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The total market capitalization of the crypto market has almost halved from its high in November 2021 (almost $3 trillion) to now ($1.6 trillion as of 10:00 a.m. 01/22/2022). The BTC price is currently around 35,000 US dollars and is therefore minus 9 percent on a 24-hour view.
Newcomers to the crypto sector in particular are likely to be more than disappointed with the digital asset class. On the other hand, the crypto market is still clearly up over 30 percent over a 12-month period. Anxious crypto investors should keep this fact in mind, especially in the current situation.
In addition, there are other reasons that speak against panic and “rush shots”.
1) DAX, Nasdaq and Co. also correct heavily
Anyone who thinks that it’s only looking bleak on the crypto market should take a look at the major stock indices. It doesn’t matter whether it’s the DAX, Nasdaq100 or EuroStoxx: the last few days have also been characterized by severe losses. The tech stocks in particular, which have a high correlation to cryptocurrencies, are often well over 30 percent or more away from their all-time highs.
Cryptocurrencies have now become a serious asset class. Accordingly, they can no longer escape the turbulence on the market. At the same time, cryptocurrencies are highly volatile and less valuable than traditional assets. The reactions and sales are consequently tough. This correlation shows that the current correction is not an issue unique to the crypto market.
2) BTC fundamentals are bullish
When prices plummet, investors should always ask themselves whether fundamentals have deteriorated. This is exactly what is currently not the case with BTC and most other cryptocurrencies. The BTC Hashrate, which stands for the stability, security and adoption of cryptocurrency, is at a new all-time high. Also the number of BTC nodes, i.e. the nodes, which are also signs of adoption, are increasing continuously.
The same developments can also be seen in the scaling solution of the Lightning Network. Especially since investments in the BTC infrastructure, including mining facilities, are also breaking new records. We also find similarly positive indicators in the ETH blockchain, which is particularly busy with NFT and DeFi applications. A fundamental trend reversal is simply not discernible here either.
3) The narrative of the interest rate turnaround by the Fed is gaining the upper hand
The interest rate turnaround by the US Federal Reserve has the markets firmly in its grip. The fear of a more restrictive monetary policy or rising interest rates is causing innovation stocks, such as tech stocks and cryptocurrencies, to bleed. Finally, the planned increase in interest rates will increase the attractiveness of monetary values while at the same time worsening financing conditions for non-profitable companies. Experience shows that assets with no cash flow, such as gold and BTC, are also negatively impacted by rising interest rates.
As negative as rising interest rates may be for the markets, there is also an exaggeration in the “out of tech and into value” narrative that it unleashed. Just because interest rates are rising slightly does not mean that all innovative stocks will have to suffer as a result. This applies above all to the crypto sector, whose expected growth in the sector should far more than compensate for a negative interest rate environment. Furthermore, there are no indications that there will be funding difficulties in the crypto sector in the future. Especially since other central banks such as the ECB have not yet adopted a more restrictive course.
4) Panic is not a good advisor – Fear and Greed Index as a counterindicator
It is one of the oldest stock market wisdoms that you should sell your assets when the markets are in a party mood and all investors are looking to the future with optimism. However, that is currently not the case. According to the BTC Fear and Greed Index, who uses sentiment analysis to assess market sentiment, says “extreme fear” currently prevails.
This indicator suggests that many “weak hands” are being flushed out of the market. Especially since the crypto sector is characterized more than other asset classes by unprofessional investors. So panic reactions are much more common here. Anyone who is aware of this basic market psychology can benefit greatly from anti-cyclical trading.
5) Political exchanges have short legs
We are currently seeing very political stock exchanges that are putting a lot of pressure on various asset classes. Ukraine conflict between Russia and NATO, supply chain problems, pandemic-related uncertainty and international protectionism, energy price explosion, etc. There are many reasons to panic.
Experience has shown that such political exchanges only have a short half-life and are quickly forgotten by the markets. A look at the long-term fundamental valuation is particularly important here. This applies to all asset classes, such as companies, real estate, commodities or cryptocurrencies such as BTC. In many cases, those who take the time to carefully analyze the fundamental outlook will come to the conclusion that there is no reason to sell the respective asset during this market panic.