Crypto Traders Fear the Altcoins Crash 💥💥

There are three major concerns for investors right now:

● What will happen to Binance

● Can Hong Kong (and China) step into the crypto void

● Will the SEC classification of “altcoins as securities” cause their demise?

Additionally, investors are reading about crypto history to try and understand it all, to gain an investment edge and prepare for future outcomes. Some of the 2017 bull market highflyers never regained their previous price peaks. Ripple (XRP) peaked at $3.40 on January 7 2018 when the SEC was restricting initial coin offerings (ICOs), as well as the Korean regulator trying to limit crypto retail trading. XRP is still down -85% from its all-time highs while EOS (EOS) is down -97%. Block.One, the company behind EOS, failed to follow through on their IOC promises and instead invested in Bitcoin (BTC). While EOS investors lost most of their money by being invested in this altcoin, Block.One did well as Bitcoin preserved its value.

No matter how much investors are down on their altcoin holdings, unless the investor is a trader with risk management skills, parking their crypto exposure in Bitcoin might be the only sensible option until a new bull market emerges that carries more weight than simply favorable tailwinds, and until the regulatory overhang diminishes.

The CFTC and SEC have brought several serious accusations against Binance, which might have colossal implications for the exchange. On February 13, 2023, Paxos halted the minting of BUSD tokens. Since then, Binance made retreats in various forms (changes in business operations in Australia and Canada, stopping zero-fee BTC trading, and removing a significant amount of altcoin pairs trading liquidity, etc.). The most worrying aspect is its suspension of USD deposits and pausing fiat withdrawal for its Binance U.S. platform.

50% of Bitcoin (BTC) held on exchanges has moved outside of the U.S. due to regulatory uncertainty, and for Ethereum (ETH) this number is even higher at 56%. Spot volume market share for U.S. exchanges has fallen to 21%, with perpetual futures markets being non-existent on U.S. exchanges, but 11x larger than the spot market. The U.S. based stablecoin USDC (Circle) market cap has fallen from $55 billion to $28.4 billion, while Paxos-Binance BUSD has fallen from $23 billion to $5.7 billion.

The decline in stablecoin market cap is a worrying sign as it shows liquidity continues to leave the industry. In contrast, the off-shore (out of U.S. jurisdiction) based stablecoin USDT (Tether) has reclaimed its $83 billion market cap. A regulatory enforcement action against Tether would greatly shock the market.

While Hong Kong has made various efforts to offer refuge for crypto investors, the large pools of institutional capital that were ready to enter the crypto world two years ago are mainly based in the U.S. So far, the actions taken in Asia are not decisive enough to offset U.S. regulatory enforcement actions, preventing those investors from entering the market now. With Silvergate Bank and Signature Bank (and to some extent also Silicon Valley Bank), two of most important crypto related on-and-off banking institutions have been removed from the ecosystem with Deltec Bank and Capital Union Bank (both located in the Bahamas) serving the Tether Limited — which manages the USDT stablecoin.

The critical driver of crypto adoption in the 2020/21 bull market was the number of downloaded crypto trading apps, which showed that over 600 million people were interested in crypto. App download data indicates that rising prices were the most important factor in generating interest, and with crypto prices going down, interest diminished. However, the analysis also showed that Android downloads outpaced Apple iOS downloads, indicating a higher proportion of lower-income users.

The fact that on June 27 2023 the U.S. retail trading app, Robinhood, will end its support for the altcoins, Cardano (ADA), Polygon (MATIC), and Solana (SOL) after the SEC labelled them as unregistered securities is critical as it will further stifle declining retail trading interest. Trading app eToro has also confirmed that they would delist a number of altcoins.

After the SEC announcement last week, traders also noticed that crypto wallets associated with large liquidity providers such as Jump Crypto and Cumberland started to liquidate some altcoin positions. Jump holds more than $2 billion in Ethereum and the firm recently announced that they would dial back their crypto engagement as trading volumes have declined.

As a result, we have observed a 30% decline in perpetual futures open interest over the last weekend, signalling a continued decline in altcoin trading activity. There is now a real possibility that the altcoins from the 2020/21 bull market will never reach new all-time highs again. This was part of our analysis in October/November 2021 when Bitcoin reached a new all-time high, but the yield farming tokens like Solana (-94%), etc. failed to rally as the second Bitcoin (BTC) rally in 2021 was driven by the NFT craze.

Maker (MKR) prices peaked in April 2021, and are down by 90%. While there is always money to be made in crypto, our view is that Bitcoin could reach a new high, but altcoins from the 2021 bull market are unlikely to achieve new highs. This is where understanding crypto history becomes so vital as it reveals the revolving door of crypto exchanges, and the different drivers of the four crypto bull markets (2011, 2013, 2017, and 2021). It clearly demonstrates that ‘regulation’ was a driving force that halted all those bull markets.

A month ago, we noticed and warned that Bitcoin failed to rally despite lower U.S. CPI data and we started to worry that the mini-bull market driven by less restrictive U.S. monetary policy could end. This appears to have been the case now. Crypto investors, unless they are traders, need to manage their positions carefully. The 2018-2019 crypto playbook is in “play” now.