What’s behind bitcoin’s relentless climb higher … the SEC brings a case against a widely held altcoin … what it means for your altcoin portfolio
We can thank the family dinner table for the recent surge in bitcoin’s price … at least that’s what some pundits are saying.
The “Holiday Effect” theory suggests that stories around the holiday dinner table, highlighting big gains from bitcoin, resulted in FOMO (fear of missing out). The family members suffering from FOMO allegedly flooded into bitcoin, helping drive up its price over the Christmas stretch.
As to that surge, below, you can see bitcoin exploding 74% since December 11th.
Now, it may be true that a new batch of mom ‘n pop investors bought bitcoin over the holidays based on FOMO. But it’s unlikely that this is the primary driver behind the crypto’s surging price.
For that, we can thank another type of investor — the whales.
***On-chain data shows that high-net-worth investors, often called bitcoin whales, stopped taking profits around Christmas like they were doing earlier in December, and instead, began buying
From Coin Telegraph:
It is nearly impossible to segregate institutional investors from individual investors through on-chain data.
However, the trend shows that investors with large capital are increasingly entering into the Bitcoin market despite its rally.
To identify these whales, we look for crypto addresses holding 1,000+ bitcoins (at bitcoin’s current price of around $31,850, a whale-account contains nearly $32 million dollars’ worth of bitcoin). Many analysts consider this level the dividing line for “whale” versus “non-whale.”
To determine the extent to which these whales are influencing the market, we can look to CryptoQuant’s “Exchange Whale Ratio.”
This ratio divides the top 10 bitcoin exchange inflow transactions in an hour by bitcoin’s total exchange inflows. If lots of whales are planning on selling, they would be sending bitcoins from their wallets to the exchanges.
This would show up in the Exchange Whale ratio as a higher number. Traditionally, anything about 85% shows significant whale activity, and hints at a correction (whales would be sending bitcoin to the exchanges if they’re looking to unload those bitcoins, whereas they send cash to the exchanges when they want to buy bitcoin).
From Dec. 8th-22nd, this ratio remained above 85%, as whales were likely profit-taking during bitcoin’s climb.
But then the whale-selling dried up — replaced by buying.
Below, you’ll see a chart highlighting how much bitcoin-whales own, as it changed from December 21st through December 27th.
The surge is most pronounced on the 25th through the 27th (the three green bars on the right), which coincided with bitcoin’s price jumping roughly 17% at its peak, before ending that period up about 13%.
From the crypto research shop, Santiment:
Over the last 48 hours since Christmas, #Bitcoin addresses with 1,000 or more $BTC now own 0.13% more of the supply than smaller addresses did previously.
This is about 24,158 tokens, which translates to $647.7M at the time of this writing.
This corresponds with the Exchange Whale ratio falling below that 85% level, as you can see below:
BTC whales seem exhausted to sell. Fewer whales are depositing to exchanges.
I think this bull-run will continue as institutional investors keep buying and Exchange Whale Ratio keeps below 85%.
And over New Year’s weekend, the institutional buying continued, leading to even greater price gains.
On-chain data shows big money continues to chase bitcoin amid the frantic bull run. That’s a sign of institutions catching the “FOMO” bug, according to one analyst …
… there is evidence that persistent demand from big players is creating a supply squeeze, allowing for a continued price rally.
Digest readers who initiated a bitcoin position back on November 12, 2019 when we first profiled Matt McCall’s interest in the crypto are up 260% (for newer Digest readers, Matt is our crypto specialist. Matt has been a bitcoin bull for many years, long before the just-mentioned Digest). And today’s institutional demand suggests this could be merely the start.
***But it wasn’t all good news in the crypto sector last week
Owners of the altcoin Ripple (XRP) — the fourth largest altcoin in the world — saw its market value collapse from $0.65 on December 17th to less than $0.18 by December 29th as you can see below. That’s a loss of 72%.
As I write, it’s regained some ground, back up to $0.23.
The meltdown is based on news that the Securities and Exchange Commission (SEC) filed an action against Ripple Labs Inc. and two of its founders, alleging that they raised over $1.3 billion through an unregistered, ongoing digital asset securities offering.
In short, the SEC is arguing that Ripple isn’t truly a currency.
Instead, they say its creators treated Ripple more like a security. And since they didn’t register it as such, it amounts to illegal sales of unregistered, non-exempt securities under Section 5 of the Securities Act of 1933.
Now, this raises a serious question for altcoin investors — if the SEC is going after Ripple, should altcoin investors be worried?
Well, answering this requires a deeper dive into the SEC’s case against Ripple.
First a little backstory …
When Ripple’s XRP ledger was completed back in 2012, its engineers created a fixed supply of 100 billion XRP. Of those, it appears that 80 billion were transferred to Ripple and the remaining 20 billion went to a group of founders.
This is important.
When bitcoin was created, the idea was for a fully decentralized, peer-to-peer network. This was a reaction against fiat currency and the broader banking system. Bitcoin was never engineered or intended to be held or controlled by a single entity.
The SEC alleges this isn’t what happened with Ripple. As we just noted, it appears all of its tokens were originally issued to the company that created it and its founders.
Then, in the years that followed, there were several missteps from the SEC’s perspective …
Ripple’s founders tried to make a market for their crypto through a “bounty” program …
The founders didn’t comply with mandates of the Bank Secrecy Act …
The company sold at least 8.8 billion XRP in the market, raising nearly $1.4 billion to fund its operations. Meanwhile, two of the founders sold XRP they had received from the initial XRP issuance to public investors, generating millions.
To the SEC, all of this paints the picture of a security (or investment contract), not a currency.
And that leaves us with the SEC now pursuing legal action and Ripple investors sitting on a massive drawdown and a questionable future. On that note, last week, the crypto exchange, Coinbase, suspended trading on Ripple.
***Why bitcoin is likely safe from this — and what this means for other altcoins
To understand what Ripple did wrong, it’s instructive to look at what bitcoin did right, so to speak.
Here’s Director Bill Hinman of the SEC’s Division of Corporation Finance, from back in 2018:
If the network on which the token or coin is to function is sufficiently decentralized — where purchasers would no longer reasonably expect a person or group to carry out essential managerial or entrepreneurial efforts — the assets may not represent an investment contract.
Moreover, when the efforts of the third party are no longer a key factor for determining the enterprise’s success, material information asymmetries recede.
As a network becomes truly decentralized, the ability to identify an issuer or promoter to make the requisite disclosures becomes difficult, and less meaningful. [ …]
The network on which Bitcoin functions is operational and appears to have been decentralized for some time, perhaps from inception.
Applying the disclosure regime of the federal securities laws to the offer and resale of Bitcoin would seem to add little value.
Here’s Coin Telegraph, drawing out the difference with Ripple:
This kind of analysis does not really work for XRP, most of which continues to be owned by the company that created it, where the company continues to have significant influence over which nodes will serve as trusted validators for transactions, and where the company continues to play a significant role in the profitability and viability of the asset.
***While this suggests bitcoin investors don’t have much reason to fear, it’s a reminder to altcoin investors that they need to understand what they’re holding
And that points toward the critical need for investors to have a deliberate, well-informed system for investing in the altcoin universe.
To illustrate, our altcoin specialist, Matt McCall, editor of Ultimate Crypto, utilizes his proprietary “MAG System.”
It’s a 10-point investment protocol that weights various crypto criteria to arrive at a composite score, indicating whether any particular altcoin is a “buy” or not.
The system analyzes everything from the size of the potential market for particular cryptos … to the strength of the team behind it … to risk … and more.
I should note that Matt’s Ultimate Crypto portfolio has never held any Ripple. Instead, it currently holds 11 altcoins, with the average position up 157%.
For full transparency, only two positions are showing negative returns, the lowest of which is down 20% as I write. Meanwhile, two positions are up more than 400%. To learn more, click here.
It will be fascinating to see how the SEC/Ripple drama unfolds. We’ll continue to keep you up to speed here in the Digest.
Have a good evening,