A market outlook for the next few months


After the Bitcoin crash last week, many are wondering what to do next. Is the downturn already over or is there a new bear market? The Friday Comment tries to give a possible answer.

For those who haven’t been in the crypto sector that long, the last few days have been a tough test. The courses have only known one direction since autumn 2020: north. Now it came to the long overdue correction that flushed “weak hands” and highly leveraged positions with all its might from the market. As difficult as it is to predict the time of a correction, the signs of overheating had increased significantly in the past few months, as we explained a few weeks ago.


Champagne mood and unicorns

The news in the last few months in the crypto sector has been nothing short of terrific and has sparked a new wave of euphoria. PayPal has entered the crypto market, Tesla has bought Bitcoin, and the DeFi and NFT sectors have spawned numerous new projects. The result was completely exaggerated expectations. Anyone who took part in a token sale like on coinlist.co could be sure of a hundredfold increase in their stake. Projects like Flow have really gone through the roof. Protocols in the beta stage were thus able to achieve ratings that even Dax companies overshadowed. For example, when the Internet Computer Protocol (ICP) cryptocurrency was released for trading on May 10, the market capitalization was 80 billion US dollars at the start. Enormous advance praise are of course with blockchain protocols, but such evaluations defy any gravity. At the same time, Coinbase is preparing to become the largest stock exchange listing in 2021. The crypto broker came to a valuation of over 100 billion US dollars at times.

To the Moon: scaling like in 2017

In addition, the Ethereum network was visibly overloaded with transaction fees reaching absurd heights. For example, anyone who wanted to exchange a cryptocurrency for a few hundred US dollars on Uniswap quickly paid 100 US dollars or more in transaction fees. In addition, an unsustainable credit system – one could also call it a house of cards – has built up. In the DeFi sector, loans were taken out purely for speculation and secured by predominantly ether reserves.

As long as prices were rising, that wasn’t a problem. However, the premise was that, first and foremost, ether had to remain stable so that the deposited collateral did not run out. Since there is currently no real economic reference to the DeFi sector, there was also no fundamental safety net that could counter the 30 to 50 percent correction experienced. Correspondingly, there was also the NFT hype. This was and is also characterized by overvaluations, as we explained in March of this year. Too high leverage, too little protection for too many crypto newbies have resulted in the perfect cocktail for an overvaluation.

Many triggers, few fundamental

Often the much-mentioned drop is enough to make a barrel overflow. So also in this case. Elon Musk has “canceled” Bitcoin payments for Tesla models, China has tightened the reins of the crypto industry like every year, there was a lot of criticism in the media about the energy balance of Bitcoin and tougher regulatory action against crypto -Sector, especially in the US and especially on the tax side, has emerged more than ever. Neither event in itself is a disaster. Certainly annoying and in parts also fundamentally slightly negative when China takes tough action against crypto mining, for example, or a higher tax on crypto profits is introduced in the USA, but ultimately this was no surprise either. There can be no question of major and lasting damage here.

If anything, the biggest damage is that some institutional investors have been deterred by Bitcoin’s high volatility. Institutional or very wealthy people who are less knowledgeable about the subject could now be deterred by the landslide from making planned Bitcoin investments. Especially when it is necessary to justify this in front of a larger body. But this brake block could also be released quickly. If it becomes known in the next few weeks and months which well-known investor has used the correction to buy more, a new buying dynamic could emerge.


The macro situation: wanderlust and inflation

Meanwhile, the macro situation is very contradictory for the crypto market. The corona easing changes the preferences, which means that less is invested and more is consumed. For many people, summer vacations, power shopping and dining out mean less speculative capital that can flow into the market. Even apart from the corona situation, the summer months have been rather quiet crypto months in recent years.

At the same time, concerns about inflation are growing, as they have now been confirmed for the real economy for the first time. The USA reported consumer price inflation of 4.2 percent – and the trend is rising. In particular, raw materials and the temporary shortage of supply are able to revive the official inflation that has been long awaited in parts. At the same time, deposit rates will remain at a still low level. The pressure to act is increasing, so that Bitcoin could become more attractive as an inflation protection. At the same time, Bitcoin also correlates strongly with tech stocks, which are more likely to suffer from rising inflation. High inflation is therefore not good for Bitcoin per se. Ultimately, this also increases the likelihood that the central banks will raise interest rates again. A higher interest rate could therefore put pressure on price growth in the financial sector and Bitcoin.

Bitcoin and Altcoins with different perspectives

In contrast to the equity sector, the valuations of cryptocurrencies are much less fundamentally judged and are based primarily on high expectations for the future. In the absence of this confidence, there are few reasons that can support the courses. Accordingly, the altcoins in particular, with their partially still high valuations, could rush further south. With Bitcoin, on the other hand, the situation is slightly different. On the one hand, in contrast to altcoins, there are also many institutional and very wealthy investors among the holders who do not sell during a market panic. The situation is different with small investors, among whom there are a particularly large number of “weak hands”. Bitcoin is also more established than any other crypto currency and has already proven its use case. The recently decreased Bitcoin dominance has such a good chance of increasing again in the next few months.

What are the arguments for a return of the cops?

The fear that there will be a two-year bear market after the bursting of the ICO bubble, as in 2017, is exaggerated. Newer crypto innovations such as DeFi, NFT, security tokens, social tokens, stablecoins, tokenized stocks, etc. have become indispensable and continue to develop, even if prices correct sharply at times. In addition to well-known companies such as Facebook or Microstrategy, which are involved in the crypto sector, the transformation process towards the medium token is also taking place at the state level. Be it digital securities or digital central bank money. This determination and variety of applications simply did not exist in 2017 and 2018. Hot air is currently being let out of the boiler and that’s a good thing.

After a short break and running through the so-called “valley of disappointment”, new impulses can quickly rekindle a rally. Be it the approval of a Bitcoin ETF by the US securities regulator, the entry of a platform giant into Bitcoin or Facebook’s Diem consortium – there are enough reasons for new impulses.

Conclusion

Whether you should sell your cryptocurrencies is, loosely, pretty easy to answer. If you have fundamentally changed your mind about your crypto investments, then you should ask yourself why. Are there rational and fundamental reasons that make you sell or is it just the market sentiment? If you should sell now without being able to rationally justify it, then you have to admit that you probably didn’t buy for rational reasons, but rather chalked up a hype. At least this applies to investors who do not actively trade, but rather have a long-term investment horizon.




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