Why the Cryptocurrency Sector Couldn’t Sustain the Latest Rally

• After getting beaten up throughout most of this year, the cryptocurrency sector rebounded sharply during the Memorial Day weekend.
• However, a plunging of market value during the June 1 session has observers wondering if an extended crypto winter is on the horizon.
• Prospective buyers should be careful about making too many strong moves as the retail investor community is struggling from prior overenthusiasm.

Although the COVID-19 pandemic was unquestionably a disaster for the entire planet, a cynical perspective will note that the impact was a bifurcated one, delineating the haves and the have-nots. In some cases, such as educated white-collar America, the global health crisis was arguably a boon. Suddenly, workers could have their cake and eat it too through secure salaries and telecommuting privileges.

Indeed, during the tumultuous period from the spring doldrums of 2020 to the end-of-2021 crescendo, retail investors could do no wrong. Leveraging steady paychecks, extra personal time and fortuitous timing as the Federal Reserve committed itself to stem the tide of deflation, market participants – even those without much experience – were banking profits from seemingly almost any investment concept.

From meme stocks to cryptocurrencies, retail investors piled into the broader capital markets – to the tune of around 20 million people, according to a recent article by The New York Times. Early and sustained success gave rise to feelings of invincibility and delusions of grandeur; essentially, the Dunning-Kruger effect in motion. But that joy gave way to dread as portfolios bled crimson ink throughout 2022.

Now, market analysts observe a pessimism infiltrating even the most toxically positive internet forums. Further, many folks have decided they’ve had enough, punching out of their positions and moving to cash. As you might imagine, it’s a dilemma particularly for cryptos.

A Strong Rally Denied

As purely decentralized assets, cryptos in a way represent naked free-market forces. No plunge-protection teams exist to arbitrarily stop trading and allow investors to enjoy a cooling-off period. Indeed, there is no timeout of any sort with virtual currencies. They trade 24/7/365, giving zero credence to weekends, holidays or any other artificial concoction.

Therefore, when cryptos started failing in November of last year, perhaps that was the indicator that not all was well with the global capital markets. At least some of the upside success of the equities sector was attributed to crypto traders who redirected their profits toward traditional “centralized” opportunities. Thus, losses in digital assets would then have some impact on stock valuations.

Given how widely integrated cryptos have become in mainstream society, it was encouraging that during the Memorial Day weekend, the sector bounced conspicuously higher. At the low point in the May 27 session, the total market capitalization of all cryptos was roughly $1.18 trillion. But on May 29, the sector started booming, peaking on May 31 with a market cap of $1.32 trillion.

A 12% move up in the entire sector is something to be celebrated. However, at time of writing, total market cap slipped to $1.23 trillion, a loss of 7% from the high.

No More ‘HODL-ing’

Throughout the rally in cryptos last year, casual observers learned a new term (or at least new to them): HODL-ing, or holding on for dear life. In short, it’s a rallying cry among investors of digital assets to never sell their position, irrespective of the volatility. Theoretically, if everyone held, bearish traders would find it impossible to short the market.

Of course, nothing ever works that way in the broader investment sector – decentralized or otherwise. More importantly, HODL-ing prevents the bulls from mounting a counterattack if you will. If traders tied most (or all) of their liquidity into cryptos or other speculative assets, then they can only watch prices plunge during a market fallout. They won’t be able to buy the dips, to use the common lexicon.

In fact, many young and novice traders placed all-or-nothing bets on cryptos and similarly risky ventures. While such actions deliver maximum profitability during bullish cycles, under bearish ones, they can be catastrophic.

Further, it’s well worth noting that crypto miners – or decentralized distributed entities that manage the various functionalities of blockchain networks in exchange for reward coins and tokens – have begun exiting the space and into (heaven forbid) fiat currencies.

Of course, the slap in the face is that the proponents that were urging retail investors to HODL were one of the first to drop.

Like a Used-Car Dealership

If novice investors are as astute and learned as they claim to be on social media, then this present downfall – assuming it materializes into a full-blown recession – should bring valuable lessons, lessons that can be applied to future market successes.

One of the most important is the matter of biased incentivization. Just like you wouldn’t trust a used-car salesperson to tell you the honest, comprehensive truth about a particular car that you’ve had your eyes on, you shouldn’t trust anybody to give you objective investment advice. Ultimately, you’ve got to perform your own due diligence and proceed accordingly.

However, it’s interesting that while a car salesperson immediately puts people on the defensive, random internet posts about cryptos and meme stocks instantly generates credibility and camaraderie – and eventually to fidelity.

Breaking the notion that you have any friends or allies in the capital markets will go a long way to approaching the money business in a sober and successful manner.