HYCM: Is Crypto Spring Finally Here?

By Giles Coghlan, Chief Market Analyst, consulting for HYCM

Green Shoots

In April we saw the bulls really taking control to break bitcoin out of the $27k-$29k range and push the number one crypto through an important resistance level at $30k. The market cap of the asset class as a whole has gone from around $750 billion in January, to $1.25 trillion in April.

The most recent impulse higher comes after marginally lower than expected CPI print (5.0% to expectations of 5.1%) showed that US inflation moderated slightly in March. This has stoked animal spirits in risk markets, with renewed expectations of an imminent pause in US rate hikes, and perhaps even a cut by the end of the year.

Recall that crypto peaked earlier than US equities (August 2021, versus January 2022) and has undergone much larger peak-to-trough declines (75% down, versus 27.5% down), which is why crypto investors are gradually growing in confidence that the bottom could be in.

The Bear Case

There’s a contingent out there concerned that the price action we’ve seen in the first half of the year could just be a bear market bounce before the market resumes lower. Fears of a looming US recession, a Federal Reserve that maintains a higher-for-longer stance, and an uncertain crypto regulatory landscape, are all factors likely to weigh on valuations should this early 2023 rally begin to run out of steam.

Further to that, while bitcoin volumes have increased since bitcoin made a run for the $30k level on April 10, these moves are occurring on much thinner volumes than we saw back in 2020 as that particular bull market started to gain pace.

Technically, bitcoin (and indeed crypto as a whole) has become overbought on the daily timeframe, with a significant RSI divergence between current levels and those registered back in January when the current uptrend began. You can see a clearer instance of this at the 4-hour timeframe with RSI diverging from price action since April 10.

Ethereum Completes Shanghai Hard Fork

Ethereum, while initially lagging behind bitcoin, recently took the lead with its own surge of bullish activity as the network successfully completed its “Shanghai” hard fork. This completes the network’s transition to proof-of-stake and allows validators who’ve had their ether locked up since December 2020 to withdraw it.

What could have been a “buy the rumour, sell the news” event, compounded by the selling pressure of so much ETH becoming unlocked, has not yet come to pass. The unlocking has been handled in a staggered way, meaning that there are still hundreds of thousands of ETH tokens waiting to be unlocked.

Ether has outpaced bitcoin and the broader crypto market since April 10 this year, with its own token rallying some 11% to bitcoin and the broader market’s 9%. Despite this recent surge, the underlying trend is still largely being driven by bitcoin, which is up 85% year-to-date, to Ether’s 75%.

Some analysts regard ether’s recent performance as the initial stirrings of what has come to be known as “altcoin season.” This is when, following a strong move higher by bitcoin, cryptocurrencies further out on the risk spectrum begin to outperform it in percentage terms. However, it’s still early days, and the fears of crypto bears mentioned above weigh even heavier on altcoins than they do on bitcoin itself.

Cardano’s Growing DeFi Ecosystem

Cardano, which was one of 2021’s standout performers among the layer 1 crypto platforms, has also experienced a great deal of renewed interest of late. The platform’s ADA native token has outperformed both BTC and ETH since April 10 with an 18% rally at the time of writing. Year-to-date it’s up almost 80%, beating ether slightly, but still falling short of bitcoin’s overall performance.

Cardano could be a project to watch for during the next bull market, regardless of whether it’s currently upon us or whether crypto investors will have to wait a little longer. After Ethereum, Cardano is currently the top ranked layer 1 smart contract blockchain. Keeping in mind that most of Ethereum’s rivals are just copies of its own EVM (Ethereum virtual machine), Cardano has pursued its own novel technological roadmap and is currently the most viable EVM alternative. Cardano has also beaten Ethereum to proof-of-stake and remains ahead of it in certain key areas such as scalability and on-chain governance.

Intriguingly, most of Cardano’s performance in the 2020-2021 cycle took place without smart contracts. In other words, with very little on-chain activity other than the minting of NFTs and the staking of ADA to secure the network. During the current bear market many parts of its own budding ecosystem have quietly come online. These include decentralised exchanges (DEXs), yield farms, lending protocols, and synthetic assets. With just $168 million dollars of total value locked (TVL), to Ethereum’s whopping $33 billion, Cardano has a long way to go, but also possibly a long way to grow. Definitely one to keep an eye on.

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