How are things panning out in the crypto market
The crypto market has had a forgettable past month, with Bitcoin falling nearly 50% in May alone.
Overall, this highlights for many the concerns that have always defined the asset class, i.e., volatility and so many unforeseen variables.
Of course, such moves in the crypto market are nothing new, especially for investors who have braved the elements of the 2017 run up and subsequent crash. A more pressing question in the immediate future is whether last month's crash is a temporary construct or signs of a deeper malaise.
Bitcoin Setting the Pace
Investors should look no further than the paramount crypto, Bitcoin, which appears to have achieved some stability over $35,000 in recent days. That being said, BTC's next moves will be crucial.
Since the price of BTC dropped below $40K in mid-May, the price of the asset has oscillated between the $32,000-$38,000 range.
In doing so, BTC has never quite managed to build enough support to recapture the $40,000.
Analysts are pointing to a key level of support at $35,000, which if it continues to build, could result in a meaningful and sustained movement toward $40K and above.
Of note, this move would not be so pumped on leverage. However, price action in recent days has been very choppy. On the flip side, BTC could enter a new period of price discovery on the lower end.
Is the Crash Overblown or Signs of a Chief Concern?
What caused the price drop in May? Ultimately a drop in demand and an over-hyped push from the outside market caused the decline in May, much as was seen in several drops during 2017 and 2018.
Put another way, there are more advanced solutions and better serving coins out there, compared to BTC as of late as well with Ethereum being a perfect example.
Ultimately, nobody really knows what the next move with BTC with the current price action having to play out with risk sentiment continuing to be a factor.
Volatility is always expected in crypto or for any new emerging technology or asset class. It is important to also pay attention to the adoption rate of the networks. For example, if the participants in the network keep growing over time, the value of the network rises.
This could be a key factor for many other cryptos moving forward in the short- and long-term.
By this metric, BTC and cryptos have the fastest growing adoption rate of any technology in recent years. BTC's adoption has been comparatively higher than the rate of adoption of the internet.
From a monetary perspective, BTC or other cryptos are also a natural hedge against a never-before-seen expansion of US dollar money supply.
Many have seen BTC replace gold in terms of inflation hedges with institutions buying BTC at rates never higher than ever before. This could represent a tailwind that speaks to a long-term bullishness on BTC, though is too early to tell.
Obviously, a continued course or status quo by the US Federal Reserve would also need to hold steady for this trend to continue.
Buckle Up for More Volatility
Crypto's price volatility is something most investors have just come to accept. If there are no periods of sharp drops of 20-50 percent over several days, there can be no periods of rapid growth of 100-200 percent over a short time as well.
There are commonly sharp movements that make crypto-assets attractive for retail investors, who tend to take high risks in pursuit of high profits.
However, if you remove the risk, crypto will become comparable to other assets such as metals or other traditional assets trading on the world's largest exchanges.
It is up for debate whether BTC will not always be capable of such extreme volatility. For example, large drops will no longer be possible when the capitalization of BTC is so large that retail sales will not affect the exchange rate.
Looking ahead, it is anyone's guess where crypto prices are headed. However, given its past performance, we could easily see BTC or other cryptos reach escape velocity at some point in the near future if risk appetite holds.
In the last 60-90 days alone there has not been a lot of positive action in the market, which could point to higher prices. With the summer months historically representing a lull for markets, it will be interesting to see how crypto behaves during this period.
Role of Ethereum
The focus lately has continued to shift toward Ethereum and there is quite a bit of attention on the decentralized finance (DeFi) ecosystem that sits on top of it.
Still, both ETH and DeFi assets across the board are heavily dependent on the price of BTC. Presently, there is an inescapable correlation to BTC price and the wider altcoin and DeFi market though this is one that could weaken over time.
For now, investors will
have to stay the course and enjoy the ride.