New Crypto-Investor
Psychology – Where Did These High Caps on High-Supply Coins Come
From?
It was around noon – I was in my favorite bagel store getting my
coffee when I overheard someone talking about cryptocurrency. I was
quite excited, considering that I finally seem less of a cultist
when I mention Bitcoin due to the media frenzy responsible for
pulling in new investors. However, my excitement turned into a
nervous sweat when the man said “hey, did you hear about this
Ripple thing? People are saying it could be the next Bitcoin!”
The market had been a bit unnerving, to say the least –
many legacy coins with massive supplies were exploding, and it had
the tendency to be a bit confusing. The total market capitalization
of cryptocurrency ran a couple hundred billion in just a few weeks,
with unknown coins reaching new heights among well-established
projects. Something was definitely wrong.
The Top is In.
On January 5th, CNBC
contributor Brian Kelly participated in a segment on Fast
Money showing consumers how to buy Ripple’s XRP from
popular cryptocurrency exchange Poloniex.
U.S. based investors unfamiliar with cryptocurrency outside of
the Coinbase quartet were probably shocked at the prospect of a
cryptocurrency trading under $100 – let alone $10.
New retail investors saw the price of XRP as an opportunity to
capitalize on discovering “the next Bitcoin,” as many like to call
their favorite cryptocurrency. However, for XRP to come even close
to Bitcoin’s price would require a market capitalization of over
one quadrillion dollars.
The price of XRP at the time of the show was $2.57, and although
it was being traded at a premium in Korea – it seems as
if Fast Money pushed it during its swan song. As
retail investors continued pouring money in, Ripple began its slow
descent to under $2, until the recent slump drove it under $1.
Ripple wasn’t the only “cheap coin” that followed these recent
parabolic uptrends into a spiral – others including parody and
rubbish such as ReddCoin, Verge, and even Dentacoin did as
well.
The psychology behind the drive was most likely the following:
why buy a fraction of a Bitcoin (whether or not the investor knows
that’s possible), when you can own a “cheaper” coin in abundance?
To someone new to cryptocurrency, what sounds more appealing:
0.54132 Bitcoin, or over 5,000 XRP?
High Supply – Misinformed and Negligence
To those who believe that XRP has a similar chance at breaching
the $10,000 mark, as Bitcoin has – I’m sorry to burst your bubble.
Even at $10 which many see XRP hitting, its market capitalization
would be somewhere around $1 trillion assuming the entire supply is
accounted for. That’s a drop under double the market capitalization
of the entire cryptocurrency market.
It could be a probable scenario if the market capitalization of
cryptocurrency were to hit the multi-trillions sector, but for
now, it seems to be a bit of a pipe-dream to assume that an
asset will float that high in the near future.
This isn’t a bash to Ripple’s technology, but rather an
observation on potential price-points of a certain asset. The same
rules apply to most cryptocurrencies that have high supply numbers,
whether or not they have solid technology behind them.
Take for example Sia – a decentralized cloud storage solution.
During the low price-point madness, the price of Sia shot from
under $0.03 to over $0.10 in a matter of a few days. It has been
around long enough but already had a $1 billion market
capitalization. It was simply another case of “cheap-coin” while
neglecting supply metrics. Again, this isn’t a knock on Sia’s
technology – it’s quite great. However, the price wasn’t justified,
and the market movement was simply caused by new investors. Kin can
be included in this mix as well.
The darker side of this were the coins that were not
up-to-par and pumped for the same reason. Take Dentacoin for
example – is the global dentistry industry really going to adopt an
Ethereum token? Raise some money, buy some clinics, claim for them
to be independent partners, and wrap things up nice and tightly.
Fine, have your ICO, and your own cryptocurrency, but nearly a $2
billion market capitalization on January 8th with little to show for it?
Something is wrong here.
Let’s take a look at the supply and price-point metrics: an
eight trillion Dentacoin max supply total, a circulating supply of
over 325 billion, and a price well under a penny. It’s a recipe for
attracting new money.
However, part of the rise of some of these gray-coins as I call
them, came from well-known cybersecurity expert John McAfee, as he
initiated a wave of buying through his “coin of the day”
scheme.
McAfee, Master Manipulator
Back on December 13th,
McAfee tweeted his love for privacy coins, as well as
a follow-up the next day regarding a “privacy coin” formerly known
as DogeCoin Dark, now known as Verge (XVG). In his tweet, McAfee mentioned that it’s
“easier” for a coin to go from $0.03 to $3.00 than it is for one to
go from $300 to $30,000.
After his tweet, Verge spiked, going from a low of $0.013 to an
all-time high of $0.30 just a week later – a gain of over %2,300. A
coin with little to no function saw a market capitalization of over
$4.4 billion, simply because of its pricing and a small bump from a
popular figure.
McAfee then decided to capitalize on his newly discovered powers
by entertaining his followers with a “coin of the day” series, in
which he announced mostly high-supply coins that his new-investor
following would eat up because of their price points.
Electroneum, an infantile fork of the Monero codebase that held
an ICO and really hasn’t accomplished much was the first of his
picks on December 21st. Just a short bit later, and
Electroneum managed to spike nearly 60% before leveling out to a
drop higher than the day’s low. To hark back to the “cheap” idea,
Electroneum was trading below $0.10 but has a multi-billion
circulating supply of nearly 6 billion.
McAfee continued this trend with his next few choices, including
Burst (1.8b circulating), Digibyte (9.7b circulating), ReddCoin
(28.7b circulating), and even DogeCoin (112.8b circulating) which
became his “coin of the week” on January 8th. Some picked up on the trend and began
using McAfee’s tweets to “pump and dump” the coins of his choosing.
Even the creator of DogeCoin, Jackson Palmer, tweeted out his confusion, as ridiculous assets
with minimal underlying technology began assuming high market
capitalizations. However, it’s easy to manipulate new investors who
believe in the potential of an asset to explode due to a low price
and a neglect for circulating supplies.
Exchanges Temporarily Halt Registration
New investors have figured out how to purchase altcoins, and
they now understand where to do if the activity McAfee facilitated
was indicative of anything. Exchanges were definitely not equipped
to handle the sudden increase in traffic, as many of them displayed
through halting new user registrations.
Bitfinex was the first to close their doors in December due
to the number of new users coming in until they reopened just
a few days ago with new requirements. On December 14th, Bittrex announced a turn-off of user registrations due to a
“large spike” in signups. Binance temporarily disabled new registrations on
January 5th, and mentioned an
“overwhelming surge in popularity.”
Even Cryptopia had to shut their doors a day later on January
6th to handle
registrations, before reopening a few days later.
An exchange account black-market quickly opened up, as investors
that lacked accounts on certain exchanges began buying them off
other users for a premium. Prices ranged anywhere from a few
hundred, to even a few thousand dollars for verified accounts.
Binance noticed this trend, and quickly put out a noticewarning any individuals wishing to buy
accounts about the associated security risks.
These temporary shutdowns were only indicative of the number of
new buyers in the space, looking to capitalize on the
frenzy-period. Little did they know that a large wash-out was
coming just a few days later.
The Tuesday Night Massacre
Over the past week, the entire cryptocurrency market has taken
quite the beating. Some are attributing the decline to news out of
Asia, in which a media frenzy that came out of South Korea after some exchange drama hit.
Others, see the decline as a conspiracy surrounding the close of
the first round of the futures market, bundled with plenty of price
manipulation from Wall Street.
After a 50% decline in the total cryptocurrency market
capitalization, signs of life are finally starting to
reappear.
Regardless of the cause of the drop, new investors were most
likely shaken out as they weren’t prepared for the true volatility
of the cryptocurrency market. Hopefully, this stomps out any form
of Phoenix that some expected these high-supply, underwhelming
technology coins to pull, and they meet their timely demise (except
DogeCoin – that can stay). It’s time for a radical adjustment.
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