Surge In Cryptocurrency Prices Renders Crypto-Market More Fragile Not Less

Recently, the surge in cryptocurrency prices has caused many to speculate about Bitcoin's possible future. However, the crypto-market remains highly volatile.

Over the last two months, cryptocurrency prices have seen an approximately 40% surge. Unfortunately, this growth cannot be sustained for long.

1. The Sentiments-To-Market Cap Ratio Is High

Sentiment analysis is often employed by traders to gain a better insight into the market. Sentiment is an indicator of investor attitudes and moods towards financial markets in general or specific sectors or assets.

Investors' sentiments are heavily impacted by many factors, particularly the macroeconomic environment (Bekaert et al. 2010). Factors that impact investor perception include inflation, corporate debt levels, economic growth rates and foreign exchange rate changes (Bekaert et al. 2010).

Sentiment can also be affected by other market-determined elements, such as trading volume, share turnover and volatility. These indicators help gauge investor sentiment and serve as a measure for the liquidity position of the market.

Studies have investigated the connection between investor sentiment and market volatility. Some of these investigations focused on developed economies, while others examined emerging markets.

One study discovered that high levels of sentiment can lead to greater market volatility. Conversely, lower sentiment had an adverse effect on volatility as well.

Another study suggested that an increase in investor sentiment can cause investors to switch their investments from risky assets to safer ones, known as the "risk on/risk off trade."

Some investors use market sentiment to determine their entry and exit points, combining it with trading frameworks or other forms of analysis in order to refine their signals.

Furthermore, it's essential to remember that market sentiment isn't the only factor determining prices; in fact, it may even move prices in opposite directions in the short term. This could prove advantageous for long-term investors since it creates trading opportunities.

Blockchain Investments' Crypto Asset Ratios and Sentiment Analysis data feed offers daily data on three common ratios - Net Value Transaction (NVT), Price-to-Metcalfe (PMR) and Transaction Amount to Active Addresses (TAAR) Ratios - along with a sentiment indicator ranging from 0 to 100. This insight allows for a better comprehension of actual usage patterns for each crypto asset.

2. The Global Crypto-Sector Is More Fragile Than It Was At Year-End

Lately, the global crypto-market has seen an unprecedented surge in cryptocurrency prices. This has caused its sector to gain popularity among investors worldwide and also spurred investments from private venture companies. All indications point towards continued growth for this market through 2022 and beyond.

But there are risks associated with investing in cryptocurrencies as well. These include regulatory and counterparty risk, which refers to the possibility of theft or loss from a third party that stores or transfers your coins. Furthermore, crypto-assets have been known to be vulnerable to scams and hacks which could cause investors to lose large sums of money.

The value of a cryptocurrency can fluctuate based on several factors, including supply and demand, news about companies' plans to utilize crypto, world events, as well as government regulations. Some cryptocurrencies even attempt to be pegged to an established benchmark like the US dollar.

In addition to these factors, the crypto-sector is also vulnerable to other risks that could make it harder for companies to operate. For instance, there are concerns regarding security of blockchain technology - the underpinning system behind most cryptocurrencies.

Another potential risk lies in price manipulation, which has become an increasing concern of cryptocurrency traders in recent years. This can cause cryptocurrency prices to fluctuate drastically, making it difficult for people to ascertain exactly how much they're actually paying for a particular coin.

Finally, environmental concerns arise from trading cryptocurrencies due to the emissions produced. This could contribute to climate change as greenhouse gas emissions from crypto-assets could reach as high as 140 million metric tons annually.

These factors have made the crypto-sector more vulnerable than it was at year-end, yet it remains a highly volatile asset class that poses risks to both new and experienced investors alike. Furthermore, since this market is young, further fluctuations can be expected as it develops.

3. The Global Crypto-Sector Is More Fragile Than It Was At Year-End

Cryptocurrency prices have been rising since January, with Bitcoin's value surging from around $35,000 to over $40,000 and Litecoin rising from $20 to almost $170. These changes are prompting many everyday people to pause and consider whether they should continue buying digital currencies or even invest in them.

Investors may wish to avoid cryptocurrency for security reasons. Cryptocurrencies lack regulation like traditional currencies and other securities, making them vulnerable to theft, counterfeiting and fraudulence. Furthermore, the cryptocurrency market is filled with amateur investors which makes it difficult to differentiate who are legitimate traders from those simply looking for a quick profit through speculation.

Furthermore, cryptocurrency mining could have an environmental cost due to its energy consumption. In the United States alone, cryptocurrency mining consumes a lot of electricity which results in carbon emissions.

Accordingly, the United States Office of Science and Technology Policy recently released a report which examines the environmental effects of crypto-assets and suggests ways to mitigate them. This report aligns with Federal government goals on clean energy production and climate change that call for reduced greenhouse gas emissions in order to safeguard public health and welfare while growing an efficient energy sector with rewarding jobs.

Crypto-assets offer some benefits, yet they also carry risks. As such, they could pose financial stability threats in countries with widespread adoption of cryptocurrencies.

To reduce these risks, the crypto-asset sector is transitioning towards a decentralized system that eliminates centralized intermediaries. Doing so would prevent shocks from destabilizing financial markets.

The global cryptocurrency market is expected to experience significant growth over the forecast period. As more people turn to cryptocurrencies as a form of payment for goods and services, this segment is seeing significant investment from venture companies and private equity firms.

The market is divided into software, exchange and payment segments. Mining software, exchange software and wallets form part of the software segment while hardware and software wallets form part of payment services.

4. The Global Crypto-Sector Is More Fragile Than It Was At Year-End

Cryptocurrencies are a new type of digital currency not backed by banks or other traditional institutions. They're stored on a network called the blockchain and all transactions are highly encrypted for extra protection.

However, despite their widespread acceptance, cryptocurrencies remain vulnerable to security threats. Indeed, six of the top 10 hacks this year involved a blockchain project.

There are a variety of reasons for this vulnerability, such as the fact that cryptocurrencies lack regulation by any central authority. Furthermore, digital tokens tend to experience high volatility and make investing difficult.

Investors in cryptocurrencies may experience substantial losses of money in the short-term, which is why it is essential to invest with long-term goals in mind.

Security-wise, one of the major challenges is to ensure cryptocurrencies aren't used for illegal activities. Furthermore, the cryptocurrency market can be prone to scams and frauds which could completely wreck an investor's portfolio.

Another challenge is the absence of a centralized system for verifying users' identities. This could lead to fraudulent transactions and lack of trust between parties, which is why governments around the world are trying to regulate this industry.

Furthermore, the cryptocurrency market is highly volatile and susceptible to manipulation. This could cause prices of cryptocurrencies to fluctuate drastically, which could prove disastrous for newcomers in this space.

Furthermore, crypto companies often experience liquidity issues and may need to temporarily halt withdrawals from customers. This could further exacerbate the market decline and lead to a crypto version of a bank run - when investors attempt to liquidate their positions by selling off assets.

Large margin calls and even worse, the collapse of the crypto market, could potentially destabilize all aspects of financial activity.

Therefore, government must ensure that cryptocurrencies are adequately regulated and monitored. Regulating cryptocurrency can be a challenging task due to its high degree of uncertainty and complexity; hence, creating uniform regulatory frameworks across countries is essential.