Since the March selloff, cryptocurrencies had managed to outperform by a wide margin, a market behavior that contradicts some of the fundamental beliefs around crypto. Given there are high uncertainty and an economic downturn, the majority would have expected to see cryptocurrencies under pressure, yet that did not happen. We’ve already seen some of the reasons why crypto valuations could rise in the future, but in this case, the problem has to do with a short-term change in the mindset of cryptocurrency investors.
Crypto better than fiat?
It was expected that COVID-19 will fundamentally change financial markets and put an end to a decade long bull run. The market drop lasted less than a month and since mid-March, we have both crypto and stocks marching higher. Investors had been stimulated to take risks thanks to extraordinary interventions from central banks, doubled by fiscal support. For the past decade, money printing had been more deflationary than inflationary, but now that governments push fiscal deficits, through the roof, fiat money will devalue along the way. This is favoring holding crypto against fiat and it should not change until we’ll see less aggressive government interventions.
Short-term favoring asset price inflation
The main flaw of monetary policy is that it fails to allocate capital in all sectors of the economy. Banks and financial institutions had been flushed with liquidity, yet they are reluctant to lend because there are few credit-worthy individuals and companies able to guarantee loans will be paid back. As a result, most of the capital stays in the financial system and go to stock markets, cryptocurrencies, ETFs, precious metals like gold and others. Although we still don’t have high interest from institutional investors in crypto, there’s still capital allocated via futures contracts or options.
Buy now, worry later
Excessive liquidity seems to be the only motivation right now for investors. It does not matter whether the crypto industry will transition to stablecoins or regulation will finally be developed. All that matters is the abundance of capital waiting on the sidelines to be invested. Investors have FOMO (fear of missing out) and jump into the market, even though valuations are extremely high. How much could this euphoria continue? It’s hard to tell, but at some point, it will start to weaning since there are so many negative factors that could materialize. At the time writing, cryptocurrencies had already started to show signs of weakness, but it’s still unclear if this is the beginning of a larger setback.