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 notice warning 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.