.

The strategists — who reportedly include JPMorgan global market strategist Nikolaos Panigirtzoglou —  judge that the top coin has recently been trading in a way that mirrors its late 2017 rally, which preceded a protracted price slump.

To ascertain the coin’s intrinsic value, the strategists reportedly analyzed bitcoin as a commodity and calculated its cost of production based on parameters such as estimated computational power, electricity costs and hardware energy efficiency, Bloomberg notes. They reportedly stated:

“Over the past few days, the actual price has moved sharply over marginal cost. This divergence between actual and intrinsic values carries some echoes of the spike higher in late 2017, and at the time this divergence was resolved mostly by a reduction in actual prices.”

Bitcoin — which has seen a renewed lease of life since April — has traded as high as almost $8,300 within the last week — having traded sideways below $5,000 throughout February and March. In mid-December 2018, the top coin had traded below the $3,300 mark — with its current price point thus representing a roughly 150% gain over its bear market lows.

Bitcoin’s 3-month chart, Feb. 20 — May 20 2019

Bitcoin’s 3-month chart, Feb. 20 — May 20 2019. Source: CoinMarketCap

In an apparent qualification of their analysis, JPMorgan’s strategist are cited by Bloomberg as having noted that:

“Defining an intrinsic or fair value for any cryptocurrency is clearly challenging. Indeed, views range from some researchers arguing that it has no fundamental value, to others estimating fair values well in excess of current prices.”

As reported, JPMorgan CEO Jamie Dimon has long adopted a sceptical stance toward decentralized cryptocurrencies such as bitcoin, even as he steers the megabank toward launching its own blockchain-powered native settlement digital asset, JPM Coin.

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