Market Wrap: Cryptos Decline Amid Bearish Sentiment
The bitcoin Fear & Greed Index reached its second-lowest record fear level in history. Analysts expect a period of lower returns.
Bitcoin (BTC) traded lower on Tuesday as sentiment among crypto traders remained bearish.
The bitcoin Fear & Greed Index has been stuck in "fear" zone over the past month and reached its second-lowest recorded fear level in the index's history last week. Still, the index has recovered slightly over the past few days, which suggests extreme bearish sentiment could start to wane, especially if BTC recovers above $30,000.
For now, most alternative cryptos (altcoins) underperformed bitcoin on Tuesday, which suggests a lower appetite for risk among traders. For example, ether (ETH) declined by 4% over the past 24 hours, compared with a 2% decline in BTC. Avalanche's AVAX dipped by 9% and Fantom's FTM token fell by 14% on Tuesday.
Typically, alts decline more than BTC in down markets because of their higher risk profile.
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From a technical perspective, price bounces could be limited until long-term momentum improves. That could point to a full year of lower returns for stocks and cryptos relative to the strong uptrend in 2020.
Volatile markets could offer opportunities for short-term traders who do not commit to price trends and can take long or short positions. Likewise, investors who are nimble enough to reduce risk can deploy unused cash for the next up cycle in asset prices.
But timing price shifts can be difficult over the short term. For example, on average, bitcoin tends to yield positive returns during periods of extreme bearish sentiment, according to Arcane Research. "Bitcoin has also seen continued sell-offs following extreme fear. Thus, you should not blindly expect that buying into fear and poor momentum is profitable."
●Bitcoin (BTC): $29,369, +0.81%
●Ether (ETH): $1,962, −1.17%
●S&P 500 daily close: 3,941, −0.81%
●Gold: $1,866 per troy ounce, +0.97%
●Ten-year Treasury yield daily close: 2.76%
Bitcoin, ether and gold prices are taken at approximately 4pm New York time. Bitcoin is the CoinDesk Bitcoin Price Index (XBX); Ether is the CoinDesk Ether Price Index (ETX); Gold is the COMEX spot price. Information about CoinDesk Indices can be found at coindesk.com/indices.
The chart below shows a long-term decline in bitcoin's compound annual growth rate (CAGR), provided by Glassnode, a crypto data platform.
As bitcoin's market size increases, more capital is required to move market prices. That can result in diminishing returns over time as the crypto asset matures.
"We can see the marked decline in four-year CAGR following the May 2021 sell-off, which we have argued was likely the genesis point of the prevailing bear market trend," Glassnode wrote in a blog post.
But diminishing returns are not just a result of larger market size.
From a macro perspective, a long period of accommodative monetary policy underpinned a strong rally in speculative assets, such as stocks and cryptos, over the past few years. Bitcoin, in particular, has traded within four-year bull and bear cycles that produced higher returns relative to stocks, albeit with more volatility.
Currently, global investors are grappling with tighter monetary policy amid high inflation and slowing economic growth. That could produce diminishing returns in both traditional and crypto markets.
"If inflation stays high for many years, both history and today's high starting valuations suggest it will be very difficult to generate positive real returns (adjusted for inflation) in most traditional financial asset classes," Deutsche Bank wrote in a research note. "Nominal returns (without considering inflation) will also likely notably underperform their long-term trend. Commodities could be the exception."
- Milady tumbles amid drama: Minimum prices (also called floor prices) for the popular non-fungible token (NFT) collection “Milady Maker” have slumped nearly 70% in the past week. The big price hit was an isolated event in the NFT market and likely linked to the drama that revealed its creator to have been a controversial personality linked to a popular online cult. The collection of 10,000 anime-inspired, computer-generated icons already had troubling baggage with sporting the name of a Nazi concentration camp on some of the artworks. Read more here.
- Terra fiasco brings scrutiny to exchanges: South Korean authorities are looking to introduce measures to hold crypto exchanges to greater scrutiny after Terra's collapse, according to local reports. Korea Times wrote that there are around 280,000 investors in the country who are believed to have been victims of UST stablecoin and LUNA tokens falling to near zero in a few days. Authorities will also investigate whether Do Kwon, the CEO of Terra creator Terraform Labs, committed fraud in targeting investors with his crypto project. Read more here.
- Crypto firms push back against tax rule: Crypto industry representatives are battling with OECD to exempt decentralized finance and non-fungible token (NFT) transactions from tax reporting rules. The OECD, an international organization that includes most developed economies, is trying to introduce new rules to stop crypto from being used to stash assets out of sight of the taxman. On the other hand, digital asset companies opine that some crypto assets just don’t fit the same mold as other traditional assets, such as stocks or gold, and that applying the same rules would put too much burden on them. Read more here.
- Wall Street Says a Fed Digital Dollar Spells Destruction for Banks: The U.S. Federal Reserve is considering whether to launch a CBDC like other nations, and bankers argue that’s a dangerous idea.
- ECB Warns That Crypto Risks Could Spill Over Into Wider Economy: Given the increasing risks of crypto, it is important to bring it into the regulatory perimeter as a matter of urgency, the European Central Bank said in a report.
- Coinbase-Led Travel Rule Group Grows Members, Expands to Canada and Singapore: The original group of founding crypto blue chips has now swollen to over 30, including heavyweights like Binance US, Circle, Robinhood and Paxos.
- Social-Media Disruptor Project Liberty to Run on Polkadot’s Blockchain Network: The partnership follows on from former Los Angeles Dodgers owner Frank McCourt earmarking $100 million last year to disrupt incumbent-dominated social media.
- Bitcoin Records Eighth Week of Losses, but Sentiment Indicator Suggests Upside: Sentiment indicators reached “rock bottom” on Monday amid a prominent fund manager calling for a retest of 2019’s price levels.
- Coinbase Enters Fortune 500 List of Biggest US Companies: The first crypto company to join the list recorded revenue of over $7.8 billion in fiscal 2021 and placed 437th.
- DeFi Trading Hub Uniswap Surpasses $1T in Lifetime Volume: Although traders still tend to favor centralized exchanges, the DEX is continuing to expand across Web 3.
Most digital assets in the CoinDesk 20 ended the day lower.
|Ethereum Classic||ETC||+4.8%||Smart Contract Platform|
|Algorand||ALGO||−5.3%||Smart Contract Platform|
|Cosmos||ATOM||−5.0%||Smart Contract Platform|
Sector classifications are provided via the Digital Asset Classification Standard (DACS), developed by CoinDesk Indices to provide a reliable, comprehensive and standardized classification system for digital assets. The CoinDesk 20 is a ranking of the largest digital assets by volume on trusted exchanges.
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