Even casual crypto observers are aware of the dramatic downward price action across the crypto space over the past few weeks.  This price action has market participants weighing in with opinions regarding where the crypto market stands:  on the cusp of a short consolidation and follow-on breakout, or has the next cyclical crypto winter made an early appearance?

Long-time crypto traders, analysts, and investors have seen dramatic price drops in the past, and so the mere appearance of a major correction seems to have had little effect on these individuals and institutions.  What the data show, is that this was a correction whereby short term speculators, especially highly leveraged speculators, were shaken out by the downward price action, and forced to either liquidate their leveraged positions on certain exchanges or to get out of the market voluntarily when Bitcoin didn’t move the way they were anticipating.

Whether one calls this a correction or a crash, the data show two things that future investors should take into account:

  • Bitcoin remains the “King of Crypto.”  At the time of writing, Bitcoin’s price is down about 11% over the past week.  Ethereum is down about 22%, and BNB (Binance) is down about 33%.  In short, Bitcoin has proven to be the most resilient coin across the space.  When times are good, other coins are going to push far higher than Bitcoin, but they are also going to crash far lower.
  • The crypto market as an entire body is likely to come out of this correction much healthier for the carnage.  While the short-term pain isn’t enjoyable, the highly leveraged speculative positions had reached unhealthy levels.  Those speculators have lost their coins, and while unfortunate for them, these coins are now held by longer-term investors. That is good news for the overall market.

Because of Bitcoin’s systematic supply “halving,” it is considered to be a very cyclical asset at this point, though over time, with so few new coins coming into circulation, this cyclical performance is likely to be less pronounced.  What we know today is that the overall “thesis” or the long-term case for crypto is stronger now than it ever has been.  Government spending continues to run unabated, individuals are regularly reminded of the power of centralized platforms, and low yield environments are making traditional banks less viable.  In regards to the reasons crypto made sense a month ago, nothing has changed.

One of the data points that shows the overall health of the market is daily volume across decentralized exchanges.  In the world of crypto, decentralized exchanges are used far more by “believers” than speculators.  There are dozens of decentralized exchanges, and true believers use these platforms in ways that they would never use Robinhood or Coinbase.  Daily volumes on these exchanges are higher here at the end of May, (just under $8B) than they were at the end of April (just over $2B).  While data’s beauty is truly in the eye of the beholder, these volumes seem to validate our overall premise:  the market had gotten a bit frothy with some entrants believing price could only go up.  Crypto’s oldest detractors used to call Bitcoin “magic Internet money.”  This correction simply proved once again that there’s nothing magic about it, and at the end of the day, the Bitcoin network just keeps chugging along, impervious to the noise, growing more resilient by the day.

Categories: Markets

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