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Might we put talk of a crypto winter behind us?
- The total cryptocurrency market cap is above $2 trillion again, and market sentiment has moved out of extreme fear territory.
- It is too soon to talk about recovery, and crypto prices have a long way to go to reclaim highs.
- There is still a lot of uncertainty, and economic and geopolitical factors could push prices up or down.
The total amount invested in cryptocurrency broke above $2 trillion this week, according to data from CoinGecko. It’s the first time since early March that the market has passed this price barrier. At time of writing, crypto’s total market cap sat at $2.12 trillion, up about 3% in the past 24 hours.
Cryptocurrency prices have struggled this year as economic and geopolitical factors push people away from riskier investments. However, in the past week, prices have trended upward: Bitcoin (BTC) and Ethereum (ETH) gained about 9% and 12% respectively. Cardano posted more than 30% growth in the same period.
Sentiment moves away from extreme fear
According to the Crypto Fear and Greed Index, cryptocurrency today moved into “neutral” territory. This time last month — and indeed, this time last week — the crypto mood was “extreme fear.” The index uses various factors, including overall momentum, social media, and volatility levels, to analyze market sentiment.
Sentiment is a key driver of cryptocurrency prices. Cryptocurrency is a relatively new and unregulated market in its very early stages. As a result, it’s difficult to use the same valuation models one might apply to individual stocks or the stock market as a whole. This is one reason cryptocurrency prices can rise or fall quickly, sometimes driven by a surge in optimism, a fear of missing out, or a dramatic drop in confidence.
Many crypto investors are eager to put the recent slump behind them and are watching carefully for signs of recovery. The recent gains are positive, but it’s still very early days. The crypto market cap has passed the $2 trillion mark several times already this year and fallen back down. It needs to hold those gains and build on them before we can talk about a recovery.
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For sure, the industry is still a long way off the $3 trillion market cap it reached in November. There’s still a lot of uncertainty, and several factors could push prices in either direction. The initial shock of Russia’s invasion of Ukraine has passed, but the ongoing conflict could continue to impact the crypto market.
Economic jitters persist. The Fed’s measures to tackle rising inflation could mean investors remain nervous about riskier assets like crypto. In addition, rising oil prices have sparked fears of a potential recession, though some economists argue these fears are overstated. Cryptocurrency prices rose when there was a lot of money sloshing around the economy. If investors tighten their purse strings, there’ll be less spare cash to put into riskier investments.
Finally, the push for increased crypto regulation is ongoing. In the U.S., President Biden’s executive order outlined an initial approach that was well-received but short on detail. The coming months will tell us more about the actual framework of any new legislation. In the meantime, crypto firms in the U.K. are having trouble meeting a March 31 deadline to register. Some complain of slow responses on the part of authorities and say they may have to wind down their activities.
For long-term investors, what’s important is not whether the crypto market can recover in the coming weeks or months, but what will happen in the next five or 10 years. The best way to survive what can be a risky and volatile market is to keep your eyes on that horizon. As long as you continue to believe in the long-term potential value of your investments, you can wait out any short-term price fluctuations — especially if you only invest money you can afford to lose.
That said, when crypto prices fall, it can be nerve-wracking for new investors. Not only is it scary to see the value of your portfolio drop dramatically, crypto critics are often quick to claim that this is the beginning of the end. The fear that prices will fall to zero may drive panic-selling and prove costly. Market gains like this one can be reassuring, and help build confidence that prices will eventually recover.
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