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Monday, September 20, 2021

How sustainable is the upturn in the crypto market?

The March correction in tech stocks like Tesla suggests that the crypto market is also likely to come under pressure. So far this has not been the case. Why the company valuation of Coinbase is sporty, the staking of crypto currencies prevents a sale and the summer could put an end to the stock market fever.

After an impressive rally, many tech stocks have taken a major setback since early February. Measured against the price increases of the last few months, an overdue consolidation, which can be described as healthy in view of the rising US yields. Compared to the tech values ​​in the S & P500, the crypto market is doing surprisingly well. Although the last half of February was also hit by a small damper, the rates of all crypto currencies have been increasing again since then.

Where does the strength in the crypto market come from?

DeFi and NFT projects in particular are still going through the roof and are still attracting fresh capital. This not only indicates a high level of dynamism and demand in the crypto market in relation to other markets, but also suggests greater independence from macroeconomic framework conditions, see S&P 500.

Supported by the market momentum, some crypto players in the scene would like to play a part in the really big, ergo traditional stocks. Accordingly, IPOs are also on the agenda. Above all, the crypto exchange Coinbase is making a name for itself, whose IPO could reach into the three-digit billion range. Competitor Kraken has already announced that it is contemplating an IPO.

IPOs as a barometer of sentiment

The time for the former crypto startups couldn’t be a better time to push through high (and cheeky) ratings. Without wanting to diminish the success of Coinbase, with a valuation of 100 billion US dollars, which is currently in the room , one has to ask whether this would be justified without the current stock market mania. Especially since the business model of a crypto broker is comparatively easy to exchange and, for example, does not benefit as much from a network effect as the Internet platforms from Silicon Valley. In the future, the crypto brokers will also have to compete with the traditional banks and stock exchanges. Just for comparison: Facebook had the largest technology IPO of all time in May 2012 and at that time it was “only” valued at $ 104 billion.

High ratings are not only found in the current IPOs. As discussed in the previous Friday comment, the ratings in the NFT sector in particular are taking on extreme traits.

Sporty ratings

In particular, the Dapper Labs Flow Blockchain catches the eye with its rapid rise. Only two percent of the total token supply has been issued. At a current exchange rate of $ 33, this corresponds to a market capitalization of around $ 1 billion. In relation to all potential flow tokens, this results in a market capitalization of almost 50 billion US dollars. For such a young project that only has two notable projects to show – Crypto Kitties and NBA Top Shot – a more than sporty rating. One could also exaggerate: The protocol evaluation is larger than the market (non-fungible token) in which it is active – find the error.

Other NFT projects or the NFT itself, ergo the traded art objects, trading cards, etc., get questionable ratings. As long as the expectations are met in the future, the high market capitalisations may well be justified. However, you should also be aware that the potential for disappointment is gigantic. The many advance praises must be transformed into fundamentally justified profit models at some point in the future. The same applies to the numerous DeFi projects, which have also been able to multiply their market capitalisations across the board.

Can stock market turnover soar?

In addition to high IPO, protocol and NFT ratings, the prices of the “exchange tokens” should serve as a warning signal. Just like the volumes and new registrations at brokers and stock exchanges in the traditional financial market, sales at the crypto exchanges are no longer stopping. The exchange’s own tokens were able to significantly outperform the rest of the crypto market. The exchange token prices skyrocketed in the last 30 days: Binance (+ 280%), Huobi (+ 80%), FTX (+ 125%) or Crypto.com (+ 170%).

Their decentralised counterparts also made good gains again. The tokens from the decentralised exchange platforms Uniswap (+ 60%) and Sushi Swap (+ 40%) also benefit from the enormous trading volume and the resulting fees over a 30-day perspective.

With staking and corona boredom against the pressure to sell

The rally in exchange tokens is reinforced by staking offers. Binance offers extremely attractive staking fees for Binance deposits. This not only creates an incentive to buy, but also an incentive to keep your tokens and let them “work” for you. The Binance crypto exchange in particular is very good at generating FOMO. In numerous promo and staking campaigns, she is fueling the current hype even further.

In principle, this may be legitimate, but one should be aware that staking returns of 30 percent per year do not fall from the sky. Investors should not confuse staking income with savings account rates while the key rate hovers around the zero percentage line. At the latest when the stock market fever subsides and the mood on the markets – this also applies to the stock markets – normalises again, the current volumes, record sales and new stock exchange registrations will also decline. Even if the prices of Bitcoin and other cryptocurrencies continue to rise, stock market activity is unlikely to remain at the current level.

Particularly with a view to the summer and the expected relaxation of the corona, a lot of private “gamer capital” will flow back into consumption. For summer vacations and dining out, not just some profit-taking will take place. The inflow of capital that is necessary to maintain the growth rate in the crypto market will also decline.

The crypto market is shaky

Compared to established stock exchange companies, the crypto market is on very shaky legs. In contrast to DAX companies, there is primarily “high-risk capital” in the various token projects. So while the stock markets can be sure of the support of pension funds, pension funds and other institutional investor classes, this is not yet the case with cryptocurrencies. Progressive “institutions” are slowly approaching Bitcoin, but not (yet) the numerous other crypto assets.

The objections outlined above do not change the long-term perspective for the various crypto sectors. Anyone who is convinced of a project can, as a long-term investor, still invest in the crypto market with a clear conscience. However, the time when you blindly invested in any token sale and three months later increased your stake at least fivefold should be over by summer or autumn of this year at the latest.

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