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-X) 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