Grasping the Cryptocurrency Market: An Overview for Decision-Makers
While many regard the cryptocurrency market as complex, the market is essentially dictated by two basic tenets: a four-year cycle countering Bitcoin and a global liquidity cycle. These are the key drivers for professionals and decision-makers to generate an understanding of a rapidly developing asset class that combines finance and technology to potentially reinvent tomorrow's markets. This article helps disentangle the important mechanics of the cryptocurrency markets for non-professionals, speaks to its impact on business and society, and outlines possible entry points for client engagement strategies.
Key Mechanics of the Crypto Market
The crypto market is built around a predictable four-year cycle which is based on similar halving events in Bitcoin that cut the supply of newly minted Bitcoin in half. These supply constraints (without equally decline in demand) have historically led to price increases for Bitcoin, often, within a year of the update on the network. The next Bitcoin halving will occur in 2024. The cycle is characterized as bear markets (2-3 years of declining prices and values) and bull markets (1-2 years of increasing prices and values). As the largest cryptocurrency by market cap, Bitcoin dictates the broader market, in part as investors selling on the price action will normally move profits into altcoins, where some volatility is present but often greater momentum for returns.
The second element is the global liquidity cycle, which mirrors the timeline of the crypto cycle. When central banks or governments raise the money supply, liquidity will move into safe assets first (e.g. bonds), then risk assets (e.g. stocks), and eventually to high-risk assets (e.g. cryptocurrencies). On the other hand, liquidity contractions (which occur in cycles and are seemingly related to debt refinancing every four to five years) can lead to steep crypto crashes when investors are forced to sell risk assets before the high-risk assets. The reason that the two cycles line up so closely is that extraordinary crypto market bottoms are often drawn out of excessive liquidity lows; however, extraordinary tops in the crypto market occur for more arbitrary and speculative reasons and, therefore, are somewhat disconnected and less syncopated.
Why It Is Important
The crypto market is not only significant to the cost speculation of the trading markets; it is enormously meaningful in terms of the intersection between technology and finance and potential for inflation, even exceeding more traditional stores of value (e.g. gold). For businesses, this creates both risks and opportunities. The volatility of the market based on the emotion in trading and leverage tactics can cause changes in investment portfolios, but the growth rate in the crypto market, or among crypto assets, is reflective of macroeconomic growth trends resulting from the depreciation of fiat currency (e.g., 30–40% growth of money supply during COVID).
There is potential for a market in crypto to become more legitimized with certain regulatory shifts (e.g., strategic Bitcoin reserves as a federal government, Bitcoin partnerships with institutional investors) and other shifts, which could motivate businesses to adopt crypto to avoid risk and take advantage of opportunity.
In addition, the perceived high risks associated with crypto limit the willingness of large institutions to invest at scale and create a space for nimble companies and investors to seize opportunities in discounted assets. Understanding these cycles helps professional investors to read the markets, allocate capital especially under tight conditions, and protect themselves in moments of rapid liquidity removal or speculative manias.
Opportunities and Things to Note
There are a number of actionable lessons from the crypto market for professional investors:
1. Timing of Investments:
The time between the bottom of a crypto market (generally after some large entity goes bankrupt—this happened in Q4 2022 with FTX) and the Bitcoin halving is an ideal time to purchase assets when prices are low and speculative energy is minimal.
2. Leverage:
High-leverage traders ramp up volatility and lead to rapid corrections in the marketplace. Trained investors should understand how leverage can damage risk management processes, and ultimately should never operate at a leverage that goes against them in crash scenarios.
3. Narrative-Based:
Altcoin Or a compelling narrative they created, that compelled people to generate alternate currencies. Examples include XRP and Cardano (a bank pollinate or study in their use in universities). Being able to identify these narratives early is a good way to generate outsized returns, while being cautious of the hype bubble that often occurs.
4. Changes In Liquidity:
Carrying out research in liquidity and liquidity trends that are watchful (while simultaneously understanding that liquidity can inherently be difficult) portrays to the trained professional such trends in liquidity can show movements in the marketplace based on liquidity globally.Some thought leaders like Michael Howell track and analyze macro market.
Looking Forward
The inherent cycles of the crypto market, responding to leading indicators of Bitcoin's halving and global liquidity, provide a launching point for professionals navigating its frothy, volatile nature. The liquidity cycles will continue—for possible beyond our capabilities as a society to refinance this systemic debt—which indicates that the crypto market will continue to grow larger with each respective cycle. The need for vigilance is reinforced by the prospects of political actions and the actions of central banks through which we cannot control or predict.
For those of us in this industry, the direction is clearly laid out for us: build your understanding of the BEES in crypto, Bitcoin's mechanics, as well as macro liquidity trends in money around the world. Consume reputable data sources, keep an eye on regulation, and apply disciplined risk management to pursue opportunities while protecting against volatility. The crypto industry is maturing, and those who understand the rhythm of the market will have the best chance to shape the industry of tomorrow as it grows alongside the disruptive future of finance.
This article is contributed by an external writer: Danny Joe.
Disclaimer: The content created by LBank Creators represents their personal perspectives. LBank does not endorse any content on this page. Readers should do their own research before taking any actions related to the company and carry full responsibility for their decisions, nor can this article be considered as investment advice.