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Crypto bears getting ready to hibernate

Fri, 06/10/2022 - 05:27

After a short hiatus, the cryptocurrency market is back in the spotlight once again. Just a matter of weeks ago, there was talk of burst bubbles, lost fortunes and even a long crypto winter ahead. But in this market, we already know how much can change in the space of a few days. From the dizzying heights of $68,000 in late November of 2021, Bitcoin finally dipped below its key local support to hit a new low of $29,570 (28 May). And while some called a bottom, others were keen to pile on the pessimism and predict further price declines to come. In the week that followed, the rally was dramatic as Bitcoin managed to cement gains of over 10%. However, the question remains: is the worst behind us, or are we caught in a bull trap?

Point 1: Bottom of the barrel or tip of the iceberg?

Obviously, nobody has a crystal ball, so we can’t say for sure whether the crypto downtrend is 100% reversed. The analyst community is somewhat divided on this issue, to say the least, but most of the technical and fundamental analysis does suggest that we are in the late stage of a bear market. First, the realised price model suggests we are only about 25% above the average cost basis of all BTC in supply ($23,600), which represents a particularly strong support level that many consider the ‘worst case scenario’ bottom.

What’s more, the news media are already talking about ‘greedy’ traders getting burnt by the cryptocurrency market as any kind of bullish sentiment appears to have completely disappeared from the mainstream press. As any experienced investor will tell you, overwhelming negativity is as good a sign of the end of a bear market as overwhelming optimism is an indicator of an imminent crash. Given the fearfulness in the air and the blood in the streets, now could be the ideal time for long-term HODLers to get greedy.

Point 2: Follow the money

One of the main arguments cited by committed crypto bears is the large capital outflows from institutions lately. While it’s true that weekly institutional capital outflows have recently been hovering dangerously close to their record of $133 million, this can hardly be viewed as a sign that institutions have given up on digital currencies altogether. What they neglect to mention is that tech stocks have seen even bigger outflows since November 2021.

Are we then meant to believe that institutions are never going to buy the Nasdaq again? Of course, not. So why should crypto be any different? All we’re seeing is a natural rebalancing of portfolios, with poorer-performing asset classes being temporarily dropped for more promising or defensive instruments. Once fund managers start to sense that prices have plateaued, the capital will soon start pouring back into Bitcoin, Ethereum and the like. In fact, the cryptocurrency market has already recorded net inflows of over $100 million over the past week (30 May-6 June), which would suggest that the market makers are already feeling more optimistic about crypto even with the recent algorithmic stablecoin debacle.

Point 3: Beyond Bitcoin

With all the attention paid to the original digital currency, it’s easy to forget that the market is literally bustling with exciting new coins, each with its own unique growth factors. The days when the cryptocurrency market moved in lock step with BTC are long gone. Look at projects like Avalanche (AVAX), Solana (SOL) and Cardano (ADA). The rapid expansion of DeFi and NFTs has driven demand for such facilitator coins, and, with CAGR rates above 30%, these markets are far from done growing. As such, it’s not impossible to imagine a scenario where Bitcoin continues to trade sideways for an extended period while smart contract-enabled ‘Ethereum killers’ like the aforementioned coins storm to new all-time highs.

Then, there are gaming and metaverse-related tokens, which have already demonstrated a low overall correlation with BTC. Take Axie Infinity, for instance, which managed to gain 2500% in July-August 2021, while Bitcoin barely rose 25% over the same period. As the metaverse really starts to take shape in the next twelve months, there are bound to be similar opportunities for the savvy investor.

Buy low, sell high

Calling the bottom or top of any market is a tough ask, but trying to do it with one as notoriously volatile as crypto is nothing more than an exercise in futility. However, what we can and indeed must do as investors is to try to identify when a bear or bull market is close to its end. While the jury is out as to whether BTC and the sector as a whole have managed to put the worst behind them, one thing is for sure: there are some quality digital currencies available at heavily discounted prices just now.

If history has taught us anything, though, it’s that the biggest gains in the next bull cycle will be made by those who picked up a bargain during the preceding bear market. Simple. That’s why dollar-cost averaging is so important and doubly so in down-trending markets. The smart way to maximise potential gains over time is to buy when prices are below their moving average. Sometimes, though, this is easier said than done.

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