If there ever was a speculative bubble in cryptocurrencies, it is gone, at least for the time being. In no way is this a reputation of bitcoin, ether, Ripple or any other coin or token. It is just that, for the present, the crypto world is in limbo and that makes it hard to get outsized returns similar to last year. A little later, let’s talk about what is needed to get prices moving again. First, let’s look at the present.
As a long time Wall Street investment analyst, I firmly believe that long term fundamentals create value and drive prices. In a sideways markets like we now have, it is hard to maintain patience. Constant price checks don’t provide the same thrill they once did. Of late we have been relieved of sensational negative headlines that drove investors away from bitcoin starting in early December and from Ether in January.
In its own way, that’s welcome but we need something much more than just lower prices.
About the most exciting news lately has been pulled from the 10K filings of financial companies like Goldman Sachs, JP Morgan, Citigroup and Wells Fargo putting their own spin on blockchain technology and the potential risks of cryptocurrencies. If nothing else, this adds legitimacy but it hardly creates an urgent need to rush out and invest.
For a clue on why prices have essentially been going nowhere recently, for the very first time we have to consider the number of investors that are losing money. Let’s look just at bitcoin and Ether for clues because they account for a big chunk of value and trading volume.
As we know from peak to trough bitcoin lost over 60% of it value while ether gave back 45%. A quick look at charts the compare price to volume, shows a massive amount of volume that took place well above current levels. that is currently showing losses.
Classic technical analysis will argue that these holders represent “weak hands” that will sell into any strength. Lots of traders in crypto use technical analysis and they see the same patterns. The result is a temporary stalemate.
If we were analyzing the stock market this issue would be of some concern but with cryptocurrencies, it is a very different story. In the world of stocks new institutional money is constantly flowing into the market that needs to be invested.
What has been happening in the crypto world has been a drying up of volume and a slowdown of new money. Look at the numbers from Etherscan. Over the past few weeks, Ether volume has dropped by over 65%. A further measure of new money is the Etherscan Unique Address Growth Chart. On January 4th, the pace of daily additions peaked at 352,888 falling to just 74,588 on February 25. Obviously, this is not a good sign.
What does all of this mean? It is important to remember that little of the $400 billion crypto market is held by institutions. It is hard to measure how large the pool is of investors losing money, but it plays a significant part in explaining the current crypto price stalemate. The one thing that is certain, they represent a major block of potential sellers. These folks need a powerful dose of good fundamental news to restore their confidence.
What Will It Take To Drive Prices Higher
Fundamentally the government threats from China and South Korea can be blamed for some of the price damage that has been experienced recently. In the short attention span that the news media lives in, it is safe to guess that this is old news by now. So what will it take to get prices moving higher and make investors take notice.
From a technical standpoint, let’s remember the number of crypto hedge funds raising capital that will bring new buying power as we move through this year. The fact that there has been a 50% correction in the total crypto market offers a strong selling point to potential investors: all good.
What we are watching for crypto developers to make serious progress in three areas: security, speed and transaction costs. Addressing the weakness in all three of these areas is a good topic for an article on another day. One thing is certain. Until investors no longer have to be warned about protecting the Private Key every time they log on to their crypto wallet, potential investors will be discouraged. Until transaction and exchange costs come down only speculators will have a lasting reason to use currencies like bitcoin, Litecoin or Ripple. Each of these issues is being addressed but at the pace of the pre-digital world.
In the meantime, the stalemate will be with us for a while. If you are a fast moving trader that is not a great outcome, but for long term believers, it is just another stage of growth.
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