Bitcoin struggles to trade above $30K, and market participants await a long-awaited rally to new highs with every passing day. Considering that we haven’t seen this yet, are there any positives to keep crypto enthusiasts’ spirits high or is everything a negative?
Cryptocurrency market crash overview
The crypto markets have largely been sideways during the last week. Among the four sectors with the largest market capitalization, DeFi, Smart Contract Platforms, and Currencies saw muted returns while the sectors with lower market capitalization placed opposite directions. In its second consecutive winning week, Web3 ended the past week with a return of 6.02%.
Market sentiment is negative at the moment, and the Crypto Fear and Greed Index shows extreme fear as the flagship crypto asset’s price is at its lows.
However, above and beyond the current sentiment, the crypto industry is still far from dead, and sentiment can change very quickly.
Investments are still flooding into the market. Thus, earlier this month, Binance launched a $500 million fund that will invest in Web3 projects, and Solana committed up to $100 million toward NFT and DeFi projects. Institutional investors continue to pour money into Bitcoin, with Andreessen Horowitz (a16z) raising a record-breaking $4.5 billion for a new crypto fund.
Responsible Financial Innovation act to boost the industry
There is a new piece of legislation being pushed through Congress that aims to regulate crypto in the United States. The bill, dubbed the Responsible Financial Innovation Act, still has a long way to go, but some of its highlights are as follows:
- Since most cryptos will be classified as commodities, the CFTC will be responsible for regulating cryptocurrencies.
- Tax exemptions will be provided for small crypto transactions under $200.
- Regulations and full backing will be in place for stablecoins.
- Crypto trading platforms would have to register with the CFTC
- Non-custodial wallets will be protected.
- Uncertainty remains regarding NFTs and DeFi.
The potential oversight of cryptocurrency by the Commodity Futures Trading Commission (CFTC) is viewed as a positive sign for the industry since the CFTC is seen as a friendlier regulator by the crypto community than the Securities and Exchange Commission (SEC) whose chair, Gary Gensler, has taken a more aggressive stance toward cryptocurrency. It is also expected to catalyze retail adoption, since its key points aim to protect the average consumer.
The CFTC already regulates futures contracts for Bitcoin and Ethereum. With the new proposal, the agency would be given wider authority by being allowed to monitor the spot crypto market, which would include a broader range of digital currencies.
Bitcoin liquidity has improved this year
In an indication of a maturing market, liquidity conditions, measured by the bid-ask spread, have improved relative to last year, in spite of recent extreme price movements. A bid ask spread is the cost of trading and represents the difference between the highest and lowest offer for a trading pair. The chart below shows the bid-ask spreads for BTC/USD on major exchanges. With tighter spreads typically indicating greater liquidity, Gemini’s spread has decreased by almost 3 bps, Itbit’s by 1 bps, and Bitfinex and Kraken’s by around 0.5 bps.
Exchange outflows are at a peak
Analyzing current investors’ behavior, we can see that they purchase Bitcoin on exchanges and then move it to either their custodians or their cold wallets in order to hold it.
We see that outflows are peaking in the chart above, which implies that investors are increasingly sending BTC outside for storage. It includes both moves out of exchanges by retail buyers, as well as custodial services provided to institutional buyers.
Exchanges’ outflows increasing is generally regarded as a bullish sign. When we observe this increase in activity, it is a powerful bullish signal since investors are actively stockpiling Bitcoin at a time when its price is low.
Analyst: ‘two sides to the coin’
It might seem obvious that extreme fear has taken control of the crypto market, but there are “two sides to the coin,” according to Swam Markets co-founder Timo Lehes.
Lehes wrote in a brief note on Tuesday that cryptocurrencies have gone through a cycle over the past two years. Specifically, cryptoasset values have “soared” and are now “coming back in for a hard landing.”
Despite recent weakness, the cryptocurrency market as a whole continues to develop behind the scenes. Projects are proceeding while business leaders continue to secure new capital, although it might be difficult to justify higher price levels to investors.
“We’re seeing a big shake out underway. What will be left is the really viable businesses and projects. Beyond this, the issue now is how crypto keeps moving forward despite the outsize losses. The sector can learn from lessons of the past, particularly from the 2008 Great Financial Crisis. As they say, history doesn’t repeat itself, but it often rhymes.“
The price of Bitcoin is currently hovering at low levels, but there are things happening in the deep waters of the industry, including massive investment outflows, favorable crypto regulations being drafted, and investors buying up the flagship crypto in anticipation of its upcoming price explosion. Furthermore, technical indicators suggest that a price rally and therefore an improvement in sentiment could soon follow.
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