In recent weeks we have seen how investment in cryptocurrencies has regained ground. For example, Bitcoin is up 35% from its mid-June depths, and while there could be a short-term pullback, there are some good reasons to believe the tide is officially turning for cryptocurrency investing…
1. It has again surpassed the very important 200-week moving average
The king of cryptocurrency investing did something in June that he has only done a couple of times before. He recently broke below his 200-week moving average (MA). He then stayed there for a few weeks, before climbing back above her in July. The moving average (blue line) is the average price of bitcoin at the end of each week for the previous 200 weeks. Bitcoin briefly dipped below it during the March 2020 Covid crash, and it has been a similar story with previous bear market lows.
Bitcoin price (red and green bars) and the 200-week moving average (blue line). Source: TradingView.
It's difficult to say exactly why bitcoin has bottomed near the 200-week moving average in the past, instead of falling much further below it. But as has happened before, investors see this area as key to starting rallies in cryptocurrency investment. If bitcoin manages to hold above that key level now, investors will likely become more confident that its worst days are behind it and more inclined to buy. On the other hand, if bitcoin ends a week below the 200-week MA in the coming weeks, it could lead to a further pullback in price.
2. The MVRV Z-Score suggests that bitcoin has bottomed️
Bitcoin does not generate cash flows like stocks or bonds, making it impossible to value it with traditional methods. But if we look at public blockchain data, we can see that bitcoin is currently trading well below its "fair value," at least according to a popular on-chain valuation model, the MVRV-Z Score. The model uses blockchain data to compare two bitcoin values; the market value (gray line) and the realized value (green line).
Bitcoin market value (yellow) vs. bitcoin realized value (blue). Source: Lookintobitcoin.com
The market value is simply the current price of bitcoin multiplied by the total number of coins already mined. This has not fallen below its realized value that often, but when it has, it has predicted a significant decline in the price of cryptocurrency investment. The realized value, for its part, summarizes the last price of each bitcoin in circulation, that is, the price at which each coin was sold the last time it was transferred to a different wallet. The MVRV Z-Score takes these two data points one step further, using some quality formulas and statistics to generate a Z-Score ranking. This score measures the distance between the two values (subtracting the realized value from the market value) and divides that number with bitcoin's volatility (how much the market value moves). It then discounts abnormal movements or extreme values to generate a smoother graph for the Z score (orange line).
Bitcoin price (black) vs bitcoin MVRV Z-score (orange). Source: Glassnode.
That is, if we had bought bitcoin when the Z-Score was in the green shaded area in the past, we would have entered at discount prices. In this way, we can start our investment in cryptocurrencies near the lows of each bear market.
3. Investor sentiment is growing
Bear market lows are often born of extreme panic, and we've certainly seen that in cryptocurrency investing. He cryptocurrency fear and greed index (gray line) gives us a sentiment score for the fear (closer to zero) or greed (closer to 100) that investors feel at any given time. It currently looks a lot like it did after the March 2020 Covid crash and the December 2018 bear market low. It shows us that investors have been extremely fearful for a long time, but have now become greedier as that cryptocurrency investment prices have begun to recover.
Cryptocurrency Fear and Greed Index. Source: Alternative.me
If we look at recent news, we have also seen what is normally expected in a bottoming market. For example, there were some major liquidations that caused cryptocurrency investment prices to plummet. Among the most notable, Earth Moon, formerly a top 10 blockchain, exploded in May. This triggered a domino effect that bankrupted Celsius Network, Voyager Digital, and Three Arrows Capital, which was once one of the largest and most profitable cryptocurrency investment funds.
The May crash fueled massive sell-offs in cryptocurrency investment. Source: Tradingview
Then came a major catalyst of good news that could help change that sentiment. BlackRock (the world's largest asset management company) partnered with Coinbase last week to make it easier for institutional investors to purchase and store cryptocurrencies in their portfolios. Not only is it a great seal of approval for cryptocurrency investing, but it's a great check mark for institutions looking to get cryptocurrencies through their compliance departments.
So, is it a good time for cryptocurrency investment?
It is impossible to know for sure what cryptocurrency investing will do in the future. But if you think long term, cryptocurrencies could be worth the risk at these prices. Remember that there are ways to manage risk when investing in cryptocurrencies and other volatile assets that can cushion the blow if the latest rally gives way to another sell-off. We can keep our cryptocurrency investment as a smaller percentage of our overall portfolio, combining it with other investments such as stocks, bonds and gold. We can also buy gradually to offset some of its short-term volatility.