October Newsletter

By Drew Feliciano and contributing writer, Michael Vescera.

FAL Consulting is a cryptocurrency consulting company. We provide a wide variety of services related to cryptocurrency and blockchain. You can find a full breakdown of our services at cryptofal.com.

The FAL Cryptocurrency Newsletter is a monthly newsletter that focuses on the monthly highlights throughout the cryptocurrency and financial technology (FinTech) industries.

Coins to Follow

Bitcoin (BTC)

Bitcoin is the first cryptocurrency and the largest by market cap. Created in 2009, Bitcoin has grown astronomically since its launch and continues to lead the cryptocurrency industry while also often dictating overall cryptocurrency market movement. It also established the norm of using blockchain as a public ledger for tracking cryptocurrency transactions, providing a revolutionary level of transparency that the broader financial system has lacked.

After almost touching $53,000, Bitcoin is finding itself consolidating within this descending wedge pattern since it dipped in early September. With volume decreasing into the downtrend, we may be looking for a reversal soon. Not only are we seeing a decrease in BTC volume, but also a decrease in the volume of the overall cryptocurrency market. With BTC dictating market movement, this could also be a potential indicator of a reversal as well.

Ethereum (ETH)

Ethereum is the second-largest cryptocurrency by market cap. It’s known for being the first cryptocurrency to introduce smart contract capabilities on its blockchain, setting the precedent for ecosystem coins into the future. As the most actively used blockchain, Ethereum has established itself as the largest ecosystem coin by market cap. Many other tokens are based on the ERC-20 protocol on Ethereum’s network.

Following BTC’s dip earlier this month, Ethereum has struggled after its bounce down from $4,000. While there’s strong support above $2,700, it still is struggling to break upper lines of resistance. Ethereum’s large gas fees that have been holding back the network will likely mean that Ethereum won’t break out until BTC breaks out of its pattern, or the fees are dealt with. Until Ethereum 2.0 comes along, it isn’t unlikely that Ethereum will be held back slightly from fulfilling its full potential.

Ripple (XRP)

XRP is Ripple’s token for their XRP blockchain. It’s both open-source and permissionless. It’s designed to help scale payment transfers globally with more energy efficiency, lower cost, and higher speeds than older coins such as Bitcoin. The cost of transfers can be as low as $0.0002. It often is used for remittance payments for individuals and is a more scalable bridge currency for financial institutions.

XRP is holding fairly steady in a consolidation pattern in its ratio to BTC. While the SEC has held it back with its lawsuit, XRP continues to be a large player in the cryptocurrency space. Currently, it’s forming a descending wedge pattern, potentially gearing up to strongly outpace BTC once more. With XRP’s recent developer-oriented event and the announcement of them getting involved in NFTs, XRP’s outlook is looking pretty positive.

Elrond (EGLD)

EGLD is a governance token on Elrond’s native blockchain on a proof of secured stake protocol. The Elrond blockchain allows for the execution of smart contracts as well, with the roadmap and technical aspects of an ecosystem coin. With sharding technology, Elrond is able to scale more efficiently than other blockchain protocols/tokens by processing up to 260,000 transactions per second. This helps provide fast, and cheap transactions. The ability of governance allows for the token holders to have a direct say in the happenings of the network too.

Currently, Elrond is forming a symmetrical triangle in its consolidation pattern after some strong movement earlier in the month. Elrond has continued partnering with a wide variety of brands and has recently released an update on the 27th of September. This update added “158 new features and improvements” according to their Twitter as well as 58 bug fixes. Technical developments are also looking positive with the momentum potentially looking ready to swing upwards as well.

Cosmos (ATOM)

Cosmos is a fairly unique protocol. It’s not a singular blockchain, it’s more of a network of interconnected parallel blockchains. This allows for the Cosmos ecosystem of blockchains to scale and operate together. The different blockchains are able to transact with each other with the goal of creating an “Internet of Blockchains, a network of blockchains able to communicate with each other in a decentralized way,” according to Cosmos’ website.

Cosmos also finds itself in a relatively neutral consolidation pattern on the chart. However, momentum took a swing downward after Cosmos followed the rest of the market’s correction in early-mid September. ATOM is now once again finding support and momentum looks like it could be gearing up to swing upwards as well.

This could mean that if BTC and the overall market reverse, we could see ATOM outpacing the regular market like it was before the dip. Interchain security is also on the way which means that projects within the Cosmos ecosystem can use Cosmos to pay for shared interchain security.

Monthly Features

A Deep Dive into BTC’s Famous Dips

Bitcoin and the overall crypto market have taken some incredibly strong dips since its inception. With dips as large as 50%+ it can be an intense asset class to trade actively and passively. These dips can be caused by a variety of both technical and fundamental triggers. We hope that by attempting to take a deeper dive into the nuances that create and/or trigger these dips, we can more appropriately react to them as an industry when they do occur.

The first dip we’re going to take a look at is a little harder to track because BTC wasn’t nearly as known nor as accessible as it is today. The dip that took place between June 8th and June 12th of 2011 was one of the first major corrections seen in Bitcoin’s tenure. This saw a price decline of about 68% in a few days. This drop triggered a bear market that wouldn’t see those peaks again until 2013, however not until dipping further to $2 from its $30+ peak. For example, the exchange MtGox even hit $0.02 at its lowest point.

So what, if anything, directly triggered this dip?

At this point of crypto history, there were often large gaps between prices on exchanges, so the prices often varied in regards to how extreme the swings would be. This crash is believed to have been caused by the hacking of MtGox and the subsequent announcement of such. This was followed by a strong sell-side pressure around $17.50 which then took a massive dive down to $0.02. Between the period of 2011 to 2013, MtGox would record over $60 million in losses and approximately 837k BTC that was either lost or stolen. To put that in perspective to today, that amount of BTC today would be worth about $35,154,000,000.

After this, most of the largest dips would be based on the halving cycles. The halving occurs approximately every four years, and we’ve had three halvings so far. The BTC halving event halves the reward that miners receive per block mined. This means, over time, mining will award less and less BTC until all 21 million BTC have been mined.

The first halving occurred on November 12th, 2012. At the time, the community didn’t have today’s understanding of the importance of BTC halving events and their effects on price action.

After each BTC halving event, there would usually be a new all-time high reached. After this new all-time high would be reached a bear market would usually follow. Since the halving is every four years a new all-time high is achieved every four years or so followed by a bear market. This has become known as the BTC halving cycle.

In 2013, a new all-time high was reached for BTC at the beginning of the year. After that, two large-scale dips occurred in 2013 before the first halving cycle’s peak was reached at the end of the year of over $1,000. The first dip was in April due to yet another MtGox hack. In this one, hackers exploited a crash that occurred due to an overload in volume. This triggered an 86% drop in price from $260 to $50 and a short-term bear market where it bottomed out in July of 2013.

*Data from All-time Bitcoin price chart at bitcoin.zorinaq.com.*

Then, from there it started its climb to break $1000 before encountering another strong correction in December of 2013 where BTC would tumble almost 50%. This triggered what would be identified later as the first halving’s bear market, where the lowest point it would hit in this period would be about $177 in January of 2015. From here, BTC would consolidate in this area before breaking out in October/November of 2015.

The second halving would follow on July 9th of 2016. By December of 2017, BTC would see a new peak of around $20,000, but it would find itself below 10k by March of 2018. This dip is believed to mainly be caused by whales (or large investors/hodlers) taking profits as well as retail investors. Some also said that the fact that the vast majority of holders were in profit at that point could have also been a potential top signal.

The dip happened extremely quickly, losing 45% of its value in six days going from $19,798 to $10,961. After this, BTC would remain in a bear market before reaching a bottom on 12/16/2018 of $3,214. From there we’d receive higher highs and higher lows into the next halving cycle.

Before moving onto the current halving cycle, there are some important fundamental factors regarding the previous two cycles to keep in mind.

Firstly, these previous cycles were often only influenced by whales and retail traders. This was a large reason for the extreme volatility. Secondly, leverage, derivatives, and bots weren’t nearly as prevalent as they are today. So, often it was just the spot market, and derivatives at the time did not have nearly as much influence on the market. Thirdly, institutional support was just not there. The larger traditional market players were still scoffing at the cryptocurrency industry and little to none of them had exposure to the asset class. Lastly, the coins available in the market were nowhere near as close as they are now to providing useable services and licensing out their technology.

Many coins have a use-case scenario now and aren’t necessarily strictly speculation anymore. This has resulted in a more mature asset class and a larger, more well-developed community behind it.

There was one more large-scale dip that occurred before the third halving cycle began in May of 2020. While it’s often debated whether BTC is directly influenced by the regular market (sometimes it is, sometimes not as much), there is no doubt that the dip in March of 2020 was a reaction to both the regular markets and the global pandemic. In two days, BTC would dive by 50%. From mid-February to mid-March Bitcoin would go from $10,000+ to levels below $5,000 with it bottoming out around $3,800 on 3/12/20.

*4hr candle chart from February through March of 2020.*

On that day, there would be a single 4hr candle that dipped from 7400 to a close of $6,000. By the end of the day, BTC would have another 4hr candle that went from approximately $6,000 to a close of $4,800 with a wick that went down to $4,400. The fundamental factors that surrounded the time of this dip were clearly a large influence on price action.

One thing that is noticeable about this dip is that it still stood above the earlier bottom from December of 2018. It’s also notable that by this time, institutional interest was more of a factor as well. The industry had matured. There were more hands in it, and many more eyes watching it.

The next large-scale nosedive is the most recent one. The April/May 2021 dip was a slightly larger dip than the one in March 2020. With BTC seeing a 53% correction. After reaching a peak of over $64k in April, by the end of May, we’d have visited levels in the mid to low $30,000s. The trip down from $58k to $36k would only take a week.

This dip was an interesting whirlwind of more modern, as well as some older, cryptocurrency-oriented problems. The cryptocurrency landscape had changed immensely since the previous dip in 2020. Now, many token projects were more fleshed out, institutional interest was at an all-time high, and the vast majority of the market was well into price discovery territory.

However, things weren’t necessarily all good. The industry would be in for a shock as a perfect storm of both technical factors and fundamental factors brought forth the 50%+ dip. First, let’s take a look at things on the technical side.

*Bitcoin daily candle chart from December to now, showing the May 2021 crash.*

Since the market had matured immensely, so had the access to leverage, lending, and the overall derivatives market. This type of access would be a bit of a double-edged sword for cryptocurrency. While it would help provide more trading options, it also provided more risky trading options to largely inexperienced retail traders which is a reality that the industry was forced to acknowledge after this dip.

There was no doubt that leverage played a role in the rocket climb to $64,000 from the low a little over a year before of $3,800. As quickly as it can influence the market on the upside, it can influence the market on the downside just as much. With many traders being new, or inexperienced using leverage, this created an environment in the market where many were over-leveraged and very close to their liquidation prices. So when the flash crash started to occur, countless were liquidated and trading bots with stop losses helped further exacerbate the sell-side pressure.

This created a vicious cycle of sell-side pressure that made for a dangerously volatile cryptocurrency market. On-chain analysis would later show that most of these sales were coming from retail traders and not institutional/larger traders because most of the sales were being made on exchanges. While at its most volatile, some whales and institutions were more hesitant to buy until it started to settle with strong support. Eventually, once the market settled in the mid-low $30,000s whales became some of the largest purchasers of BTC.

In the longer term, Bitcoin’s climb up to $64k was so quick, that it wasn’t incredibly surprising that there would be a correction afterward. Glassnode, the data aggregation company, even noted that the vast majority of holders were now in profit which had not been the case since the previous all-time-high was reached in the last halving cycle. While of course there were other metrics that suggested it wasn’t the same as when BTC would reach a new cycle peak, this could be used as a potential signal for a market dip.

On the fundamental side, there were a few influential events that had a direct impact on downside price action. On May 12th, Elon Musk tweeted that Tesla would no longer accept Bitcoin as a form of payment. This brought about a dip that went from $54,000 to $49,000 in a single 4hr candle. Elon continued to fan the fires after making this announcement through tweets and other means. This is all only months after Tesla announced it had purchased Bitcoin and would accept it as a payment and only weeks after Tesla sold a portion of their Bitcoin to test liquidity.

The other main influential fundamental factor was China’s ban on mining. In mid-May, China announced that it would have a strong crackdown on BTC mining. This would further drive prices down from the mid-$40,000s to the low to mid $30,000s. Even though this was the umpteenth time that China had a cryptocurrency-oriented type of ban, this actually had a significant influence on the market.

While hash rate doesn’t always correlate with price action, it should be noted that it can often correlate by providing an idea of the number of transactions being approved on the blockchain. In the time following these bans where China started shuttering mines, the hash rate (or the transaction rate) decreased significantly since China previously was responsible for about 65% of BTC’s hash rate.

By the beginning of July, the hash rate would bottom out and start to recover after many miners attempted the relocation process, and demand was met elsewhere.

Knowing the context behind these large market sell-offs provides useful context for how the market moves, more specifically BTC. This is important for creating trading strategies, knowing what type of fundamental events may impact price, and helps you with a general idea of what to look for when trying to find the relevant causes of a dip as well.

You can’t truly say you understand the industry if you only understand the inner workings of what makes the price pump. You must also understand what makes the price fall.

NFT Market Mishaps

*From the Blockchain Bikers NFT collection.*

NFTs and their prevalence in the cryptocurrency market have exploded in 2021. Not only have classics such as CryptoPunks sold for millions, but the NFT market itself has also seen an immense influx of volume.

Unfortunately, it’s not all sunshine and rainbows in the NFT landscape. Some glaring issues have started to come to the forefront of the NFT community’s discussions, specifically manipulation tactics, insider trading, and wash trading. This coupled with scams and an asset class that is even more speculative than the broader cryptocurrency industry makes NFTs a true Wild West at times.

While NFTs take digital collectibles to a whole new level, they also come with their own share of problems. NFT market manipulation through various means runs rampant in the industry. One of the main ways that NFT markets are being manipulated is by large players inflating prices themselves.

With NFTs this is done when a sale is put up, and then purchased by the same person with a different wallet. This is usually used to inflate both volume and price by creating an artificial floor price. This can result in outside parties purchasing these NFTs based on the new floor price. These outside parties are then buying something at a much higher premium than the market value, starting them off with a potential loss.

Effects from other less direct forms of market manipulation are also running rampant. One of the main issues that have been associated with various NFT projects is their potential to be used as money laundering vehicles. This can both influence price as well as attract the glare of less market-friendly regulators. This will likely be a hot topic if countries eventually choose to regulate NFT projects.

Lastly, the instances of NFT insider trading have come to light recently as an OpenSea employee has been accused of insider trading. A Twitter user found a correlation between what was in a certain wallet and what ended up on the trending page.

This discovery forced OpenSea to launch an investigation into the incident after the Twitter user went public with the information. The employee ended up being fired, however it spoke to a flaw with the way OpenSea listed its trending projects and staff having access to it and acting upon that non-public information.

Fintech and Blockchain Updates

Solana’s Growing Pains

Solana has rocketed upwards since its July 21st bottom of approximately $22. By September 8th it would peak at around $215. However, despite Solana’s exponential growth over the past year, the large-cap is not immune to growing pains.

On September 14th Solana would have to shut down due to an overwhelming transaction volume. It was offline for almost 18 hours until validators restarted the entire network. When the entire network was down, so were all of the dApps and other systems built on the network.

Apparently, the crash occurred due to network engineers not being able to stabilize the network in time for the volume of transactions they were receiving. Network engineers said that a bug caused the blockchain to fork when it attempted to reach 400,000 transactions per second.

This resulted in Solana taking a dip from around $169 to about $145. There were some concerns raised that if the network could be shut down that it may not be as decentralized as it purports to be.

This also made some question to an extent the limits of the network and/or the proof of history consensus protocol as well.

FTX Acquires Ledger X

By Mike Vescera

FTX is known globally for being one of the up-and-coming derivatives exchanges for cryptocurrencies. The US is one of the toughest countries when it comes to crypto in general and because of that most exchanges offer only spot trading as there is a lack of regulatory clarity.

The acquisition of LedgerX will give FTX.US the ability to offer futures and options for BTC and ETH. Since LedgerX was already a licensed and regulated company under the CFTC this means FTX will not have to go through the hoops necessary to acquire such a license. LedgerX also has the ability to operate 24/7 and serve institutional as well as retail investors.

Derivatives are a very underserved market for crypto in the US and that limits how traders can play the market. A derivative is a contract between two parties that derives its value/price from an underlying asset.

For example, traders will use derivatives to short the market and make profits when the price is going down or long when the price is going up. These are of course more risky trading methods (especially when leverage is involved), but they are very popular among traders. FTX has been making moves all year in an attempt to solidify itself as a top cryptocurrency exchange.