In the last few weeks the price of Chia has taken a radical nosedive, crashing to around 10% of its all time high recently after launch. This is devastating for anyone holding XCH, including myself, and has made some of my plans around funding some necessary Chia software development out of XCH donations a bit tough to imagine now. So let’s talk about why.
The first, and most obvious, answer is just the price of cryptocurrency in general. All cryptocurrencies have experienced a drastic price decrease in recent weeks, in lockstep with the price of bitcoin. Just a few months ago BTC was at $60 000 USD per coin, and now its dropping below 30. This has hit every coin to roughly the same degree, some much more and few somewhat less. There is a lot of speculation about why this is, with as many theories as there are YouTube channels. I suspect it has to do with the inflationary nature of pumping Tether into the exchanges without pulling enough money out, but until we have proof its all speculation. But with XCH it seems that there is something else going on too.
So why has XCH dropped 90% since the ATH? Well that high price of around $1600 was right at launch of transactions, when hype was high and supply was very low. Since then roughly 10 000 XCH have been entering the supply chain every day through block rewards and total supply is now hundreds of times bigger than it was then (minus the pre-farm). This will of course drive the price down without additional buying pressure to keep it up. Thanks to xchscan.com we can take a look at the data necessary to visualize this.
First, you can see the price decrease over time. You can see that it is radically faster than the linear growth in supply will show. Because the Chia Network team has not spent any of the pre-farm to date, the supply begins at “0” and grows and treats the 21 million XCH held in the strategic reserve as the zero-point. The opening of that reserve would do what I am describing here but in hyper-speed. as the available supply would explode with no buying pressure. This would be a foolish mistake for the Chia Network team and would devalue their asset, which is why I don’t think there is much risk of that.
So in order to see what is happening we look at the total market capitalization charts, minus the pre-farm, to see how – when you control for the radically increasing supply – the price drop tends to follow a lot closer the overall drop in cryptocurrency prices. To me this provides enough evidence that what we are seeing is a combination of the price stabilizing to the market during an overall market crash with the overall cap dropping by 2/3 instead of 9/10. I don’t think there is anything nefarious going on, and it is unlikely to crash to zero because of this. Its just bad timing for the XCH coin itself. Additionally, with the launch of the on-chain pools and micro-rewards going out the transaction volume has doubled and more and more farmers are getting coin.
So is it going to get better? Maybe, a little bit. But I don’t think we are going to see any significant price increases until two things happen. First, the overall cryptocurrency market – driven by BTC – has to re-enter a bull market. Until then, with everything basically pegged to some degree to bitcoin, the odds of massive gains are low. Additional to that, though, there needs to be an increase in demand for the coin that exceeds the 10k / day issuance. And that probably won’t happen for quite some time without some significant utility added to the network. So sign up for the hackathon when it re-launches, learn chialisp and get to work!