Shrinking Risk Aversion Drives Cryptocurrencies Lower


The year 2018 had been an absolute nightmare for cryptocurrency enthusiast across the globe as they saw the value of all major tokens dipping by more than 80%. Bitcoin currently trades around $3,291, Ether at $87.50, and Litecoin at $26.4, a scenario which would have seemed impossible a year ago when euphoria was at record highs.

What made the bubble burst?

There were many reasons that led to the bear market we currently see in the cryptocurrencies market, including regulatory concerns, exchange hacks like Mt. Gox, and a rising number of exposed scam companies.

 

cryptocurrencies and risk sentiment

Source: https://pixabay.com/en/business-computer-security-currency-3159208/

As many famous investors have said, including Warren Buffett, there was “no intrinsic value” in cryptocurrencies are prices were very speculative at the end of 2017.

The bubble had been compared with the tulip bubble, which was the first market bubble from the recorded history. Still, there is another reason which had almost gone unnoticed among cryptocurrency enthusiast.

Risk sentiment

Without a doubt, 2017 had been the year for cryptocurrencies since their appearance, but there’s something interesting about that performance. Digital money is a relatively new concept and since the industry is still in its early phases, cryptocurrencies are labeled as instruments carrying a high level of risk, mainly due to high volatility.

In 2017, riskier assets like stocks, junk bonds etc. had all am an impressive performance. Boosted by this extreme confidence and high-tolerance to risk, cryptocurrencies had also been favored.

What we have seen in 2018 was a gradual decline in the appetite for risk, which was in line with the falling trend in the price of cryptocurrencies.

What could it mean for the future?

If we put this into a greater perspective, what we can conclude is that we won’t see another strong bull run in cryptocurrencies until global risk sentiment won’t pick up again. That does not mean prices do not have the potential to rise in the short-term.

It just means that it takes sustained confidence and willingness to take higher risks in order to see prices picking up strongly. In the meantime, buy-and-hold is not expected to be an effective strategy, but cryptocurrency trading, now that all major online brokers had included them in their instruments list, looks more suitable.

Digital money and the blockchain technology have potential, but we must understand that it takes time to properly integrate them into the global economy and exploit their capabilities to the maximum.


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Shrinking Risk Aversion Drives Cryptocurrencies Lower

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