Things are heating up in the crypto market. Confidence in their long-term potential is being affected by a change in the way investors value growth on the stock market. Investors, most of whom take long positions on cryptos, are having their faith put to the test: how deep is the belief in rising prices, how strong are the proverbial "Diamond Hands" when prices just keep falling?
Bitcoin: History repeats itself
Markets in general, and cryptos or Bitcoin in particular, follow certain cycles that repeat themselves time and again, from overvaluations to undershooting expectations. A peak price in Bitcoin near $70,000 at the end of November 2021 - i.e. in the middle of the seasonal winter - is now followed by the crypto winter: This is what die-hard fans have been calling such prolonged correction phases in cryptos - price declines of a good 70% from a peak high to a low - which have also occurred in the past, namely in 2018 and 2019/2020. If you consider the correction from 2018 to 2020 as an extended crypto winter, there was a drop of a good 80% during that time, without investors who bought in near this high point ever seeing their entry price again once. It took 154 weeks to reach the 2018 highs. If history repeats itself, prices around $70,000 will probably not be possible again until the end of October 2024.
Unstable times for Stablecoins
May brings a new dawn for cryptos this year. The stablecoin Terra proved to be not so stable and slid to zero: and did so in a flash crash that spanned less than eight days. The special thing about this collapse is that Terra was not some second- or third-tier altcoin that nobody knew about, but one of the big ten cryptocurrencies in terms of market capitalisation. Terra weighed as much on the stock market as the insurance company Allianz, which employs 155,000 people worldwide. With Terra, a comparable stock market value was destroyed in a very short time.
The hope among many crypto investors for an "epic" turnaround in the price is repeatedly expressed in social media and in relevant forums, but the theme of the past months has in fact been more about getting rid of risks in portfolios than about accumulating new risks.
Change in behaviour among crypto investors
In fact, in recent months we have seen crypto investors start to behave similarly to investors in tech companies: they have reacted to a historic rise in interest rates with discounts in the valuations of Bitcoin, Ethereum and basically all other coins. Crypto investors eliminated risk wherever they could. As a result, cryptos could be seen closely tracking the Nasdaq Composite in the US.
The fall of Terra further eroded confidence, to the extent that the German newspaper Handelsblatt started an article about behavioural tips for crypto investors with the sceptical sentence: "Anyone who is still interested in cryptos now...”. Has interest really dropped that much?
Looking at CMC Markets Sentiment* on Bitcoin today, the picture is clear. 70% of CMC Markets clients are counting on a rising Bitcoin price and only 30% on a falling Bitcoin price. Among the top clients who have been able to increase their account value over the last three months, the proportion of Bitcoin short sellers, i.e. who are speculating on a falling price, is higher at 49%. Almost half of the top customers at CMC Markets are therefore expecting the Bitcoin price to continue to fall.
ECB chief takes a critical view of cryptocurrencies
Christine Lagarde, the head of the European Central Bank, is sceptical about digital currencies and warns of their risks. Lagarde said in an interview on Dutch television that she is worried about people "who don't understand the risks, who will lose everything and be terribly disappointed, which is why I think this should be regulated". Cryptocurrencies, she said, are worthless because they are not based on anything and there is no security anchor on which they are based.
*Client sentiment is provided by CMC Markets for general information only, is historical in nature, and is not intended to provide any form of trading or investment advice - it must not form the basis of your trading or investment decisions.
Disclaimer: CMC Markets is an execution-only service provider. The material (whether or not it states any opinions) is for general information purposes only, and does not take into account your personal circumstances or objectives. Nothing in this material is (or should be considered to be) financial, investment or other advice on which reliance should be placed. No opinion given in the material constitutes a recommendation by CMC Markets or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person. The material has not been prepared in accordance with legal requirements designed to promote the independence of investment research. Although we are not specifically prevented from dealing before providing this material, we do not seek to take advantage of the material prior to its dissemination.
