Contributed Commentaries
Are cryptos becoming the new pink sheets?
Kitco Commentaries | Opinions, Ideas and Markets Talk
Featuring views and opinions written by market professionals, not staff journalists.
David Lifchitz, CIO Tellurian-ExoAlpha – August 31st, 2023
“Pink sheets” is the nickname of highly illiquid stocks that trade only over the counter (OTC) as they don’t meet the requirements to be listed on a major exchange such as the NYSE. They are highly speculative and also quite illiquid, leading to potentially violent price swings and prone to manipulation.
In the early days of trading, the quotes of those share prices were written on small pink pieces of paper… hence their name. In his early days as a stock broker, Jordan Belfort a.k.a. “The Wolf of Wall Street” as featured in the movie of the same name, was selling these pink sheets to credulous investors…
Cryptos today make me think of the new pink sheets as they share many characteristics: unregulated instruments, highly speculative, have now become highly illiquid and easy to manipulate. There has always been thousands of valueless and meaningless coins, pumped by unscrupulous insiders just before dumping them on unsuspicious hopefuls seeking a “get-rich-quick” schema, but nowadays, even the large-cap cryptocurrencies begin to behave as pink sheets, essentially due to a lack of liquidity.
This lack of liquidity began in early 2022 as the bear market began, and turned into crypto winter in early November 2022 when FTX collapsed. This illiquidity makes cryptos hardly move for days to weeks, and then suddenly jump or dive by a double-digit move that fades the next day or so.
For the most recent examples, if we just focus on the largest crypto, and also the most liquid, i.e. Bitcoin: it has been almost frozen since June 24th, but jumped on July 7th, 2023 on XRP half-victory against the SEC news, only to dump by an equal amount the very next day, before sliding very slowly (-2.6% over 5 weeks), then violently crashing 10% on August 17th, 2023 in less than a couple of hours. It then plateaued again until August 27th, 2023 when it jumped more than 6% on the Grayscale closed-end to ETF conversion moving forward, but that move also faded in less than 48 hours.
As much the jumps on July 7th and August 27th were linked to news to which Bitcoin reacted, as much euphorically as liquidity was nonexistent, as much the dump of August 17th, 2023 was as sudden as violent and without any catalyst, except that Bitcoin was sitting on its support and that liquidity was almost nonexistent, which made it easy for a large player to suddenly push prices below support to trigger an avalanche of sell orders (and profit from it): stop-losses hit, leading to more selling, leading to forced liquidation of overleveraged traders, leading to even more selling pressure, etc. And between these moves, Bitcoin hardly moved from day to day.
Bitcoin has behaved all Summer as a pink sheet: going nowhere, then suddenly moving up, then fading the next day or dumping without bouncing back.
So the questions are:
1) Why did liquidity disappear?
Liquidity was initially been brought by large institutions diving into cryptos, but these large investors turned cold feet as the 2022 bear market unraveled and FTX was the last nail in their crypto coffin. They haven’t come back yet, hence the lack of liquidity in the market.
Institutional investors were interested in cryptos because of their potential for generating a double-digit return in a couple of weeks, which was not possible with traditional assets without a significant amount of leverage and as much risk. Some of them took a hit in 2022, but that was part of the game. What drove them out was the failure of FTX, which highlighted the operational weakness of the asset class trading infrastructure. As much they accepted the trading risk, i.e. taking a trading loss, as much they couldn’t deal with the infrastructure risk. Then on top of that, the Regulators stepped in, creating even more confusion in the space, while the typical double-digit returns were no more. So why would they remain in the minefield without reward?
2) When will liquidity come back?
Liquidity will come back when institutional investors will come back. For that, they need to see a more robust infrastructure, more clarity on the regulatory front, and the potential again for double-digit returns in a short period of time.
Many think that the approval of a Bitcoin ETF would ignite investors' animal spirit, but that would just bring an easier way for investors to access Bitcoin instead of a still cumbersome process. It may generate some interest in the short term, but if institutional investors don’t embrace the asset class again, the Bitcoin-ETF-induced effect may not last long.
Now that August 2023 comes to an end, we’ll see how September will shape as the month of September has historically been a weak month for risk assets (cryptos & stocks), and we are ending August at support…
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