Cryptocurrency Prices: The Worst Is Behind

Not only is it springtime, but it is beginning to feel like it. You know: the time of year when hope springs eternal.  That is the way crypto markets have been performing over the last week and more. This is all cool but where do we go from here?

From an objective observer, the worst prices of 2018 are behind and a 30%-50% price appreciation from here is not an absurdity.  This is based on the point that current crypto pricing is generated overwhelmingly by momentum. The very force that drove prices to bargain levels is attracting bottom fishing investors.  Once this takes places everything changes. Let’s take a look.

The Collapse  

Any asset, no matter whether it is a publicly owned common stock or a cryptocurrency, goes through a testing period (call it a seasoning process).  The recently completed quarter was the first time crypto investors were forced to deal with adverse news: government regulators threatening, wallets being hacked and ICO scams.

This is a lot of fodder for mass media headlines.  Once prices began to crumble, the headlines kept piling on.  The most bombastic was the comedian John Oliver who dedicated and entire segment of his HBO show to ripping bitcoin.  That was in March, within days of prices hitting bottom. Thanks very much John for landing on the top of the pile.

For the first time, crypto investors were introduced to adverse news following the initial euphoria of Bitcoin hitting $19,000.  Of course, there will be periods of bad news in the future but in all likelihood, none as severe as the first quarter of 2018.

What Come First, the Price or the News  

One of the fascinating things about the stock market is the seemingly infinite variety of investors that operate side by side. It is a perfect ecosystem: conservative blue chip investors operating in the same arena with bottom fishing value investors.

The value investor thrives on bad news or simply no news at all.  A whole lot of what we have watched over the last week or so has the imprint of bottom fishers doing what they do so well.  That is an encouraging sign that conventional stock market dynamics are starting to rub off in the crypto world.

Suddenly Very Good News

Now that prices have staged a brief but powerful rally, the good news seems to follow.  Is this all coincidental or does asset pricing drive the headlines? Well here are several headlines that suddenly appeared since the rally began.

The central nank in Russia is working with Ethereum to create a system for pan-Eurasian payments.  Moody’s, the big credit rating agency, claims that blockchain technology could save the mortgage industry $1 billion. Next,  Bank Santander and Ripple announced the launch of the first blockchain international payment service for retail customers. And then Bank of America applies for a patent for a blockchain app for storage of health records.

So, has all this sudden good news responsible for the crypto price rally or it the other way around?  Bottom fishing investors believe that prices drive the news. Obviously, nobody has the answer to this riddle.  What we do know is that once value investors perform their service, momentum investors often take over from there.  This is the next phase toward restoring confidence to the crypto markets.

What’s the Upside Potential

In the long term, fundamentals determine prices.  In the short term, anything can happen. In that time period things like technical analysis can be useful.  If the current rally continues much further points of critical resistance will be broken. When this happens, the community of technical analysts will be geared up to recommend purchase of the group.  Considering the average crypto lost more than half its value in the last few months, an upside from here of 30%-50% would surprise no one. Prospects to ponder as spring unfolds.

Featured image courtesy of Shutterstock. 

James Waggoner is a veteran Wall Street analyst and hedge fund manager who has spent the past few years researching the fintech possibilities of cryptocurrencies. He has a special passion for writing about the future of crypto.