It is not uncommon to see comparisons of parabolic rallies or sell-offs with shooting stars. It is practically impossible to accurately determine price extremes, since the market often reaches levels that are contrary to logic and common sense. That is why many market participants tend to trend trading, since this approach takes into account market sentiment, and this is a powerful force.
And, of course, sentiment can be at odds with the fundamental balance of supply and demand.
Therefore, at any moment the price of the asset is justified, since it was at this point that sellers and buyers met. And often, market participants’ problems begin with the assumption that the price is wrong.
Emotions invariably lead to this conclusion, since it is a psychological reaction based on feelings. It was when I let my emotions get in the way of realizing that my only friend is a trend that I suffered the heaviest losses (and learned the most valuable lessons) precisely in those moments.
I grew as a trader and investor when I removed the emotional reaction to market dynamics from the equation.
In 2020, the cryptocurrency market entered one of the most aggressive bullish phases I have ever seen. Bitcoin surged to over $65,500 per token and Ether broke the $4,400 mark; similar rallies were demonstrated by many other currencies, of which there are almost 11,000.
In April and May, the combined market capitalization of this asset class peaked at over $2.4 trillion, but gravity had its say. After a twofold correction, BTC and ETH went sideways near recent lows.
Cryptocurrencies have fallen asleep
Since mid-April, bitcoin has not pleased its “followers”. On June 22, the price of the July futures fell to $28,840, after which it consolidated (continuing to show more of a “bearish” character).
As the daily chart shows, since June 22, Bitcoin’s trading range has been capped at $28,840 and $36,650. Last week, the currency ended just below the middle of this channel.
During the same period, Ether futures traded between $1,710.75 and $2,420.75. Having settled at $1940 on July 16, the currency was also below the middle of its range.
In fact, the two leading cryptocurrencies, which account for 63.2% of the market capitalization of the entire asset class, have gone dormant near recent lows.
Consolidation is normal
The incredible April-May rallies were highly volatile. Many market participants knew about this, but the idea of jumping off a speeding train scared them.
The sell-off of recent weeks, which cost bitcoin and ether half of the capitalization, can be a very positive development. Market participants need time to digest aggressive price movements.
While some continue to draw parallels to the tulip fever of the 16th century, the situation in the cryptocurrency market is radically different. The new asset class reflects declining confidence in central banks and governments to control the money supply. Digital currencies are based on a libertarian psychology, and the limited issuance of tokens is a statement that free market advocates seek austerity and natural price formation at the intersection of supply and demand.
Yes, regulators constantly talk about the potential for misuse of cryptocurrencies, which help to hide from tax inspections and prosecutorial oversight, but currency advocates turn to them in order to save capital, not trusting governments and supranational bodies that manipulate the money supply as part of the political agenda.
The strengthening of digital assets is an ideological wave designed to change the status quo in the global financial system.
Consolidation near the bottom of the range can be dangerous
As the events of recent years show, Bitcoin and Ethereum tend to renew highs against the backdrop of any external events. A few examples: Bitcoin passed the $20,000 mark at the end of 2017 when CME launched futures trading on it and provided the cryptocurrency with a new trading platform that boosted its popularity. Ethereum took off in February 2021 when CME introduced a similar futures contract.
Support from reputable companies also played a role. In late 2020/early 2021, Square (NYSE:SQ) and Tesla (NASDAQ:TSLA) invested in bitcoin. Tesla went even further and announced its readiness to accept BTC as a payment instrument (although later abandoned this concept due to the carbon footprint of miners).
Square is working on the issue of trust storage, which can also help promote them.
The launch of derivatives such as ETFs and ETNs will boost liquidity and drive up prices. Meanwhile, rising price pressures, political turmoil and growing distrust of governments will boost demand.
Greed is a powerful driver of bull markets.