The Wingsuit Test of 1912

Late last year press reports informed us that by October, the number of active accounts at US cryptocurrency exchange Coinbase* had exceeded the number of accounts at Charles Schwab, one of the oldest US discount brokers, by 1.1 million. The report was dated November 27, by which time the number of accounts had just soared by another 1.6 million. We felt reminded of the final few weeks of China’s stock market bubble, which saw similarly stunning growth in retail brokerage accounts. We felt that these Johnnie-come-latelies would soon experience the financial equivalent of the infamous wingsuit test of 1912. Witness the sacrifice of a man ahead of his time:

 

Wingsuit pioneer Franz Reichelt fails to get past the proof of concept stage.

 

What happened recently in cryptocurrencies was not quite as bad as the wingsuit test experience, but presumably more than harrowing enough for newbies:

 

Bitcoin hourly since January 02. In a little more than ten trading days, the currency went from in interim peak at $17,235 to an intraday low of $9,222 (at the Bitstamp exchange), a move of 47%. At the low it was down 54.21% from the 19,666 peak recorded on December 17. Note that the top in BTC was reached just one day after the FOMC announcement and the most recent short term low in gold. We cannot be sure whether that is meaningful, but it is certainly interesting.

 

Of course this was not the first time bitcoin has displayed such huge short term volatility, which traders actually thrive on. However, in in the final quarter of 2017 when all these new market entrants opened accounts at cryptocurrency exchanges, quite an orgy of speculation in all sorts of cryptocurrencies and assorted “tokens” took hold.

Some of these made their biggest moves after the peak in the leading cryptocurrency BTC. As an example, banker-approved Ripple (XRP) became a favorite plaything of speculators – at first it quadrupled between December 24 and January 4; alas, by January 16 it had done a complete round-trip, returning to the point at which the late December leg of its rally had begun:

 

XRP first increases by 300% in 11 days and then plunges by 75% in 12 days. The chart doesn’t exactly look very inspiring at this stage.

 

A Distinct Lack of Concern

To be sure, crypto-veterans have seen it all before and from what we gather, they don’t seem overly concerned. After all, as we type this, BTC is merely back to where it was in early December, at which point it had gained around 1,100% from the beginning of 2017. Anyone who owned XRP before its epic ascent started in early December still sits on quite a large percentage gains as well.

Perhaps they are not concerned enough though. Although we cannot be sure, we have a feeling that nonchalance may not be appropriate for once. One problem is that following the massive influx of new players, a lot of trading took place at higher prices. There are now sizable positions which are underwater and represent a large overhead supply. Many of these positions are presumably not exactly in the strongest of hands.

There is another problem though, one that very few participants in these markets seem to be considering (at least we have not heard it mentioned anywhere). It is the same issue other asset bubbles will eventually have to face and it is looming ever larger. We discuss this problem in detail in Part 2.

 

Footnote:

*oddly enough, at Coinbase, major cryptocurrency vs. fiat pairs, such as USD-BTC or USD-LTC routinely trade at a sizable premium over those quoted at other exchanges, despite the fact that Coinbase has quite sizable trading volume. We have yet to find out why these large premiums are not routinely arbitraged away.

 

Charts by: Cryptowatch

 

 

 

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2 Responses to “Cryptonite”

  • jks:

    Know-your-customer regulations are a major roadblock to getting on an exchange. The fiat on-ramp exchanges are flooded with new applicants. Bitstamp says they get 100,000 new applications per day! There’s an ocean of money trying to get into the crypto space that can’t get in through the narrow pipes of exchanges constrained by KYC. Even existing customers complain of money transfers to their accounts that aren’t getting processed. The exchanges are hiring and training new people to process the applications and orders, but they have a big backlog to slog through. This is bullish, but as Pater points out, there are lots of newbs that got in at high valuations and are getting lessons in crypto volatility they’d probably rather not learn.

    The arbitrage opportunities between exchanges are insane! They exist because it’s not easy to open accounts at multiple exchanges and because it’s not easy to move crypto quickly from one exchange to another. BTC, in particular, is very slow and expensive to transfer at just the time you need it to be cheap and fast. Pater, you need to put a Litecoin address in your “Donate” options. BTC transfer fees are too rich at the moment.

  • Galactus:

    Ol’ Franz looked like he had to really fight off common sense and the self preservation instinct to take that final step in the video.

    I’m sure the trip was exciting however. It’s like a gambler’s high I’m sure- except Franz appeared to be spared the pain of his decision at the end, unlike gamblers. Depression era brokers seem to have appreciated Franz’s way out.

    It’s interesting that it appears someone measured the depression left into the ground by Franz at the end of the video. I’ll bet it was a government economist trying to establish a metric by which to judge the level of failure involved with one’s decisions for the good of the people.

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