Crypto markets: What to watch in June 2022
Volatility, regulation, the looming Ethereum 2.0 upgrade and inflation fears continue to drive crypto markets.
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The crypto market tends to orbit around the gravity of Bitcoin and the leading crypto has hovered around its US$30k support since dipping briefly to US$25k earlier in May.
Ethereum and many other altcoins are also down heavily since the start of the month, with much of crypto trading in a down-to-sideways channel and the 'Fear and Greed index' briefly dropping under 10 (extreme fear).
Pressured by rising interest rates and inflation, which spiked to a 40 year high in the US and 5.1% here in Australia, volatility has increased over the last month. The fall of the Luna / TerraUSD (UST) ecosystem has also contributed to sell-offs.
Crypto's correlation to stocks
And what's perhaps most apparent amongst all this volatility, is that crypto as an asset class continues to behave like technology and growth stocks.
These stocks have the potential to grow exponentially but they are largely hampered by an uncertain future and remain incredibly volatile along the way.
To emphasise this point in the current market environment, IG Australia market analyst Hebe Che explains that growth stocks and crypto assets are both at the mercy of the US Federal Reserve and that crypto assets are moving like safe havens that were expected prior to the Ukraine conflict.
"I think in the short run, crypto still trades like a risk asset. It has moved in greater sympathy with US equities – tech especially – in the last few months," she said.
With volatility comes opportunity
If you take the assumption that previous highs could be reached again, current price turbulence might create an opportunity to buy for crypto traders. But of course the market could also continue its downward trend.
Chen urges traders to exercise caution and perspective, though she emphasises that the exact approach boils down to individual investment strategy.
"A wait-and-see approach can't hurt for a long-term investor," she explained to Finder.
Although counterintuitive at first glance, market volatility can actually be your friend, especially if you're a long-term investor. After all, a cheaper price today on quality assets does not mean lower prices tomorrow. Instead, it allows investors to buy assets cheap and wait for them to appreciate.
While the market analyst pointed to the dip as a potential buying opportunity she did highlight the importance of having some deployable capital in order to take advantage of opportunities that may arise from a volatile market.
"I think always having some powder dry [cash reserves] is a very prudent policy," Chen said.
"Anticipating when a dip isn't a more sustained drop is tough. What I would say is that an investor should always be on the lookout for good value. Again, that's not simple. But applying a bit of analysis, you can start to quantify when an asset offers an attractive buying opportunity."
Read more with IG: Bitcoin prices approach July low as APAC traders brace for more selling.
What you can do?
The crypto markets will continue to face challenges which will put pressure on its price.
But short-term pain for both crypto and growth shares could be a long-term opportunity for investors.
As Chen highlights, the current market largely depends on personal investors' choices and strategy.
"A speculator or someone with a shorter investment horizon would certainly have reason to sell out of this market," she said.
"However, in the longer run, risk equities tend to move past conflicts – that's what the historical data says – so if you're investing on the basis of years or decades, keeping that in mind might be helpful."
Chen also suggests that for nearer term time frames, opportunity may await in either market direction for risk equities like crypto.
"Apart from a traditional trade that profits as a market rises in price, you can also open a short position that will profit as the underlying market decreases in price using Crypto CFD trading — or Contracts For Difference. This tool enables investors to participate without taking on the risks of direct ownership. Crypto CFDs enable buyers to go long and short to exploit any price movements, as well as protect themselves against volatility with stop and limit orders."
Read more with IG: Crypto investment: what's the best option for you?
The Ethereum merge is coming
Despite Ethereum's market dip, anticipation is still growing for the upcoming Ethereum 2.0 upgrade.
The upgrade had been expected sometime before June, but Ethereum core developers recently pushed that back by a few months. The "merge" as it's called, which is the changeover from proof of work (PoW) to proof of stake (PoS), is the second-last hurdle developers in the Ethereum ecosystem will need to overcome. From depositing ETH in the smart contract to validate the upgraded network, through to testnet implementations, it has been an arduous journey.
Finder's crypto prediction panel largely thinks Ethereum's move to PoS will have at least a somewhat positive impact on its price.
Regulation: "There's no reason to treat crypto market any different to other technology"
In recent weeks European Union lawmakers passed a proposal that could see an end to even the smallest anonymous crypto transactions. And it's now setting sights on unregulated exchanges.
The EU parliament's vote, as part of its bid to fight money laundering, could see all transactions over €1,000 be monitored. Unsurprisingly the crypto industry has responded saying it will stifle innovation and is an invasion of privacy.
6/ Imagine if the EU required your bank to report you to the authorities every time you paid your rent merely because the transaction was over 1,000 euros.
— Brian Armstrong - barmstrong.eth (@brian_armstrong) March 30, 2022
However, it's not all bad on the European front. The EU also recently rejected provisions that could have effectively banned energy-demanding PoW cryptocurrency mining, the form of consensus used by Bitcoin.
And moving across the ditch to the US, the Securities and Exchange Commission (SEC) has proposed regulations of its own that are impacting the crypto market.
In a speech made on 4 April, SEC chairman Gary Gensler announced an expansion of investor protections in a bid to stop the US$14 billion that scammers and hackers stole in crypto last year.
The changes would put crypto markets under the microscope by introducing regulations to significantly change how decentralised digital currencies are managed through exchange platforms.
"There's no reason to treat the crypto market differently just because different technology is used," Gensler said at the Penn Law Capital Markets Association's annual conference. "These crypto platforms play roles similar to those of traditional regulated exchanges. Thus, investors should be protected in the same way."
US officials are also looking to protect the US dollar.
In a speech focusing on Central Bank Digital Currencies (CBDCs), US secretary of the treasury Janet Yellen said regulatory frameworks should be designed to support responsible innovation while managing risks – especially those that could disrupt the financial system and economy.
However, she did note that a CBDC (or digital dollar) could become a "trusted money comparable to physical cash", further highlighting the real-world applications for the asset class.
The 3 Rs
Looking into what's driving the current market, it's largely around the 3 Rs: Russia, rate rises and the possibility of a recession which are dominating share and crypto markets alike.
Markets like certainty. And the current geopolitical and economic climate are anything but.
Central banks are already busy fighting the inflationary fallout from the COVID-19 pandemic. Lockdowns have seen supply chains bottleneck which is, in turn, driving prices up. Added to these real-world cost-of-living pressures is the war in Ukraine and subsequent sanctions placed on everything Russian.
With the price of oil inflating to over US$100 per barrel in March and fears Ukraine will be unable to get its wheat supplies out, retail and institutional investors are trying to navigate the choppy waters of 2022's economy.
In response, central banks can increase the cash rate, cool down demand for products and hopefully reduce inflation. The US central bank, the Federal Reserve, was the latest to do just that – and it's warning 6 more rate rises could be on the way.
However, lifting rates usually leads to an economic recession as less money is spent. Worst-case scenario in all this is a process known as stagflation, where output stalls and inflation remains high.
This unpredictable economic backdrop is seeing global markets remain incredibly volatile for both share and crypto investors.
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