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2018 Yearly Market Report ∙ The Year in Review — Subscribe to our newsletter.
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2018 was not all about that bearish reckoning. It was also about learning and building.
2017 might have been “the year of new cryptoassets”, as we concluded in the last LBX Year in Review. However, 2018 was even more dramatic than the denouement of that Cambrian explosion. It was about recalibrating, learning and building as both investors and developers were forced to reassess their game plan: cryptoasset prices fell 87% on average between January 7th and December 15th — this year’s highest and lowest points. Bitcoin, the cryptoasset which cemented its status as leader of the pack, anticipated the market top in December 2017, but failed to make a higher low last January — while alternative cryptoassets rallied several times amidst the extreme lambo-driven euphoria. That was the first indication that demand was lower than supply and thus signalled the beginning of a bear market — defined in traditional markets as a period with a prolonged decline of asset prices, with at least a 20% drop from the most recent high. By then, it was unclear whether that fall in demand was just a temporary slump or a sign of the ongoing turmoil for the year that was commencing. It was obvious the market was exuberant, but the extent of the bulls’ greed could have allowed for further upside — like it did in March 2013. However, the market was now structurally different. The rising popularity of derivatives exchanges and traditional futures contracts allowed traders to bet against the price of a cryptoasset — of Bitcoin more commonly — therefore, changing the rules of the game and affecting the ebb and flow between exchanges, bots, day traders, remittance companies and speculators. As the incentives to mindlessly ‘hodl’ were put aside, trading became a game of chicken — because going long was no longer the only option for new and old players to benefit from wild market volatility. It became a very profitable game for the brave bears in particular. As if the dumps weren’t enough to frighten hodlers, many claimed that those betting against the crypto ecstasy used powerful narratives to further drive away demand. We argue that these memetic stories aren’t the primary culprit for the extent of the depression. We shall highlight this year’s key events and attempt to explain the major cryptoassets’ price action. The goal is to undercover the main mechanics behind the mysterious drivers that move them — so that you can better anticipate the strong forces at play that may define price action in 2019. Like last year, we’ve divided this report into three neat quadrimestres that marked the charts — ‘January to April’, ‘April to August’, and ‘August to December’ — with more emphasis on the critical early period of 2018.
January to April
After bitcoin, the ether fever peaks and everyone freaks out.
Like 2017, the year started euphorically. Though the previous year it was bitcoin that had broken new records, it was now ether’s time to shine. This was all due to mythical instant riches achieved by flipping tokens right after a project distributed them to the public. The ICO market achieved its peak in February, shortly after ether reached its all-time high of over $1,800. Remember that at the time of Ethereum’s presale, in 2014, ETH was sold on average at $0.35, implying a whopping 5000x return on investment at this stage. Even if by the beginning of this year most investors were happy with “just” 5x returns — usually achieved in a couple of weeks — this greed soon proved itself as unsustainable. Why? Despite the evergrowing number of ICOs launched every day, the market didn’t onboard enough new buyers, and thus supply flooded the market. The 2017 ICO dream was built on a relatively small number of projects that decided to fundraise moderate amounts through Token Generation Events. Some of these new token buyers decided — or were forced through vesting schedules — to hold tokens for prolonged time periods while the project matured. This created a secondary market which opened access to those scarce new tokens in hopes that some of them could become the ‘next ether’. It was mostly fuelled by a wave of new investors in Asia, in particular in Japan and South Korea, but it was led by the early adopters of cryptoassets. Nonetheless, by 2018, it appeared that everyone was behind some kind of ICOrelated initiative. These late leaders tried to repeat the process used by early adopters, now targeting what they considered to be ‘noob’ investors — who had joined the space after Thanksgiving and Christmas. During this time period, it seemed everyone was interested in joining the profit party, but most exchanges couldn’t cope with the potential influx and blocked new registrations for several months. Soon after, the few fresh investors who joined the party in late 2017 started to register their first hangovers, better known as losses. On one hand, it became increasingly difficult to access good quality ICOs. Either because there were many projects, and even if not all were scams, only a select few had reputable teams and legitimate ideas behind them. Or alternatively, almost all of them had negotiated exclusive pre-sale deals with private funds. This meant the secondary market became the playground for those private funds to sell their heavily discounted tokens to the masses. And because there were dozens of projects fundraising every day, soon most tokens were being sold at a lower price than that of the initiated public sale. There’s a popular saying that goes as follows, “you can fool all the people some of the time, and some of the people all the time, but you cannot fool all the people all the time”. Hence, after numerous bad experiences, accompanied by the falling price of ether, investors stopped gambling. Firstly, there was Bitconnect, a clear Ponzi scheme which finally collapsed in January after exit scamming its participants. Then, other shady ICOs failed to comply with what was expected of them, e.g. Centracoin — which was backed Floyd Mayweather, the millionaire boxer. Their creators were some of the first to be arrested and charged with securities fraud by the US SEC, in March. It was then that everyone finally started to realise what some studies claimed — i.e. that “over 80% of the number of ICO projects were identified as scams”. Then the music stopped. Ether’s January top was marked by a 35% decline in the price of bitcoin in that same week. Which meant the existing market participants were selling their bitcoin to buy ether, and no new money was entering the market after a long two-year bull run. Once the ICO panic set-in — prompting all the projects that had recently fundraised to sell part of their holdings to cover expenses and secure their financing — suddenly there was more supply than demand and the tides changed. The market first capitulated on February 6th, following some regulatory ‘FUD’ (Fear Uncertainty & Doubt) from South Korea. This opened the way for bears to dominate price action over the rest of the year, even with bitcoin and ether providing some interesting bounces up until April. We covered that red day by arguing that “it might not have been the bottom”, but only a few believed it until the following dead cat bounce failed to make a higher high. So, by March 5th, it was clear that both bitcoin and ether were in for a dive. This was because that day, both BTC and ETH failed to overcome critical price levels that were established around February 20th. As investors saw market demand wasn’t strong enough to drive a higher high, a generalised loss of trust kicked in. This drove ether into a 75% decline between its January high and its April low — with the rest of the alternative cryptoasset market following — while bitcoin revisited its February lows. There was one grain of hope though, as the original cryptoasset didn’t breach its local bottom.
April to August
ICO respite prompts mini-alt season. Howbeit all bullish narratives fail.
After that gasp of positivity, i.e. the higher high bitcoin made, bulls recovered their strength and by the beginning of April began pumping alternative cryptoassets. Ether, XRP, litecoin, EOS, bitcoin cash: many more doubled in value in April. Curiously, it was also in April that one of the most popular exchanges behind the 2017 bull run — Bittrex, widely popular from its alternative cryptoasset offering — finally reopened registrations for new users. However, it was too late as it had already lost its leadership to Binance. Some projects also managed to successfully fundraise again through ICOs, after traditional VCs joined the party following Telegram’s multi-billiondollar ICO in February. This made May another spectacular month for those who were looking to flip their recently acquired tokens. By May 5th, bitcoin and ether failed to rise above their March highs once again. This happened in unison and marked a new period of coupled decline — as in April alts were up but bitcoin traded sideways. Then, over the next couple of months, BTC dropped 40% and ETH fell 50%. Still, the market was active and interesting. Volatility was present and both bulls and bears rejoiced at cyclical pump and dump tandem. They also talked about how a supposed triangular pattern the charts of the major cryptoassets were printing was supposed to signify bullish continuation. This was amplified by the narrative that participants in a major cryptoasset conference called ‘Consensus’ — held in New York in May — would leave the venue with positive talks with their ears ringing with the decentralised crypto gospels, and would propel prices upwards again. The forecast stood on top of a whimsical correlation with past conferences and this time failed to materialise. And that meme triangle lost its power as many claimed it could also lead to further bearish action. Meanwhile, fear regarding Tether’s instability resurfaced. What was supposedly a stablecoin, USDT, was accused by “a pair of academics” of being used to “artificially inflate” bitcoin’s price. This sensationalism further incentivised bears to bet against the market and the renewed selling pressure led bitcoin prices to a new yearly low by the end of June. By then, another popular narrative that argued bitcoin was poised to hit $33,000 by the end of July was abandoned and most bullish year-end price predictions were safely ridiculed. Still, a few bears were confident enough to predict a further decline from that level. That was because both ether and bitcoin had bounced 25% and 45% respectively, since June 29th. This led many to cry that the move was “either the making of an alt season or the biggest trap in history”. In hindsight it is easy to call it a major trap, but back then it was a different story. On one hand, we had a new bullish narrative on the block — about the potential approval of a Bitcoin ETF, a financial instrument which would enable mainstream investors to easily buy physical Bitcoin without having to use derivative contracts. On the other hand, BitMEX, a popular derivatives exchange which allows traders to trade popular cryptoassets with up to 100x leverage, launched a new contract to trade ether against the dollar on August 2nd, subtly and without fanfare. Previously, speculators could only trade ether on its platform against bitcoin, which meant both assets were usually highly linked. But now there was a powerful instrument that allowed bears to voice their negative stances against Ethereum’s native currency in an independent way. Ether started falling two days earlier, on July 31st, as some traders likely knew about this beforehand. Five stable days after the contract commenced trading, ether began a new 50% decline that was only halted in September — while bitcoin just moved 15% during that period.
August to December
The doldrums, the BCH hardfork, and the delayed Bakkt.
The market plunge was nothing new. Bitcoin’s “seasonal affective disorder” has been common since 2014. This was visible in the first month of the northern Hemisphere’s summer, during 2017’s bull run– even if it was mostly influenced by the Bitcoin Cash civil war. However, in 2018, the disorder manifested itself differently. In this case, through extreme boredom. As the last stages of ether’s infamous “death spiral” came to an end in August, bears took a beach break, and bitcoin became the playground of algorithmic trading bots. These emotionless computers squeezed the already lower-than-usual volatility out of the market. What once had made bitcoin interesting — its exciting price swings — had now disappeared, and even passionate believers wondered if the markets were dead for good. After an already calm September, in October bitcoin broke all records. For more than a week it moved less than 2%, as trading volume hit its yearly lows. Traders exasperated and looked away to other markets, as apathy sunk and bitcoin became less sexy than ever. This dullness helped separate the wheat from the chaff. Those who were patient simply waited. Those who were building had more space to focus. And all the inquisitive ones took the time to learn and capitalise on their curiosity. Then, on November 14th, the crypto market abandoned its doldrums. How? With help from the same project that drove most of 2017’s key price movements: Bitcoin Cash. Twice per year, the most direct competitor of the original cryptoasset undergoes a hard fork. Until then, all such forks took place smoothly, integrating scheduled improvements accepted by all participants in the community. But this time, two factions emerged within the already contentious project and they didn’t seem to agree on key issues. The fork was scheduled to take place on the afternoon of November 15th, and on the days leading up to it, it became clear that the fork wouldn’t be consensual. One of the groups was led by the original backers of the project, namely Roger Ver and Bitmain’s Jihan Wu. Though the other faction was led by the most famous outsider of the cryptosphere, who had been originally recruited by Roger Ver to try to bring some legitimacy to the fallen fork. We’re talking about Craig Wright, this space’s most consensual persona non grata. He was supported by Calvin Ayre, another infamous character who arrived in the cryptosphere after his entrepreneurial success in the online gambling industry. Having founded a famous crypto-news website and mining pool, he commanded an interesting set of resources. Wright and Ayre pledged to return Bitcoin to the original vision of Satoshi Nakamoto, and waged war on both the original Bitcoin Cash group, now dubbed ABC, and on the entire Bitcoin community. The threat was initially dismissed but proved to be very real. What happened? Each side was mining large amounts of bitcoin cash which they then sold for bitcoin as interest in the fork appreciated BCH’s price. Which means both sides could then increase the value of their reserves to better fight the war. And, on day before the split, bitcoin selling volume rose above average, a move attributed to one of the factions, as Craig Wright had claimed some hours earlier his side would sell their bitcoin holdings to fund their Bitcoin Cash mining operations and that would tank BTC’s price. We explained the details of this event in this newsletter for those interested in learning more, but what’s important is that such selling led bitcoin to experience a downfall of 15%. It rested around $5.5k for five days and then the dump continued. Curiously, the dump happened on a Monday after a stable weekend in which the market failed to react to bearish news from the US SEC. The dump was a delayed reaction to that news, which took more time to be absorbed by the now apathetic bears. The CEO of Bakkt took the opportunity, that same day, to announce the deferral of the launch of this innovative platform, backed by the owner of the New York Stock Exchange in partnership with Microsoft and Starbucks. The awaited date was moved from December 12th to January 24th and with it all hope of a Christmas rally evaporated. This was the last bastion of the bullish narrative and now all doors were open for new floors to be found. And so it was. Bitcoin’s gravitational pull dragged down the entire cryptomarket with it over the following weeks, having — for the moment — settled with a bottom around $3.1k on December 15th, while ether, which is no longer the second most valuable cryptoasset, touched $80. As we all know, between that Saturday and Christmas eve, bitcoin appreciated 35% while ether managed a fantastic 100% jump. Winter bears showed up again and the next few days are be critical to determine the year ahead. So, stay tuned for our prescriptive outlook for the next twelve months, which will be released next week. It will focus on how this year’s supply and demand imbalance could change in the future and on critical issues that the crypto market needs to address in 2019. While many are counting on the approval of the SolidX/VanEck ETF by the US SEC, the outcome is still uncertain. Yet, even if it’s approved, like the once-bullish Bitcoin futures marked the beginning of the bear market, the ETF can come to symbolise a dreadful bearish consolidation. Remember that if you survive this bear market, you’ll be well equipped to survive the most extreme trading events life can throw back at you in the future. As a famous trader once said “stay alive, energetic, and focused because what doesn’t liquidate us make us stronger”.
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