Bearish Bearish Cryptos

The cryptocurrency sector is showing weakness again by the end of the week. Bitcoin moved below $30,000 after lower opening among the US indices. Smaller cryptocurrencies are in red now. Altcoins such as Chainlink and Cardano are losing even more than 7% today despite lower volatility in previous days. The crypto market seems to be ‘abandoned’ by short-term investors, but is this really an argument for rising valuations? The bears are in move right now:

  • The recent report of JP Morgan analysts testifying to the undervaluation of Bitcoin and the fair value at around USD 38,000 did not cause a jump in the valuation of the cryptocurrency, which has a huge problem with entering above USD 33,000;
  • Today is the day when more Bitcoin ‘call’ options will expire (levels of $34,000 and higher) which could increase volatility and cause liquidation on nearly $800 million in BTC. Buyers momentarily forecast a broader unwind and Bitcoin’s quick return above the $27,000 levels has emboldened the bulls;
  • During the bull market of 2021, news like this caused valuations to spike, but today the high risk is clearly not in the price. Cryptocurrencies show that they are not a hedge against ‘inflation’ and falling purchasing power of fiat money. Weak investor sentiment is limiting demand for digital assets;
  • In previous cycles, downturns in the crypto market usually lasted for a period of about 2 years and ended when Bitcoin was facing another halving (decrease in supply and rewards for miners for the block mined). Halvings to date have occurred every 4 years or so and each time ended with euphoric increases in popularity and valuations of Bitcoin and smaller projects;
  • Previous cycles each time ended in a total panic during which few believed in the return of the industry to high valuations and the favor of investors, currently we are still far from such a scenario. At the same time, it is hard to expect the sector to fall like this every time, especially given the involvement of institutions, and the interest in ‘catching the holes’ by funds like Andressen&Horowitz, which allocated $4.5 billion to cryptocurrency market ‘bargains’ emerging in a downturn;
  • A more likely theory is that Bitcoin’s previous rally was indeed, beyond the technological basis for speculation, a ‘baby of low interest rates’ and the era of cheap money;
  • In the opinion of the CEO of the US mutual fund Fidelity, Abigail Johnson we are witnessing the ‘third cryptocurrency winter’. This is already another important person from the blockchain industry after Charles Hoskinson of Cardano and Gavin Wood, who confirms the downturn and indicates room for further declines. All of this likely points to a continuation of the cyclical nature of Bitcoin and cryptocurrencies’ rise.  The fund has been involved with the blockchain industry since 2014 when it began mining the first Bitcoins.
  • However, Johnson remains optimistic about the long-term prospects behind the adoption and use of cryptocurrencies; previous cycles have taught her patience. Ultimately, Fidelity wants to offer nearly 20 million of its retirement plan customers investments in Bitcoin through U.S. employee 401(K) plans. So far, this has faced criticism from the Department of Labor over concerns about high volatility in the sector;
  • The turbulent situation in the market for ‘stablecoins’ or cryptocurrencies that mimic the quotes of physical assets such as the US dollar has calmed down since the collapse of the algorithmic stablecoin Luna UST. Fear was also cast on investors by the largest stablecoin Tether, which temporarily lost correlations with the U.S. dollar by nearly 5%. In turn, stablecoin USDC, which is built by FinTech company Circle, gained on the wave of fear. Circle regularly reports reserves of physical dollars and the company’s balance sheet is audited. USDC’s capitalization has already grown to nearly $50 billion, online payments giant Checkout.com has pledged to accept customer payments in USDC. This could potentially accelerate stablecoin adoption, which could be supported by the so-called ‘network effect’ in the future.

The Fear and Greed Index continues to show fear but has managed to rise from extreme levels around 10 points. Historically, such moments usually turn out to be a good time to buy, but they can persist for many months, making the index rather useful for determining the general mood of the market and as a component of analysis, in itself not indicative of an imminent rebound. Source: CNN Business

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