Could Crypto’s Biggest Winners Be its Biggest Threats?
Even with cryptocurrency’s revolutionary potential for decentralization and democratization, the nascent crypto industry remains highly volatile and at risk, likely thanks to some of its brightest names.
EOS caused major waves recently after selling 300,000 Ethereum, allegedly causing prices to temporarily crash. The event itself was mostly contained but did serve to raise important questions the industry must consider for the future.
EOS has significant reserves of ETH that are gradually being liquidated to create a cash fund for expenses, leading many participants to consider what happens when other companies decide that their holdings are better served in fiat and subsequently sell reserves.
The answer is unclear, but it does highlight an emerging paradox in the industry: to be successful as blockchain-based entities, businesses must be liquid, and that requires fungible capital. If these coin liquidations are large enough, they can theoretically impact the market and risk the rest of the ecosystem’s stability by causing a substantial drop in prices.
This situation begs an important question: what happens when the crypto market’s biggest bets for success also pose its biggest existential threats?
As ICO fundraising continues to soar, companies must contend with the realities of the market. To move past fundraising towards sustainable business models, they must have reserves of cash in fiat currency since most business services don’t operate in cryptocurrency.
As the number of companies with massive ICOs expands, the market may face an unforeseen existential threat from its biggest players
The Funding Paradox
One of the unforeseen side effects of cryptocurrency volatility is the pressure it puts on companies that rely on it as a main source of liquidity. Despite its astronomical value as a speculative asset, businesses require capital that is both fungible and stable. Despite all their benefits, cryptocurrencies have been known to swing wildly in valuation, adding the risk of massive losses completely unrelated to operations. Thus, to ensure that their reserves will retain the most value, it makes sense to convert ETH or BTC (and other successful altcoin and token) holdings into fiat currencies or stable coins once fundraising is complete.
On a large scale, this is not a significant event for crypto markets. Enormous volumes are traded daily across hundreds of exchanges. With the top exchanges clearing hundreds of millions of dollars every day, a company liquidating a few thousand ETH is a relative drop in the bucket. However, there is a growing number of post-ICO companies that have holdings of ETH and BTC that could potentially exhibit an outsized impact on prices if offloaded.
There are already clear cases of large selloffs by individual entities triggering staggering losses in cryptocurrency valuations. EOS was the most recent example, but a Mt. Gox trustee highlighted the potential impact a single party can inflict after unloading large blocks of coins. In March, we learned that Nobuaki Kobayashi, a lawyer managing the remaining Mt. Gox assets, was selling significant amounts of bitcoin on two exchanges. Kobayashi sold more than $300 million worth of bitcoin, and many believe this recirculation of such a large number of coins severely depressed prices.
In EOS’ case, it was simply the company divesting their ETH holdings. However, the company, one of the oldest on the Ethereum blockchain, has significant holdings. According to some reports, EOS has over 1.1 million ETH, positioning them as an influential player in the ecosystem. This is where the funding paradox comes into play. The company is a major success story for cryptocurrencies. Even so, to truly take off and continue growing, it must convert its sizable supply of ETH into fiat equivalents. The results were in full view when ETH dropped $62 in 24 hours following a high volume of activity from wallets linked to EOS.
Herein lies the paradox in the current ecosystem: for a company to truly realize their gains (as measured in fiat) they must potentially put all others’ gains at risk. Thus, projects that could be massive for blockchain threaten to potentially crash markets by divesting.
Are There Other Potential Shockwaves Coming?
EOS and Mt. Gox were short-lived spikes, due partly to relatively isolated incidents. Not every company or white whale will divest such a large amount of cryptocurrency on a regular basis. However, a rudimentary scan of the current ICO landscape reveals that there are several companies with potentially game-changing solutions that could lead to significant losses for Ethereum, Bitcoin, and other major coins.
Ethereum challenger Qtum, for instance, had a highly successful ICO which initially raised $15 million worth of ETH and BTC. The company offers a blockchain solution that combines bitcoin’s security-oriented blockchain with Ethereum Virtual Machine to produce an agile and easy-to-use platform for building dApps. The company raised 75,000 ETH, which today totals over $44 million, and 11,000 BTC which is worth $81 million. Qtum has not made any overtures that they intend to divest their holdings, but the possibility could generate significant uncertainty in markets.
Similarly, TenX raised $80 million worth of ETH at the time of their ICO, reaching a hard cap of 200,000 coins that is valued at nearly $118 million today. The company is now moving on to development and has started issuing cards. However divesting might make sense considering payment processors have notoriously high overheads and require liquidity for cash flow purposes. FileCoin’s mammoth $257 million ICO in September 2017 puts it in rarefied air, meaning it wields as much influence as some crypto whales should the company opt to divest its holdings.
ICOs in 2018 have already easily outstripped 2017’s sizeable record, with the total number surpassing $6.3 billion by April. As more companies become significant holders of the major cryptocurrencies, this need for fungible capital to realize financial gains may put the broader ecosystem in peril.
An Unexpected Twist
Regardless of the current situation, it would take a significant number of companies simultaneously divesting to cause permanent damage to cryptocurrencies’ respective valuations. Nevertheless, as more companies thrive in the ecosystem and require additional access to liquid capital to progress, the likelihood of these flash crashes will continue to expand.