Analysis: Crypto Valuations Owe Much to Investor Fear and Greed — Just Like With Stocks

The end of 2017, just a couple of months ago, was a watershed moment for the virtual currency markets.

The unprecedented appreciation of Bitcoin and other virtual currencies helped fuel the appetite for initial coin offerings, fundraising vehicles for new, untested coins.

Though the direction of the cryptocurrency markets has not been influenced directly by movements in the stock market, recent turmoil in the crypto markets seems to indicate that Bitcoin and its peers are not as immune to stock market movements as originally thought.

For one, the pace and dollar volume of ICOs has diminished considerably.

ICO offerings in January raised just $911 million, compared to the record $1.6 billion raised in December as Bitcoin roared above $20,000.

Valuations of many currencies were down dramatically from January, but so were initial offering prices as well. According to data from the research firm ICIRating, less than half of all ICOs from 2017 raised more than $100,000.

During recent sessions, too, as adversity hit the stock and bond markets — marking investor concern over inflation and the direction of interest rates — virtual currency markets responded accordingly.

Interestingly, Bitcoin last week began to track the movements of the Dow Jones Industrial Average from day-to-day, an unexpected occurrence.

Perhaps it was chance, but also perhaps a reflection of overall risk sentiment toward any and all investments, irrespective of their underlying risk profile.

Other altcoins followed in tandem: EOS fell 67% from its record price on Jan. 13 of  $18.37. TRON dropped down 92% since Jan. 22. OmiseGo and ICON were both down by more than 70%.

Momentum buyers

A significant number of those new to the Bitcoin and ICO markets were participants in what had been, until recently, a steadily rising stock market, analysts pointed out.

“It seems pretty clear to me that there are a lot of investors whose appetite for risk is dictated by moves in the equity market,” said Galen Moore, who runs Token Report.

For these individuals, the appeal of Bitcoin wanes considerably when the stock market declines, despite the fact that the investments are unrelated.

The sharp drop in the price of Bitcoin, Ethereum and Ripple since January demonstrates the speculative nature of trading on the exchanges and how susceptible these digital currencies are to changes in investor sensibilities.

Without any rational basis for establishing the value of cryptocurrencies, prices are largely driven by momentum and buyers at the speculative extremes, wrote Gunduz Caginalp, a professor of mathematics at the University of Pittsburgh, and Carey Caginalp, an instructor at Carnegie Mellon University, in a recent research paper.

“Stability will be lacking, so the cryptocurrencies may simply be a mechanism for a transfer of wealth from the latecomers to the early entrants and nimble traders,” they noted.