After the equities market suffered a rough session to start the business week of July 11, those investors tied to the cryptocurrency sector have some tough choices ahead. Throughout the first half of this year, cryptos have not demonstrated the positive disassociation from the stock market that many proponents have talked about. Instead, as Wall Street faded, so too have digital assets, setting a worrying course ahead.
Recently, Fortune described how virtual currency stakeholders fear that the underlying sector’s crash is about to get a whole lot worse. Without diving into an overly bearish mood, the sentiment certainly commands credibility. While there’s no high quite like a surging bull run in cryptos, the lows feature an equivalent magnitude of devastation — if not worse.
Primarily, what investors must watch out for is that the price action tied to the total market capitalization of cryptos demonstrates an inability to break out of an established resistance zone.
Unfortunately, the longer investors thrash around in the waters, the likelier it is that the sharks will come sniffing to see what the fuss is all about.
Still, nobody knows for certain what will happen next in cryptos, meaning that tough decisions lie ahead.
While Bitcoin (BTC-USD) appeared on the cusp of surging higher — charting what looked to be a bullish pennant formation between July 7 and July 9 — the upward movement turned out to be a false alarm. It’s sad because at its peak over the trailing seven days from the early evening of July 11, BTC was trading hands above $22,000. Now, it’s below the critical $20,000 threshold.
Increasingly, I am nervous about Bitcoin’s ability to stay above $20,000. Remember, early this year, the support line was around $40,000? Later, as inflationary pressures rocked the U.S. economy, the support line dipped to around $30,000. Now, we’re at $20,000 but who is to say that we won’t dip even lower? Perhaps in a few weeks, we could be talking about $10,000.
To be clear, no one knows what’s next for cryptos — that’s why you need to conduct your own due diligence before making any significant moves. However, with inflows and outflows at exchanges basically at parity over the past week, Bitcoin stands at an awkward juncture.
As with its larger counterpart, Ethereum (ETH-USD) ended up charting a head fake last week, surging toward the $1,300 level on July 7 before eventually fading away — and quite dramatically. At time of writing, ETH is trading a little over the psychologically important $1,000 level. Of course, dipping below this demarcation point may have severe repercussions.
Interestingly, against the current price point at the time of writing ($1,127), Coinpaprika.com reports that only a minority of Ethereum holders are in the money (37%). On the other hand, 48% are out the money, while 15% are at the money (neither profitable nor losing). To be fair, 52% of Ethereum investors are at least not losing money. But what would the psychology be if ETH starts ticking down?
We must remember that Ethereum itself doesn’t pay dividends. So, barring high-risk crypto-lending programs, there is no financial incentive to hold a losing digital asset except for the hope of capital gains. However, the longer ETH doesn’t go anywhere, the likelier it is that investors will lose heart.
While you might think that stablecoins like Tether (USDT-USD) are always perfectly pegged to the dollar, that’s not the case at all. Indeed, USDT gyrates constantly. For instance, during late last week’s runup in cryptos, USDT moved from a 0.9991 peg to the dollar to 0.9996 at the peak (July 9).
If you happen to be trading large volumes of these stablecoins, the five-hundredths of a percentage point might net you a pretty penny. However, investors not accustomed to extremely volatile sectors should consider taking some of these USDT units off the table and converting them back to fiat currencies.
Admittedly, the disaster that was the recently rebranded Terra Classic (LUNC-USD) has me very concerned about a potential bank run in cryptos. More significantly, though, since that fateful day when LUNC basically evaporated, Tether’s peg to the dollar has yet to reach the perfect 1:1 ratio.
In many instances prior to the LUNC catastrophe, USDT enjoyed a peg higher than the dollar. Therefore, Tether losing steam at this critical juncture does nothing for confidence in cryptos.
As if proponents of cryptos needed more bad news to worry about, legal experts have started to weigh in regarding the Securities and Exchange Commission’s lawsuit against Ripple Labs, the originator of the XRP (XRP-USD) coin.
In a tweet, Deaton Law Firm managing partner John E. Deaton wrote that, “Considering Congress is not going to provide regulatory clarity (especially in an election year on the heels of the SCt overturning Roe), the ruling by Judge Torres in the SDNY will decide whether the SEC has jurisdiction over the existing altcoins that have traded for years.”
While it’s difficult to imagine federal entities essentially collapsing a burgeoning economic venture at a time like this, it’s not a mild threat to be easily dismissed. There could be myriad consequences impacting cryptos if the SEC triumphs over Ripple.
Not surprisingly, XRP has failed to gain traction, slipping last week and also this week. To be fair, recent sessions suggest that the bulls have been moving in based on XRP’s order book. However, I would still tread carefully as other mainstream cryptos have failed to demonstrate upward mobility.
If you thought that XRP stakeholders are the only ones anxious about legal battles impugning the integrity of cryptos, Solana (SOL-USD) advocates now have something to say about the matter. According to CoinQuora.com, a north California resident hit Solana insiders with a class-action lawsuit for the unregulated sale of SOL tokens.
Per the article, plaintiff “Mark Young accused Solana Labs, Solana Foundation, co-founder Anatoly Takovenko, Multicoin Capital Management, and its co-founder Kyle Samani, and FalconX. The California resident believes that these entities and individuals made profits from the sale of SOL. These entities are therefore in violation of the registration provisions of federal and state securities laws.”
The lawsuit echoes fears of the aforementioned legal expert John Deaton, who also believes that if XRP is deemed a security as opposed to a virtual currency, “then hundreds of class-action suits will be filed against cryptocurrencies in the future. Not only tokens or exchanges but promoters of altcoins can come under regulatory scrutiny.”
While Solana doesn’t appear to show unusually severe volatility compared to other major cryptos, this is a developing story to keep close tabs on.
While cryptos often have a reputation for supreme secrecy and anonymity, the reality is that mechanisms exist to break this wall of silence. Perhaps most notably, the Department of Justice recovered some $2.3 million in crypto ransom associated with the Colonial Pipeline breach.
However, if the hackers — who committed the most disruptive cyberattack on record — had demanded a ransom payment in Monero (XMR-USD) instead, circumstances may have played out differently. According to Coinmarketcap.com, Monero’s goal is simple, “to allow transactions to take place privately and with anonymity.”
Amid the rise in the number of blockchain-based projects — there are now over 20,000 cryptos available — Monero stands out for its utility. If you want near-perfect anonymity, XMR is your coin of choice. However, even this distinct attribute has not been enough to spare XMR from volatility.
Based on its order book, sell orders (or asks) have started to pick up steam relative to buy orders (or bids) between July 10 and July 11. Therefore, investors should be careful about speculating on XMR at this juncture.
While all eyes are on the big dogs in cryptos such as Bitcoin or Ethereum, the memes in the digital asset space might actually make for a more convincing profile for speculative endeavors. Take Dogecoin (DOGE-USD) as an example. The crypto that started the pup-coin phenomena, most serious investors might dismiss DOGE as nothing more than a passing fad.
To be fair, it’s easy to think that way considering some of the goofiness associated with Dogecoin. However, what’s interesting is that based on its blockchain analytics, the majority of DOGE investors (64%) have held onto their position for longer than one year. In second place are investors who held for a period between one month and 12 months (31%).
By logical deduction, only 5% of investors have held for shorter than 30 days. Therefore, when people talk about holding on for dear life (HODL-ing), it’s actually an ethos within the Dogecoin community. I can’t say for certain that this dynamic will lift DOGE higher. However, it’s something to keep in mind if you must speculate on digital assets.
On the date of publication, Josh Enomoto held a LONG position in BTC, ETH, USDT, XRP and DOGE. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.