After a massive rally in the last two months, the crypto market finally entered a correction phase. Tight risk management is crucial as we await the best time to re-enter the market.

Quick summary

  • Bitcoin’s safe haven thesis was debunked in February.
  • As fears about the recession increase, people gravitate to the most tangible assets: cash and gold.
  • Crypto is merging with the mainstream, and its user experience is significantly improving.

Market overview

After a very strong start of the year, the market continued with the rally in February. In the first half of the month, it gained another 33.8%, but then the correction finally occurred. The market gained 109.8% from the local low reached on 17 December, 2019, which was an enormous increase in such a short period of time. Consequently, the market lost 25.9% in the second half of February, concluding the month with a virtually flat performance of -0.8%. It is important to keep in mind that market corrections are healthy and important for the stable long-term development of the market.

Chart 1 - Crypto market performance (2020-02)

The altcoins moved in line with their main characteristic: They are more volatile than Bitcoin. Consequently, they strongly outperformed it in the first half of the month and dropped sharper in the second half. Several altcoins still managed to generate a positive monthly performance. The top three performers of the top 25 altcoins by market cap were Tezos (66%), Chainlink (46%), and Ethereum (22%). In line with the market development, Bitcoin dominance decreased to 60.9% in the first half of the month and ended at 63.9%.

Chart 2 - Top 25 assets by market cap performance (2020-02)

Bitcoin as a safe haven – part 2

Events in January tended to confirm the Bitcoin as a safe haven thesis, while events in the last two weeks demonstrated the opposite: Bitcoin’s price tumbled together with the stock markets. When fear about the recession increases, people gravitate to the most tangible assets: cash and gold. As I wrote last month, it is far too early to conclude that Bitcoin is perceived as a safe haven, so we will have to wait until the next recession for a more accurate evaluation.

Thoughts on the COVID-19 (Coronavirus)

I believe people severely underestimate the impact of coronavirus on the global economy. Yes, the mortality is low (but increasing), and I don’t think it will decimate the world’s population. However, if we take a look at Italy, we can see how it is affecting their economy. We were already on our way to a global recession, but now it is going to transform into something much worse. And when people start to panic, “the shit is going to hit the fan.” Interest rate cuts won’t help in this situation, and they only increase the fear.

Crypto is merging with the mainstream

Month after month, we are witnessing new activities that demonstrate the merge of crypto and the mainstream. JPMorgan is merging its blockchain unit Quroum with ConsenSys; Visa granted Coinbase power to issue crypto debit cards, but the most noteworthy is the initiative called Baseline Protocol.

E&Y, Microsoft, ConsenSys, Chainlink, MakerDAO, and others have joined forces to launch a new package of public domain blockchain tools that will allow enterprises to build business processes securely and privately on the public Ethereum blockchain. It is a massive step in the right direction as it switches the focus from private and permissioned to public and permissionless blockchains.

Crypto user experience continues to improve

Good user experience is one of the prerequisites for the growth of the crypto ecosystem. Coinbase added a feature that allows you to send crypto through usernames instead of using the long addresses.

Square sold over half of $500 million worth of bitcoin in 2019 via its Cash app, which offers a frictionless experience of buying cryptocurrencies. The number is 240% higher than in the previous year. Bitcoin is a major source of revenue for the company as Jack Dorsey, Square (and Twitter) CEO, stated that bitcoin activities are generating two to three times the annual revenue compared to other cash customers. It is also a significant driver of user acquisition.

The same is true for Revolut, one of the largest fintech companies in Europe, which is expanding to the US market. The gateways to the crypto market with improving user experience are growing at a rapid rate, which will help boost the long-term demand.

Conclusion

In my January monthly commentary, I stated,

After such a strong rally in January, we can expect the market to cool down for a while.

This proved right as the market corrected. Due to a massive two-month rally, it might take a little longer for the market to consolidate. Tight risk management is crucial as we wait for the best time to re-enter the market.

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DISCLAIMER: This article is for informational and discussion purposes only and does not constitute a marketing message, an investment survey, an investment recommendation, or investment advice. The article was prepared exclusively for a better understanding of market dynamics.

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