Bitcoin (BTC)’s price has been hovering between $16.5k to $17k since Dec 15. But over the weekend, BTC jumped up 22.5%, finally breaking the $20k mark!
In the same period, Ethereum (ETH)’s price hovered between $1160 and $1220. Over the past 5 days, it spiked up 17.5%, breaking the $1.5k mark!
Are these dead cat bounces or do they spell the end of the crypto bear market?
End of Crypto Bear Market? Not so fast…
Unfortunately, I’m taking a pessimistic stance in the short term. Here are 2 reasons why I believe that the crypto bear market still has some legs.
1) Contagion effect of LUNA crash has not been cleared out of the system
Celsius and Hodlnaut were major lenders that went bust as their funds were completely wiped with the fall of LUNA and UST. This caused BTC’s market cap to fall by 65% in less than 100 days. FUD spread across all crypto projects and investors were busy cashing out.
The second major hit in the markets was FTX’s bankruptcy. Turns out, their books were inflated and badly managed.
FTX was the second biggest crypto exchange in the world, with several other exchanges under their umbrella. Hence, when FTX declared insolvency, all related exchanges were affected.
Withdrawals halted and users were left high and dry.
Trust was at an all time low, and the sentiment spread to other major exchanges such as Coinbase, Binance and crypto.com. Many users were asking platforms to be transparent on their assets holdings and if they could be the next FTX.
Mass withdrawal also happened as users took as much as they could out of exchanges, some causing a liquidity crunch. Smaller and not so well known exchanges were put in a spot by the massive exodus of funds and a few succumbed to the withdrawals.
At the point of writing, the contagion effect has not stopped with DCG and Genesis and Gemini being embroiled in the mess. The SEC has also sued Genesis and Gemini, starting a new wave of legal procedures.
I believe that the contagion effect from the LUNA crash will continue to play out in the short term. And until the air of suspicion has cleared, investors will continue to remain wary of crypto exchanges. This sentiment would hold towards other crypto projects, keeping retail investors at bay.
Hence, while the markets did rally over the weekend, I would think that it is fueled mostly by insiders and existing crypto investors. It would take a while before retail interest returns.
2) High CPI and high fed rate continues to keep BTC price low in short term
Crypto remains a highly speculative asset class. Most people dabble in crypto with a speculative mindset and thus they would buy coins without much research, using their spare cash.
When interest rates and the cost of living start rising, there’ll be less spare cash lying around. Hence, less money will be entering the crypto space.
As seen in the past 13 years, tight cash periods correlates with the bear market periods.
A looming recession in 2023 as forecasted by many analysts adds to investors’ worry.
Many would prefer to hold cash and tide over this period, instead of putting it into a speculative and volatile asset.
Why did the crypto market rally?
Sorry that it still looks bleak from a long term investor’s perspective. So…why did the crypto market rally last weekend?
Here are two overarching reasons.
1) China’s reopening and a recovery in stock market
Markets are driven by sentiments; good news = markets go up, bad news = markets go down.
After 3 years, China finally reopens their borders, allowing citizens to return back home for the Lunar New Year and travelers to visit other countries. This would boost tourism for regional countries such as South Korea, Japan and SEA countries.
Such good news spilled over into the Chinese stock market, causing the stock market to surge. Even the tech stocks joined in the celebrations and enjoyed a slight recovery.
Crypto prices follow tech stocks closely, so a recovery or rally would spill over to the crypto space too.
2) Hong Kong likely to allow virtual assets for retail investors in June 2023
Mainland China still bans the trading and possession of crypto, however Hong Kong’s upcoming licensing regime would allow retail investors to access “highly liquid” virtual assets.
This means that Hong Kong would probably be the only gateway for the Chinese investors to purchase crypto. That said, not all cryptocurrencies would be made available, retail investors would only have access to the major ones as shared by their SFC CEO.
Hong Kong plans to be the next virtual asset hub, in the race against Dubai and Abu Dhabi. Opening up a regional hub to attract Asia’s financial powerhouses would attract fresh funds into the crypto market.
While the West are dealing with the after effects of the collapse of FTX, managing the expectations of crypto investors and preventing another meltdown, the East is quietly building and preparing for the next wave.
Hence, it would make sense for some investors and traders to enter now at the low before the Chinese money enters. This sentiment is likely to prop up crypto prices in the short term.
So, is the Crypto Bear Market over?
I believe that the current rally should be short lived and that the bear market remains prevalent as the major reasons holding the market back have not been completely resolved.
If you’re thinking of taking up a small position, you should learn how macro affects the markets and stay tuned to upcoming macro news.
On a side note, NFTs are not dead as many have believed.
Markets move in cycles. While I do think that the crypto bear market isn’t over yet, I strongly believe that it is now the best time to learn about cryptocurrency and how to approach it safely. Sharpen the axe and prepare yourself to flourish in the next bull market.
I’ve been in the markets for over 6 years and counting. I’ve condensed everything I’ve learnt from previous bull and bear markets and will be sharing the fundamentals you should note before you invest in cryptocurrencies. Join me live.
