Cryptocurrency Meltdown Continues; Volatile Storm Brewing After Key Reversals

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  • Key reversals lead to corrections in leading cryptocurrencies
  • Lower lows last week
  • Correction and consolidation are healthy for markets
  • Regulation vs. speculation in 2022 will go hand-in-hand
  • Buying on weakness remains optimal approach but could become frightening

Though Bitcoin and Ethereum have both declined from their Nov. 10, 2021 all-time highs, and the cryptocurrency arena has continued to experience weak price action in early 2022, the returns since the leading cryptos began trading continue to astonish. 

Even though nearby Bitcoin futures fell from nearly $70,000 per token in November 2021 to the $33,472 level at time of publication on Jan. 24, it's worth remembering that the price was five cents in 2010. While January Ethereum futures dropped from over the $4,900 level in mid-November to around $2,216 on Jan, 24, the price was $11.13 in May 2016.

Looking at the latest price action in the cryptocurrency asset class under a microscope can alter perceptions. Overall, their explosive appreciation has been unprecedented. The leading cryptocurrencies have given birth to over 17,000 other digital tokens, and each day the number of new tokens increases.

While most will likely wind up as dust collectors in computer wallets, the potential for Bitcoin or Ethereum-like returns has created a buying frenzy for many new tokens. Nonetheless, cryptocurrency prices have moved lower during the early days of 2022, with prices approaching half the value seen at the Nov. 10 high.

If the past price patterns are a guide, the substantial selloff in the asset class could set the stage for another volatile storm sooner rather than later in 2022.

Key reversals lead to corrections in leading cryptocurrencies

Nov. 10, 2021 was a fateful day for Bitcoin and Ethereum which rose to new record highs then reversed. Bitcoin Futures Daily Source: CQG

As the chart highlights, January Bitcoin futures reached a peak at $69,820 per token on Nov. 10 before turning lower and closing the session below the previous day’s low. The bearish key reversal pattern has led to losses over the past two months. Ethereum Futures Daily Source: CQG

January Ethereum futures followed the same bearish path, rising to a record $4,972.75 high, then closing below the November 9 low.

Lower lows last week

Since Jan. 10, the two-month anniversary of the move to record highs and reversals, Bitcoin and Ethereum have continued to make lower lows.

January Bitcoin futures had traded in a $39,470 to $44,450 trading band, defining short-term technical support and resistance levels until Jan. 21 when the price fell through the bottom of the range and moved below the $37,000 level.

January Ethereum futures range had been from $2,918 to $3,413.50, defining the short-term critical levels that had contained the price action. On Jan. 21, January Ethereum futures fell to below the $2,600 level.

The leading cryptos have suffered substantial declines from the highs. January Bitcoin and Ethereum futures were trading at $36,725 and $2,610.50 at the end of last week and they are even lower now. Both are trading at the lowest prices since July/August 2021.

Correction and consolidation healthy for markets

Bull markets rarely move in straight lines. As such, corrective price action in a bull market can be brutal, and the more volatile the asset, the uglier the correction. Volatility is a nightmare for investors, but it creates a paradise of opportunities for nimble traders with their fingers on the pulse of the markets.

After a very volatile 2021, where cryptocurrency prices soared and plunged, Bitcoin and Ethereum are searching for bottoms. The prospects for higher US interest rates and selling in the stock market have led the selling in the cryptocurrency space. When the cryptos find bottoms and can consolidate and digest the losses since the Nov. 10 highs, they are likely to move back into bullish trends.  

Regulation vs. speculation in 2022 will go hand-in-hand

For devotees, cryptocurrencies embrace a libertarian ideology, as they remove the power of controlling the money supply from central banks and governments and return it to individuals. Crypto values are determined solely by bids and offers for the tokens.

Meanwhile, the incredible rise in cryptocurrency values has fueled a speculative frenzy in Bitcoin, Ethereum and many other tokens in the asset class.

At the end of last week, the overall market cap in the cryptocurrency asset class stood below the $2 trillion level, having lost around $1 trillion in value since the Nov. 10 high. In comparison, technology giant Apple’s market cap is at the $2.65 trillion level, so the cryptocurrency asset class is nowhere near a level that poses a systemic risk to the financial system.

However, the over 182% rise in its market cap in 2021 to the $2.166 trillion level on Dec. 31, 2021, is a trend that could cause regulators to become nervous about systemic risks if similar or better growth continues in 2022. By Dec. 31, 2022, the same percentage increase would put the asset class's market cap at the nearly $4 trillion level.

The speculative activity in cryptos acts as a magnet for increased regulation of the asset class. The higher they rise the more regulators will seek to put a leash on the burgeoning marketplace. 

Buying on weakness remains optimal approach but could become frightening

Anyone who has dipped a toe into cryptocurrencies knows the price action can be head spinning. Before cryptos burst on the scene, commodities were the most volatile asset class, but they pale in comparison to the price action in cryptocurrencies.

Cryptos have correlated well with inflationary fears in 2021 and early 2022. The US Fed is prepared to tighten credit to address escalating prices over the coming months. And the prospects for higher interest rates have weighed on cryptocurrency prices.

However, the correlation could be false as historical data is not robust for the new asset class. While cryptos compete with other assets for investment and speculative capital, they offer an ideological alternative by, among other things, representing the evolution of the fintech revolution.

Meanwhile, trading patterns over the past year suggest that investors who buy Bitcoin, Ethereum, and other tokens during periods of price weakness increase their odds of success and profits. While past price performance is never a guarantee of future results, historical patterns are valuable tools that often repeat.

Cryptocurrencies have moved from niche alternative assets into the mainstream. Many financial institutions now offer customers the ability to invest a percentage of their portfolios in the most liquid digital currencies.

For those considering dipping a toe into the crypto asset class, the current consolidation period could be the perfect time to take the plunge. But remember, any crypto investment is 100% at risk. Buyers must continue to be vigilant as the potential for incredible profits comes with the risk of total loss.

A consolidation period could lead to another volatile storm in the cryptocurrency arena. Fasten your seat belts as the odds favor a continued wild ride. 

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