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The Crypto Rally Is Over – What’s Next?

The Crypto Rally Is Over – What’s Next?
By Yasmin Sharbaf
Date August 19, 2022

Editor’s Note: Vin is out of the office attending LA Tech Week. So KingsCrowd Investment Research Analyst Yasmin Sharbaf is filling in for him on this weekly crypto market update. We think you’ll be interested to hear her point of view.

Crypto Market Musings

Last week, the crypto market rallied after the government released data showing the the Consumer Price Index decreased in July (dropping slightly compared to June). But now the crypto market seems to be continuing its overall bearish trend. As of this writing, in the past five days, bitcoin has been trading 4.5% lower than it was last week. And Ethereum — the second largest coin by market cap — lost 2.5% of its value in just a day, dropping to around $1,830. 

But we can’t forget the big elephant in the room: the Ethereum Merge, in which Ethereum will shift from a proof of work protocol to a proof of stake protocol. With the Merge being about a month away, ETH will probably see a big rally.

Ethereum Classic (ETC) is expected to soar and benefit the most from the upcoming Merge. Many miners will be moving to ETC after the Merge because it will be the most accessible to them. In fact, over the past month, ETC has soared more than 60% and is expected to climb even higher. 

The Merge does not only affect crypto — it could influence the stock market too. We might see NVIDIA report lower revenue as there will be less demand for its chips that are currently used for Ethereum mining. 

What Yasmin Is Thinking About

We tend to focus on the U.S. when we talk about inflation, but other countries are dealing with it too. 

Although the U.S. saw lower than expected inflation in July, inflation in other countries still seems grim. The U.K. just hit a 40-year high at 10.1%, and inflation is expected to reach 13.3% in the next two months. As a result, demand for fixed income investments could increase and thus strengthen the British pound over the U.S. dollar. If this happens, then U.S. inflation will rise again. 

So what does this mean for crypto? We have seen in the past few years that cryptos such as bitcoin and ethereum have not acted as inflationary hedges, as their values correlate closely with the stock market. And so it is very possible we might see another crypto crash.

Considering all that, I think we are still in a bearish market despite last week’s good news. I wasn’t surprised by the recent repeat crash of cryptos since financial markets tend to respond quickly to news. It’s normal to see prices drop back down after a spike as traders try to squeeze out profits. However, long term investors should always remember that they’re in it for the long haul. And although it’s important to pay attention to the news and possibly buy during dips — or, what I like to call them, discounts — long term investors should not panic buy or sell.

And Finally…

Major crypto exchange Coinbase just announced it would pause new Ethereum and ERC-20 token deposits and withdrawals during the Ethereum Merge. Other major exchanges will probably follow suit. Coinbase claims it’s taking “precautionary measures” for its users. The platform has also warned users against sending their ETH to anyone telling them to upgrade to Eth2, as they could be scammers. 

Oh, and speaking of crypto frauds, there is some good news on that front. Crypto prices might be down, but at least crypto crimes are down too! According to Chainalysis, crypto scam revenue is down by 65% this year compared to 2021, and illicit activities are down by 15%. This could be linked to the declining prices of cryptos, but I also like to think this is due to people being better educated about the crypto space and less likely to fall for scams or “get rich quick” schemes. 

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