Last night I had a very interesting conversation with Aviv Milner of the When the Music Stops (highly recommended) podcast, and he asked me a very interesting question that I think has a lot of impact to all of us: Who was buying XCH at the initial extremely high prices?
My assumption was wash trading, that as soon as the exchanges listed XCH they bought as much as they needed right off the bat from the early farmers and then began wash trading that coin back and forth. It is a good theory, I think, but Aviv told me in the cryptocurrency space it is quite common for a new coin to spend venture investment money propping up the network – especially when the developers themselves are the initial sellers having had a head start on everyone else.
Now, for any long term plans this is an insane strategy, and would simply be a really bad version of a stock buyback. But the purpose here isnt actually encourage long term trading or produce confidence in the market, but simply to prop the price up long enough and provide a “buyer” for the development team to begin quietly off-ramping immediately.
I’ve been told this is what’s known as a “rug pull” in the crypto space, and that it is depressingly common. Aviv informed me that the space has been plain littered with coins that only existed to provide short term value for insiders. Now, to be clear, I am not accusing Chia Network of using VC money to prop up their coin price for development sales. There is no evidence to that fact, and from my interactions with the developers they seem genuinely excited about the project.
However, there is clearly something propping up the price until about May 19th when the price started to crash and has been dropping ever since.
The reasoning behind something like this is actually pretty obvious for a blockchain technology like Chia, where all the expense is up front and once a high coin price has convinced you to add storage space to the network there is not a lot cost to just keeping it up and hoping.
Because the maintenance cost of XCH farming is so much lower than the power costs for Bitcoin or Ethereum once a farmer has plotted their space there is little incentive to shut it down unless you are planning on selling the hardware to someone else ready to give it a go. This keeps the network alive even if the price begins to crash, as long as a certain number of nodes and amount of netspace is available and would fully explain the incentive for Chia Network or another aligned entity to prop the price for a short time until enough farmers were connected to keep the protocol alive.
Regardless of what is behind the price drop, it is starting to seem like it will not go up to last month’s levels until another general bull run on cryptocurrencies comes along. And if I could predict those I would already be very, very rich.