What caused this market decline (and what not)

Between 14 and 25 on November 2018, there was a massive sale of crypto assets in the crypto asset markets, raising concerns about the duration of the current bear season in the digital asset market, during which all those who tried to enter this market should probably capitulate. The rapid movement was generally expected, since the volatility for almost all the most liquid digital assets was at historical lows. The kinetic energy of the volatile market was usually suppressed during the previous two months, so now it had to burst out with all the accumulated power. Not only the direction of the expected burst remained unclear.

After the price fall of November 14, most of the talk about the reasons that caused it revolved around several topics - the market tried to develop a narrative. What taught us the analysis of crypto markets is that we can always expect some kind of undercover struggle that accompanies or even precedes price fluctuations. Given the susceptibility to emotions, still largely characteristic of digital asset markets, trends can be artificially established, but they can hardly be controlled in a similar way. Moreover, the fundamental reasons are often completely separated from the moods of market participants and do not have a significant impact on them. This is true even for the largest crypto assets. I will explain this idea with a recent example.

The initial sale on the market was presumably triggered by two large ETH short positions on BitMEX (the cryptocurrency derivatives exchange) at the beginning of Wednesday, November 14, 2018 of the year. In 9: 48 (UTC), we see a significant decrease in the price of ether, probably starting on BitMEX [1]. On Bitfinex and Binance, the price in ETH / USD pairs also repeated this impulsive movement. It is difficult to determine the very exchange and millisecond in which this sale occurred, since a large number of algorithmic traders trade on the most liquid crypto exchanges. Nevertheless, judging by the market data we collected, the largest initial downward movement seems to have occurred on BitMEX, which can be attributed to the large leverage available to traders on this exchange. Although spot Bitfinex and Binance could also trigger an initial dump (price drop) in the ETH / USD market, it was the behavior of the BitMEX price that drew this market further down, which is why we adhere to our assumption.

BitMEX Market Data from Plot.ly

Following the sale, prices for other leading cryptocurrencies also fell, but ETH had the largest range of movement. The tendency of the previous few months to the sale of this currency continued. An hour before the real collapse of the markets on November 14 (which began at 16: 15, UTC), around 15: 14 (UTC), one could notice the last alarm (see below) - and, again, the price of ETH began to decline first . This impulse also influenced BTC, but after 10 minutes the price of bitcoin won back the losses, while Ethereum remained under pressure. Here we would like to note that the market data we collected from various exchanges indicate an increase in the efficiency of the cryptocurrency markets, with the most liquid pairs on Bitfinex and Binance (two more ETH / USD markets that we carefully studied - for many reasons that are beyond the scope of this article) traded in a very close relationship to each other.

BitMEX Market Data from Plot.ly

Given the extremely high level of correlation between crypto assets, algorithmic traders could not miss such a discrepancy. We can safely assume that the spread deviation between ETH and other most traded assets was a signal for some of them to open a long ETH position against BTC. As a result, an hour later (in 16: 16, UTC) we witnessed the beginning of a new global downtrend.

BitMEX Market Data from Plot.ly

In order to quantify the movement and make sure that it was provoked intentionally, we calculated the market volume of ETH / USD on BitMEX during the proposed placement of short positions and compared it to random 5-minute intervals in the hourly range (+ 1h / -1h ) inside the same trading hours taken within a few days before and after the dump. The table below shows a sharp increase in trading volume during the short sales we identified. Even in comparison with the largest in volume of the following trading days. Again, this may well be due to the initial wave of volatility caught by BitMEX traders, but the surge in the trading volume of November 14, in our opinion, stands out even with this assumption.

Market data on BitMEX

Given that in this case we did not observe indicators in the form of massive dumps preceding the price movement in spot markets (usually occurring after large over-the-counter transactions), we assume that there was a deliberate attempt at BitMEX to front-line the global ETH sale. Considering one of the possible predecessors of this situation - the story of the surrender of ICOs - we checked the data on the treasury accounts of ICO projects that we have been collecting since July 2018. Generally speaking, the amount of ETH withdrawn from such accounts before 14 on November 2018 of the year is only 0,56% of the current volume of the ETH offer, while the price for the same period fell by 60%. There was no significant increase in the volume of funds withdrawn from such accounts on the eve of the dump. The outflow of ICO funds, which we tracked from 14 to 30 on November 2018, amounted to 286 036 ETH (of which 82 thousand ETH was deduced 28 November). In dollar terms, this is about 36 million. [2]Given how liquid the ETH / USD markets were these days, with volumes of 2 billion, 1,8 billion, 1,8 billion, 2,7 billion and 2,3 billion, from 16 to November 19 and November 27 [3], respectively, we consider the effect of this factor on the price of ETH is currently relatively moderate.

Starting on November 14, we observed some activity, but after the start of the dump. 22% of the withdrawn ETH (before 30 November 2018, 12: 00 UTC) were in exchange accounts, 23% was sent to the Wrapped Ether smart contract, and 55% were sent to an unknown address. Although we cannot be sure that most transactions with an unknown destination address are just recurring expenses (presumably paid in ETH and never hit the market directly and in full), we are sure that 23% ETH worth about 9 million dollars [4] sent to the Wrapped Ether smart contract were not released to the market.

Wrapped Ether (wETH) is widely used to place collateral in an Ethereum-based stablecoin system Dai. Dai is a stablecoin with a price pegged to the US dollar, released by an untrusted distributed system called Maker, which allows ETH holders to borrow in dollar terms without resorting to the services of centralized exchanges with trading pairs for fiat currencies or other, also centralized, dollar-pegged stablecoins. Since ETH is highly volatile, the Maker-issued Dai tokens that are pegged to the dollar and traded against other crypto assets are overcollateralized. In both cases, ETH was moved to replenish the Dai collateral smart contract. We assume that this was due to the fact that the price of ETH began to approach the level of margin calls. In addition, Wrapped Ether (wETH) tokens can be used on the Radar Relay decentralized exchange, which has a dominant (but generally negligible) trading volume for the wETH/Dai pair.

Thus, in reality, in the period from November 14 to 30, only about $ 8 million in ETH was withdrawn from the treasury accounts of ICO projects directly to the exchange accounts. [4] Given the available data, we can confidently say that ICO projects only reacted to market conditions, and did not dictate them. At the present time, at least 3,4% of the total volume of Ethereum emission is still held on the treasury accounts of projects. Our findings have been confirmed by independent researchers. AND disputed some of them - most likely, because the authors of these reports automatically consider all displayed ETH directly sold.

In the days around the latest market crash, two news related to Ethereum were also published. One of them was dedicated to Nvidia, which reported on November 15 on the decline in profits for the 3 quarter due to a reduction in GPU mining of cryptocurrencies (mainly ETH). As a result of this news, Nvidia shares fell in price. So we can say that this rather drop in the price of ETH ultimately triggered a drop in NVDA, rather than vice versa. Other news, however, was more important. Ad US Securities and Exchange Commission (SEC) on writ of execution for organizers of two Ethereum-based ICOs held in 2017 and subsequent general statement on November 16 regarding the practices of issuing and trading tokens put an additional downward pressure on the price of ETH, comparable to what BTC experienced.

Market data on BitMEX

We cannot reasonably argue about whether someone really had the necessary information and carried out front-running regarding the upcoming SEC statements. The (fictitious) seller of ETH could have made a profit simply from the expectation of the market falling, given the narrow range in which he traded for quite some time before the crash. However, the data we have leads us to a different conclusion: it was the ETH price behavior and the general narrative regarding the Ethereum blockchain that pushed the rest of the crypto markets to fall (even though the actual data does not correspond to the market sentiment), and only then this impulse was transmitted and supported. BTC price movement. As in 2017, when the Enterprise Ethereum Alliance announcement triggered a massive bull rally, this momentum was soon bolstered by ICO mania, and it was only later that BTC brought prices back on track more or less.

Source: Coin Metrics

After the cryptocurrency-wide sale began, the main attention of analysts and commentators, as you might expect, turned out to be focused on BTC. While much of the attention to Bitcoin was due to the turmoil around Bitcoin Cash (BCH), which in turn split into two blockchains and two networks, in reality the grounds for the drama around this hard fork were insignificant and, in general, negligible.

In order to quantify the possible continuation of the sale of BTC by BCH miners competing for the highest hash rate (mining power), we calculated the delta obtained as a result of an increase in the combined hashrate for both BCH chains formed as a result of the fork. We proceeded from the fact that all this will be funded exclusively by selling BTC, and not by switching mining from BTC to one of the new BCH chains (which in most cases seems more likely). We calculated the cost of: a) purchases total necessary equipment, b) rent and c) a combination of both expense items in a combination of 50 / 50. And based on the figures obtained (see below), we came to the conclusion that mining wars between competing BCH chains had little to do with the actual price of BTC, even if we assume that all expenses related to this competition were funded from the sale of BTC. Given the recent daily BTC trading volume of billions of dollars, we believe that BCH could hardly have an impact on the price of BTC. Also, based on our calculations, the cumulative increase in the BCH hashrate can be only 7% of the total decrease in the BTC hashrate for the week from 14 to November 21.

In addition to concerns that the situation with Bitcoin Cash could lead to losses for BTC both in support of miners and in price, several commentators found that Bitcoin's hash rate nevertheless decreased significantly, perhaps even until its value drops. Below, we calculated the current profitability of Bitcoin mining in China (as in a kind of reference region with respect to BTC mining), with one significant warning: our calculations were based solely on specifications Bitmain S9 models as the most commonly used equipment in China. Considering how competitive the mining market is, we assume that other miners today use equipment (possibly customized) with approximately similar characteristics of hashrate and electricity consumption.

Source: HASH CIB, Statista

The two graphs presented show a significant discrepancy in the profitability of Bitcoin mining for the average Chinese miner (chart above) and larger players (chart below). This tells us that some rather large percentage (the largest players; we took the published Bitmain data as a standard), if not the majority of the hashing capacities of China, could now come close to mining at a loss. In addition, if our calculations are correct, this means that smaller players most likely could not accumulate a significant amount of BTC beyond what was sold to cover their current expenses, probably having small reserves for dumping in order to cover losses .

Source: HASH CIB, Quartz

We believe that most miners have already been depleted by a continuous decline in prices over the 2018 year, and therefore probably just do not have a lot of BTC for sale. Given the adjustments for the complexity of 16 – 17 in November and mid-December with an impressive outflow of hash caused by a decrease in value, we expect that the profitability of BTC mining should increase for the remaining miners. In addition, the long-awaited new version of the Bitmain miner is also approaching, the first deliveries of which were planned for the end of December this year. So, as is the case with treasury accounts of ICO projects in ETH, the mining industry of BTC is more likely to follow the price, and not the reason for its decrease. We see no signs that these factors are key to the recent situation on the BTC market.


[1] BitMEX offers trading in synthetic assets in pairs denominated in US dollars secured by BTC. We believe that perpetual ETH / USD swaps, which were launched in August 2018 of the year, are the second most liquid BitMEX market after perpetual swaps in the BTC / USD pair. However, BitMEX never discloses its historical market data.

[2] Aggregate of all transactions, each valued at the average ETH price on the day the funds were transferred, as reported by CoinMarketCap. We have neglected transfers less than 1200 ETH (in the amount of 24 435 ETH or about $ 3 million between November 14-30).

[3] Priced at the average ETH price on the day the funds are transferred, as reported by CoinMarketCap.

[4] We measured the markets according to the (average) two-day lag (data for November 30 November 2018 are not available).

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