In a piece published last week on CNBC, Julian Hosp, co-founder of Ten-X, a company that develops debit card solutions for cryptocurrency holders, outlined four major risks that he believes can trigger a massive crash in the crypto markets.
What makes Hosp’s piece particularly informative is that he provides his opinion regarding the probability of each risk scenario manifesting and the potential consequences, expressed in % drop, that each scenario may cause.
As a blockchain expert and active practitioner, Hops was able to draw upon his network to gain insights and opinions directly from those who operate in the blockchain and cryptocurrency space.
“Knowing that one person alone is hardly ever smart enough to weigh all the variables, I have set out over the past few weeks to talk to some of the brightest and most experienced people in the crypto ecosystem, to challenge them with the question of what could make a crypto bubble pop.”
The following is a summary of Hosp’s findings:
Risk 1: Regulators Step Limit or Ban Cryptocurrency Trading
- Likelihood of occurrence in 2018: 10%
- Potential market impact: 50% drop from top
“If regulators in the U.S., Europe or elsewhere get together and ban exchanges and other companies that provide services to the crypto ecosystem, that would have a hefty effect on cryptocurrencies themselves, which cannot really be banned.
Looking at China, which “banned” cryptocurrencies in the summer of 2017, there’s one clear result: People and companies simply moved somewhere else. And instead of the market collapsing it rallied. Would the U.S. or Europe have a more dramatic effect? I am pretty sure they would, but how likely is the entire scenario of one of the major Western economies banning cryptocurrencies? After bouncing this idea off a lot of people that I trust, I would give it a 10 percent chance in 2018, leading to a decline of about 50 percent from the market top.”
Risk 2: Cryptocurrency Exchange Blow Up from Hacks or Lack of Capital
- Likelihood of occurrence in 2018: 25%
- Potential market impact: Drop of 10-15% from market top
“Prior to 2014, the crypto ecosystem saw one exchange accounting for over 70 percent of all trading volume: Mt. Gox…initiating an 80 percent crash of the entire crypto market from its high. Some worry that we could see something similar today, but trading is much more distributed and hardly any exchange owns more than 10 percent of the entire trading volume according to CoinMarketCap.
There are, however, some significant exchanges that do play an important role…So a problem to the ecosystem could arise not from a hack, but rather from the cessation of fresh money to keep feeding the growth…What if Coinbase goes down and fresh money dries up? What if the extremely young exchange Binance runs into any issues?
I know first-hand that they and many other exchanges do the best they can to keep users’ funds safe, but there is always the risk of one or more of them blowing up. Growth is exponential and if some small thing goes wrong, it could make fresh capital dry up or lock up lots of coins indefinitely.”
Risk 3: Purchases on Credit and Leverage
- Likelihood of occurrence in 2018: 20-25%
- Potential market impact: Drop of 5-10% from the top
“Some exchanges allow users to buy cryptocurrencies with credit cards. And, on top of that, investors can even leverage purchases in many cases. In fact, one report put the number around 3 to 4 percent for purchases that are made on credit that could not be paid back by the buyer. Such a play is a bet the market will continue to go higher, so any extended period of sideways movement could be bad news for those who have to start closing positions.”
Risk 4: Tether
- Likelihood of occurrence in 2018: 10%
- Potential market impact: Drop of 10-15%
Cryptocurrency market cap is not an accurate indication of how much cash in backing the coin. According to Hosp, a coin’s market cap is calculated by multiplying the number of coins by the last price. Therefore, market cap does not accurately reflect how much money has been invested into the coin.
“For a cryptocurrency to have a market cap of $1 billion, maybe only $50 million actually moved into the cryptocurrency. Therefore, if that coin collapsed completely, its market cap would go from $1 billion to zero, but investors would have actually only lost $50 million.”
The exception, however, is Tether, a crypto coin that is supposedly “tethered” to the US Dollar. Currently priced at $1.6 billion, the price should indicate that approximately $1.6 billion is backing the coin. But there are reports circulating that Tether’s stated dollar value is false. Furthermore, several exchanges are connected to Tether. Should it be discovered that the reports of the misstated value are true, such a revelation would cause a significant downturn in the crypto markets.
“According to some reports, however, there isn’t actually $1.6 billion backing up the token. Since many exchanges and other cryptocurrencies are connected to tether, any finding that its stated value is untrue would send the market into a significant decline.”
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