Bitcoin, Ethereum Tank; Big Rewards Entail Lots Of Risk. Here's What To Do Next

 | Jun 28, 2021 11:04

This article was written exclusively for Investing.com 

  • Not a question of if, but when the correction would occur
  • Picking tops and bottoms in any market is a fool’s game
  • Trade with the trends; they are your only friend as sentiment rules
  • Bitcoin and Ethereum have the critical mass traders require
  • Respect sentiment without sentimental emotions

CME Bitcoin futures closed 2020 at $29,220 per token. At the $33,500 level at the end of last week, Bitcoin delivered a 14.6% return since the end of last year.

Ethereum futures began trading on the CME in early February at $1669.75 per token. At $1941.75 on June 25, they were 16.3% higher over the past five months.

In the interim, Bitcoin traded to over $65,500 and Ethereum to above $4,400 per token. The current prices are looking mighty good compared to where they were at the end of last year, but don’t tell that to anyone who decided to pile into the leading cryptocurrencies near the highs.

Parabolic market moves are like shooting stars. When gravity hits a parabolic market, the result is often price carnage. Everyone loves a bull market, which tends to become magnetic. Like a game of musical chairs, when the music suddenly stopped in April and May, the latecomers were left without chairs, holding Bitcoin and Ethereum long positions with massive losses.

While the decline has shaken the confidence of market participants, it has only made the diehard devotees more excited. Lower prices offer an opportunity to load up and buy more tokens.

The degree of reward is always a function of risk in any market. The highly volatile cryptocurrency asset class has plenty of reward potential but carries a commensurate risk level.

h2 Not a question of if, but when the correction would occur/h2

It is still challenging to imagine that an asset that was going for five cents in 2010 rose to over $65,500 in 2021. I have been involved in markets for over four decades and I never witnessed that type of price appreciation. The only examples from history are from economies that suffered during hyperinflationary periods.

Meanwhile, cryptocurrencies remain an emerging asset class. For many, the attraction appeals to a libertarian ideology that removes the control of the money supply from the hands of governments.

Governments derive power from controlling the purse strings. Cryptocurrencies are a direct challenge to that power, which is a roadblock for future success.

However, with limited supplies fueled by bullish trends, Bitcoin, Ethereum, and the over 10,600 other cryptos reached lofty levels in 2021. While devotees of libertarianism have ideological reasons for holding cryptos, many others became mesmerized by the prospects of turning a small investment into a large fortune.

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After all, someone with the foresight to buy $100 of Bitcoin eleven years ago at five cents per token turned that small cash outlay into over $130 million at the April 14 peak. Even though Bitcoin dropped to the $33,000 level as of June 25, the investment was still worth over $66 million.

The price action tells us that cryptocurrencies rose to unsustainable levels. 

h2 Picking tops and bottoms in any market is a fool’s game/h2

Bitcoin, Ethereum, and the other cryptocurrencies may be a burgeoning asset class, but they are still asset markets. Ideology and fortune-hunting aside, they move higher when buyers are more aggressive and lower when selling dominates buying.

After four decades in markets, I learned that fundamental supply and demand analysis goes only so far in determining the path of least resistance for asset prices. The market sentiment that creates trends can be a far more powerful indicator of price direction. Therefore, when markets are rallying, they tend to move to levels few analysts expect.

Conversely, when they decline, prices can fall to an illogical, unreasonable, and irrational level. Less liquid markets tend to experience the most dramatic moves as selling can disappear during rallies and buying can evaporate during downside corrections.

Cryptocurrencies have limited supplies, and sentiment tends to focus in one direction, causing extreme moves higher or lower. Picking tops or bottoms during moves becomes an exercise in ego.

Market participants that attempt to pick tops or bottoms are going against trends. While countertrend trading or investing can create profits at times, it increases the chances of losses. More traders and investors have lost their shirts by ignoring influential market trends than by following them. 

h2 Trade with the trends; they are your only friend as sentiment rules/h2

Successful traders and investors know that the trend is your best friend until it bends. Since late 2017, when the CME introduced Bitcoin futures, there have been five significant trend changes.