Bitcoin and mainstream coins are all falling in a waterfall, will the Altcoins season ever come?

On the morning of November 26th, the bitcoin and mainstream coin markets saw a waterfall across the board: BTC fell below $17,500, ETH fell below $510, and LTC fell below $80. … The top ten tokens in terms of market capitalization were all down in varying degrees.

The instantaneous drop broke the upward party of the previous days, and the data showed that some miners started selling BTC, but there is no major sell-off yet. So what are the reasons for this waterfall? Will there be an altcoins season again after the big drop?

As for the main reason for this drop, William, chief researcher of OKExResearch, analyzed that bitcoin has strong financial attributes, and it can be said that speculative demand is an important factor influencing the price of bitcoin. As a special asset class, unlike stocks or bonds, bitcoin does not generate any predictable cash flow, so the only way for investors to get returns is to see the rise of its price, and like all risky assets, its price is subject to the swing of investors’ emotions and changes in risk attitudes, which is characterized by cyclical changes.

First of all, there is a strong correlation between the price cycle of Bitcoin and the emotional pendulum cycle of investors. Such large fluctuations in the bitcoin market cannot be explained by fundamental changes in companies, industries, or the economy, and are largely attributed to investors’ psychology and emotions swinging like a pendulum. Especially in short cycles, investor psychology is like a pendulum that swings back and forth between optimism and pessimism. The pendulum rarely stays in the middle for long, and the swing back and forth often shows a movement from one extreme point to the opposite direction, which can often be observed in Bitcoin’s market fluctuations.

Another important factor influencing the price of Bitcoin is the changing risk attitude cycle of investors. According to the Chicago School of finance, assets that appear to have a higher risk must appear to have a higher risk premium, or no one will want to make these investments. This is exactly the case with Bitcoin, which, despite being overly risky, has attracted a large number of investors due to its potential for high returns.

Excessive risk tolerance leads to flat capital market lines, and excessive risk aversion leads to steep capital market lines. When the market is going well and the price of bitcoin is soaring, investors often mean that the future is bright, and money is easy, everyone feels good; this means that very little risk aversion is built into the pricing, so such market prices are fraught with danger; likewise, at the bottom of the market, risk tolerance can be so low that people simply don’t allow any risk to existing. It is completely impossible for investors to lose money by buying at such low price levels, but the sting of the previous market decline is still there, making investors just want to increase their risk aversion and just sit on the sidelines to watch, they are reluctant to invest despite low price levels

For all these reasons, the price of bitcoin often rises and falls dramatically and with great volatility. During the last round of the Bitcoin bull market, we were able to observe a complete cycle of Bitcoin bubbles. According to Kindleberger’s classification, a typical asset bubble can be divided into five phases: displacement, boom, euphoria, distress, and panic. Between November and December 2017, the price of bitcoin jumped from around $8,000 to a high of $19,000, and it was the most frenzied and euphoric period of the market.

Then how about the current bitcoin market situation? Since mid-October, the price of bitcoin has jumped from around $10,000 to the current $19,000. Many people in the market have very optimistic expectations for bitcoin, believing that bitcoin can hit $80,000 or $100,000 by the end of the year; on the other hand, when researching the market, it was found that many investors started to invest in bitcoin using credit cards or through loans, which is very dangerous behavior. The Bitcoin Greed Index has reached 94, which means that the market is in a state of extreme greed and frenzy. Especially from the historical data, since mid-November, the Bitcoin Greed Index has been around 90, which is a very dangerous signal.

As you can see from the above analysis, the bitcoin crash on the morning of today was not sudden, and in fact, there were already signs of it.

Fear&Greed Index

It’s worth noting that skew data shows that the short-term correlation between Eth and bitcoin trends has declined, and historically this indicates the onset of

Altcoins season. Will there be a repeat of the historical market this time? What are the potential factors behind the rise of altcoins, given that institutional purchases are driving the current round of Bitcoin?

William points out that in proper market research, we have theoretical analysis followed by data validation, rather than data phenomena followed by theory to force explanations. I don’t think the low correlation between Bitcoin and Ethereum means anything. If altcoins cannot improve their technical competitiveness and community operation, they will eventually be eliminated, and even if they rise, it will only be speculation in the market. Ethereum 2.0 has a boosting effect on ETH prices, especially with the recent minimum staking requirement for deposit contracts, which has led to amplified market demand for ETH, especially as the deadline approaches, causing ETH prices to soar.

Article from meio(Jinse Finance)

Translated by Yang(Mengyan Finance)

To translate some latest policy and issues on blockchain and fintech happened in China