• Even though the threat of tougher regulations and continued uncertainty over crypto rules in the US Infrastructure Bill remains a risk to the crypto market outlook, sentiment continues to warm
  • Encouragingly, Gensler understands that cryptocurrency is a new technology that cannot be ignored

Market sentiment is the collective attitude of investors towards a particular financial asset or market. It is a concept applicable to all financial markets, including cryptocurrencies. 

Like every financial asset, cryptocurrency prices are intrinsically linked to market supply and demand. Increasingly, we are seeing social media, public opinion and print media having an influential impact on these market forces, ultimately causing prices to rise or fall on the latest market sentiment.

Take Dogecoin, for example. When the cryptocurrency, created by software engineers Billy Markus and Jackson Palmer, went on a bull run in January 2021, the consensus was it was heavily influenced by social media. 

Retail investors bought dogecoin without fully comprehending its tokenomics, goals or that it was originally created as a joke. At the time, investors were swayed by emotion-driven market sentiment, in this case a sense of FOMO. Additionally, influential individuals, such as Elon Musk, championed dogecoin as a legitimate investment prospect via Twitter.

On August 3rd, the chair of the US Securities and Exchange Commission (SEC), Gary Gensler, called for full regulation of digital assets – in line with stocks, bonds and commodity-related trading instruments.

Gensler outlined his desire for Congress to afford the SEC more authority to police cryptocurrency trading, lending and platforms. He described crypto markets as the “Wild West” claiming the asset class is “rife with fraud, scams, and abuse in certain applications”. He advocated “additional congressional authorities to prevent transactions, products and platforms from falling between regulatory cracks.”

One might assume Gensler’s speech, calling for increased control over cryptocurrency exchanges and questioning its potential to act as a substitute to the fiat currency, would send prices spiralling. 

However, on August 4th, the market brushed off the news and Bitcoin bounced back towards $39,000, with traders and investors seemingly responding to short-term oversold conditions. Similarly, Ether, the cryptocurrency of the Ethereum network, experienced an even greater rise.

Encouragingly, Gensler understands that cryptocurrency is a new technology that cannot be ignored. His admission that the lack of crypto regulation cannot be a good thing for the advancement of the technology illustrates that he is pro-innovation and provides a less bearish, and more promising, outlook.

Over the past three weeks, sentiment in the market seems to have completely flipped. Despite Gensler’s speech – described by Katherine Wu, a crypto legal commentator, as “the most aggressive and hostile stance re U.S. crypto regulation to date from the SEC” – momentum since the end of July has not dampened.

On July 30th, the Bitcoin Fear and Greed Index — which measures investor sentiment — finally returned to ‘neutral’ after being stuck between ‘fear’ and ‘extreme fear’ since mid-May. The values of this index are determined by five factors — volatility, trade volumes, social media, surveys and dominance – and provide insight into market sentiment. This offered an early indication of the current bounce we are witnessing across crypto markets.

According to CoinMarketCap’s price index, Bitcoin reached $46,589 on Monday 16th August — its highest level since 18th May — having traded below $30,000 in recent weeks. Bitcoin broke above the 200-day moving average, a long-term determinant of market health. 

This bounce stimulated a wider recovery in crypto markets, with other currencies in the top 20 by market capitalization like Binance Coin, Cardano, XRP, Litecoin and uniswap experiencing price rises.

Most notably, ether gained as much as 3.1% to $3,191 on Sunday 8th August – gaining for the fifth consecutive day. Also, Solana (SOL) and Terra (LUNA) continued to hit all-time highs this week, after hitting the lows merely three weeks prior. This shows how sentiment in the market can shift very quickly and no investor can fight the trend in the market.

With Bitcoin and Ether both reaching their highest levels in more than two months and signs of a market-wide comeback, it is evident that momentum is building once more. There seems to have been a clear shift in market sentiment compared to May and June. 

Cryptocurrencies markets are invigorated again, following the pull back from record highs and subsequent sluggishness due to global regulatory crackdown and debate around Bitcoin’s environmental impact and energy consumption levels.

Even though the threat of tougher regulations and continued uncertainty over crypto rules in the US Infrastructure Bill remains a risk to the crypto market outlook, sentiment continues to warm. 

It is no secret that market sentiment drives cryptocurrencies, and other asset classes are far from devoid in volatility themselves. However, it is heartening how resilient crypto assets are generally. The path to crypto being mainstream will inevitably be paved with peaks and troughs, but medium-term resilience will be the litmus test.

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  • BKCoin Capital
    Founding Principal
    Kevin Kang is the Founding Principal of BKCoin Capital. BKCoin Capital is a digital asset quantitative hedge fund, dedicated to delivering consistent, uncorrelated absolute returns through its Market Neutral - Long/Short, Arbitrage strategies. BKCoin was up 71.8% in 2020 as a market neutral strategy vs. an average public equity market neutral performance of -1.12%, according to BarclayHedge. BKCoin is $65mm in AUM.