Cryptoassets Pull Back After A Long Run Surpassing Expectations

Cryptoassets Pull Back After A Long Run Surpassing Expectations

Defying all conventional logic, global equity markets continued to rise last week. In fact, the FTSE All World index joined the S&P 500 and Nasdaq in reaching new levels last week, hitting 384.91 to surpass its February high. Somewhat conversely, several cryptoassets have pulled back a little after months of surpassing expectations.

Comments provided by David Derhy and Simon Peters, eToro analysts

Whilst the last few weeks have appeared to be tough on bitcoin’s performance, investors should put things into perspective. The fact remains that we have still been positive over the past month, with the price mostly hanging around the $11,400 – $11,500 range.

We’ve also seen a range of positive on-chain metrics, such as Glassnode’s recent analysis showing that the number of bitcoin hasn’t moved in the past 2 years is currently at a 3-year high. With investors hodling and not willing to part with their bitcoin and the quantity of new bitcoins coming into the market decreasing, a substantial demand increase, possibly catalysed by ongoing dollar weakness and investors turning to bitcoin as an inflation hedge, theoretically could be positive for price.

In addition to this, and despite the recent price stagnation, newsflow around bitcoin has remained positive. The Federal Reserve continues to highlight cryptoassets and the impact they will bring and are bringing, whilst various institutional investors have continued looking at bitcoin as an asset to invest in. It has been a while since there was a development that drives bearish sentiment.

What is clear is that investors are holding their bitcoin and optimism is permeating throughout the community, despite the price remaining steady. Doubtless the majority of those who are holding crypto are private or retail investors, but it seems some institutional investors view the asset as an important part of their portfolios and are putting it on their buy lists.

Altcoin movements reminiscent of the winter of 2017

Last week, we’ve seen further drops from a number of altcoins, with Cardano’s ADA falling from a high of $0.126 to the $0.127 it sits at now – and I believe that we’ll continue to see such profit taking as coins retrace 50% from their exceptional highs.

Recent cryptoasset activity reminds me, dare I say it, of 2017. Towards the end of the year, we saw large retracements in the gains made by various cryptoassets, and the same seems to be happening here following an exceptional summer run.

In addition to that price comparison, the explosion of DeFi is mirroring the massive influx of initial coin offerings (ICOs) we saw in 2017. However, despite these similarities, I still think it’s worth remembering that we are now three years older and wiser; I am not expecting the same negatives and pushbacks from the DeFi boom as we saw from the ICOs (especially since it was justified!).

Powell’s new policy will drive inflation fearing investors to bitcoin

On Thursday, Jerome Powell spoke at the Jackson Hole Symposium, aka central bankers Glastonbury (also held virtually).

What he announced was an iconic policy switch, a fundamental shift in how the Fed will target inflation. Instead of maintaining a constant level of 2%, the FOMC will act to ensure that inflation is averaging 2%. This means that the Fed is happy to see it rise above 2% if it follows a period of low inflation, instead of turning on the brakes as it would have done previously.

What does this mean for crypto? For starters, investors will be looking at some of their portfolio positions and wondering what extended periods of inflation will mean for their investments, perhaps looking where they can go for a way to hedge against it. We’ve eulogised often on the benefits that bitcoin can bring to portfolios when used as an inflationary hedge, and this opinion has been championed recently by a number of institutional investors. This could be another step in the right direction for uptake of bitcoin as an essential allocation in institutional and retail investor portfolios. It’s not a mention of ‘money printer go brrr’, but Jerome’s latest move might signal another nail in the coffin for the old financial regime.