For many investors, the start of the year has not been a good time to hold cryptocurrencies, and in particular bitcoin, the most popular of the bunch. Bitcoin’s price nearly halved from $69,000 on November 10 to $35,000 on January 22.
Altcoins or other crypto outside of bitcoin also saw steep declines. Ethereum, the second crypto by market value, and the very popular meme currencies dogecoin and shiba Inu also suffered.
This was also the case for native tokens related to decentralized finance, or DeFi, like solana, avalanche, compound and aave. What makes them particularly interesting is that they are examples of crypto use cases since they are related to financial services (loans and exchanges) that the cryptocurrency industry offers to businesses and to individuals.
The declines affirmed what investors have seen all along: bitcoin and cryptocurrencies are generally volatile and risky assets. When you invest in the latter, you should expect jolts in both directions.
For speculators and investors looking for quick gains, crypto can be a money pit and a source of serious disappointment. Despite great promises from crypto players, this sector is not quite mature yet and investors should tread carefully, experts say.
For investors looking for the long term, this can pay off. Think about it: In just 10 days, the crypto market has recouped almost all of the losses it has suffered in over two months. Bitcoin, for example, has risen 20% since mid-March, helping it erase all of the losses in 2022 and leaving it up around 2% for the year.
Why are prices rising sharply now?
The rise in cryptocurrency prices reflects several factors. The first is that crypto prices, and bitcoin in particular, have to some extent followed the stock market. To use the adage: when the stock market coughs, crypto-currencies catch a cold. When the stock market goes up, as it does, so does the cryptocurrency.
The VIX, a measure of volatility often referred to as the fear index, can help you track the direction of the stock market and therefore crypto.
With the exception of a few days in early February, the VIX rose sharply from January 14 to March 14. This period coincided with factors such as market fears about the economic impact of Russia’s invasion of Ukraine, as well as concerns about inflation, recession and the withdrawal of Federal Reserve support. to the economy, all as the Covid-19 pandemic subsides.
The VIX is down right now, which means there is less uncertainty in the markets. It is often a signal that pushes investors to turn to riskier and more speculative assets. Investors also generally seem a little less concerned about regulation.
Clearly we have to wait to see what the Biden administration decides, but its executive order has reassured investors that crypto is no longer viewed exclusively as a tool for criminals. Another factor that has helped popularize crypto to the general public is the use of crypto to help Ukrainians. Many people who are unfamiliar with crypto have discovered that it can be used for real-world cases.
Is this the start of a new frenzy?
It’s been a golden year for the cryptocurrency industry. The rebound in prices since mid-March may seem like the start of an ascent. And several factors point in this direction.
Large investors who have remained on the sidelines may at some point invest in the bitcoin and crypto more broadly. The amount of US dollar-denominated stablecoins (including Tether, USDC and Binance USD) on centralized exchanges – an indication of the amount of standby cash that could be deployed to buy digital assets – rose sharply between late January and early February, according to Glassnode.
If this money is invested in bitcoin and altcoins, prices could rise very quickly. This is a scenario that should not be ruled out. Big names in hedge funds like billionaires Ray Dalio, Ken Griffin, and bond king Bill Gross recently said they were wrong about bitcoin and cryptocurrencies.
But at the same time, some alarm bells are ringing in the cryptosphere.
Investors should not forget that they are still far from November’s records. The market is still down $800 billion from its peak of $3 trillion on November 8, according to data firm CoinGecko.
Also, they would do well to remember that cryptocurrency project platforms are vulnerable. A number of them have been hacked this year, with the most recent taking place a few days ago and leading to the theft of $625 million.
Separately, non-fungible tokens, or NFTs, which helped fuel the euphoria around cryptocurrency, have lost some of their luster. Investors are beginning to wonder what the real use is of NFTs, which allow them to own pieces of digital content, like a unique photo or GIF.
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Why is Bitcoin (again!) up today? – The ₿log
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