With the crypto market languishing the past several weeks and major cryptocurrencies posting new monthly lows, you - like many investors - may be looking for answers. We saw Bitcoin’s price drop below $6,000 for the first time since June and Ethereum, the second largest crypto asset, plummet to a multi-month low under $300. Likewise, the top 15 coins all dropped close to 15% over the past few days with the leading altcoin losses on the week nearing 30%.
In their search for answers, we see many attributing the sudden downturn to the US SEC’s announcement on August 7th to postpone their decision regarding the VanEck/SolidX Bitcoin ETF. It was expected that an approval could trigger a bull run as large price movements of Bitcoin - and a crypto market that’s largely followed suit - have often coincided with major announcements from the SEC.
However it is important to remember that crypto is a global market with massive volume traded outside the US. And with recent international currency crises like the Turkish lira crash, many also expected Bitcoin and top cryptos to rally vs. dipping further regardless of the SEC news. So with this market downturn being just one of many to occur in 2018, would a Bitcoin ETF actually make a large difference?
Significance of the Bitcoin ETF
The key reason we’ve seen such sharp reactions to these SEC announcements is because of an ETF’s potential to quickly bring billions of dollars in fresh investment capital into the global cryptocurrency markets. A Bitcoin ETF would allow larger investors to get exposure to Bitcoin without having to go through a cryptocurrency exchange, which has kept many traditional and institutional investors at bay.
Crypto-based ETFs have the potential to be an investment “holy grail” for the industry that would signal major Wall Street adoption. For Bitcoin in particular, it would also signal confidence in long term price growth and its case for being a safe store of wealth similar to gold. So should a safer and more regulated Bitcoin ETF be approved, it’s expected that major institutional (and global) investment would follow suit.
Pattern or Coincidence?
For context, keep in mind this was VanEck’s third failed attempt to get a Bitcoin ETF approved. While the SEC did not outright reject the proposal, they did extend their timeline for making a decision to September 30th. Just one day before the SEC’s announcement, Bitcoin was trading at around $7,000. One day after the decision was announced, Bitcoin was trading at around $6,300.
Bitcoin, however, was not the only coin to lose 10% or more during this time. In fact, the entire crypto market dropped significantly and continued to dip for much of the last week - with Bitcoin even dropping below $6,000 briefly on August 14th.
This downward momentum continued a trend that began in late July when news broke that the SEC rejected another Bitcoin ETF proposed by the Winklevoss brothers. Considering that over the past several weeks the markets dropped significantly after each of the failed approvals, it does seem highly indicative of a pattern.
On the other side of the spectrum, the market tends to have a very bullish reaction to positive news. For example, when the SEC formally recognized the importance of cryptocurrencies, or more recently announced bitcoin would not be treated as a security, strong bull runs followed.
Considering the trends, it seems difficult not to attribute any of these price movements to the SEC’s ETF announcements. Global investors tend to follow US regulatory news so we could be seeing international downward pressure magnified by US headlines. So if the SEC does reject the ETF application again in six weeks, historical data indicates the triggering of a market downturn.
Other Bear Market Factors
While these US regulatory headlines may seem clearly indicative of price trends, most trading volume takes place outside the US so we can’t ignore other factors that could adversely impact the markets. One such contributor could be large selling activity by crypto “whales” in the Bitcoin OTC markets. Some estimates put the OTC market for Bitcoin at 2-3X larger than the exchange market so if high volume selloffs did occur - potentially magnified by the SEC announcement - it may have caused a very subtle, but equally adverse negative impact.
Another more common theory seen as contributing to the recent market dip is from ICOs that may be liquidating their funds raised through token sales. It would make sense for projects that raised funds through coin offerings to eventually convert their holdings into fiat to be spent on product development. A recent Bloomberg report cites research suggesting ICO liquidations worth around $5 billion have been driving down ETH’s price - an impact that’s been “magnified due to deteriorating sentiment and low liquidity.”
Support for this theory comes from the fact that most token initiatives are ECR20 projects built on the Ethereum blockchain with funds raised in ETH. Considering Ethereum’s status as the 2nd largest crypto asset, a selloff would have a broad impact on the entire market.
Yet another theory comes from rumors alleging the SEC is set to tighten their regulatory grip in September with new rules for ICOs.
Even while factoring in OTC markets and ICO liquidations, it’s hard not to attribute recent major price swings and volatility to the SEC’s very public announcements. However as of August 15th, Bitcoin prices and the market at large seem to be rebounding. And while it’s unclear whether or not this upward momentum will continue, if the VanEck/SolidX ETF does get approved it could lead to an unprecedented bull run. Either way, mark your calendars as one way or another history indicates we’ll see some major price movement come September 30th.