Updated: Apr 30
The last week was characterized by sharp corrections in the crypto markets, encouraged in particular by rumors and speculation about Bitcoin. This opens the opportunity to '
discuss how to understand the structure of these markets and differentiate the offerings.
A week ago, Bitcoin hit a record high of U$64,869, just before the IPO debut of Coinbase Global Inc, an exchange that in addition to offering major cryptocurrencies and tokens, provides services related to them. After the euphoria of this Nasdaq listing, Coinbase sustained downward corrections. And last weekend Bitcoin experienced a drop of up to 15.1% in the Asian markets, to US$ 51,707 (today it oscillates around US$ 56,000). Ether, the second largest Coin, fell nearly 18% before paring losses.
On the networks, several attributed its fall to Coinbase's overexposure, and to the rumor that the US Treasury might crack down on money laundering conducted through digital assets. It would have also weighed on the announcement that Turkey's central bank will ban the use of cryptocurrencies as a form of payment as of April 30. It was even attributed to the power outage in China's Xinjiang region, which accounts for almost a quarter of bitcoin mining or hashing.
But the truth is that Coinbase's debut met expectations for a stock of its characteristics and the best is yet to come. On the other hand, the rumor posted on social networks about possible Treasury shares, without pointing out sources , is of dubious provenance. Regarding Turkey, it is true that this affects the use of Bitcoin as a means of payment, but the truth is that its technical structure is as a store of value, and given the inflation expectations of the United States in the not distant future bitcoin still has a lot to continue to grow in that space. Finally, regarding the outages in China, experts showed with graphs that there is no correlation between the price of bitcoin and the mining rate of the cryptocurrency.
This shows us that it is important to understand how narratives (mostly unsound) impact the short-term price due to the behavior of traders who are in the market. A group of them speculate and react to different facts, but do not delve into technical and long-term market structure knowledge.
In the same week that Bitcoin has experienced downward corrections, amid rumors and unserious analysis that triggered inexperienced traders to liquidate their positions, Dogecoin has experienced a week of glory.
Let's remember that Dogecoin, a token created as a joke and boosted by the likes of Elon Musk and Mark Cuban, rallied more than 110% on Friday before falling the next day. In April 2020 its share price was US$0.002 and its market capitalization hovered around US$250 million, while today its values are respectively at US$0.39 and close to US$50 billion. This has led it to position itself within the eight cryptocurrencies with the highest capitalization, even surpassing Litecoin, Tether, Cardano, Bitcoin Cash, Chainlink, Stellar and Uniswap.
Dogecoin is a cryptocurrency derived from Litecoin. While Bitcoin has a maximum number of coins to be issued (21 million to be reached between 2030 and 2040 depending on its demand). Dogecoin, has no issuance limit, which makes it an inflationary currency. On the other hand, Dogecoin requires only 60 seconds to perform its transactions, unlike the 10 minutes needed by Bitcoin or the 2.5 minutes needed by Litecoin.
But while companies such as Tesla, PayPal, MasterCard, Visa, among many others, are already considering Bitcoin as a currency and are incorporating it into their payment systems, in the case of Dogecoin -beyond the memes and ambiguous tweets by Elon Musk about taking Dogecoin to the Moon- there is no clarity about its solidity over time and it implies a higher level of risk for those who want to take it.
This euphoria over Dogecoin may cause a boomerang effect for the crypto industry. This has been pointed out by Charles Hoskinson, founder of Cardano, another Coin. "When the Dogecoin bubble bursts, it will be a catalyst for regulators and legislators to get more involved with cryptocurrencies and hurt the entire industry," he said. There is a high level of concentration of Doge holders today and it is still not a robust community, which lends itself to manipulating the price and then selling and thus leaving a number of investors hurt. Which would not be far from Wall Street practices: just remember the real estate bubble of the 2000s that led to a global financial crisis.
We are dealing with assets that for the first time meet three characteristics at the same time: they are currencies, intangibles and financial assets. And it is crucial that those who advise on investing in Coins and Tokens clarify to their investors the structure of each of the crypto-assets. It is key not to get carried away only by the euphoria of high returns in a bull market, where it is easy to win, but it is also easy to lose if you invest in crypto assets that do not have long-term sustainability. And as in any investment, it is necessary to remain calm in corrections to analyze their causes and probable evolution over time on a technical basis.