The global crypto market capitalization continues to retrace from the highs and dropped below $1 trillion, a historic figure reached as some of the largest tokens (BTC, ETH, LTC, or NEO) were posting significant gains at the end of 2020 and beginning of this month.
Institutional interest in Bitcoin had been surging last year as the Grayscale’s BTC Trust benefited from record inflows. Valuations had become overstretched and a correction lower was very speculative. For BTC, momentum peaked on January 8th and since then, sellers had been in control, generating a wave of selling across most of the best-performing altcoins, as well.
USD no longer a tailwind
On top of the extreme overbought conditions, another factor worth noting is the short-term bottoming of the US dollar. Following months of weakness, buyers returned, as the prospects for new stimulus in the USA paled, considering the new administration will still need support from the opposition, even though a “Blue Wave” occurred.
Further strength on the dollar will act as a headwind for crypto and could be one of the reasons why more selling could occur in the weeks and months ahead. Coupled with that, we also have increased regulatory hints coming from multiple high-ranking officials.
To clap down on speculations, regulators have changed their tone and expressed concerns about the high risks involved with crypto, as well as the potential to use these instruments to finance illicit activities. Several weeks ago we’ve seen how XRP got hit with a lawsuit by the SEC and multiple exchange delistings followed afterward.
An old pattern repeating?
If we look back more than 2 years, we’ll see that at the end of 2017 there was a massive bull move on cryptocurrencies, followed by a topping formation in January 2018. Regulatory fears had been the main trigger of massive selling and thus far, we see the same script unwinding again.
However, that does not guarantee 100% we’ll have to deal with a bear market in the months ahead. It simply means traders and investors need to cautiously monitor the main headlines and adjust exposure based on how valuations perform.
Bitcoin already dropped more than 20% from the all-time highs, posting the largest weekly decline since March. More follow-through selling will be a red flag and breakout below critical support levels will generate a self-reinforcing pattern. The crypto appetite to buy is very low right now and it would be better to wait and see until the context will start to change.