Cryptocurrencies have been massively rewarding for both early investors and savvy traders. Take bitcoin for example. All those who invested before 2017 have seen returns greater than 550%. Traders on the other hand greatly benefit from bitcoin’s significant volatility: one day of bitcoin volatility is nearly equivalent to volatility of an interval of roughly 23 trading days for the S&P 500. For traders, volatility brings opportunity.

In this article I will focus on the reasons behind a grim outlook for crypto investors, at least in the short-term.

Most cryptocurrencies can’t be valued by traditional means (discounted cash flows) as they lack associated cash flows. Models for valuing cryptocurrencies require a great number of made up inputs.

Take for example this fantastic hypothetical model by Burniske. Here the author attempts to value a token by borrowing the Equation of Exchange from monetary economics. The valuation requires coming up with an imaginary value for a token’s Velocity (i.e. the number of times a token changes hands in a year) as well as with an Adoption Curve. In that model, changing the time one assumes adoption goes from 10% to 90% from 15 years to 30 years reduces the value of the token from $0.12 to $0. Readers can find more details on that valuation approach on this article.

In short, from the perspective of a fundamental investor, the whole asset class could go to zero. Valuations provide no floor.

Cryptocurrencies are barely used for anything aside from speculation. Take ETH for example. Ethereum’s main uses are DApps and ICOs. However DApps have barely any users: on Aug/22/2018 there were a total of 15,689 users (more data available on this website). At the moment of writing, the well-known prediction market Augur has had a whopping 52 users in the prior 24 hours. The market capitalization of Augur’s token, $REP, currently stands at $200 million — with only 52 users.

Meanwhile the amount of money raised by ICOs has nosedived. Furthermore, in 2018 ICO investing largely stopped generating fiat inflows as investors started recycling pre-existent crypto holdings into new ICOs. What does that leave? Speculation! Usage provides no floor.

(Readers can look into ICO numbers using Coindesk’s ICO Tracker — although their numbers incorrectly list the mammoth EOS ICO as conducted in June 2018 — or Icodata.io)

In this article from 2017, I covered in detail how flawed most tokens are and how ICOs were driving crypto prices higher.

Picture Pether Block (pun intended), a sharp entrepreneur seeking to raise funds. Imagine Pether raises funds not by issuing equity (stocks) or legal promises to pay funds back (loans, bonds), but instead by giving out pretty bits of paper with no legal backing saying he plans to pay back. Now imagine Pether actually gets funding by giving out pretty bits of paper that do not even promise to pay back. Furthermore, imagine a case where Pether is actually anonymous, he did not even have to disclose his identity to raise funds. This is happening in some ICOs. Ponzi schemes abound. OneCoin is the most famous uncovered Ponzi scheme. Bitconnect, a cryptocurrency that offers guaranteed 149% annualized returns (assuming daily reinvestment) plus variable returns generated by a “volatility trading bot”, is in my humble opinion the most striking Ponzi scheme of present times.

Eventually economics caught up with hype and most ICO prices collapsed over 80%-90% from their January highs. The SEC helped along the way by driving the message that ICO tokens were in most cases unregistered securities.

Over half of ICOs dies within four months of token sale. Readers can find details on the great number of dead ICOs on Deadcoins.com.

“I accept figures I have seen that 80 percent of ICOs were frauds, and 10 percent lacked substance and failed shortly after raising money. Most of the remaining 10 percent will probably fail as well.”

The average ICO investor was stubborn and uninformed. Most did not even read the whitepapers or offering documents, nor were aware their tokens provided them with absolutely no rights, even though they believed they were acquiring participation in the success of a project.