Jeff Dorman, Chief Investment Officer at Arca, recently published an article expanding on the performance of crypto-assets since the start of the year. According to Dorman, the performance of the digital assets market has been “nothing short of spectacular thus far,” adding that Bitcoin is “now on pace for its best January since 2013.”
However, he noted that it could be a little too early to celebrate, claiming that rallies are double-edged swords. Dorman re-visited how Bitcoin and Ethereum had been making steady week-on-week gains before 2017’s historic climb, following which ICOs began to enter the space at a staggering rate. New cryptocurrency projects saw their tokens’ increase in value tenfold, while Bitcoin underperformed significantly for a time.
When Bitcoin started gaining traction in the second half of the year, investors rotated their holdings back into BTC. “While the dynamics have certainly changed in 2020 compared to 2017 (ICOs are a thing of the past and the amount of people eyeing Bitcoin is magnitudes higher),” he said, “this nonetheless feels similar.”
“The Bitcoin halving is rapidly approaching, and we may be gearing up for a crypto market that leaves all naysayers wondering what just happened.”
The Arca CIO also argued the negative side, stating that the rally might not be the best thing for the industry. “When every project rushes to throw press releases and Medium posts out just to create artificial double-digit moves in their tokens,” he said, “it certainly doesn’t feel sustainable nor does it remove skepticism.”
Dorman brought up the example of Augur (REP), a decentralized betting platform “that basically no one uses and is the leader in the crypto-clubhouse for ‘highest ratio of hype versus people actually using it.'” In January last year, REP surged by more than 100% in just weeks due to Augur’s partnership with a company called Veil. The following week, REP fell by 50% and ended the year in the red.
Exactly one year later —last week — REP gained by 100% once again, but this time due to the anticipation of its V2 platform launch. At the time of writing the report, Dorman said that the token had already fallen by 33% from its intra-week peak.
“The majority of YTD “winners” thus far are assets that were last year’s biggest losers.”
Dorman said that a few clear themes emerged last year, themes that led to a very “bifurcated return set, one where a few big winners trumped many more losers.” He also claimed that it’s doubtful that investor opinions about the space or the actual value of such projects have changed over the last three weeks.
Despite small-cap rallies not being uncommon in traditional asset classes, Dorman pointed out that the gains for the last twelve months arriving in just 20 days is typically not a good sign of health, nor is it something that is sustainable. “Evaluating digital assets as an investment class based on how high prices are going during an untethered and largely unexplained rally is likely not the right way to assess progress or risk,” he said, adding that evaluating how low prices drop once the euphoria ends is probably more important.
According to Dorman, most digital assets, in reality, are effectively penny stocks with regard to volume traded v. market capitalization, enabling any token to take off at any time for no reason. While this doesn’t invalidate the whole space, the ‘penny stocks of crypto’ are still quite prominently displayed on exchanges and price aggregators, as well as discussed frequently in the media.
He also said that those that accrete actual economic value or show real user growth will hold gains better than others, and over time, the size of the real projects will dwarf and drown out the rest.
“There is a real industry growing here — don’t let it be overshadowed by the worst representations.”