Bitcoin’s price in US dollars from Thanksgiving 2017 to 2018. It starts at about $7,000, rises to nearly $20,000 and slumps to $4,500 in time for everyone to gather round the turkey.

It’s not hard to think there are lots of stony silences around dinner tables in the US this week. It’s Thanksgiving, when families come together to reflect on the year gone by. Last year, there were lots of excited articles about this new “bitcoin” thing whose value – measured in dollars, obviously – was shooting up and was going to go to the moon. John McAfee said so and that guy sleeps with a gun!

As you can see from the graph, the excited articles, and excited returning-home sons convincing their parents to put their 401ks into bitcoin, were right – up to the point where they weren’t. Anyone who bought into the bitcoin excitement around Thanksgiving 2017 (a topic that must have made a pleasant break, while passing the cranberry sauce, from talking about the first year of a calamitous “good people on both sides” president) would have done well. At first.

$8,000 turned into, wow, $20,000! And if you were able to get out by mid-May, you’d have been OK. Since then, ehh, not so much. The price noodled around $6,000 for months. (I do hope that the Washington Post will revist this group in Kentucky that it wrote about in February, profiling people who jumped into bitcoin in.. urgh, just after Christmas 2017, one of whom then got into an altcoin called “mintcoin”. This seems to be so thinly traded that nobody is able to draw a graph for its price.)

Now though the Bitcoin price has crashed below $5,000, and as I write is dithering around $4,500. The question is: why did it crash so far?

I think there are a number of reasons which happen to have come together to create the perfect storm to lead to a bit of pan-crashing and slammed doors and “well you knew there was some risk” conversations this delightful holiday weekend.

They’re threefold.

The US Securities and Exchange Commission determined that two ICOs (initial coin offerings – basically, alternative cryptocurrencies) were regulated securities, and that they’d have to pay back anyone dissatisfied at the original price, in dollars.

Hedge funds which bought into bitcoin in 2017 were approaching their year-end accounting period

Thanksgiving and Christmas are approaching: a time when people traditionally splash out on presents, which they buy with dollars, not bitcoins.

Let’s go through them.

1: The hammer falls

ICOs were a really big thing in towards the end of 2017. To anyone standing outside the cryptocurrency space (such as me), it seemed absurd that anyone would buy one of these. You hand over your actual money to a company which says it’s going to do wonderful things, and in return it gives you one of a limited number of tokens which might or might not rise in value as a result of the company’s efforts, but which gives you no say in the running or organisation of the company. You know what accountants call that? A non-voting share. You know what easily fooled people call that? Their passport to riches.

The SEC finally got round to calling them that too, and on 16 November it announced $250,000 in civil penalties against two ICOs, Paragon and CarrierEQ, and told them to notify investors they are eligible for refunds if they still own the token or sold it at a loss. Here’s the kicker: the buyer compensation had to be at the original price and paid in fiat currency. None of your Bitcoin/Tether nonsense here. That’s a cool $27m that those two companies needed to find pretty fast.

Now look at the chart below. The spikes are sales: red means selling below the predominant price, and green means buying above the predominant price.

Consider where the price drop is, two days before the SEC announcement. 7,000BTC are sold at a price of about $6,000: that’s $42m.

Now ask yourself whether the folks at Paragon and CarrierEQ might have known the SEC was about to announce its finding, and that they were going to need some real money. Or, equally, that other people heard there was going to be a finding against ICOs by the SEC, and that it was going to be a whopper.

The latest selloff in bitcoin seems to have been triggered by a 14 November disposal of about 7,000BTC.

This isn’t over: other ICOs which fall under the ambit of the SEC (basically, any of them which sold to someone in the US) will inevitably have to suffer the same finding. It’s just a matter of time. That conversion from crypto to fiat is going to come again and again.

2: “How’s your year-on-year looking, Gary?”

Towards the end of 2017 a number of hedge funds decided that a bit of bitcoin might spice up their portfolios. And so it proved: see the runup in that graph above. But as Anthony Pompliano pointed out a couple of days ago, hedge funds tend to run on year-on-year comparisons, and by the beginning of November those weren’t looking too hot. Over to Anthony:

crypto hedge funds are going to start shutting down due to high water mark issues. A high water mark is a contractual clause in fund documents that ensures fund managers only receive their performance fee (usually 20% of profits for crypto funds) if the fund’s net asset value is higher today than in any previous investment period. December 2017 was the end of the last investment period for majority of the funds, but it was also the top of the last bull market. We have seen 50–80% decreases in net asset values in some funds since then. This means these fund managers will not receive a performance fee in 2018, which drastically reduces the income of the individual manager. Additionally, the fund managers won’t receive another performance fee until they are able to 2–4X increase the net asset value of the fund from current levels. It wouldn’t surprise me if fund managers won’t be able to achieve those levels of profits until at least 2020, if not further out. This lack of eligibility for their most important financial incentive will lead to many fund managers shutting down their funds and returning capital to investors. They are likely to sit out of the game for a few months or even a year, before returning with a new fund that will not be subjected to the high water mark challenges.

Now, they might choose to sit on their investments, but without any boost in value, wouldn’t it make just as much sense to get out? So perhaps some of those sales in mid-November were just profit-taking, or more possibly loss-stops on positions.

Anthony’s not finished, though. He points to the SEC’s ICO funding above, and notes that this becomes a Big Problem for ICOs, given how cryptocurrency prices* are down 50–90% from their watermark high. As he explains:

Almost every project raised capital in the form of cryptocurrency – for example, lets say investors contributed 50 BTC to a project at a price of $10,000 for a total of $500,000 raised. This example team would be on the the hook for returning $500,000 to investors on top of the financial fine levied by the SEC. Normally this wouldn’t be a big problem, except crypto prices are down 50–90% since the all-time high. It is unlikely that an ICO project has enough funds, based in US dollars, to pay investors back (depending on when the ICO was raised – most were in Q3 & Q4 2017). In our example, if Bitcoin is down 50% since investors contributed the 50 BTC, the team would only have $250,000 on hand to repay investors (if the team didn’t spend any of the money yet either). The only options they have is to raise more capital (unlikely) or declare bankruptcy.

Yes, the B-word. He thinks “the current bear market is going to go from bad to worse very quickly for both crypto funds and ICO markets.” And it has a domino effect: if cryptocurrencies write down their value, or simply decline in value, then any fund holding them has to do the same – it’s known as mark-to-market. The American tax year ends on December 31, and is approaching fast (five weeks away!), which means there might be a lot of teeth-sucking at some funds. Pompliano, for his part, thinks it’s going to get much worse before it gets better.

Need a concrete example? Bloomberg, at your service. Here’s Michael Patterson:

To see what may be one of the most poorly timed trades of the past year, take a look at the $1 billion Grayscale Bitcoin Investment Trust. On Dec. 18, the day before Bitcoin’s epic crash began, buyers of the trust propelled its premium over net asset value to more than 100 percent. In rough terms, it was like shelling out $40,000 for Bitcoins that were trading near $20,000 in the spot market. The markup was largely a result of scarcity value. Buying the trust was one of the few ways for regulated U.S. institutional investors to gain exposure to cryptocurrencies. Some were willing to pay for the privilege on expectations that crypto-mania was just getting started. Of course, we now know that was the peak. As Bitcoin tumbles toward $4,000 and the Grayscale trust’s premium shrinks, the bullish Dec. 18 bets are looking worse by the day. While it’s unclear how long buyers held on to their positions, anyone who stuck with the trade would be nursing losses of more than 87%.

What do you think – reckon they’ve been HODLing, or did they look at their valuation, look at the screen, look at each other…

An update to that (found after the first publication of this story): MarketWatch reports that “35 crypto-related funds have closed since the beginning of 2018, representing more than 5% of the 633 funds the company [Crypto Fund Research] tracks.”

The rush to allocate capital amidst the crypto-boom began in the second half of 2017, peaking with 44 fund launches in the month of January 2018 — the highest month on record, according to data from Crypto Fund Research.

The graphic that goes with it shows that peak of launches, just at the point when Bitcoin was riding the long slope down. (Ironically, the funds which launched at the back end of 2018 will probably be OK, as will the ones that launched before August 2017. Everyone else — that’s about two-thirds of them, if you add them up — is going to have some problem in their year-on-year comparisons. Sure, they might be in it for the long haul: holding on for years. But if all the money is going out of the sector, when is the price ever going to come back?

As one analyst said wearily about Bitcoin, “there are no fundamentals, only technicals” — that is, there’s no underlying reason to buy it (unlike gold, say, where you can at least argue that it has value for use in gilding things, electrical contacts and so on, meaning there will be demand for the actual commodity quite separate of other beliefs). The only thing that changes its price is what people believe is going to happen to its price.

But wait, we’re not finished yet.

3: Something for under the tree

In case you hadn’t noticed, Americans are doing Thanksgiving, which means they’re going to storm retail outlets on Friday and mash the BUY button on websites on Monday. Such purchases require money that isn’t virtual, and some people who had already seen their gigantic hopes flushed away simply cashed out so they could afford to buy some presents, or just some fuel. You don’t have to believe me, of course; just imagine all those times children have asked their parents “what have you got me for Christmas?”, and imagine the thrill on their face when you answer “Nothing tangible, but I have this declining speculative asset sitting in a virtual wallet somewhere, I hope.”

People cashing in is all money moving out of the market. Without money coming into the market, there’s nothing to prop up the price. As money exits the market, through people selling their Bitcoin because they have to pay real-world bills, the price will keep going down. (Yes, every seller must be matched with a buyer; but when there are more would-be sellers than buyers, the price drops.)