[As of publish time, Ethereum has taken a dive down to ~$260]

Background

What happens to all the ETH backed projects which didn’t cash out enough post token sale to fund a long enough runway? A few months ago on a team call (ETH was in the high $300’s), I predicted to some others who commented on Ethereum’s amazing price stability that I expected it to take a large dive, ultimately correcting down to or slightly below $100. Given where it was 18 months ago, that still may be generous given what I’m about to describe.

Besides the obvious answer of ‘Speculation’, the question that must be asked is, “What has powered Ethereum’s massive climb on this last crypto run?”. One answer would be the technological potential it offers with an active dev team powering it and how it has the great chance to provide a scalable cryptocurrency platform when a few more roadmap items have been delivered. The second, and in my mind the primary contributor, is that Ethereum has the most easily utilized utility of any cryptocurrency which is available. You can argue about it vs other platforms, but it cannot be denied that ERC-20 and other Ethereum token standards have been by far the most popular and widely used of any crypto powered platform available.

 

It All Comes Down to Buyers vs Sellers

For anyone who tried to get into ICOs over the year and half, you’ll notice that each time a large wave of ICOs came available, the price of Ethereum skyrocketed as demand increased, but it had the tendency to stay high, and not come down. Why is this? I believe there are 2 reasons.

  1. Potential ICO investors continued to buy ETH in preparation for more upcoming ICOs.
  2. There was a minuscule amount of sell action going on from the funded ICOs

In conjunction, these two powered a heady ETH price action, causing it either be flat or move up in great bounds. A positive feedback loop was thus formed, since any ICOs which received funds had an incentive to hold their ETH, as doing so would prevent price drops and increase the size of their funding in USD.

However, what goes up must come back down, and with the contraction of the overall market driving down the price of ETH, we’re soon going to see a race to the bottom as ICOs which did not immediately cash out enough for a long runway will start dumping in order to secure themselves some USD or their local fiat. As anyone who’s ever been stuck holding bags can tell you, the earlier you dump the better it is for you personally. In a system where the momentum is downward, and any dedicated selling by an ICO funded company can drive ETH prices down substantially, there’s the ultimate incentive to sell early for these players. That incentive? Survival.

The Driving Force for Sellers: Survival

Imagine for instance that you’re an ICO and you have 5 competitors, also ICO funded. Now imagine that you’re sitting on a huge stack of ETH, and you can see that each of your competitors has most of their ETH in their wallets. Now, which of these 3 would you rather happen?

  1. The market dumps, you and everyone who holds ETH is screwed
  2. The market recovers, everyone has lots of money again
  3. Your competition dumps their ETH, leaving you with a much less valuable stack and possibly leaving you with no chance of survival
  4. You dump your ETH and your competition dies because they lack funding, thus leaving you alone in your space with plenty of cash

Of the above, 2 and 4 are preferable, but of those, only #4 is one that you can directly make happen. Given that ETH at $300 is still 30x higher than it was before the ICO craze of  early 2017 (~$10 on avg), should you take your chances that ETH may go 2-3x in the very short term with a miraculous recovery, or that it could continue to dump on its own via slow selling down to sub $100? The above are simplified numbers, but you can see that the reasonable thing to do in this scenario is to secure any funding possible, as it locks in your runway and will most likely hurt your competition.

In fact, while I’ve written this article, there’s been a lot of talk in the crypto channels of some ICOs starting to do this, and with order books thinning out, the longer people wait the more of a risk they run. To paint it out, I’d think the worst case scenario we’d see out of this would be ETH down to $50 or so, but only if BTC the other market leaders also take a large dive. The big decider here will be at what point people will decide to simply HODL and not dump anymore. Though I’ve been an extreme bear for the short-mid term over the last 6 months, I’m still very bullish on crypto in the long term (late 2018 and beyond), and I’m sure many others who hold vast sums of ETH feel the same. So we may see a legitimate death spiral of ETH caused by aggressive cashouts, but I think that’s not extremely likely. But do be wary about the actions surrounding the large ICO wallets.

Wrap Up

In part 2, I’ll talk about further implications of this scenario I’ve discussed around ERC-20 offerings and alternative funding sources for these companies along with the consequences of using those for funding and how that would deepen the market’s death spiral in order to aid the survival of the early dumpers.

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