Gains in the crypto market have probably been driven by a reversion to the mean, Bernstein said in a research report Monday, noting that bitcoin (BTC), the largest cryptocurrency by market capitalization, fell more than 65% last year. Mean reversion is a theory used in finance that suggests asset prices tend to revert to their long-term mean or average level.
According to Bernstein, the mean reversion of crypto still has room to run, and so the broker advises caution about being bearish at current levels. Bitcoin in its entire history has never had two consecutive years of negative returns, it added.
Although the implosion of crypto exchange FTX and the bankruptcy filing of crypto lender Genesis has been negative, “the potential overhang on the liquid crypto markets has receded,” the report said. Much of the expected selling pressure has been in illiquid private crypto assets, it said.
The risk of an immediate sell-off in the Grayscale Bitcoin Trust (GBTC) has also receded as creditors and Digital Currency Group, which owns Grayscale, Genesis and CoinDesk, negotiate a settlement, and with all the relevant situations now under court settlement, the “public crypto markets seem to have felt some relief from any forced selling narratives.”
It is unlikely, however that this is the start of a sustained rally, because this is more “capital internal to crypto (sidelined stablecoins) being deployed,” analysts Gautam Chhugani and Manas Agrawal wrote. “We have not yet seen any new capital allocations to sustain this rally.”
Regulatory news from Hong Kong, which is looking to allow crypto trading licenses for some assets, has also contributed to positive sentiment in the crypto market, the note added.
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