Cryptocurrencies are attracting investors, but it will pass

Bitcoin rallied from $20.5K to $21.6K during the day on Tuesday but later reversed to decline and went back on Wednesday morning. Ether corrected deeply, losing 4.4% over the last 24 hours. The top ten altcoins showed mixed dynamics, ranging from a 6.5% decline (Solana) to a 3.6% gain (Dogecoin).

Total crypto market capitalisation, according to CoinMarketCap, declined 1.9% to $900bn. Bitcoin’s dominance index dropped 0.2 points to 43.5%. The Cryptocurrency Fear and Greed Index is up 2 points to 11 by Wednesday and remains in a state of “extreme fear”.

After a strong move down last week and a retreat from the extremes on Sunday, BTCUSD failed to gain ground with buyers and remained pegged at the round level of $20K.

Bitcoin’s recent drop below $20K triggered a new wave of deleveraging and liquidations that affected miners and long-term investors, Glassnode claims.

Ethereum co-founder Vitalik Buterin criticised the popular Stock-to-Flow model for predicting bitcoin exchange rates, saying it is wrong and only gives people unwarranted confidence in the predetermination of exchange rate movements.

Investors are buying Bitcoin despite the market’s decline. According to CoinShares, crypto funds saw capital outflows of $39m last week, while there were inflows of $28m into BTC.

Investors have, in our view, false confidence in their strengths. It is commonly believed in the media that retail investors were the first to buy out the 2020 bottom and who managed to beat the funds in 2021 using the r/wallstreetbets forum.

But then the Fed and many other central banks, along with governments, were on the buyers’ side, conducting unprecedented policy easing and handing out monetary stimulus. Now they are doing the opposite: rolling back support programmes and raising rates at the highest rate in decades.

Retail shoppers risk being caught swimming against the financial current, which is hardly a successful strategy. History suggests that enthusiasts risk running out of steam soon, being left with depreciating assets, and losing confidence for years that equity or cryptocurrency markets are a worthwhile place for their money.