Decoding the Crypto Market: Bull Run or Bear Trap?
Examining conflicting indicators to determine the future of the crypto industry
The crypto market is showing conflicting signs, leaving investors wondering if the bull market is returning or if we’re heading into a bear trap. In this article, I’ll delve into various indicators and factors that could determine the market’s direction.
Let’s start with the most obvious indicator: The positive price movement of the last months.
1/ Price Action Analysis: Bitcoin Shines, Altcoins Lag
Bitcoin (BTC) has had four consecutive months of positive price action, starting in January this year. However, this multi-month rally hasn’t been mirrored by most major altcoins, with the exception of Ethereum (ETH). In a true crypto bull market, a broader range of altcoins would participate in the positive price action. The absence of this effect may be evidence of a bear market rally rather than a genuine bull market.
This is also reflected in Bitcoin dominance, which has been rising for months. Bitcoin dominance is a key indicator reflecting the proportion of the total crypto market cap represented by Bitcoin.
A surge in Bitcoin dominance typically signals an atmosphere of fear. On the other hand, when investors feel confident in the crypto market, altcoins typically rise because they promise even more profit and Bitcoin dominance falls.
Currently hovering near the 50% mark, Bitcoin’s dominance has been showing no signs of losing momentum, which is rather a bearish indicator.
2/ Trading Volume Divergence: A Cause for Concern?
Data from CoinMarketCap suggests that trading volume for BTC has continued to decline as prices have risen, with this effect being even more pronounced for ETH. Especially in April 23, the volume was very low and yet the price of Bitcoin and ETH increased.
The divergence of rising prices and falling volume could be further evidence of a bear market rally and suggests that a reversal could be imminent. However, institutional investors may be investing in crypto via centralized proxies like futures contracts, settled in cash, due to concerns around crypto regulation.
If we take a closer look at Ethereum, there is a strong indication of institutional investment via futures contracts. Ethereum’s recent Shapella hard fork, or Shanghai upgrade, implemented on April 12, has significantly reduced staking risks for ETH, by enabling the withdrawal of locked coins at will. This development has spurred institutional interest in the second-largest cryptocurrency.
Subsequently, open Ether futures contracts on the Chicago Mercantile Exchange (CME) have seen a 39% increase, with a 70% rise in U.S. dollar terms. Institutions tend to favor regulated products like CME futures, allowing them to engage with digital assets without direct ownership, making these futures a good indicator of institutional activity.
3/ Crypto Regulations: A Double-edged Sword
The regulatory situation in the United States has been less than favorable for the crypto market, with the SEC targeting specific projects and companies, and banking regulators working to de-bank the crypto industry. The focus on stablecoin issuers, in particular, could pose a significant threat to the entire DeFi niche.
The crypto industry is undeniably in a challenging position with policy and lawmakers in the U.S., especially with SEC Chairman Gary Gensler and Senator Elizabeth Warren. According to Kristin Smith, the CEO of Blockchain Association, the crypto industry in the US is in a war with regulators that could last another 18 to 20 months. She shared these thoughts during a discussion at Consensus 2023.
On the other hand, countries like the UAE, Saudi Arabia, Hong Kong, Singapore, and France are introducing sensible crypto regulations, which could encourage investment in the market. The passing of these regulations may be enough to increase conviction in crypto’s recent price action and confirm the beginning of a new bull market.
I think the crypto industry can’t reach its full potential without more regulation but these regulations must happen with moderation and reason. What we see in some countries looks very promising, whereas lawmakers in the US seem to feel very threatened by crypto and are aiming to crush the industry.
Let’s take a quick look at what’s happening in countries around the world.
- UAE: Since introducing pro-crypto regulations in 2018, the UAE has become a major hub for the crypto industry, marked by the creation of a unified federal license for virtual asset service providers in 2022, widespread adoption of crypto-based transactions and services, and the establishment of over 1,500 crypto projects and companies.
- Saudi Arabia: The kingdom is seriously considering pro-crypto regulations (probably because it wants to compete with the other Gulf countries). Earlier this year it was announced that the Saudi government had partnered with the crypto project Sandbox for metaverse development.
- Hong Kong: Hong Kong officials are set to unveil crypto licensing requirements soon, enabling retail investor access to cryptocurrency, potentially driving significant inflow of capital from mainland China and attracting numerous crypto companies. Hong Kong mandates banks to accommodate accounts for crypto clients — a requirement even crypto-friendly jurisdictions like the UAE lack.
- Signapore: Singapore has seen a significant surge in crypto investments and a growing acceptance from major companies and banks, underscored by the introduction of revamped crypto regulations and efforts to facilitate banking access for crypto projects and companies, indicating a promising outlook for the sector.
- France: France is becoming the most crypto-friendly country in Europe outside Switzerland and possibly the most crypto-friendly in the West. Binance is securing a digital asset registration, one of the country’s largest banks offering crypto custody services and Circle is choosing France for its European headquarters.
4/ Interest Rates and Global Liquidity
Interest rate decisions by the Federal Reserve and the European Central Bank play a significant role when looking at the crypto market. The expectation that the Fed and the ECB will soon pivot to lower interest rates has contributed to the recent rally.
One of the reasons for the assumption is the positive development of inflation figures in the U.S., which have been declining since July 2022. The Consumer Price Index (CPI) in the U.S. fell to 4.9% in April 2023, which is still far from the Fed’s 2% target but heading in the right direction.
As interest rates rise, liquidity gets drained out of the financial system, which should cause risk assets like crypto to crash. However, countries like China and Japan have continued to stimulate their economies, with money finding its way into crypto assets. This flow of capital could help sustain the crypto market, but it is uncertain how long this stimulus will continue.
In this regard, it is important to keep in mind that cryptocurrencies are a global asset class and do not depend only on Western events. Following a report by the IMF, China and India together are forecast to generate about half of global growth this year. Positive conditions in the Asian region, could further boost the crypto market.
Even according to Cameron Winklevoss, an American investor and co-founder of crypto exchange Gemini, the next crypto bull run will start in Asia.
5/ A Crypto Supercycle on the Horizon?
Not only have countries like China and Japan been actively boosting their economies, but also recently, due to the occurrence of several bank crashes in the US, the Federal Reserve has found it necessary to inject more funds into the economy.
As faith in the traditional financial system rapidly erodes, the crypto market is poised for significant growth. This phenomenon is not unfounded, as evidenced by the robust response of the crypto market to recent banking crises. If such economic disruptions persist, we can anticipate a sustained positive price trajectory for most cryptocurrencies.
Even in the absence of banking instability, the advent of Central Bank Digital Currencies (CBDCs) could similarly influence the crypto market. CBDCs provide a mechanism for governments and central banks to exert control over spending and saving behaviors. However, this could inadvertently trigger a public shift in perspective, making government-backed money appear less secure for wealth preservation. This realization may prompt people to seek alternative, non-traditional stores of value.
In practical terms, this may translate to a growing proportion of personal portfolios being allocated to assets outside the conventional financial system, including cryptocurrencies. As these alternatives become more user-friendly, their appeal will likely increase, further driving their market growth.
Though it may seem like a futuristic scenario, this shift is already taking place. Across the globe, individuals and institutions are turning to cryptocurrencies as a response to failing currencies, unstable banking systems, or the impending implementation of CBDCs. This collective move towards crypto could establish a price floor for many digital currencies, which may rise in parallel with the diminishing allure of traditional fiat currencies.
We may be witnessing the dawn of a crypto supercycle, or at least a unique market cycle distinct from any previous ones.
Conclusion
While there are some positive signs pointing to a potential crypto spring, such as Bitcoin’s four-month bull run and sensible crypto regulations being introduced in various countries, the uncertainty surrounding interest rates and regulations in the US call for caution. Investors should carefully weigh these mixed signals and consider potential risks before making any decisions.
In conclusion, while the crypto market is sending mixed signals, it is crucial to keep an eye on price action, trading volume, regulatory developments, and macroeconomic factors to make informed decisions. Stay vigilant and be prepared for any sudden changes in the market’s trajectory.
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None of the above is financial advice.
