Crypto Investment: Late Entry, Missed Opportunities, Or Wise Move?

Investing in cryptocurrency is a hot topic, with some sources suggesting that it is never too late to invest in crypto. However, it is a highly volatile market, and prices can fluctuate rapidly and unpredictably. While some coins, like Bitcoin, have shown remarkable growth over the years, it is challenging to predict future performance. The upcoming Bitcoin halving cycle in 2024 could be a potential catalyst for price increases, but there are no guarantees. Ultimately, investing in crypto involves a high level of risk, and individuals should carefully consider their financial goals and risk tolerance before making any investment decisions.

The upcoming halving and its potential impact

The upcoming Bitcoin halving event, expected to occur in April 2024, will have a significant impact on the cryptocurrency market. Bitcoin halving refers to the reduction of block rewards, or mining rewards, by 50% and occurs roughly every four years. This event is significant as it reduces the supply of new bitcoins entering the market, potentially increasing their price.

Historically, Bitcoin's price has appreciated rapidly after halving events. For example, after the May 2020 halving, Bitcoin's price skyrocketed by 661% in the following 18 months, reaching an all-time high of nearly $69,000 in November 2021. However, it's important to note that the circumstances surrounding each halving are unique, and demand for Bitcoin can fluctuate.

The upcoming halving will likely impact miners the most. With the reduction in block rewards, some miners may find their activity less profitable due to costs such as electricity and hardware. This could lead to consolidation in the mining industry, with larger players acquiring smaller miners or individual miners dropping out of the market.

The impact of the upcoming halving on Bitcoin's price is uncertain. While some analysts predict a similar bull run to previous halving events, others caution that the days of such significant price increases may be behind us. The approval of spot Bitcoin ETFs by the SEC in 2024 has also added a new dynamic to the market, potentially increasing demand for Bitcoin.

Overall, the upcoming Bitcoin halving is expected to have a notable impact on the cryptocurrency market. The reduction in supply and potential increase in demand could lead to a price surge. However, the extent of the impact remains to be seen, and investors should carefully consider their risk tolerance and market conditions before making any investment decisions.

The influence of interest rates and risk aversion

Interest rates and risk aversion play a significant role in influencing the cryptocurrency market. While cryptocurrencies exist outside the traditional banking system, they are not entirely immune to changes in interest rates. Here's how these factors can impact the crypto space:

• Opportunity Cost and Investment Returns: When interest rates are low, traditional investments like bonds and savings accounts offer lower returns, making them less attractive to investors. This drives investors towards alternative assets, including cryptocurrencies, in search of higher yields. Conversely, when interest rates rise, traditional investments become more appealing, potentially leading to a decrease in demand for cryptocurrencies as investors shift their funds back to interest-bearing assets.
• Risk Appetite and Sentiment: Interest rates can influence the overall risk appetite of investors. Low-interest rates encourage risk-taking behaviour, as investors may allocate more of their portfolios to riskier assets, such as cryptocurrencies, to achieve their investment goals. On the other hand, when interest rates rise, the increased returns on safer investments can reduce the need for additional risk. As a result, investors might move away from volatile assets like cryptocurrencies and towards more stable, interest-bearing securities.
• Liquidity and Borrowing Costs: Changes in interest rates can impact liquidity and borrowing costs in the cryptocurrency market. Lower interest rates make it easier and cheaper for traders to borrow funds to invest in various assets, including cryptocurrencies. This increased availability of cheap credit can drive up demand and prices for cryptocurrencies. Conversely, when interest rates rise, borrowing costs increase, leading to reduced demand for leveraged investments in the crypto market, potentially exerting downward pressure on crypto prices.
• Inflation and Currency Devaluation: Central banks adjust interest rates in response to inflationary pressures. During periods of high inflation and low-interest rates, cryptocurrencies, especially Bitcoin, are often viewed as hedges against inflation and currency devaluation due to their limited supply and decentralised nature. Investors may turn to cryptocurrencies as a store of value to protect their wealth from inflation. This increased demand can drive up crypto prices. However, if higher interest rates successfully curb inflation, the perceived need for an inflation hedge may diminish, potentially reducing demand for cryptocurrencies.

Regarding risk aversion, it typically refers to the behaviour of traders during times of uncertainty and high volatility. In the context of the forex market, when risk aversion is high, traders tend to unload their positions in higher-yielding and riskier currencies and move their capital towards safe-haven currencies, such as the US dollar (USD), Japanese yen (JPY), and Swiss franc (CHF). These safe-haven currencies are expected to retain or increase in value during times of geopolitical stress and economic uncertainty.

While there is no consensus on whether it is too late to invest in crypto, some sources suggest that there is still room for growth and potential in the market. The approval of spot ETFs for Bitcoin, for example, has legitimised it in the eyes of investment firms and regulators, potentially attracting more capital and driving up prices. Additionally, the upcoming halving event for Bitcoin, expected sometime in 2024, has historically been followed by significant price increases.

Market Value to Realized Value (MVRV)

MVRV is a way to identify whether the price of Bitcoin is undervalued or overvalued at any given time. MVRV stands for Market Value to Realized Value. It is calculated by dividing Market Value by Realized Value. The Market Value of Bitcoin is calculated by multiplying the price of Bitcoin by the number of coins in circulation. The Realized Value, on the other hand, is the cost basis of all available bitcoins in the market. The price of Bitcoin is taken at the time they were last moved, instead of the current price as in Market Value.

The MVRV ratio is useful because it shows when the current market value is overheated relative to a more neutral level, which is the realized value. The realized value is more neutral because it is gradual and smoothed out over time, and not as volatile as market value, which can be dictated by extreme market participant emotions such as fear or greed.

Historically, when the MVRV ratio is high, the market is euphoric and the price of Bitcoin may be topping out. When MVRV is low, it can signal that the price of Bitcoin is close to bottoming out. These extremes in the results have occurred at the major tops or bottoms of Bitcoin’s market cycles.

MVRV is calculated on a daily basis and provides an oscillator from which two historical thresholds emerge: 3.7, which denotes overvaluation, and 1, which denotes undervaluation.

It is recommended to use this indicator with prudence and in conjunction with other fundamental and technical tools. The MVRV ratio only provides a long-term perspective of BTC market cycles and is best used for multi-yearly analysis.

Exchange-traded funds (ETFs)

Spot ETFs, which gained approval in early 2024, directly hold the cryptocurrency, building a portfolio that replicates the performance of the digital assets it contains. Other crypto ETFs invest in futures contracts, agreements to buy or sell crypto at a preset date and price.

The ProShares Bitcoin Strategy ETF, the first and largest U.S. cryptocurrency futures ETF, started trading in October 2021. In January 2024, the SEC approved the first 11 spot cryptocurrency ETFs for the U.S. market.

Crypto ETFs have several advantages. They provide exposure to crypto without the additional ownership expenses or the risk of holding digital assets in a wallet. They also reduce the learning curve, as investors do not need to grasp the technological jargon or complexities of directly owning digital assets. Crypto ETFs offer more security, as cryptocurrency exchanges, storage devices, wallets, and blockchains have been vulnerable to hacking. They also lower costs for investors, allowing for diversification without the fees and hassle of buying and exchanging tokens.

However, there are also disadvantages. Crypto ETFs are subject to regulatory uncertainty, as the SEC has expressed concerns about investor risk, fraud, volatility, and low investor protections in crypto markets. They also have higher fees and expenses than other ETFs, and investors do not have direct ownership or control over the underlying cryptocurrency. Additionally, crypto ETFs are subject to the dramatic price swings of the crypto markets, increasing risk.

Some examples of crypto ETFs include:

• IShares Bitcoin Trust (IBIT)
• Bitwise Bitcoin ETF (BITB)
• Grayscale Bitcoin Trust ETF (GBTC)
• VanEck Ethereum Strategy ETF (EFUT)
• Global X Blockchain ETF (BKCH)
• Amplify Transformational Data Sharing ETF (BLOK)
• ProShares Ultra Bitcoin ETF (BITU)

Fear and Greed Index

The Crypto Fear and Greed Index is a tool that investors use to help them decide when to enter and exit the market. It is a single figure that is calculated by taking multiple data sources into account. The index is scored on a scale from 0 to 100, with 0 representing "Extreme Fear" and 100 representing "Extreme Greed". The index is divided into the following categories:

• Extreme fear (0-24)
• Fear (25-49)
• Greed (50-74)
• Extreme greed (75-100)

The index is calculated using a range of sources, including volatility, market momentum/volume, social media, dominance, and trends. Surveys have also been used in the past but are currently paused. The Crypto Fear and Greed Index is based on the sentiment of Bitcoin and other large cryptocurrencies.

• Volatility - A rise in volatility is used as a sign of a fearful market.
• Market momentum/volume - The current market momentum is compared to the current volume. When buying volumes are outpacing the longer-term momentum, it signals that the market is getting too greedy.
• Social media - Twitter sentiment analysis tools are used to identify unusually high interaction rates, which are used to identify greedy market behaviour.
• Dominance - A rise in Bitcoin dominance is considered a sign of a fearful market moving to a safer asset, while a fall in Bitcoin dominance is seen as a sign the market is getting too greedy and moving to more speculative altcoins.
• Trends - Data from Google Trends is used to see how many people are searching for information about Bitcoin. An increase in certain search terms such as "Bitcoin price manipulation" is considered a fearful signal, while "How to buy crypto" would be considered more bullish.

The Crypto Fear and Greed Index can be a helpful tool for investors to use when making investment decisions. For example, if the index is in the "Extreme fear" range, it could be a buying opportunity as investors may be too worried. On the other hand, if the index is in the "Extreme greed" range, it could mean that investors are too greedy and the market is due for a correction.

It is important to note that the Crypto Fear and Greed Index is a short-term indicator and does not correspond tightly to longer-term bull runs. It is also worth mentioning that the index should not be the sole factor in making investment decisions, and investors should always conduct their own due diligence and consult with a financial advisor before investing.

Frequently asked questions