After a week of positive price action in the cryptocurrency market, many are rejoicing at the promise of the continuation of the bull run. Though there has been good news recently, such as EIP-1559, there have also been regulatory concerns and issues that should make investors cautious, yet optimistic.
During the first part of 2021, when the cryptocurrency market was experiencing a meteoric rise from a $750 billion to a $2.5 trillion valuation, investors were incredibly excited and optimistic about the inevitability of a $100,000 Bitcoin. Unfortunately, since mid-April, the markets have been on a steady decline and fell by nearly 50%, which is over $1 trillion in lost value. This massive correction saw many newcomers into the cryptocurrency space lose a significant portion of their initial investment, even though anyone who invested before 2021 is still in profit territory.
Though many speculated that this decrease would be the beginning of a 4-year bear market, this does not appear to be the case. Since Bitcoin fell below $30,000 on July 20th, the markets have begun to rebound, and are now up to a total valuation of $1.7 trillion, up nearly 50% over the past three weeks.
Though market corrections are always devastating to individual holders, they are typically beneficial for the overall health of the market. For example, the previous bullrun saw astronomical and undeserved valuations for many meme coins, such as Dogecoin, Shiba Inu, and Safemoon. Even after the most recent upturn, some of these meme coins are still down 75% or more from their all-time highs, and will likely never reach new all-time highs. With less scam and meme projects, there is more room for high-quality cryptocurrencies to grow and thrive.
The reason for the market increase has been highly speculated, yet there seems to be no true cause. One of the most popular theories is that the recent implementation of EIP-1559, an upgrade to Ethereum, is the cause. This is because this upgrade causes some of the transaction fees from using the Ethereum network to be burned and taken out of the total supply, instead of being distributed to miners. This means that, with enough transaction fees, Ethereum could become deflationary, and any asset with a decreasing supply and fixed demand has an increase in price.
Though this is a compelling argument, it does not explain why all cryptocurrencies, not just Ethereum, are increasing. Arguably this upgrade is bad for Bitcoin, as it makes Ethereum closer to becoming a store of value asset like Bitcoin, so Bitcoin should have decreased following its successful implementation.
Another theory is that the cryptocurrency whales have stopped manipulating the market and creating sell pressure. They are now creating buying pressure, which will cause their holdings to increase in value, and will promptly sell off some of their crypto when they feel inclined to do so. This is nearly impossible to prove, though in unregulated markets there is always some level of manipulation. If this speculation is correct then the current uptrend is only temporary and will last as long as the whales want it to.
Even though an increase in price would suggest entirely positive news, there has been some negative news coming from the United States. In an infrastructure bill being evaluated by Congress, there is a section about taxing cryptocurrencies and crypto industries. Right now, it would require all wallet providers, exchanges, and proof of stake delegates to provide tax documents to their users, which is effectively impossible and would devastate the U.S. crypto industry. Fortunately, there is an amendment proposed by Senators Lummis, Wyden, and Toomey that exempts these entities from the proposed tax requirements, which would be incredibly positive for the market. Typically in times of uncertainty the price stays steady, so it does not make sense that there has been significant upside movement. At the moment, there are more supporters for the amendment than opposers, but it is still far from certain to pass.
Though the reason for the market’s increase is uncertain, investors can be cautiously optimistic about future price action. At current prices, many still believe that crypto is undervalued, so this price movement may simply be a correction to the true value of crypto. Regardless of what the cause is, there is news to both be celebrated and feared in the space, so investors need to use diligence and rational thinking now more than ever when choosing their next move.
By Lincoln Murr