Market Insights

Home / Market Insights

Are Cryptocurrencies Approaching A Bottom Following May Meltdown?

2018-05-31 15:11:24.0

The cryptocurrency markets had a difficult month. The major cryptocurrencies, including Bitcoin, Ether and Litecoin trade in the bearish consolidation zone and the global risk appetite for cryptocurrencies, or the lack thereof, explains the debasement across many cryptocurrencies during the month of May.

Latest news and developments hold investors back from returning to the market.

Mt Gox dump may have enhanced the sell-off
Bitcoin retreated by more than 25% from its May 5th high on the back of a mixed bag of news, including a new sell-off from Mt Gox.

On May 11th, Mt Gox Trustee Wallet sold another 8’000 BTC, the equivalent of approximately $70 million. Although the sell-off alone is not responsible for the trend reversal, it came after Bitcoin failed to clear the 10’000-resistance. Hence, the large volume of sales is believed to have added an additional downside volatility in the market and paved the way for a further decline toward the $7’000 level.

Mt Gox Trustee is often criticized for dumping large volumes and generating unnecessary panic in the market. Although one would agree that such volumes could be absorbed by a positively biased market, it is not yet the case when markets are vulnerable.

Regulation & taxation worries
The US Department of Justice (DoJ) launched a probe against price manipulation in the cryptomarkets. Although the news weigh on the short-term market sentiment, the investigation is positive as it would clean the market from bad actors in term and provide more stability and security for investors.

In the meantime, South Korea’s biggest crypto-exchange blocked operations in 11 countries in an attempt to fight against money laundering and to increase compliance with regulations.

In addition, Bitfinex, one of the world’s leading crypto-exchanges, asked investors to submit their tax IDs before May 24th. The request has resulted in a decent fund withdrawal from the exchange and weighed on cryptocurrency prices.

Despite the negative knee-jerk reactions, regulation and taxation should not have a long-term impact on sector fundamentals. In contrary, these are the sine qua non conditions for cryptocurrencies to gain legitimacy and to take part in the financial system as a new asset class.

Upbit Investigation

Upbit, a major South Korean crypto-exchange, has been under investigation for not having integrated related crypto-exchanges’ native wallets in its system. As a result, traders have not been able to withdraw their funds, although the trading was not affected by the issue.
Naturally, the investigation in South Korea weighed on the global risk sentiment.

Good news is that, although the authorities have not made their final statement yet, it appears that no irregularities were found in more than two weeks into the investigation. The end of the investigation should help restoring the investor confidence in the medium term.

Buying the dip: Bitcoin, an irrefutable sentiment gauge
As the major cryptocurrencies stepped in the oversold market, dip-buyers are seeking interesting entry opportunities in long positions.
Yet, the overall sentiment is often crucial to determine whether it is the right time to take action.

Though it is impossible to tell if prices have already hit a bottom, Bitcoin is often the major sentiment indicator in the crypto market and should provide the first hint of a potential recovery.

Although Bitcoin is increasingly criticized for being left behind other cryptocurrencies from a technology standpoint, the first and the most famous cryptocurrency is representative of the confidence in blockchain technology and cryptocurrencies.

And despite the fact that the blockchain technology is spreading to numerous industries and that the cryptocurrencies have individual underlying drivers, most of them have a high beta especially during a bear market. In other words, most of the cryptocurrency prices are highly influenced by the overall risk sentiment in the sector, particularly if the sentiment is negative.

Therefore, Bitcoin, which stands for 40% of the total market capitalization, should recover to boost the sentiment across altcoins. But once the market conditions improve, investors have a large pallet of alternative coins to invest in.

We like Bitcoin Cash’s proposal for a Development Fund
Bitcoin Cash miners met to discuss about the ‘Bitcoin Cash Development Fund’, which aims to finance the development of applications on Bitcoin Cash’s network. Miners are asked to give away a part of their rewards to finance the project, with the objective of solidifying Bitcoin Cash’s popularity in term.

Fundamental traders are positive regarding the idea, as it is crucial for any cryptocurrency to achieve gradual improvement regarding its technology and operations to stand out of the crowd in the future.

Ipek Ozkardeskaya
Senior Market Analyst
MBAex Analyst