Initial coin offerings using the Ethereum blockchain are seen as one of the main catalysts for sending ether’s price surging last year. Now they’re being blamed for its decline.
Ether, the cryptocurrency of the distributed-ledger network, tumbled by as much 17 percent Monday, the biggest drop since March. The price slumped to as low as US$285, pushing it below US$300 for the first time since November. The digital coin is down about 60 percent this year, compared with Bitcoin’s 54 percent slide.
Ether skyrocketed over US$1,000 in February in part as startups built projects on top of the Ethereum blockchain and sold digital tokens in exchange for ether in crowd sales known as initial coin offerings. Investors who bought ether to participate in those ICOs drove up the price. Now, some of those projects are cashing out to cover expenses and on concern this year’s cryptocurrency bear market will drag out, according to Biswa Das, who runs cryptocurrency quantitative hedge fund BloomWater Capital.
“These startups are raising a lot of funds but they don’t have treasury management or enough cash management experience, so they’re selling too early and causing a lot of pressure in the market,” said Das. “It was fine last year but right now the the market is so fragile that it causes a lot of pressure.”
At the height of ether’s rally last year, where it soared more than 100 times from below US$10, the digital coin grew so much, it comprised 32 percent of the total cryptocurrency market, compared with bitcoin’s 39 percent at the time. Some speculated ether would eventually overtake bitcoin as the most valuable cryptocurrency, a phenomenon known as the “flippening.” Projects who raised funds at the top of the market will be the most compelled to sell, said Das, who helps startups sell ether across multiple exchanges, to minimise market impact.
Pressure from ICOs cashing out is compounding with generalized bearishness in the cryptocurrency market, with market capitalization dropping to about US$200 billion from a high of over US$800 billion in January, on concern about tightening regulation and slow adoption.
Worries that the Ethereum platform won’t be able to withstand enough transaction volumes to support applications for the mass-market, as competitors spring up, have also weighed on the digital asset this year. While raising billions, most ICOs don’t have working products while many have been fraudulent or have had security issues.
“Investors are increasingly disillusioned with tokens and ICOs, most of which have been launched on top of ethereum and we’re seeing this play out in the market with continued downward price pressure,” said Spencer Bogart at Blockchain Capital LLC.
Assuming ICO liquidations of US$5 billion or so led to the continued pressure on the ether price, the negative impact has been magnified due to deteriorating sentiment and low liquidity, wrote Lex Sokolin of Autonomous Research LLP in a note last month.
Research website Santiment, which compiles a selection of Ethereum-based projects, estimates startups have spent over 110,000 ether in the past 30 days.
Startups are likely not done cashing out on ether, but longer term, continued demand to build and hold ICOs on the platform should cause the coin to rebound, Das said. Ethereum remains the most popular platform for startups to build blockchain-based applications, as it’s used by more than 90 percent of projects.
“The pain is probably not over,” he said.
This story first appeared on Bloomberg.