Back in February, the CEO of one of the largest digital currency exchanges made a bold prediction that crypto assets will reach a combined market cap of $1 trillion before the year is over. To put that into perspective, that would mean growth of around 280% from current levels.
The market has declined steadily since Jesse Powell, founder and CEO of Kraken, issued the forecast. But that hasn’t stopped analysts from predicting higher highs for assets like bitcoin (here, here, here and here).
Evaluating the $1 Trillion Market
Four months ago, crypto’s eventual climb past the trillion-dollar mark seemed like a foregone conclusion. But since peaking near $840 billion in early January, the market has plunged 70%. Recovery attempts have been futile, with the total market cap rising above $500 billion only once since the epic collapse began.
Investors are often reminded that past performance doesn’t guarantee future success. In the world of cryptocurrency, the inverse is also true. Take bitcoin as an example. The currency’s average bearish cycle is around 71 days, with the end of each cycle witnessing renewed upside in prices. This was evident last month when BTC rebounded 20% from its Feb. 26 swing low. However, what separates the recent rally attempts from the more successful ones of the past is sustainability (or a lack thereof, in this case).
Shallow recoveries followed by deeper corrections have been part and parcel of crypto trading for the better part of two months. For much of the decline, traders have looked for an underlying cause only to come up empty handed. There’s even evidence to suggest that selloffs have occurred regardless of news cycles, which signals a more profound cooling off in the market than previously thought.
But that’s not to say bad news hasn’t been a contributing factor. Fear, uncertainty and doubt (collectively referred to as ‘FUD’) have played a tremendous role in talking down cryptocurrencies. On the spectrum where news matters most of the time and not at all, the impact is likely somewhere in the middle.
Although Powell talked about a strong business environment around crypto in his evaluation of future market trends, the $1 trillion mark will likely require more than just a budding startup community. For starters, it will require renewed interest in altcoins that is equal to and even greater than the one seen for bitcoin. Investors should recall that altcoins accounted for more than two-thirds of the value universe during the height of the bull market.
Guidance around regulation has also been cited as a prerequisite for the next bull market to emerge. The author only half agrees with this statement. Once again, investors should recall that crypto’s most euphoric period came immediately after China issued a blanket ban on everything crypto. China banned all signs of cryptocurrency in September and by October, the market cap had forgotten all about it.
While regulatory developments are important, business adoption could prove more pivotal for crypto. Many analysts agree that news of wider acceptance of crypto-as-a-payment could spark the next bull market rally. New developments around scalability and transaction speed can also help in that respect.
A Reliable Proxy
One of the best tools for evaluating the success of crypto markets is Google Trends – a tool that allows you to gauge how well specific keywords are trending. When bitcoin peaked in December, the ‘bitcoin’ search term on Google had a perfect score of 100. In other words, interest in bitcoin peaked in December.
Since then, the trend score for ‘bitcoin’ has declined to 14. That’s an 86% drop. The cryptocurrency itself has lost two-thirds of its value since the December high.
The search term ‘cryptocurrency’ peaked in early January as the market crossed the $800 billion mark. It has since fallen to 18.
What’s more, both terms have seen a steady decline in search traffic since the start of the year. On the face of it, these numbers don’t imply that a strong rally is coming anytime soon.
Regardless of whether we hit $1 trillion this year or not, cryptocurrency is here to stay. The arrival of institutional trading, the never-ending push for bitcoin-backed ETFs and near universal embrace of blockchain suggest a paradigm shift is afoot. These forces lead us to believe that we have not seen the final peak for bitcoin or the broader market.
Disclaimer: The author owns bitcoin, Ethereum and other cryptocurrencies. He holds investment positions in the coins, but does not engage in short-term or day-trading.
Featured image courtesy of Shutterstock.