Alt-coinsPrice Analysis

Ethereum Hit Hard By ICO Winter

By March 26, 2018 No Comments
It's impossible to shut down a truly decentralized cryptocurrency, so regulators are grabbing whatever low hanging fruit they can wrap their arms around - the capital-raising side of the market, namely ICOs. Since almost all of these token sales are ERC-20 tokens - its native cryptocurrency, ether, has been hit particularly hard in this crypto-bear market.

It's impossible to shut down a truly decentralized cryptocurrency, so regulators are grabbing whatever low hanging fruit they can wrap their arms around - the capital-raising side of the market, namely ICOs. Since almost all of these token sales are ERC-20 tokens - the native cryptocurrency, ether, has been hit particularly hard in this crypto-bear market.

One Of Last Year's Best  

Ethereum was one of last year's top performing cryptocurrencies - rocketing from a price of $8 in January 2017 to more than $1,500 just a year later.  It's also being slammed unusually hard in this current "ICO winter", when regulatory uncertainty is haunting the markets for new coin offerings.  Ethereum is trading below $500, more than 63% off its all-time high on Jan. 10th, and there is no end to the bloodbath in sight.

Sector Slammed

While regulators are still trying to wrap their heads around just exactly what cryptocurrencies are - the SEC says they're securities, the CFTC says some are commodities, and the IRS wants to treat them as property - all the subpoena-issuing and regulatory bla-bla has driven crypto prices down across the board, and has understandably hit the blockchain-builder sector particularly hard, since these are the native currencies of the platforms on which ICOs are built.

Open-Minded - Not So Much

While CFTC Chairman Chris Giancarlo was surprisingly open-minded at a Feb. 6th Senate hearing on banking, SEC Chairman Jay Clayton was most decidedly not.  He pretty much put his foot down without even caring enough to listen to the other side of the story.

These are the words that sent a chill through the ICO market and started the long, cold, crypto-winter for ethereum and the other cryptocurrencies in the blockchain-builder sector.

Much More Nuanced

The other side of the story was pretty compelling.  Some of cryptocurrencies' most ardent defenders came to DC in March to testify in a Congressional financial services hearing focused entirely on ICOs.  A researcher from CoinCenter, a Silicon Valley attorney who handles many ICOs, and Coinbase's chief legal and risk officer all gave a much more nuanced picture of the ICO market - noting that each use case is unique and should be evaluated on its own merits.

Unintended Consequences

The bottom line from those with extensive experience in the crypto sector is that trying to define and squeeze ICOs to fit into  current US securities laws amounts to nothing more than regulatory "shoehorning" and it will likely have the unintended consequence of innovation and driving some of the most valuable future capital markets overseas.

Digital commodities are scarce items that may have value on open markets as money, as investments, or as inputs for valuable commercial and industrial processes.  Promises of future tokens, representing the hopefully profitable efforts of a developer, are securities.

Peter Van Valkenburgh, CoinCenter

Watch Peter Van Valkenburgh of CoinCenter explain to a Congressional Financial Services ICO panel the difference between a digital commodity and a security 

Piling On

Of course what would a crypto-crisis be without the piling on of still more bad news?  With all the smart contracts built on the ethereum blockchain, it's of course inevitable that there's some poorly written code out there, but is this shoddy code worth worrying about?  Apparently it is.

Suicidal Contracts

A research report from Singapore ominously entitled "Finding The Greedy, Prodigal, and Suicidal Contracts at Scale" found that 3.4% of one million smart contracts analyzed on the Ethereum network were susceptible to bugs because of bad code. The research group found 6,239 Ether locked inside dead contracts of which 313 Ether had been sent after the contracts had been killed.  Vulnerabilities exposed included:

finding contracts that either lock funds indefinitely, leak them carelessly to arbitrary users, or can be killed by anyone
Last week was a crypto-bloodbath, but one major coin stood up to the regulatory scare - one based in China of all places - by far the worst crypto-regulatory environment on earth. How is NEO seemingly immune to regulatory fears while other cryptos nose-dive at the first whiff of regulation? Our live video trading analytics show you how to put bad news to work for you, helping you isolate the strongest players in the midst of a market panic.

The bloodbath in ether continues - it's currently trading well below $500.  While there is certainly plenty of FUD out there to go around - the nightmare scenario of all the major ICOs dumping their ether onto the market is an unlikely one.

Worth Worrying About?

Sounds pretty bad, right?  Well guess what?  It gets worse.  Since approximately two-thirds of the $6 billion raised in ICOs in 2017 was in the form of ether, these projects must sporadically cash out some of their ether holdings for fiat currency to cover expenses that can't be paid in crypto.  This means there's a lot of ether, several billion dollars worth, just waiting to flood the market.

In fact, because of the public transparency of the blockchain, it's possible to see exactly how much ether is being held in each project's wallet to get an idea of just how bad the situation could be.  Clicking on the Image below will take you to a google sheet that lists the amount of ETH held in the wallets of major ICO projects.  The total is about $2 billion dollar's worth.

Will ICO projects liquidate their ether holdinds and flood the market?  Not very likely.

Will ICO projects liquidate their ether holdings and flood the market? Not very likely.

Don't Panic

Fortunately the nightmare scenario of all these ICO projects dumping their ether holdings is extremely unlikely, since it is the "gas" that will power their transactions, contracts, and network usage as their blockchain projects develop and mature.  In fact, one could argue that the smart ICO teams would be buyers of ether while prices are low.

https://www.cryptocompare.com/coins/guides/what-is-the-gas-in-ethereum/​​​

Images via Shutterstock, Youtube, Google Sheets

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