The Bearish Trend in Cryptocurrencies Continues - It Can Turn on a Dime
On November 10, 2021, Bitcoin and Ethereum prices issued a dire warning when the two top cryptocurrencies put in bearish key reversal patterns on their respective daily charts. The cryptos reached new record highs at nearly $69,000 and over $4,865 per token and closed below the previous day’s low. Since then, Bitcoin, Ethereum, and many other cryptos have made lower highs and lower lows, with the latest lows coming in June 2022. The trend remains bearish, as the asset class’s market cap dropped from over $3 trillion to the $1.192 trillion level on June 10.
There are few asset classes as volatile as cryptocurrencies. The speculative frenzy during the bull market periods has calmed as prices continue to decline. Late-comers that bought as the prices reached the November 2021 peaks are licking their financial wounds. However, buying cryptos during implosions has been the optimal approach over the past years as the bear market can turn into a raging bull once again in the blink of an eye.
A boom-and-bust asset class - Explosive and implosive cycles
- In 2017, Bitcoin moved from under $1,000 to nearly $20,000.
- By late 2018, the price had dropped below the $3,200 level.
- In 2019, a recovery to over $13,000 led to a drop to under $4,000 in March 2020.
- Highly volatile conditions led to a rise to a record high of over $68,900 in November 2021, followed by a correction to under $26,000 in May 2022.
- Ethereum and other cryptos have followed a similar volatile pattern.
- The asset class’s market cap peaked at over the $3 trillion level and was below $1.2 trillion as of June 10, 2022.
Contradicting signals from the leading US bank
- JP Morgan Chase is the leading US financial institution.
- Over the past years, Jamie Dimon, Chase’s Chairman and CEO, called bitcoin “a fraud,” said he would “fire” any Chase employee that was “stupid” enough to trade cryptos on the bank’s behalf, and compared the asset class to “tulip bulb mania” in the 1600s in the Netherlands.
- Late last year, Mr. Dimon said Bitcoin was “worthless.”
- In late May 2022, JP Morgan Chase analysts replaced real estate with cryptocurrencies as a “preferred alternative asset,” expecting a 30% rally in Bitcoin.
The SEC’s regulatory efforts rise and fall with prices
- SEC Chairman Gary Gensler taught a fintech course at MIT between his chairmanships at the CFTC and SEC.
- The crypto community embraced his appointment as SEC Chair with hopes that he would establish a regulatory framework, expanding the cryptocurrency asset class.
- In late May, SEC Commissioner Hester Pierce said, “We’ve sort of dropped the regulatory ball. We are not allowing innovation to develop and experimentation to happen in a healthy way, and there are long-term consequences of that failure...we’ve got to get working.”
- The drop in the cryptocurrency asset class’s market cap has caused systemic risks to decline, putting crypto regulation on the SEC’s back burner.
The number of new cryptos continues to rise
- Bitcoin and Ethereum have more than halved in value since the November 10, 2021, highs, but the number of new cryptos coming to market continues to increase.
- At the end of 2019, there were 4,986 cryptos.
- At the end of 2020, the number rose to 8,153 cryptos.
- At the end of 2021, it more than doubled to 16,238 cryptos.
- As of June 10, 2022, the number was 19,818 and was rising each day.
It is impossible to pick bottoms, but the odds favor another explosive move
- Markets across all asset classes often rise and fall to illogical, unreasonable, and irrational prices during bullish or bearish trends.
- Picking tops or bottoms is dangerous.
- The boom-and-bust nature of cryptos suggests that the asset class will find a bottom, and the speculative interest will return.
- Buying on a scale-down basis could be optimal at the current price levels as risk-reward dynamics have improved at lower prices.
- Never invest more than you can afford to lose in the burgeoning asset class and avoid leverage.
Thanks for reading, and stay tuned for the next edition of the Tradier Rundown!