Cryptocurrencies are already 12 years old. During this period, they have managed to earn a reputation and achieve wide recognition, but they still have a long way to go.
As of the end of last week, the market capitalization of this asset class was $1.235 trillion. For comparison, the largest publicly traded company represented by Apple (NASDAQ:AAPL) is worth more than $2.38 trillion.
Cryptocurrencies are revolutionary exchange tools created on the basis of blockchain technology and represent the evolution of financial technologies. They also have a political “layer”, since digital currencies appeal to libertarian ideology in the issue of control over the money supply, offering to return it to end users.
Traditionalists (in the person of Charlie Munger) consider them a “threat to civilization.” The arguments of the supporters and opponents of the “crypt” are very emotional and probably a little exaggerated.
Meanwhile, the incredible rally of bitcoin, ether and many other cryptocurrencies caused a surge of speculative madness, which reached its apogee on November 10, 2021; on that day, the leading digital currencies updated their record highs.
However, then the rule of the bulls ended. On the daily timeframes of BTC and ETH, the “key reversal” models were formed, which resulted in a fall to the lows of January 24, 2022.
Since then, digital currencies have been trading closer to their local lows than to the peaks of mid-November. Digital currencies are “looking for themselves”, while liquidity is gradually drying up.
In such conditions, the risks of false breakouts significantly increase.
Aggressive ups and downs
In 2021, when bitcoin was approaching the $70,000 mark per token, many optimists predicted further growth to $100,000 by the end of that year. However, they were wrong.
The chart shows that the rally fizzled out in November 2021, but it does not reflect all the price fluctuations from November 10. On that day, BTC and ETH reached their record highs, but closed below the lows of the previous day.
The formation of the “key reversal” models triggered a sell-off, as a result of which cryptocurrencies fell to their local lows. Last week, bitcoin updated the current year’s minimum and dropped to the December 2020 levels of $25,919.52 per token.
As for the ether, on May 12, it fell to the lows of June 2021 at $ 1,721.474.
Clashes between supporters and opponents of cryptocurrencies
The beginning of November 2021 was held under the slogan “To The Moon”, whereas in May 2022 cryptocurrencies were at the mercy of “bears”. The optimistic forecasts regarding bitcoin at $ 100 thousand per token were replaced by the pessimism of Charlie Munger and Warren Buffett.
The founder of PayPal (NASDAQ:PYPL), Peter Thiel, being one of the main supporters of cryptocurrencies, called Warren Buffett “the main enemy of bitcoin” and “grandfather sociopath from Omaha.”
As part of Berkshire Hathaway’s latest annual event (NYSE:BRKa) Warren Buffett said, “If you owned all the bitcoins in the world and offered them to me for $25, I wouldn’t take them.”
Warren Buffett does not consider bitcoin and other cryptocurrencies to be productive assets. In 2018, he said cryptocurrencies would “end badly.” His partner Charlie Munger went even further, calling cryptocurrencies “stupidity and evil.” Their stupidity lies in the risk of complete depreciation, and the “evil beginning” is manifested in the fact that they undermine the efforts of the Federal Reserve System.
The generational debate reflects the threat that fintech poses to the status quo of the financial system. Aggressive development of a new asset class that has not yet “found itself” provokes spikes in volatility. As recently as the end of 2021, the market capitalization of cryptocurrencies was $ 3 trillion; whereas as of May 14, the figure was $ 1.235 trillion.
The collapse scared off speculators
Nothing warms up a bull market the way an uptrend does. Back in 2010, one bitcoin cost five cents, whereas in November November 2021, the price approached $ 69,000.
The prospect of turning $100 into $138 million attracted a huge mass of speculators. As prices rose, traders and investors increasingly bought bitcoin, ether and other tokens offering the potential for incredible enrichment.
The key reversal of November 10, 2021 did not immediately undermine the enthusiasm of speculators, and many market participants bought the drawdown. However, the subsequent series of descending lows and the absence of significant corrective rallies led to the breakdown of the speculative bubble. Hopes for profit turned into significant losses.
The “bearish” nature of the trend and the pace of falling prices in the event of sales extinguish greed and turn it into fear, pushing speculators to the sidelines and forcing them to lick financial wounds.
Falling liquidity volumes and Stablecoin Failures
The flight of speculators has already led to a drop in available liquidity, and last week cryptocurrencies had to face a new catastrophe. But first, a little context: a stablecoin is a digital currency, the price of which is tied to the value of another asset, for example, fiat currencies or commodities.
TerraUSD (UST) is a decentralized algorithmic stablecoin that uses complex codes to create new and destroy existing tokens in order to maintain a stable peg to the dollar. Stablecoins usually have a balancing token that ensures the stability of the exchange rate. However, this did not help UST.
From November 2020 to May 7, 2022, the price of one UST managed to be maintained near the $ 1 mark, but then everything collapsed. As of the end of last week, one UST was worth less than 20 cents. The stablecoin turned out to be not so stable, causing a wave of panic that swept through the entire market.
Tether (USDT) is another major stablecoin, and at the moment it manages to keep the value, but most of the 19,400 existing cryptocurrencies have turned down.
High probability of false breakouts
The lack of price growth has forced many speculators to leave the cryptocurrency arena. The fewer bidders there are, the less available liquidity, which, in turn, creates prerequisites for spikes in volatility.
As a result, bullish markets may encounter an unexpected lack of supply, whereas during periods of sales, buy orders disappear, causing gaps and slippage of technical support and resistance levels.
It is also worth noting that in the absence of liquidity, the probability of false breakouts of technically significant levels increases.
Those who believed in bitcoin for $ 100.00 in 2021 were mistaken, however, those who claim the prospects for the depreciation of cryptocurrencies in 2022 are probably also wrong. The ratio of risk and potential profit has improved, but any investment is fraught with the threat of total capital loss (which only increases in conditions of high volatility).
Treat cryptocurrencies with extreme caution, realizing that every cent invested can both enrich you and sink into oblivion.