Bitcoin, ETH, XRP, LTC, And XLM Sell-off — Is It Overdone?

Last week was a horrible week for cryptocurrency markets. Bitcoin, ETH, XRP, LTC registered double digit losses, with ETH and LTC losing more than 20% of their value–see Table 1.

Table 1

Seven-Day Price Change For Major Cryptocurrencies

Source:Coinmarketcap.com 9/28/19 at 11:40 a.m.

The losses spread across the entire market, with only 11 out of the top 100 cryptocurrencies advancing and 89 declining—see Table 2.

Table 2

Number of Cryptocurrencies That Advanced/Declined In The Top 100 Ranks

Source:Coinmarketcap.com 9/28/19 at 11.40 a.m.

The board sell-off in cryptocurrencies coincided with a couple of events that should have been bullish rather than bearish for the digital currency. One of them is the introduction of Bakkt Bitcoin futures.

That’s a positive development for cryptocurrency markets. Futures contracts could solve one of Bitcoin’s problems: market volatility, and help the digital currency to become “people’s currency.” Gain broad acceptance among merchants as a medium of exchange, that is.

Then there’s the rising uncertainty in Washington that shook Wall Street.

That should have been positive for Bitcoin, too, as the digital currency is supposed to be a hedge against uncertainty.

Does anyone know what caused the sell-off?

Nicholas Pelecanos, Advisor to NEM Ventures, offers a couple of clues. One of them is technical. “The BTC price has seen a 20% sell off this week after breaking out to the bottom side of the descending triangle pattern its price had been consolidating in since late June,” he says.

Then there’s the news of a flush crash in the Bitcoin “hash” rate. “News of a 40% flash crash in the Bitcoin hash rate (the metric used to measure the amount of computational power securing the blockchain) was touted as the cause of the dump in price, but I don’t necessarily agree this caused fall in price or actually happened,” says Pelecanos.

But he doesn’t believe that the flush crush, indeed, happened. “For a 40% flash crash in the hash rate to occur, 40% of mining rigs securing the network would have had to shut off at the same time. I believe a more likely explanation for the reported fall in hash rate can probably be found in the methods blockchain monitoring websites like Blockchain.com use to calculate the hash rate. “

Simply put, cryptocurrency markets may have been misreading the news.

And there’s the Bakkt event, which tricked Bitcoin traders.

“The thinking on Bakkt was that the future’s volume would end up being net long as the contracts are BTC settled unlike the CME futures which are cash settled,” Pelecanos says. “This would mean that finally the institutional money could flow into BTC and pump the market, I still believe this will be the case. As this didn’t happen on the first week of Bakkt going live, sentiment changed under the shadow of a large bearish descending triangle.”

Again, cryptocurrency markets could have been misreading the news. Wall Street is trying to reduce rather than raise market uncertainty.

Still, he thinks that the sell-off is overdone.  “Several indicators, both technical and quantitative, are starting to show signs of BTC being oversold,” he says. “One of the main indicators I’m keeping my eye on is our network value model. This model helps us predict price action 3 days in advance with a 70% correlation. Generally, when the network value climbs above the market price, it’s a signal for bulls to rush in.”

That’s what happened back in 2017 and 2018, when the Bitcoin market bottomed.

Will history repeat itself? It remains to be seen.