The Month in Review: Analyzing the Cryptocurrency Markets for May
After suffering a brutal decline in 2018, cryptocurrencies are in the early stages of a new bull market. The month of May was a very good month for crypto traders and investors. All the major cryptocurrencies generated a nice rate of return. The average monthly rate of return was 46.9%. What was the driving force behind the crypto rally in May? Can we expect this rally to continue? Let’s examine the details.
Cryptocurrencies Results from 1st May to 30th May
As you can see from the table, all 10 of the major cryptocurrencies produced an extremely healthy rate of return during the month of May. Bitcoin Cash (BCH) was the “big winner,” with a massive advance of 58.6%. Ethereum (ETH) was the second largest winner in May @ 57.8%, followed by Bitcoin (BTC), with a healthy return of 55.5%.
Cryptocurrencies Are Highly Correlated
We should not be surprised that all of the major cryptocurrencies saw positive returns for the month--or that the sharp correction on 31st May affected them all as well.
Whether we like it or not, cryptocurrencies are highly correlated. In other words, the crypto universe has a tendency to move in the same direction. Of course, the crypto community is quite pleased with the high correlation during the middle of a bull market.
Throughout the first five months of 2019, traders and investors have thoroughly enjoyed the fact that all cryptocurrencies are experiencing a positive rate of return!
Unfortunately, though, as we’ve seen today, high correlation is a double-edged sword. Traders and investors are happy as long as the crypto markets are moving in their favor.
Unfortunately, the bull market won’t last forever. Bear markets can be quite painful for investments that are highly correlated, like cryptocurrencies. Those who invest in cryptos should always be mindful of the fact that these digital currencies typically move in the same direction.
The first five months of 2019 is a perfect example of how cryptocurrencies usually behave. Most likely, this high correlation will never change.
3 Major Factors Driving the Current Crypto Rally
May marked the fifth consecutive month of steady/rising prices in the cryptocurrency universe. This is the longest consecutive crypto winning streak since the massive bull market of 2017.
Basically, there are three main reasons why cryptocurrencies have enjoyed rising prices during the first five months of 2019. Let’s examine them all.
The First Factor Driving the Crypto Rally
The first reason is based on the fact that cryptocurrencies were extremely oversold from 2017.
For example, from its peak in December 2017, Bitcoin (BTC) lost 84% of its value. BTC finally hit bottom in December 2018.
In fact, in a rather strange coincidence, the Bitcoin bear market lasted exactly one year. The top occurred on 18th December 2017 @ 19,862. The bottom was formed precisely 12 months later on 18th December 2018 @ 3,158.
Based on previous historical bear markets, Bitcoin (along with the entire crypto community) was at a perfect price level to form an important bottom. Since its inception in 2009, BTC had experienced two previous bear markets. Each of the two prior bear markets had formed an important bottom near the 80% to 90% level.
In other words, Bitcoin lost between 80% and 90% of its value during the previous declines. Therefore, BTC was perfectly positioned in December 2018 to enjoy a sustainable rally.
As of 30th May, the price of Bitcoin has increased 157% from its 2018 bottom. The current rally could easily carry BTC to a new all-time high within the next few years.
The Second Factor Driving the Crypto Rally
The second reason cryptocurrencies have achieved five consecutive months of prosperity is based on technical analysis. Bitcoin’s initial bullish breakout for 2018 occurred on 2nd April @ 4,440. This was the initial launching pad that sent BTC to much higher prices--check out chart 2 below.
The next important resistance level for Bitcoin was 5,704. BTC penetrated 5,704 on 3rd May. You can analyze the bullish breakout on Chart 3 below.
The final important resistance level was 8,485. BTC exceeded 8,485 on 27th May (see chart 4 below).
Based on almost all technical indicators, cryptocurrencies have turned from bearish to bullish over the course of the past five months. This is an excellent indication that the crypto bull market has the potential to continue for an extended period of time.
In terms of the next important resistance level, BTC needs to penetrate 9,966 (as demonstrated in chart 5 below).
If Bitcoin can achieve a weekly close above 9,966, this will open the door to a new all-time high within the next 12 to 24 months.
The Third Factor Driving the Crypto Rally
The third reason the crypto universe is in the early phases of a new bull market is because of an increase of use cases. In other words, global consumers have actually increased their daily use of cryptocurrencies during the past 12 months. This is particularly true with BTC.
Throughout 2018 (and the first quarter of 2019), we have witnessed a mass adoption of Bitcoin in our daily lives. Consumers are actually integrating cryptos into their daily routines. In addition to being used as a store of value by investors, cryptos are now being used as a medium of exchange. This explains why some of the most prominent investors in the crypto universe are predicting that Bitcoin will become the next digital gold.
During the past 12 months, the cryptocurrency space has witnessed a huge push among crypto and blockchain companies to provide better merchant payment solutions for consumers. The cryptocurrency industry is fully aware of the fact that in order for Bitcoin (and other digital currencies) to survive, they must be able to compete with VISA, Mastercard, and American Express in regards to offering fast, affordable payment platforms for consumers.
Two weeks ago, Gemini announced an exclusive agreement with Flexa, a global cryptocurrency payments network that enables major retailers to accept cryptocurrency payments in physical stores. This is a perfect example of how the digital currency community is making a strong effort to increase the daily use of cryptocurrencies at the consumer level.
By increasing the number of daily crypto users at the retail level, this will certainly extend the cryptocurrency bull market. For now at least, despite some sideways trading, the cryptocurrency bull market is alive and well!
Full Disclosure: I own BTC on the spot market, BTC futures, and BTC exchange-traded notes.