Crypto Market Trades In Narrow Range – Extreme Volatility Ahead?

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Crypto Market Trades In Narrow Range – Extreme Volatility Ahead?
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For the second year in a row, cryptocurrencies underperform during the past few months of the year, even though seasonality had been favorable for the past few years. The first half of 2019 had been fruitful as the market rebounded from extreme oversold conditions. Given that it performed poorly since June, does that mean we had just technical buying? We’ll try to answer this question as well as some interesting things we think should be watched in the near term. 

Poor market performance since June

As it can be easily noticed in the coinmarketcap.com chart below, the cryptocurrency market cap topped on June 26th, when it reached approximately $380 billion, up more than 200%, if we compare the figure with the January 1st level. 

Even though expectations were high, top cryptocurrencies did not manage to deliver and Bitcoin, Ether, Litecoin, XRP, and other altcoins drove the market south. We had several failed attempts from the buy-side, but each one proved to be just another opportunity to sell at a higher level. 

What’s interesting to notice is that the market sentiment slumped once regulatory scrutiny returned to the center stage. Most of the global regulators showed concerns about Facebook’s Libra project and its influence on global finances. According to cryptofrontline.com, regulation for Libra will mean laws from all cryptocurrencies and what was a major tailwind during the first half of the year (cryptocurrencies rose due to rumors related to Libra) turned out to be a headwind in the second half.

Volatility pattern unfolded

Before we move on to our next topic, we would like to talk first about an interesting pattern formed by periods of consolidation followed by sudden volatility spikes. We’ll use the same market cap chart as an example since the dynamic is pretty obvious when looking at a global scale.

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Since September 1st, we can easily notice three similar performance patterns. The market consolidated in a narrow range, followed by a spike in volatility. At the time of writing, the same thing happens, with a new consolidation going on, which leads us to believe that we should see volatility spiking again before 2019 ends.

What’s even worse, is that the market cap trades around the lower bound of the range, which leaves most cryptocurrencies at risk for more losses in the near term. However, the volatility spike did not occur yet, so we should wait and see where the impulsiveness will be headed.

Bitcoin to lead the market again?

Whether we like it or not, Bitcoin continues to be the main market mover. Bitcoin topped on June 26th, the same day when the entire market cap did the same. With $154.25 billion in market cap at the time of writing, it’s no doubt Bitcoin will continue to influence the market in a significant way. 

Unfortunately, the Bitcoin price action suggests that we might have formed a topping formation during the summer which means more gains could be erased in the following months. The difference-maker has to do with more derivatives instruments (most of them related to Bitcoin) launching during the year. Institutional investors in the US and Europe can trade Bitcoin-related futures contracts, or ETFs (in Switzerland), which have created a new major source of liquidity driving the Bitcoin price. 

At the end of October, Bitcoin spiked higher after China showed its interest to become a leader in blockchain developments, but since then gains had been slowly erased given that the country’s negative stance towards cryptocurrencies did not change at all. 

Altcoins outperformance?

Another interesting phenomenon that started to happen since the beginning of October has to do with the Bitcoin’s dominance. That’s when we see it starting to retreat lower, while other cryptocurrencies started to outperform.

Ether, XRP, and some other smaller altcoins had been gaining ground since then, although the recent Bitcoin weakness had started to have a meaningful influence on their performance, as well. Since January 1st, the Bitcoin dominance rose from 51% to 69.9% on September 9th, a level not seen since April 2017. 

That puts Bitcoin in an extreme overbought condition and many buying opportunities emerged among other altcoins. Given that Bitcoin is still at some high grounds, we believe altcoins could continue to be in the center of attention during the next few months. A rotation-type process could continue, as many investors find greater value in other promising tokens. 

Summary

To summarize, we expect cryptocurrencies to become volatile again before 2019 ends and at the same time, altcoins could perform better than Bitcoin. We can’t be 100% about this fact, but the current conditions show altcoins are in a much better position from a value standpoint.


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