Cryptocurrencies: Five Reasons Why The Worst Is Behind

February 5, 2018 is the day when investor fear was replaced by greed. That marked the current bottom for cryptocurrency prices.  Simple enough to make this claim now that we have had a few good trading days.  But how do we know for sure that the worst is behind?

Oh if there was a reliable way to measure fear and greed in this nascent crypto world. It could tells us emphatically when market tops and bottoms are occuring, we could make some real digital dough.  True, there are lots of tools that have been tried on traditional markets likes stocks and bonds.  But if these will truly work in crypto land remains to be proven.

Sometimes the most reliable barometer is nothing more complicated than “gut feel”.  Here is what feels encouraging when I apply this test.

The February 5th Bottom

Volatility has been a major feature in crypto trading since day one.  After better than a 7000% appreciation in Bitcoin and Ether in 2017, should a massive correction be a surprise? Between December of last year and February 5th, Bitcoin lost almost two thirds of its value while Ether dropped almost 50%.  We could go on listing every currency but you get the point.

It this were the infamous Dutch tulip bubble of 1634 the carnage would have continued endlessly.  With crypto, investors collectively found value starting on February 5.  Since then, Bitcoin has gained 50% and Ether about 30%.  That has all taken place in a matter of a two weeks.

This is unprecedented.  When the dotcom price burst in February 2000 the Nasdaq began a 75% fall before hitting bottom in November.  It took fully 14 years before the Nasdaq fully recovered.

Running Scared Of Government

Many investors try to connect the stock market correction with the slide in the cryptocurrency markets.  That would be a mistake because the circumstances are quite different.

The crypto correction and frightening headlines coming from China and Korea about threatened government crackdowns had everything to do with investors heading for the sidelines. This is not to ignore the mechanical influences like the slow transaction speeds etc. But the minute the word government comes into the picture, the worst fears take over.

With the benefit of time, investors are slowly coming to the realization that no government regulation can effectively control ownership of cryptocurrencies. They can however, regulate the operation of exchanges and that is a good thing.  This offers the chance to clean up the bad practices, excessive fees and outright scams which have hurt the individual investor.  

Initial investor reaction to the Chinese and Korean government news reminds us of an important point.  There is no such thing as perfect information in the crypto market.  Even so called professional investors know very little.  The general public are price driven momentum players.  Even erroneous headlines move markets; facts take more time .  

A  Pickup In ICOs

It doesn’t matter if you are dealing with stocks bonds or Bitcoin, when investors are willing to put money in the most speculative sectors, that is a sign of market strength.  Recently we wrote an article noting a precipitous drop in capital raised from ICOs during January.

We used data compiled by ICO Watchlist.  These folks are the only ones collecting data and their numbers don’t alway agree.  But we are using their date consistently for comparative purposes.

From a monthly average of about $400 million during the four peak months of 2017,  January dropped to just $76 million.  Easy to understand, investors lost their confidence in high risk instruments.

Things are beginning to change. With the recovery of major currencies the ICO market is showing new life.  With more than a week left in the month, ICOs have raised over $176 million, according to ICO Watchlist.

These figures exclude the current ICO underway for messaging app Telegram that claims it has raised $850 million thus far in a $2 billion total effort.  If these initial reports prove accurate it would be the largest ICO on record and create bold headlines.

More Hedge Funds Are Coming

According to Autonomous hedge fund money is piling up to between $3.5 and $5 billion marked exclusively for crypto investing.  The rise is dramatic reaching 226 funds globally compared with about half that many as recently as 5 months ago.  At the start of last year there were just 37.

The Negative Headlines Are Gone

There is nothing like raising prices to force the media to seek explanations.  Now instead of naysayers like Warren Buffett being quoted incessantly, CNBC brings on Shark Tank host Robert Herjavec declaring the Bitcoin is “going to skyrocket again” the “blockchain technology is here to stay” and that more government regulation will be the key driver.

CNBC even dragged out an old forecast by Tom Lee prejecting Bitcoin at $25,000 this year and Kay Van-Petersen of Saxo Bank predicting Bitcoin at $100,000.

The market litmus that I call “ gut feel” is hardly scientific.  There are probably analysts of big data that can offer better supporting evidence.  But for now, things are looking pretty good.

Featured image courtesy of Shutterstock. 

Author:
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.
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