Even though current crypto valuation might look exuberant for many of you, the reality is that there are many precedents of overshooting valuations in the market and same as in the past, at some point in time the trend will reverse and losses will start to occur. Today we want to talk about this boom and bust cycle, why it is important and some hints on how could the market perform in 2021.
Recent crypto performance in a nutshell
Since our last article, the situation had gradually changed. Altcoins were performing poorly but in the meantime, names such as Ether, Cardano, or Bitcoin Cash played catch up, managing to follow the Bitcoin path higher. BTC reached $40,000 and it is currently consolidating around that area, however, the most important aspect is that there is still no clue suggesting buyers want to take a break. The weekly RSI is trading around 94, the highest reading on record, and that could have some significant implications as we move forward into 2021.
Will we have a continuation higher in 2021?
At this point, anything can happen in the crypto market, given the performance of the largest tokens had exceeded even the most optimistic expectations. Rising institutional investments was a game-changer for crypto in 2020 and as companies continue to invest, more gains could be on the table.
Traders and investors will need to remain vigilant due to extremely overbought conditions on higher time frames, which might be indicative of a corrective move in the near time. As with any prior cycle, cryptocurrencies surged impulsively during the first 2 years, only to given up between 60%-90% of the gains during the bust phase.
These cycles go around the Bitcoin halving and right now, we’re in the “bubble phase”. Investing long-term in crypto is tricky at the current elevated levels, another reason why a corrective move had become very speculative.
The bottom line
After a booming 2020, market participants have high expectations for 2021, as well. What we need to consider is that the crypto market is still very speculative and thus subject to sharp bear markets. All the gains that can be seen right now had also been generated by leveraged positions and once those start to wind down, the momentum will be difficult to maintain. Overall, it sets up to be another volatile year and with prices fluctuating impulsively, many opportunities will arise along the way.