Although virtual currencies have enjoyed some positive developments over the Fourth of July weekend, cryptos remain a problematic sector as they struggle to break out of a consolidation pattern. Investors looking for clear signals to move in simply don’t have it. Indeed, any major decisions at this moment constitute a grave risk, so market participants are probably best served accruing funds rather than spending them.
True, the total market capitalization of cryptos increased roughly 5.5% from the closing bell on Wall Street on Friday to the late-night hours of Monday. Unfortunately, the main concern is that the sector value is still $910 billion, conspicuously below the psychological important threshold of $1 trillion. You’ll recall earlier this year that the bulls were desperately attempting to hold the $2 trillion market cap line.
Another factor to consider for cryptos is the fundamental question of value creation. Under a traditional financial perspective, a business creates value through earning revenue (or a return on capital) that exceeds expenses (or the cost of capital).
With cryptos, the narrative is much more simplistic (i.e., pure supply and demand), translating to an extremely volatile framework. As always, caution is key here.
According to a report from Bloomberg, what separates the current volatility in Bitcoin (BTC-USD) and other cryptos is inflow/outflow rates tied to virtual currency exchanges. Previously, bear market corrections sparked increased crypto deposits in exchanges, indicating an intent to sell. Right now, though, BTC is moving to cold storage, presumably for long-term accumulation.
Of course, the implication here is that reduced supply will lead to greater demand. Nevertheless, it’s important to realize that mere rarity is not necessarily a value-creating instrument. People must be willing to buy the underlying asset, irrespective of its rarity. For now, the market is telling us that BTC, priced around $20,000, has not yet proven to be an attractive discount.
Most importantly, I would look at stakeholders making money at the current price, which at the time of writing was $20,220. At this level, 48% of investors are in the money, while 48% are out. The remaining 4% are at the money (neither profitable nor losing).
Should the price of Bitcoin fall any further, there’s a big risk that the 48% out of the money may panic, which is why you need to exercise caution.
One of the interesting developments for Ethereum (ETH-USD) recently is the profitability of its stakeholders. Unlike Bitcoin, ETH clearly has a bullish slant, with 51% of holders in the money while only 39% are out of the money. The remaining 10% are at the money, suggesting that Ethereum could go lower without sparking much panic in the crowd.
However, using data complied by Coinpaprika.com, we can tell that the number of transactions greater than $100,000 has declined significantly. On June 28, there were 3,948 transactions that met the aforementioned criterium. However, on July 4, following a bump up in transaction count, the figure was still comparatively low at 2,764. This suggests that fewer alpha dogs are trading Ethereum, implying a broader exit from the market.
It’s difficult to pinpoint if that’s really the case. However, should Ethereum feature a greater share of retail investors relative to institutional players, trading could get choppier or more volatile. Therefore, the same cautionary approach for Bitcoin applies to ETH at this juncture.
One of the main reasons why investors of digital assets are still holding onto their cryptos right now is that we saw a similar bout of extreme negativity during the second half of July last year. After Bitcoin briefly dipped below the critical $30,000 level, the blockchain market came to life, sending virtual currencies higher — in Bitcoin’s case to all-time highs.
During this remarkable rally, the stablecoin Tether (USDT-USD) experienced phenomenally bullish imbalances in its order book. With bids (buy orders) outweighing asks (sell orders) by a roughly four-to-one ratio, investors converted their fiat money into stablecoins. The primary reason for this activity is to facilitate quicker, more convenient transactions for desired cryptos.
However, this imbalance now creates a conundrum. Mainly, we don’t know the full details about Tether’s reserves; in other words, whether the USDT coins are backed 1:1 with dollars or some other ratio or even if there’s any backing at all.
With such fundamental questions and with so many people holding Tether coins, a bank run for stablecoins could cause massive ruptures in cryptos. To me, excessive positions in USDT is asking for trouble.
Can the Supreme Court provide a helping hand to XRP (XRP-USD)? According to attorney John Deaton, it can. In a recent tweet, Deaton stated that the Court restricting the U.S. Environmental Protection Agency’s power to regulate carbon emissions could play a role in determining whether the Securities and Exchange Commission has the authority to dictate that XRP is a security rather than a cryptocurrency.
Now, I don’t like to dive too deeply into legal granularity as these things can go either way. If you’ve followed the courtroom drama, you’ll be familiar with the frequent ebb and flow that sends stakeholders to the heights of ecstasy and to the depths of sorrow. Rather, it might make more sense to consider the free market data.
One of the factors I’m watching is that XRP saw a significant bullish imbalance favoring the bulls in its order book in October of last year. Of course, this is during the time when cryptos were climbing toward yet another peak in November.
The problem is that XRP investors may have fired their ammo prematurely (at a high price), leading to a lesser ability to influence the market right now. Therefore, I would still maintain a cautious outlook.
Among a core group of alternative cryptos (or altcoins) that have sought to displace Ethereum as the leading backbone of blockchain applications, Solana (SOL-USD) has enjoyed tremendous support during the wild bull run of 2021. However, this support has been noticeably fading since peaking in early November.
At the same time, SOL has enjoyed a series of rising lows since hitting a bottom on June 13 of this year. Can this momentum continue marching forward?
From the order book, we can see that during the runup to this mini rally, Solana bulls piled into their crypto of choice. For several sessions, the imbalance favoring the bulls over bearish orders featured a ratio of 2:1 to almost 4:1. Therefore, the upswing wasn’t necessarily unexpected.
However, having moved so strongly into SOL, there’s a question now about whether the bulls have enough in the tank to continue going on the offensive. My main concern is exhaustion of the optimists as the money to buy cryptos obviously doesn’t grow on trees.
Looking at the long-term chart for Cosmos (ATOM-USD), it appears that the market was charting a bullish pennant formation, with the base starting on July 20, 2021, the peak arriving on Sept. 18 and the apex (or focal point) appearing on April 2, 2022. However, the pattern ultimately failed, making Cosmos look rather terrestrial than its brand name implies.
Still, compared to other cryptos at the time of this writing, ATOM is up both over the past 24 hours and the trailing week. Can investors trust this momentum when other virtual currencies have disappointed their stakeholders?
Intriguingly, the bulls may have a rational point regarding their optimism for Cosmos. According to its order book, sell orders began conspicuously outpacing buy orders since September of last year. Further, the imbalance favoring the bears continued into April of this year.
Now, the order book has tightened, which suggests that for ATOM, it’s the bears that may have exhausted themselves. Nevertheless, a cautious approach is warranted as digital assets tend to follow wherever Bitcoin is going.
Shiba Inu (SHIB)
Even among proponents of cryptos, Shiba Inu (SHIB-USD) is a difficult pill to swallow. While other blockchain projects feature serious ambitions and broader aims to disrupt centralized financial infrastructures, the Shiba Inu community appears to focus on personal enjoyment while readying themselves for potential upside opportunities.
That’s probably a generous description. I’ve seen other descriptions that are far less generous. Nevertheless, what’s intriguing about Shiba Inu — if you can get over its meme-ish charm — is the power of its community. Frankly, it’s impressive.
It also reveals itself in the order book. Throughout most of its life cycle, the trading dynamics between bulls and bears is very tight. However, the edge belongs to the bulls. While there have been sessions featuring significant bearish activity, the bulls have been more than willing to pick up the discounts.
Put another way, while advocates of competing cryptos often talking about holding on for dear life (HODL-ing), Shiba Inu stakeholders walk the walk. In an often-insincere environment, such authenticity clearly commands market value.
On the date of publication, Josh Enomoto held a LONG position in BTC, ETH, USDT and XRP. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.