Crypto Valuation: Why So Many Failed Rallies?


Since the crypto price peak at the beginning of this year, we have all been seeking the answer to two questions. The first and most obvious: what is making crypto short sellers so happy and making you, the long term investor, so miserable as the value of your portfolio diminishes month after month?

And then there is the big one: what is making prices unable to sustain any type of price rally? Technical analysts have been consistently right in pointing out the negative chart patterns but loath to explain what has been causing $600 billion of crypto value to disappear over the course of the past eight months.

Seeking Answers

You can’t be too critical of those of who read the technical tea leaves.  None of us have come up with a better answer. Over the course of recent articles, I have point out any number of downright absurd scholarly explanations, virtually all using correlation analysis that is largely useless in pinpointing cause/effect.

In other words, if you lost 65% of your investment in Bitcoin this year, and you want to know why.  Simply being told that you fit within less than one standard deviation from the mean of all investors just doesn’t cut it.

The need to have a rational explanation continued on September 5th when, in the course of a few minutes, the price of Bitcoin dropped by $10 billion and the value of all crypto came near their lows of 2018.  That started the round of serious minded souls raising the question WTF just happened?

Goldman Sachs got the blame from news that one of the biggest Wall Street trading firms had decided to delay rolling out their crypto trading desk.  Aside from the obvious, Goldman’s presence offered a portal and secure host for deep pocket institutional investors. Even though sources at Goldman called the delay “fake news,” it didn’t matter.

In the 15 hours following the September 5th peak of $7372, Bitcoin investors dropped 14%. Keep in mind, even if the Goldman story was “real news” it only suggested a delay in the project.

Goldman Is Not The Only One To Blame

Most often when asset prices change suddenly and dramatically, there may be a tipping event and then a host of other factors take over.  Surely this is what most observers would agree is what happened last Wednesday: fear took over and one of the most tranquil months for crypto prices turned into a raging fire.  So Goldman Sachs wasn’t the only cause of the drop.

Now For The Third And Most Important Question

What is making prices unable to sustain any type of rally?  To have a good answer to this question means having more than an understanding of what crypto is worth.  It is having a general consensus on ways to value crypto. Translated into financial terms: some way of measuring return on investment. In other words, income and cash flow.

Thomas Lee, partner of Fundstrat, explains one of his valuation metrics is based on Facebook, where he claims the value of the company is based on a multiple of the size of its network.  The simple but valid point is the more members in the network, the more eyeballs for advertising and related commerce.

This is a loose analogy but at least a starter. The number of nodes on the Bitcoin network do reflect traffic and interest in the cryptocurrency.  But every analyst of Facebook will agree, sub measures like the amount of time spent on Facebook, number of friends and many more are key parts. What good is a network if nobody is using it?

Losing Interest?

In the case of Bitcoin, interest in the crypto as a means of exchange is declining. Here are some figures from Diar.  The rise of cryptocurrency merchant processors has made it far easier for consumers to convert crypto to fiat when purchasing goods and services.  However, merchant processing has plummeted nearly 85% over the last 12 months.

It seems obvious that if this data is representative of what is happening in the real world, it goes a long way in helping to explain why crashing crypto prices are not followed by sustainable buying.  It shows that right now, Bitcoin and others are little more than toys for investors to play with in their leisure.

Critics who agree with this point of view point out that it is the lack or regulatory clarity that is thwarting merchants.  However, these are the same folks that claimed that merchant acceptance was being held down because of crypto volatility. Well after the last six months featuring the lowest volatility in two years, at least we know that hasn’t been a factor.



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