Virtual Currency

Have Cryptocurrencies Reached the End of Their Rally?

We knew it was coming…

And now the crypto crash is finally here.

Investors who claimed they would never touch the “fake money” are laughing at the collapse. They’re wagging their fingers and snidely saying, “I told you so.”

The believers are having their faith tested… once again.

But is this the end of the road for Bitcoin, Ethereum, Dogecoin and the rest?

Or is there a second chance for profits?

Crashing Back to Earth

It’s been a difficult run for crypto markets in the past few weeks.

You don’t need to look any further than the many YouTubers posting videos about their imploding portfolios with sad, exaggerated faces.

Some feel betrayed by their messiah and “Doge Father,” Elon Musk. The crypto space has been crashing back to earth after the Tesla (Nasdaq: TSLA) and SpaceX CEO hosted Saturday Night Live on May 8.

But the pain began a couple of weeks before then. Since topping out at around $64,000 in mid-April, Bitcoin has shed more than half of its value and tumbled all the way down to around $30,000.

Bitcoin Price

It’s bounced back some – $30,000 appears to be the floor, while $40,000 is acting as resistance. We saw Bitcoin pull back and hold at this $30,000 level earlier this year as well.

Meanwhile, the Bloomberg Galaxy Crypto Index has collapsed 41.7% since May 11.

Bloomberg Galaxy Crypto Index

So what’s happening here?

Well, this is a perfect example of the two phases of an overheated market. Think of it as a sugar high and the resulting crash.

I don’t think cryptos are done. Not by a long shot. But this is when the jokes start to die.

FOMO vs. FOLM

In crypto, we’ve seen the classic idiom play out: A rising tide lifts all boats. But the leaky ones eventually sink.

When there’s a lot of excitement about an investment – and that investment is performing well – everything in that sector starts to take off.

Investors are driven by FOMO – fear of missing out.

It can get pretty fun, funny and profitable.

During the last Bitcoin boom in 2017, I would buy any investment that had Bitcoin or crypto in its name, hold it for a week, take my double and move on.

We also had the rise of CryptoKitties on the Ethereum blockchain, the jump in Dogecoin and widespread mania.

This time around, we had the rise of nonfungible tokens, creator coins, Dogecoin and a bevy of Dogecoin knockoffs.

In this type of cycle, early investors do extremely well.

But then the tone of the market shifts. It moves from FOMO to FOLM – fear of losing money.

Investors start taking profits. The enthusiasm and euphoria begin to moderate. And instead of buying every hot new token under the sun, they become more selective, focusing on quality and value.

The exact same trend happens in stocks. In fact, we can see this playing out right now with the tech sector’s struggles in 2021.

For cryptocurrencies, there’s another thorny issue investors have to contend with. The overheated market draws the attention of regulators.

Bitcoin miners are dealing with a crackdown in China. And in the U.S., Federal Reserve Chairman Jerome Powell said greater regulation of cryptocurrencies may be warranted.

These situations always ignite profit taking, which combusts into panic and explodes into a crypto crash.

In turn, I think we’re about to enter a more difficult stretch for the space.

The Fun Part Is Over

Right now, I wouldn’t be tripping over myself to snag shares of Chinese crypto miners, like Canaan Inc. (Nasdaq: CAN) and Ebang International Holdings (Nasdaq: EBON).

China appears intent on pushing crypto mining and trading outside its borders. And I think the global hub will find a new home.

But here’s the deal… investors still want exposure to cryptos.

Every portfolio has to have some exposure because this asset is generating the largest returns (though it also has the greatest volatility)…

But we’re going to continue to see a shift away from moonshots to portfolios being more heavily weighted in the strongest assets.

That means focusing on larger cryptos – like Bitcoin, Ethereum and Litecoin – as well as stable coins, such as Binance and Tether.

In the past, I’ve outlined that the sector moves in a wave – a two-year bull market followed by a two-year bear market. This has to do with the reward halving of Bitcoin.

The current rally peaked on April 15, with a 635.9% gain since the last halving on May 11, 2020. If that top holds, it would be the smallest and shortest – a mere 339 days – bull market following a reward halving yet.

Bitcoin Gain Following Reward Halving

Regardless, investors have to accept that the fun part is over.

Now we’re in a more difficult – but likely more focused – stretch. FOMO is being replaced by FOLM. And the pressure is on to see whether there will be one last run to new all-time highs.

I’m not sure this current bull is completely at rest yet. But there are signs it’s getting winded.

Here’s to high returns,

Matthew

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