Understanding the Current Crypto Macro Climate
Prior to the recent selloff, the crypto markets as a whole had been sitting relatively level for the past few months. Despite the drastic changes in the market over the past nine days, it always helps if investors can get a better understanding of the higher level factors that will influence price changes over the next few months, or even years.
It seems like everyone has a different perspective on where the crypto markets will head, and it is usually informed by their ideals and current holdings in the market.
One common belief you’ll hear from from those who believe the Federal Reserve is that almost every single mainstream asset class is overbought right now – even after the recent price collapse. Along with this, they believe that during the next crash in equities or real estate, there will be capital flight and cryptocurrencies will be the sector this money is moved to.
Although possible, this ignores the basic investor psychology that would prevent people from becoming more risk-friendly in a situation like that. It is one thing to move money from equities to bonds or real estate, but to move money into an unproven asset class like cryptocurrencies takes a large increase in risk tolerance that it is unlikely pension funds, or even older investors, are likely to have.
The Current Macro Environment
Another aspect in the macro-environment of cryptocurrencies is regarding hedge funds. With the current investing climate, redemptions have been increasing. In fact, many of them don’t have the liquid assets to cover their redemptions.
These funds function differently than ETFs like Grayscale funds that are backed by liquid assets. Investing in ICOs is extremely risky, and much like many venture capital funds, the money will be locked up for years.
The common belief is that a “crypto spring” will follow the crypto winter we are currently in, but this doesn’t take into account the timing. Bitcoin (and crypto as a whole) may have dropped a significant amount, but there is still a long way for it to fall. As such, the next price pump will take a while as big institutions wait for a bottom in the markets.
Capitulation of many “HODL’ers” is a goal for these institutions. They want to “shake out” as many of the longs as possible so the price reaches a low before they buy.
Psychology that Doesn’t Add Up
As always, the market psychology is inconsistent, to say the least. You have some diehard crypto fans who will hold for 10 years because they believe so strongly in the cause. But you also have speculative investors moving on to other trends like medical marijuana or cannabis stocks more generally.
One interesting phenomenon is the same investors who bought Bitcoin at a price in the high teens are now less likely to buy when the price has dropped more than 75% from an all time high.
None of this is to say you shouldn’t buy more crypto, but it might also be prudent to keep some extra “gunpowder” on the side so as to be able to take advantage of any additional drops in price in the future.
Some believe this negative investing climate may endure until 2020. In the end, this could be a good thing for anyone looking to dollar-cost-average into cryptocurrencies, but it will definitely feel like a poor outcome in the beginning. The good news is that by understanding the current dynamics, nothing will feel like a surprise over the next few years.
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