Monthly Crypto Commentary — July 2019

After the spectacular bull run in the first six months of the year, the crypto market dropped by 35%. Is the crypto winter back?

Quick summary

  • After each leg up, there is a correction and consolidation period.

  • Previous crypto bull markets were driven by retail investors; this one is driven by institutions.

  • Crypto is making giant leaps into the mainstream.

Market overview

July was a month of correction and consolidation. The market lost 8% on 1 July and then gained 17% in the next eight days. The rebound was followed by the continuation of the correction as the market lost 35% from the local top, reached on 26 June. The month ended with a negative performance of -15.7%, concluding the five-month streak of positive returns.

Crypto market performance | July 2019

Some of our clients asked us whether the crypto bull market has ended after such a substantial drop. However, corrections are an integral part of the bull markets, so it is important to look at the latest market pullback in a broader context. As I wrote in my previous monthly crypto commentary:

“The price of Bitcoin went from $7,500 to $13,800 in the second half of June, respectively 85% in only 17 days. The larger and faster the advance, the sharper the pullback. This dynamic is normal and healthy for the positive long-term development of the market.”

Bull markets dynamics

In my 19 years of discussions with investors, I gained various insights about their understanding of market dynamics. One of the things I learned is that many of them expect a constant appreciation of prices throughout the bull market. When the market enters a correction phase, they become anxious and start doubting the sustainability of the bull market. Still, it is a natural dynamic of the bull market that after each leg up, there is a correction and consolidation.

Let’s take a closer look at the previous bull market, which lasted almost three years (1,068 days). While generally, the prices keep appreciating during the bull run, there were many smaller and larger pullbacks in between, as well as longer periods of sideways movements. Overall, investors went through eleven price drops ranging from -20% to -36%, and it took from 4 up to 122 days to recover the losses. Yet in total, the market still achieved an enormous gain of 11,523% in this period, albeit it was quite a rollercoaster ride. In Chart 2, you can see the details of this dynamic:

Third major Bitcoin bull run (14 Jan 2015 - 17 Dec 2017)

Don’t chase the next hot cryptocurrency

When a pullback occurs, many investors yearn after a continuation of the growth and start looking for a solution. This usually means chasing the next hot cryptocurrency, which would help them continue increasing the value of their portfolios. Often, the opposite happens. They buy the one which has recently gained the most, only to see that it underperforms the market in the following days and weeks. The more they pursue such activity, the more profit they will leave on the table. As I stated many times, the best strategy during the bull market is simply – to HODL.

This bull run is driven by institutional investors

When analyzing the dynamics of the previous Bitcoin bull markets, I observed that each subsequent bull market rate of return has come out as approximately one fifth of the previous bull market rate of return. At the same time, the bull market periods were getting longer. However, looking at the current bull market, it is obvious that a different dynamic is in play. All previous major bull runs were driven by retail investors, while the present market is – at least for now – primarily driven by institutional investors. Many institutions are starting to tip their toes into the crypto ecosystem, which has substantially increased the demand and will continue to do so. Grayscale, the largest crypto asset manager in the world, stated that 84% of investments in their products in Q2 2019 came from institutional investors.

Conclusion

In my previous monthly commentary, I wrote that “regardless of how the Facebook Libra develops, it would immensely help to spread awareness about cryptocurrencies across the world.“ At that time, I thought that it would take at least several months before we would see any meaningful impact, but some major ramifications have already been seen in July. To name a few: the US president tweeted about Bitcoin and Facebook Libra, the US senate had several hearings on the topic, and many media companies began increasing their crypto coverage.

Crypto is making giant leaps into the mainstream and into the minds of the citizens across the globe.


Watch Gregor explain this topic on video:

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DISCLAIMER: This article is for informational and discussion purposes only and does not constitute a marketing message, an investment survey, an investment recommendation, or investment advice. The article was prepared exclusively for a better understanding of market dynamics.

 
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