The Crypto Market Will Never Be The Same Again, But Could Ethers Still Fly To The Moon?

Updated on

Victor Argonov, senior analyst at International FinTech, EXANTE says that whilst the cryptocurrency market is in deep correction due to Elon Musk’s influence and a series of actions by American and Chinese politicians there’s still hope that the market will withstand the blow, however, it will never be the same again.

Get The Full Series in PDF

Get the entire 10-part series on Charlie Munger in PDF. Save it to your desktop, read it on your tablet, or email to your colleagues.

Q1 2021 hedge fund letters, conferences and more

He says: “The idea of ​​"non-environmental" BTC and the whole principle of PoW (on which Dogecoin also works) can gain a foothold in society and lead to an increase in the market share of PoS blockchains and especially the cryptocurrency ether (ETH), which plans to switch to it. However, PoW will also have many principled supporters. By the end of the year, the capitalisations of BTC and ETH can be compared at rates of the order of $30- $50 thousand and $6-8 thousand, respectively.”

The Cryptocurrency Market Has Started To Resist The Fall

If we are in a bubble now, then this bubble is less than in 2017. The fall of BTC below $30K is unlikely Argonov says: “Whether Elon Musk wanted such a deep collapse of the entire cryptocurrency market or not, politicians from the United States (who announced the persecution of Binance) and China (who banned payment companies from working with cryptocurrency and threatened completely ban cryptocurrencies and mining in the country) have also added to the situation. However, having sagged by about 40% from the May highs, the market has started to resist the fall.”

Gregory Klumov, CEO of Stablecoin platform STASIS, EXANTE’s sister company, adds: “The latest cryptocurrency downfall is not caused by the depressive news from China only, but rather present the aftermath of an overheated market and a huge impact on the fledgling minds of digital asset margin traders. The victims of such situations are often those who are new at this market and haven't learnt the ropes yet. Otherwise, one might recall that there are certain repeated cycles as the governmental regulatory attacks on digital assets also happened back a few years ago.”

Argonov argues: “Some companies, such as Micro-strategy, have bluntly admitted that they used the crash to buy assets. Elon Musk himself noted that despite criticism, Tesla does not intend to sell the BTCs purchased in February. If we draw an analogy between the current events and December 2017, then the current bubble, most likely, is smaller than the past. The fact is that there are many more long-term investors on the market now.

“The bubbles of 2013 and 2017 were viewed by many investors as a one-time phenomenon, on which it is worthwhile to quickly get rich and forget. But since then, BTC and many other currencies have been legalised in many countries. Specifically, in the US, BTC and ether have been legalised as exchange commodities, for which there are legal settlement and deliverable futures and options. Even pension funds have gained the right to directly own cryptocurrencies. It became clear that cryptocurrencies are serious.

“According to research in March, about half of the capitalisation in the cryptocurrency market is now accounted for by retail investors, and the other half by institutional investors such as pension funds and other large players. Institutional capital makes the market more stable than it was in 2017. They have a long-term focus and know that the cryptocurrency market, with all its bubbles, has a long-term positive trend. Institutional players have a good group of professional traders and are much less prone to panic.

“During the bubble in 2017, BTC rose 20 times in price, and then fell 6 times in 2018. Despite such a deep recession, over the course of 2 years, it has risen in price by almost 4 times: from $ 1000 (at the beginning of the bubble) to $ 3800 (during the crypto winter). This corresponds to the long-term regularity of annual satisfaction of the "base" rate of BTC, below which a collapse is almost impossible. At the end of 2015 - $ 500, at the end of 2016 - about $ 1000, at the end of 2018 - $ 3800, at the end of 2019 - $ 7500. Extrapolating this pattern, BTC could hardly be worth less than $ 30,000 at the end of 2021. Consequently, if we are now observing the deflation of the BTC bubble, then it will be no more than twofold. At least half of the capital that was in BTC in April is long-term capital, not aimed at reselling the asset this year. Most likely, in the coming months, the BTC rate will stabilise in the $ 40-50K corridor. Other coins, such as ETH, have excellent chances of returning to growth.

Will the market be redistributed in favour of ETH and PoS blockchains?

Argonov says: “Musk's long-term criticism of BTC due to mining being unsustainable is a blow not so much to BTC itself, but to all blockchains based on the PoW (proof of work) principle, where consensus is established through significant waste of electricity. And although many criticise Musk for participating in the market crash, society will remember his words in favour of energy efficient blockchains.

“Even if the correction ends soon and rates recover, long-term beneficiaries of current events will be currencies based on the PoS principle (Proof of Stake) and Ether, which is preparing to switch to this principle. However, they will not be able to completely supplant the PoW principle, since many crypto enthusiasts consider PoW to be the only effective mechanism for the safe decentralisation of currencies, since it separates financial power from political power. Development decisions, for example, the BTC network are not made by the largest currency holders, but by the largest miners who constantly spend funds to maintain their authority. In PoS, there is no such division: power directly depends on the number of coins in the holder, although there are attempts to create compromise principles such as PoI (proof of importance), where not only the ownership of funds is important, but also their use. But these alternatives allow for cheating (like throwing funds over to yourself) and are generally based on less reliable criteria than proof of using high computing power.”

Gregory Klumov adds: “No doubt that the forthcoming bans will have consequences for market participants who violate the laws in the jurisdictions where they are located. However, this will only enhance the development of the cryptocurrency industry and strengthen its foundation for future growth in capitalisation. The positive trend will continue, and the market will recover with stronger rates. The most quality and prospective projects already show the strongest signs of recovery.”

“At the very beginning of the collapse, the capitalisation ratio of BTC and ETH changed dramatically: for the first time since 2018, it was 2: 1 (42%: 21%). Soon, ETH sank, but for a while, the Cardano PoS blockchain (ADA) gained a lot in weight. When the correction is over, it is likely that they will show a particularly large increase. Now the circle of ETH and PoS fans can expand due to the supporters of green technologies. In the medium term, the capitalisation of ETH may become comparable to BTC,” says Argonov.

However, as for the strategic prospects of PoS versus PoW, they should not be exaggerated in the medium term.

  1. Many crypto enthusiasts are only such in relation to PoW. PoS, PoI and other “green” blockchains for them are not “real”, objectively inclined to a greater concentration of capital in a narrow group of “whales” than PoW. Elon Musk is not the only opinion leader in the market. Many other crypto enthusiasts, in the event of a direct war of paradigms, will urge supporters to invest only in PoW blockchains.
  2. ETH so far also works on the PoW principle, and therefore the overwhelming part of the market capitalisation is de facto behind this principle. The capitalisation ratio of BTC and ETH (2: 1) does not at all mean a similar ratio of PoW and PoW capitalisation s. ETH only promises to abandon PoW. If this refusal occurs, some investors will leave ETH. Most likely, the rejection of PoW will be carried out only if the team is confident that this transition will be accepted by the masses of not only speculators, but also long-term ones.
  3. BTC and ETH have the highest legal acceptance in the world. In particular, it is on them in the United States that there are legal delivery futures for institutional investors, including pension funds. For a large part of the market, the transfer of funds between BTC and ETH is easy, while the transfer to the rest of the blockchains is problematic. Among other coins, PoW blockchains are again enjoying great legal acceptance. For example, BCH and LTC presented in the PayPal account.

“PoW is likely to maintain its overwhelming market dominance in the coming months. Even PoS enthusiasts, de facto, in the majority vote with dollars for ETH, and not for ADA, EOS, DASH, etc,” continues Argonov.

Up to $ 6,000 or higher? Limits to ETH's Growth

Argonov says: “Although a global market transition to PoS in the coming months seems unlikely, a strong reallocation of capital in favour of ETH is likely. Should the cryptocurrency market expect a change of leader?

“In the summer of 2017, the capitalisations of BTC and ETH were almost equal for a short time. This was due to the technical problems of BTC and hopes that ETH would solve them more efficiently. However, the halving of BTC, when the current BTC and BCH (both with accelerated transactions) emerged, showed the team's willingness to fix issues and once again allowed BTC to far outstrips its competitor.

“It’s likely that in 2021, ETH can again compare in terms of capitalisation with BTC. Again, the reason is the supposedly greater technical excellence of ETH. It is easy to calculate that with a BTC rate of $30-50K, the ETH rate should be $ 6-8 thousand for parity with it in terms of capitalisation. These are the levels that can be expected in the coming months. The capitalisation ratio of BTC, ETH and the rest of the market can become approximately equal: 1: 1: 1, that is, a little more than 30% for each.

“Further redistribution of capitalisation s is in doubt. A significant part of the current capitalisation of ETH is the result of the desire of BTC investors to diversify their portfolio. Equality capitalisation of the two currencies can be an optimal solution, where commensurate amounts are put both on the preservation of BTC and PoW, and on the development of ETH and PoS. Concluding ETH as an outspoken leader will be perceived by many as a bubble and not supported,” he concludes.

Article By Victor Argonov, senior analyst at International FinTech, EXANTE