Cryptocurrency Market: Greed Above All
The euphoria surrounding Donald Trump's election and the nomination of Paul Atkins as the new Chair of the US Securities and Exchange Commission (SEC) has subsided, yet the prices of key cryptocurrencies remain near record highs. This comes as no surprise, as crypto-finance is gradually embedding itself into the traditional financial landscape. Established and reputable investment banks have started investing in cryptocurrencies—not with their own money, but predominantly with client funds. This development is slowly transforming the crypto-economy from a niche hobby for tech enthusiasts into a mundane, routine sector. For small investors, this evolution is undoubtedly for the better.
Nothing better illustrates the state of the crypto-finance market than the so-called Crypto Fear & Greed Index, a fascinating indicator that reflects investor sentiment. When the needle swings towards green, indicating greed, it suggests that investors are inclined to take risks and invest without fear of losses. Conversely, when the needle shifts to the red side of the scale, signifying fear, it means that panic may be brewing in the market.
At the time of writing this article, the Bitcoin Fear & Greed Index stood at 83, a level labelled as "extreme greed." This coincided with Bitcoin's price exceeding $100,000 per coin. Investor sentiment appears overwhelmingly bullish. However, market behaviour experts often interpret such levels of greed as early signs of a potential downturn.
Why would this be the case, especially when prices are rising and investors are eager to inject their money into the market? The answer lies in the age-old adage: "Trees do not grow to the sky." A rally is invariably followed by a correction, even if only a temporary one. Specialists in technical analysis on dedicated platforms warn that as the Fear & Greed Index approaches levels close to 100, the likelihood of a correction—or even a market reversal—steadily increases.
However, this story isn't solely about the changing moods of small investors. Another significant factor is Paul Atkins.
When the Whales Enter the Game
In crypto-finance, "whales" refer to individuals or entities holding substantial sums in cryptocurrency wallets. Due to the transparent nature of cryptocurrencies, especially Bitcoin, analysts can easily track large transactions in and out of wallets. While the identity of wallet owners is often unknown, the volume and timing of transactions are well-documented.
The first major crypto rally occurred in autumn 2017, when Bitcoin surged from a few thousand dollars to nearly $20,000 within a couple of months. Such rapid growth has not been seen since. At that time, the market lacked the participation of investment banks or funds, making it relatively narrow and highly susceptible to sentiment-driven volatility.
However, a breakthrough came in 2021 when the SEC approved the operation of the first investment fund dedicated to crypto-assets—a Bitcoin ETF based on futures contracts. ETFs, or exchange-traded funds, are investment vehicles tied to assets traded on stock exchanges.
The introduction of Bitcoin futures ETFs in October 2021 significantly energised the market, with Bitcoin reaching $67,000 by early November that year. This record held until March 2024, although the groundwork for another rally had emerged in summer 2023.
The most significant driver of Bitcoin's growth is the removal of bottlenecks preventing ordinary small investors from entering the crypto market. It seems Paul Atkins is determined to shatter these glass barriers.
The SEC had consistently rejected applications for spot Bitcoin ETFs. The stalemate began to shift when Grayscale, a cryptocurrency asset manager, sued the SEC, demanding a more substantiated position from the Commission.
Surprisingly, it wasn’t Grayscale that reaped the benefits of this legal victory, but the globally renowned investment bank BlackRock. In June 2023, the SEC approved BlackRock’s application for a spot Bitcoin-ETF. This milestone was expected to flood the market with substantial funds and boost cryptocurrency prices, including Bitcoin. Indeed, the market responded: Bitcoin rose from $17,000 in December 2022 to $30,000 by July 2023. However, further growth stalled.
New investment tools for cryptocurrencies have emerged, but compared to the excitement surrounding the first Bitcoin futures ETFs in 2021, investor enthusiasm seems somewhat muted.
Yet, when a critical mass of spot Bitcoin ETFs, backed by prominent investment banks such as BlackRock, Fidelity, and Franklin Templeton, entered the market, Bitcoin’s price began climbing. These investments, led by reputable funds, acted as powerful gateways funnelling money into cryptocurrencies.
Photo: Chart of the Fear and Greed Index in the cryptocurrency market. Donald Trump's victory clearly inspired proponents of the crypto-economy. Source: Binance Square.
The SEC May Shift Gears
This all unfolded amidst scepticism and resistance from the SEC. However, the Commission is now set to welcome a new Chair—Paul Atkins, known as a proponent of deregulation and liberalisation, as well as a staunch advocate for crypto-finance. Atkins previously served on the SEC from 2002 to 2008, making him well-acquainted with its inner workings. Markets anticipate swift action and a more constructive stance under his leadership.
Given Atkins’ reputation, his tenure is unlikely to usher in chaos. Instead, a more positive outlook towards retail investors participating in the crypto market is expected to lead to the introduction of standard regulations concerning investment security, financial monitoring, taxation, and more.
The current price of $102,000 per Bitcoin may not yet be the peak, as investor sentiment remains dominated by greed and FOMO — fear of missing out. FOMO, a phenomenon popularised by the crypto market, captures the anxiety of missing out on exciting opportunities others are seizing.