From Collapsing Prices, Liquidating Portfolios and Shrinking Channels

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Bitcoin and other cryptocurrency prices have plummeted more than ever. The corona crisis is affecting all the financial markets. The Crypto market lost more than $100 billion in the last days. In addition, panic attacks both the Bitcoin and Ethereum networks, with unpleasant consequences for many users.

The Bitcoin price has dropped by up to 40 percent in a few days. I don’t remember anything like that happening, other than when a bubble has reached the top and dropped from there. But otherwise? No way.

btc 4000 - From Collapsing Prices, Liquidating Portfolios and Shrinking Channels
Bitcoin fell from more than $ 9,000 to a low of just under $ 4,000 within a few days – but has rebounded later to just under $ 6,000. Source Tradigview chart.

I myself am not too worried. The price has dropped and will rise again, which also shows that a crash to just under $ 4,000 was followed by a recovery to just under $ 6,000. But that is just my personal opinion, which is based on nothing but a lukewarm feeling, and which is in no way useful as an investment instruction. You can see that an hour later: now the price is back at $ 5,100. The uncertainty is great.

In general, there is something disturbing about the current events on all stock exchanges in all markets. The prospect that the world will shut down for a few weeks or months, people are less in the office, travel less, attend fewer events and international trade will cool down a little – this prospect seems to be enough to bring down all markets. This shows profound uncertainty in the economy, as if the markets did not believe their own value, and as if everyone knew that everything was made of sand. Or is today’s economy really like the cyclist who falls as soon as he has no speed for a moment?

marketcap - From Collapsing Prices, Liquidating Portfolios and Shrinking Channels
The total market capitalization of all cryptocurrencies fell from more than $ 260 billion to a low of less than 120 billion in a week, but is currently at $ 160 billion with a loss of $ 100 billion. Chart from Coinmarketcap.

The really bad news for Bitcoin is that the cryptocurrency cannot defy the global crash. In all the past few years, when the financial crisis first exploded in Cyprus and then in Greece, when the international banking system became less efficient due to new sanctions, when the central banks printed new money and India banned cash – it always looked like Bitcoin was one Crisis winner. It is different this time. Bitcoin behaves no differently than a second-class stock that cannot counter the frenzy that tears everything down.

It is also unfavorable that volatility is higher than ever. The past few days have made the problem worse. Who the hell wants a currency whose price is beating around like crazy? For anyone who wants to use Bitcoin as a means of payment, who wants companies to accept Bitcoin, that customers pay with Bitcoin, that suppliers and employees get Bitcoin – the course turbulence of the past few days is bad news. With the rise in prices from 2017, Bitcoin became not less volatile, but more; The explanation for this is probably that Bitcoin is no longer used significantly, but a large part of the capital that flowed into the cryptocurrency is speculation and maybe also investment. Instead of digital cash for the whole world, Bitcoin apparently became a toy for speculators.

Volatility doesn’t just hit traders hard. It also intervenes in the mechanics of cryptocurrencies themselves. This was evident in both Bitcoin and Ethereum.

Traffic jams in the MemPool and the capacity of the channels shrinks

At Bitcoin, there has been a traffic jam in the MemPool of unconfirmed transactions in the past few days. Prices fall and rise and fall even lower, and of course people want to send bitcoins on exchanges because of that. Therefore, there are more transactions, but they come up with a very limited capacity of around 1.2 megabytes every ten minutes. The consequence? Transactions remain unconfirmed for a long time, and fees rise.

It currently costs 70-80 cents, sometimes more than one euro, to probably get a transaction into the next block. Those who pay too little, say 30 to 40 cents, can wait hours, those who pay even less can adjust to days. If you were planning to transfer your coins to an exchange to sell them before the price slumps – or who was planning to do so at the right moment – you will be very annoyed. Bitcoin is not only highly volatile, it is also extremely slow and transaction fees are unpredictable.

mempool - From Collapsing Prices, Liquidating Portfolios and Shrinking Channels
Jochen Hoenecke’s visualization of the Bitcoin MemPool. The colored layers indicate the fees of the unconfirmed transactions. Anyone who wants to be confirmed in the next block should send a transaction that has less than 1 megabyte of other transactions about them. For this, he currently has to pay around 70-80 Satoshi per byte, which is around 90 cents for simple transactions, but can easily jump to 1-2 USD depending on the wallet. Source: Johoe’s MemPool

The problem is not really new, but has been chasing us since mid-2017. As soon as there is movement in the market, a traffic jam forms in the MemPool and the fees become unpredictable. Unfortunately, there is still no solution to this problem that the Bitcoin community has imposed on itself by not allowing the block size to be increased in 2017.

Lightning capacity - From Collapsing Prices, Liquidating Portfolios and Shrinking Channels
The capacity of the Lightning network is as low as it has been in about a year. Source: BitcoinVisuals

It is widely believed that Bitcoin should scale through the Lightning network, the off-chain solution that has been under discussion since 2015 at the latest. Lightning is already live and busy, but it is still a bit away from being ready for the market. In view of the corona crash, there are now a few more problems.

Those who use Lightning need so-called payment channels in which they include bitcoins. These are then transmitted to the destination via several stations of other Lightning nodes. But if the price of Bitcoin drops by 50 percent, the capacity of all Lightning channels will also decrease by 50 percent. The amounts that can be reliably routed through the network are getting smaller. At the same time, on-chain fees have exploded, meaning that the minimum amount a Lightning channel needs to hold to be safe from fraud is also increasing. Some thin channels could already have a semi-living existence.

The crash of Bitcoin also affects the function of Lightning as a means of payment.

Ethereum network reaches its limit during crash

Ethereum has a very similar problem. Here, too, the transaction volume exceeds the capacity; Around 70,000 transactions are currently awaiting confirmation, and fees, known as gas prices at Ethereum, have skyrocketed. Ethereum transactions are also becoming expensive and slow, which is also disadvantageous because the majority of the Tether dollars go to Ethereum.

pending eth - From Collapsing Prices, Liquidating Portfolios and Shrinking Channels
Pending transactions at Ethereum according to EtherScan

A particularly dramatic effect of this was seen at Maker-DAO, the Defi leader that binds the SAI token to the dollar through the correct use of ether. The exact background is complex, but roughly speaking, the following happened: Because the SAI dollars were covered by ether, but their price fell, the coins held by the members of the Maker-DAO were liquidated. That is completely correct and should be so.

However, the markets where the coins are liquidated were not liquid enough. Therefore, it was difficult, if not impossible, for DAO members to get reasonable prices while the coins were being sold automatically. At the same time, the network was congested, which is why the smart contract campaigns became expensive. Some of the makers did not manage to submit their necessary actions. The result can be seen in numerous complaints on the social media of people who have lost hundreds, sometimes even thousands, of ether as a result.

eth gas - From Collapsing Prices, Liquidating Portfolios and Shrinking Channels
Ethereum charges – gas prices – have exploded. Source: EtherScan.

The maker-DAO was brought into a difficult situation by the price drop. The nuclear option for the DAO would be shut down, an absolute emergency measure designed to prevent further ether losses. If this were to happen, several million ethers would enter the market and possibly create further selling pressure. This could be part of a self-reinforcing spiral that was triggered by a “black swan”, a very random event – the coronavirus.

Despite everything, the SAI dollar can also be used for good news. Because it holds its value of about a dollar. The SAI price has also gone through some turmoil in recent days, with a peak of $ 1.08 and a low of 92 cents. But at that moment he’s back at exactly one dollar. He has caught himself and the system works after all.

 

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About Author

Ethan Hunt

Bitcoin Maximalist and Toxic to our banking and monetary system. Separation of money and state is necessary just like the separation of religion and state in the past. Also, pro-local, pro-global and anti-national.

Disclaimer: All content found on 7bitcoins.com is only for informational purposes and should not be considered as financial advice. Do your own research before making any investment. Use information at your own risk.

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