Cryptocurrency Carnage - It Can Be Darkest Before the Dawn

Cryptocurrency Carnage - It Can Be Darkest Before the Dawn

In November 2021, Bitcoin and Ethereum prices reached all-time highs. Bitcoin traded to $68,906.48 and Ethereum to $4,865.426 on the same day. The asset class’s market cap rose to over $3 trillion.

In a sign that danger was on the horizon, the leading cryptos put in bearish key reversal patterns on the daily charts in late November, igniting a correction that caused carnage in Bitcoin, Ethereum, and most of the other over 20,240 cryptos. While prices have declined, the number of new tokens coming to market continues to rise.

On July 15, Bitcoin was just over the $20,000 level, and Ethereum was around $1,250, with Bitcoin under one-third the price at the high and Ethereum below one-quarter the peak level.

In late 2021, the bullish trends had many analysts calling for Bitcoin at $100,000 or higher. Expectations for Ethereum’s prospects were even higher on a percentage basis. In July 2022, calls for $10,000 Bitcoin or lower have increased. In 1650, English theologian Thomas Fuller wrote, “It is always darkest just before the day dawneth.” For many cryptocurrency devotees, that phrase provides some hope in the current environment where cryptocurrencies have been falling knives over the past eight months.

The bodies pile up

• Three Arrows Capital (3AC) could be the leading casualty of the crypto price collapse as it filed for bankruptcy as 3AC may have lost more than $1 billion.
• Voyager Digital Ltd., a crypto lending platform, filed for Chapter 11 protection after halting or limiting customer withdrawals.
• Celsius Network, a crypto trading and loan company, filed for bankruptcy last week, one month after stopping customers from withdrawing funds. Platform users face substantial losses.
• Coinbase shares (COIN) fell from $429.54 in April 2021 to below the $55 level on July 15.
• Crypto winter continues to take no prisoners in the asset class.

Cleaning out the market

• The decline in crypto values and bankruptcies have opened opportunities for some native companies.
• Bahamas-based crypto exchange FTX provided a $400 million loan to BlockFi, including an option to buy the troubled crypto lender.
• Other new entrants and survivors will face less competition in the asset class as the carnage cleans out the weak players. Well-capitalized and stable companies will swallow the weak, leading to accretive results.

The reasons for cryptocurrencies remain compelling

• Cryptocurrencies remain an alternative to fiat currencies.
• The asset class takes control of the money supply away from governments and returns it to individuals, a libertarian philosophy.
• Cryptos are the children of blockchain, a universally embraced financial technology.
• Early entrants still have significant profits on holdings, and lower prices will attract new participants when cryptos stabilize and recover.

It is impossible to pick bottoms, but the value proposition has improved

• Bear markets often send prices to illogical, irrational, and unreasonable prices.
• Cryptos have been falling knives, and the trend remains bearish, with the asset class’s market cap below the $964 billion level on July 16.
• Bitcoin and Ethereum are now at fractions of the November 2021 highs, making them more attractive for value-seeking investors and traders.

A volatile asset class requires caution, but risk-reward is attractive

• Volatility is nothing new for cryptocurrencies.
• Risk-reward is far more attractive at current price levels than in late 2021.
• Only invest capital that you can afford to lose- The potential for substantial rewards comes with significant risks.
• The darkness of the crypto winter could lead to a brighter dawn for the asset class.

Thanks for reading, and stay tuned for the next edition of the Tradier Rundown!