the Latest Crypto Rally Explained
Cryptos have staged an outsized rally following a "crypto winter" that began with a large decline in 2021. We have seen this pattern before following large drawdowns in 2013 and 2018.
Based on this limited sample size, CryptoWorld has developed a narrative exemplified by the mantra "prices (always) to up." Thus, the present rally is yet another example of a crypto rally based on a false narrative and, according to the narrative, this rally should take Bitcoin above the previous high of $57,000.
However, as I discuss in detail in my book, "CryptoWorld Narratives: Eight False Narratives that Prop-up Cryptocurrencies," t.ly/3xdLv while narratives (stories) drive a group's demand for crypto, the demand is based on emotional appeal, which makes them more volatile than asset prices based on economic value. rather than rationality. This is true for the present rally which is based on emotional factors.
The crypto rallies since 2017 are driven by a self-fulfilling cycle which is also a feature of financial bubbles.
The cycle goes like this: a price increase in crypto causes an increase in demand for cryptos, which leads to a further price increase, which leads to more demand, etc., etc.
The key takeaway here is the cycle occurs because a price increase feeds into a narrative that causes a price increase. The only thing that is driving this rally is the price increase.
There is an unconvincing rationale that this rally is prompted by the possibility that the SEC may approve crypto spot ETFs. There are several problems with this explanation. First, the SEC approval is uncertain, second, there is widespread disagreement about the extent to which the ETFs will cause demand for cryptos. Third, the biggest problem with this narrative is that demand for the pending ETFs will only occur if the price of cryptos continues to increase or is perceived to be rising. So we have the situation that a price increase in cryptos (via demand for ETFs) is caused by a price increase in cryptos.
Of course, these rallies have momentum that may prop up crypto prices for a while based on continued price increases, actual or anticipated. Eventually, reality will deflate this rally. It is wise to heed John Maynard Keynes' dictum that irrational market movements may last longer than your budget.
Please view my book on Amazon: "CryptoWorld Narratives: Eight False Narratives that Prop-up Cryptocurrencies," t.ly/3xdLv
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