Introduction

On November 28th 2017, the price of Bitcoin broke past $10,000 for the first time. This triggered a media frenzy, and encouraged a wave of new investors to quickly enter the market. Bolstered by this flood of new money, crytpo prices continued to skyrocket. On December 17th, the price of Bitcoin reached a new all time high, less than $200 shy of $20,000. After doubling in value in only 19 days, Bitcoin, and by extension, the entire cryptocurrency market, had reached a level of mania never seen before.

By the end of 2017, many began to voice concerns that a correction was inevitable. Some warned of a complete crash, perhaps none more famously than notable investment guru, Warren Buffet. On January 10th 2018, in an interview with CNBC, Buffet was quoted as saying:

In terms of cryptocurrencies, generally, I can say with almost certainty that they will come to a bad ending.

Buffet's words would prove to be prophetic. Over the next few weeks, the entire cyrptocurrency market would go on to lose roughly half of its value, replacing record profits with record losses, and leaving an entire investment community with whiplash.

The Cryptocurreny Crash of January 2018

In this article we will attempt to balance the fears of the skeptics, and the optimism of the faithful, to approach something resembling truth. More specifically, we will investigate some of the alleged causes of the crash, look at some macro trends, and try to better understand the big picture. No one can say with certainty what the future will bring. Nothing in this article should be considered investment advice. That said, what is the data telling us here?

Our Data

CoinMarketCap.com currently tracks the activity of 1,507 different cryptocurrencies across 8,494 different markets. They provide prices, volume data, and most important to this article, the market capitalization of these crypto assets. On January 7, 2018 we began collecting this data. As of the time of this writing, we have collected roughly 10 million records, which serves as the basis for the following analysis.

The Cryptocurreny Crash of January 2018 - missing data

As seen in the above graph, we encountered an issue with our data center on January 18th that resulted in roughly 3 days of missing data. This issue has since been corrected, and we believe our analysis remains clear even without this data. This gap in our data has been clearly visualized above for the sake of transparency.

Given the choice of 1,507 different cryptocurrencies, it is a daunting task to decide which specific coins to focus on. The gross majority of cryptocurrencies experience extremely low trading volume, offer small market capitalizations, and are largely ignored. However, hiding among these smaller coins are many of the top performers in this space. Looking at the market purely through the lens of technical analysis underestimates the influence of a very active, and very loud, community of crypto traders online.

While collecting data for our Reddit project, we discovered many subreddits dedicated to crypto, perhaps none more entertaining than /r/CryptoCurrency. Offering a daily barrage of irreverence, a multitude of "dank memes", and an occasionally insightful commentary, this community has already attracted an audience in excess of 564,000 people as of the time of this writing.

As one might expect, the comments left on posts to this subreddit are filled with "hot tips" and blatant speculation. We wanted to know which coins were mentioned most often, regardless of sentiment. This proved more difficult than initially expected.

The 25 most mentioned cryptos on /r/CryptoCurrency

We collected 25,747 comments from January 28 through February 2nd, 2018, and counted the number of times a coin was mentioned, by name or by symbol. For example, the 1,196 mentions of XRB shown above include 775 mentions of the symbol "XRB", along with 218 mentions of "nano", and another 203 mentions of "raiblocks".

Some coins, like XRB, have rebranded themselves and changed name. Other coins share names or symbols with words that appear commonly in regular speech found on /r/CryptoCurrency, such as "meme", "ponzi" and "shilling". This illustrates both the sense of humor of the community, and the challenge of counting these mentions accurately. As with all real-world data science, the above list required a certain degree of human intuition.

It is worth noting that ICON (Iconic) was included on this list by mistake, as it was confused with ICX (ICON) in our comment analysis. This list also includes TRAC (OriginTrail) which CoinMarketCap began listing on January 24th, 2018, in the middle of the period studied here. All other coins listed in the above visualization will be evaluated further by the end of this article.

Perspective

On January 8th 2018, the total market capitalization of all cryptocurrencies peaked at approximately $833 billion USD. On February 2, 2018, the total market capitalization of all cryptocurrencies crashed to approximately $385 billion USD. This represents a loss of $448 billion USD, a decrease of about 53.78% in a matter of 23 days.

Given that the median US income is roughly $60,000 per year, it would take the average American approximately 7.4 million years to earn that amount of money, which is roughly how long it has been since the middle of the Miocene Epoch. Most human minds struggle to make intuitive sense of such large figures. When dealing with billions or trillions of something, the underlying meaning is often lost, unless we first seek some perspective.

Worse than 1929

On September 3, 1929, the Dow Jones Industrial Average swelled to a record high of 381.17. By November 13, 1929 it had fallen to 198.69, a loss of approximately 47.87% in 71 days. In other words, the crypto market just fell further, faster, than the Wall Street Crash of 1929 which is often credited with ushering in the Great Depression.

The Market Crash of 1929

Is it fair to assume that the Cryptocurrency Crash of January 2018 will trigger another depression, just as horrible as the one experienced 89 years ago? Although possible, it is most certainly improbable.

Relative Size

The $833 billion USD valuation of crypto at the height of the peak was about 83% of the size of the entire economy of the USA circa 1929 (roughly $1 trillion USD). However, if we compare the pre-crash peak of $833 billion USD to the Q4 2017 real GDP of $17.272 trillion USD, we see cryptocurrency was roughly 4.22% the size of the full US economy at its peak.

Considering the global nature of cryptocurrencies, perhaps a better comparison would be the gross world product, an estimated $78.28 trillion, which was roughly 93 times larger than cryptocurrency at the peak. In other words, although significant, cryptocurrency is not nearly as influential to the global economy of 2018 as the US stock market was to the global economy of 1929.

Crypto versus Stocks

Above we have compared the market capitalization of cryptocurrency, both before and after the crash, to the market capitalizations of a few select companies, as of the close of business on February 2nd, 2018. It is worth noting that the Dow Jones Industrial Average and S&P 500 both just finished their worst week in the past two years, however, the correction to stocks was extremely mild compared to crypto.

Before the crash, the entire cryptocurrency market was a bit larger than Apple or Alphabet (the parent company of Google). After the crash, the crypto market was reduced to the size of JP Morgan Chase, about 30% larger than VISA. This begs the question: should cryptocurrency be compared to a tech company like Apple, or to a financial company like VISA? Beware the false dichotomy.

Although cryptocurrency is usually evaluated in terms of price and market cap, just like stocks are, purchasing a crypto coin is not the same as purchasing a share of stock. A share of stock represents partial ownership in a company, whereas a crypto coin is simply a unit of alternate currency. And unlike stocks, which are thoroughly regulated in the US, the cryptocurrency market remains fundamentally unregulated for all intents and purposes.

The Wild West

Our study of this market began with a simple question: can cryptocurrency be predicted? Is it possible to use machine learning, technical analysis, or some other method, to accurately predict this market? Plenty of serious literature has already been published on the topic, and some experiments have proven interesting, but far from conclusive.

Although it may sound like science fiction to some, this is already a booming business among major players such as Goldman Sachs and Morgan Stanley and others who have used automated algorithms to trade stocks, currencies and other assets with great success. A machine that can automatically make profitable trades remains the "holy grail" of many serious financial analysts and data engineers today.

The Bitconnect Ponzi

This brings us to the subject of Bitconnect, who declared that they had found the "holy grail" of Bitcoin back in 2016.

Bitconnect - BCC

Bitconnect 's "Bitcoin Price volatility software" promised to trade Bitcoin automatically, exploiting allegedly predictable changes in price to secure an average profit of 1% per day. At that rate of return, we would expect an initial investment of $10,000 to become $1,000,000 in roughly 1.3 years. Many people were insulted by these outrageous claims, and loudly accused Bitconnect of being nothing more than a Ponzi scheme. Steve Dell, in his article on Medium, explains the situation in greater detail.

Given the generous profit-sharing system devised by Bitconnect, there was no shortage of favorable sentiment on YouTube. Many were confident that the "Bitconnect bot" was real, and they had the profits to prove it. Skeptics remained equally confident that those profits came from the hands of new investors, and not any sort of automated trading. This level of controversy helps to explain why Bitconnect was the 20th most mentioned coin in /r/CryptoCurrency comments.

On January 16th, 2018, Bitconnect announced an end to their lending and exchange program, and the price quickly plummeted.

Bitconnect Crashes - January 2018

From a height of $442 at the end of 2017, these BCC coins are currently trading for less than $6.50, a loss of more than 98%. For the sake of perspective, $10,000 invested at the height of Bitconnect is worth about $190 as of February 3rd, 2018.

Does the collapse of Bitconnect explain the Cryptocurrency Crash of January 2018?

Crypto already down ~20% when Bitconnect crashed - January 2018

At the start of January 16, total crypto marketcap was roughly $682 billion USD, already down about 18.13% from the peak. In other words, we were already about a third of the way through the crash when Bitconnect announced it was closing shop. This suggests that it was the crash of crypto that caused the death of Bitconnect, and not the other way around. Bitconnect was a relatively small project. Even at the peak, Bitconnect only accounted for roughly 0.28% of overall crypto market share.

Bitconnect Market Share - pre and post crash

The Tether Controversy

The 3rd most mentioned coin in /r/CryptoCurrency comments is another source of controversy.

Tether - USDT

In theory, Tether (USDT) provides a safehaven for crypto investors by offering a coin pegged in value to the US dollar. Simply stated: 1 USDT = 1 USD. The logic behind Tether is simple. If an investor is worried during times of extreme price volatility, such as January 2018, they can move assets into USDT, and return to other coins once prices have stabilized.

The controversy regarding Tether is equally simple. At the time of this writing, there are roughly 2.2 billion USDT, which should be backed by $2.2 billion USD. Tether Limited, the organization behind Tether, claims to have these funds in reserve. However, despite promising an independent audit to verify funds, no such audit has been forthcoming. Skeptics allege that Tether is simply "printing money" by releasing coins valued a $1 each, without actually having the funds to back them.

Price Fluctuations in Tether

In the above visualization we see the volatility of price in Tether, ranging from a low near $0.92 to a high near $1.07. There is a significant degree of volatility in the price of USDT, which is strange. Why would a person pay more than $1.06 for a dollar? Why would someone accept less than $0.93 for the same dollar? Perhaps this can be explained by dramatic shifts in demand during the past few weeks of chaos. Perhaps something more sinister is going on.

Tether Market Share - pre and post crash

One interesting result of the Crypto Crash of January 2017 is that Tether's market share has increased from around 0.18% to 0.51%. Relatively speaking, it is now roughly twice as big as Bitconnect was during its peak. Moving forward, as the total market cap of Tether increases, so too does the threat of what an eventual audit (or lack thereof) may reveal.

Markets Evolve

The lack of regulation in cryptocurrency is a cause of great concern for many would-be investors. When people watch Bitconnect collapse nearly overnight, or hear horror stories of people who have lost money due to other corrupt or incompetent exchanges, they are rightfully terrified. But what happens when government regulators get involved with cryptocurrency?

Government Gets Involved

In the first week of September 2017, cryptocurrency prices dropped after China banned mainland residents from particpating in coin exchanges or initial coin offerings. Despite the ongoing crackdown, crypto trading in China continued via alternate channels, and Bitcoin hit an all time high near $20,000 by the end of 2017.

On January 8th, 2018, CoinMarketCap removed Korean exchanges from their price listings amidst rumors that Korea was about to follow in China's footsteps. This corresponds perfectly to the start of the Cryptocurrency Crash of January 2018.

January 2018 Crypto Crash begins fter CoinMarketCap removes Korean exchanges

By the end of the month it was revealed that Korea intends to regulate crypto markets, not ban them. Around the same time it was reported that India intends to regulate crypto markets as well. Here in the USA the battle over cryptocurrency regulation is already underway. According to analysists on CNBC, even China is expected to reverse the crypto ban in favor of regulation eventually.

Most government regulators share the same concerns regarding cryptocurrency: they oppose money laundering, financing illegal activities, and tax evasion. The objection is not to the underlying technology, but to the crimes currently being committed with it. Looking at the macro trend, it would seem as though government regulation is not only possible, but ultimately inevitable.

This is a both a blessing and a curse to the libertarian-minded community of crypto enthusiasts. This government intervention may ultimately yield a future in which cryptocurrency has been both legitimized and regulated. However, before that future day can dawn, the sun must finish setting on the "wild west" days of the untamed crypto frontier.

The sun sets on the wild west

Technology Marches On

With so much attention focused on the changes in price, it can be easy to forget all about the underlying technology behind cryptocurrency. The decentralized blockchain that gave birth to Bitcoin is a legitimate technology, with countless real-world applications. Major companies such as IBM have already released full blockchain platforms. Companies like Apple, Google and even Goldman Sachs are taking steps to implement this technology into their daily business.

AOL was once the predominant ISP in the USA

In the year 2000, America Online (AOL) had a market cap of $224 billion USD, earned $4.4 billion USD per year in subscription revenue, and was about to merge into the ill-fated AOL-Time Warner. In the year 2005, MySpace was the predominant social media platform, had 16 million daily active members, and was acquired by NewsCorp for $580 million USD. Although both AOL and MySpace still exist in 2018, their current incarnations pale in comparison to their former prominence.

In the year 2018, most Americans have abandoned their AOL dial-up service in favor of high-speed Internet connections, and traded their MySpace page for a Facebook account (with a market cap over $500 billion USD, and 1.4 billion daily active members). Skeptics of AOL-Time Warner and MySpace were proven correct- as far as those specific companies go. But these underlying technologies, both Internet service and social media, have only increased in relevance throughout the past decade.

Many believe the same thing is now happening within the cryptocurrency space. Bitcoin had the first-mover advantage, and remains the biggest cryptocurrency today. However, since being invented in 2009, Bitcoin has gone from representing 100% of what we now call the "crypto market", to roughly 34%, based on total cryptocurrency market capitalization.

BTC is now the predominant crypto in the USA

The cryptocurrency market, like all markets, must either continue to evolve, or face extinciton. Is it possible that 10 years from now Bitcoin will be remembered as "the AOL of cryptocurrency"? Is it possible some other crypto will soon usurp Bitcoin as the leader of the pack? And if so, which one?

Shifting Market Shares

When nearly all crypto prices are dropping upwards of 50% in tandem, as we saw in January of 2018, it can be hard to understand exactly what is going on with any specific coin. Below we have visualized the relative market share of each coin throughout the crash. Specifically, we have taken the size of a coin's market cap versus the total market cap of all cryptos over time. To better illustrate these trends, we have also graphed the linear regression of each coin's market share.

The Cryptocurrency Market Evolves

Above we have the top three cryptos by market cap: Bitcoin (BTC), Ethereum (ETH), and Ripple (XRP). As we can see, the market share of Bitcoin stayed relatively stable, while the market share of Ethereum climbed significantly, and the market share of Ripple decreased.

The Cryptocurrency Crash of January 2018 scared a lot of money out of this market. As with any form of evolution, disaster precipitates change. Ethereum makes sense as a potential replacement to Bitcoin for a few reasons. Ethereum advocates claim it is technically superior to Bitcoin, especially in regards to scalability, which is perhaps the most significant challenge presented by the mass adoption of cryptocurrency. Consumer-friendly exhanges like CoinBase and Gemini already allow investors to buy and sell ETH with USD directly, just like Bitcoin.

Most crytocurrencies can only be exhanged for other cryptocurrencies, making them somewhat illiquid by comparison. In other words, before one can buy a Dogecoin (or another minor crypto), one must first purchase a Bitcoin or Ethereum (or another major crypto) with US dollars, and then exchange them.

However, before we declare Ethereum the winner, let us consider the fact that CoinMarketCap.com has already added 5 new cryptos during the writing of this article. Ethereum itself was only created three years ago, and hundreds more have joined the crypto space since then, many of which promise exciting new innovations.

It is quite possible, perhaps probable, that the eventual winners of the crypto space are yet to be invented.

The 25 most mentioned cryptos on /r/CryptoCurrency

Below we have visualized the shift in market share of the cryptos mentioned most often in comments on /r/CryptoCurrency. Remember: we are looking at relative market share here, not overall value.

Change to market share is defined as the difference in market share on the last day of our study (February 2nd) minus the market share when we began collecting data. Since these dates are arbitrary, the results can be occasionally deceptive. To better illustrate these trends, we have also visualized their corresponding linear regressions.

January 2018 Change to BTC Market Share

Bitcoin remains the current champ, maintaining a solid 34% market share.

January 2018 Change to ETH Market Share

Ethereum trades with USD directly at most major exchanges, and saw a significant increase.

January 2018 Change to USDT Market Share

One of the most controversial coins on our list, Tether saw the 3rd largest increase.

January 2018 Change to XRB Market Share

Nano saw a significant gain in market share, but is trending down according to linear regression.

January 2018 Change to NEO Market Share

Neo trades with USD directly at Bitfinex, and saw a significant increase.

January 2018 Change to VEN Market Share

Of the coins we looked at, VeChain had the largest increase in market share.

January 2018 Change to XRP Market Share

Of the coins we looked at, Ripple had the 2nd largest loss of market share.

January 2018 Change to MIOTA Market Share

IOTA lost a significant amount of market share.

January 2018 Change to ICX Market Share

Like Bitcoin, market share of ICON remained relatively unchanged.

January 2018 Change to GAS Market Share

Neo GAS, like NEO, saw a significant increase in market share.

January 2018 Change to XLM Market Share

Stellar saw a modest increase to market share.

January 2018 Change to PRL Market Share

Oyster lost a significant amount of market share.

January 2018 Change to TRX Market Share

TRON lost about half of its market share.

January 2018 Change to WTC Market Share

Of the coins we looked at, Walton had the 2nd largest increase in market share.

January 2018 Change to LTC Market Share

Litecoin saw a modest decrease to market share.

January 2018 Change to DOGE Market Share

Dogecoin, like TRON, lost about half of its market share.

January 2018 Change to XMR Market Share

Like Bitcoin, market share of Monero remained relatively unchanged.

January 2018 Change to OMG Market Share

OmiseGO gained a small amount of market share but is trending down.

January 2018 Change to BCC Market Share

Here we can clearly see the death of Bitconnect.

January 2018 Change to ARK Market Share

Ark gained a small amount of market share but is trending down.

January 2018 Change to LSK Market Share

Lisk saw a modest increase to market share.

January 2018 Change to AMB Market Share

Ambrosus lost some market share but is trending up.

January 2018 Change to BNB Market Share

Binance Coin lost some market share and is trending down.

In summary:

Biggest gains to market share:

  • (VEN) VeChain +223.91% trending up
  • (WTC) Walton +187.9% trending up
  • (USDT) Tether +183.63% trending up
  • (NEO) NEO +115.29% trending up
  • (GAS) Neo GAS +75.15% trending up
  • (ETH) Ethereum +52.69% trending up
  • (XRB) Nano +36.32% trending down
  • (LSK) Lisk +11.75% trending up
  • (XLM) Stellar +10.52% trending up

Biggest losses to market share:

  • (BCC) Bitconnect -95.08% trending down
  • (XRP) Ripple -52.4% trending down
  • (TRX) TRON -50.89% trending down
  • (DOGE) Dogecoin -50.16% trending down
  • (PRL) Oyster -26.78% trending down
  • (MIOTA) IOTA -18.8% trending down
  • (LTC) Litecoin -14.19% trending down

Relatively unchanged market share:

  • (OMG) OmiseGO +8.32% trending down
  • (ARK) Ark +6.04% trending down
  • (BTC) Bitcoin +2.04% trending up
  • (ICX) ICON +1.94% trending up
  • (XMR) Monero -1.88% trending up
  • (BNB) Binance Coin -3.26% trending down
  • (AMB) Ambrosus -9.82% trending up

Conclusion

Crypto-skeptics are quick to remind us: most cryptocurrencies earn no profits, pay no dividends, hire no employees, and are fundamentally incomparable with stocks. If the intended purpose of cryptocurrency is to serve as an alternative currency, it is better compared with the US dollar, or other FIAT currencies, such as the Euro. However, unlike the US dollars deposited into your local bank account, which are insured by the FDIC, your cryptocurrency is not insured by anything.

Crypto-believers are quick to remind us: analysts have been proclaiming the death of cryptocurrency since they were first created. A year ago, Bitcoin was trading for roughly $1,000 USD. Today, even after the crash, they are trading for 8 times that amount. In some parts of the world, like Venezuela, cryptocurrency offers a superior option to local currencies in turmoil. In an age of quantitative easing, many scoff at a market capitalization below a trillion dollars.

As of publication, it appears as though the Cryptocurrency Crash of 2018 will continue through Februrary. Have we already seen the peak of cryptocurrency come and go? Or is the best yet to come?

Only time will tell.

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