The latest crypto market overview
So far, 2020 has been a good year for the cryptocurrency market. Despite significant volatility, Bitcoin (BTC) has recently crossed the $10,000 mark for the first time since February.
Much of the rally has been attributed to the anticipation of Bitcoin halving on May 11 or the point at which block rewards for miners are halved. The halving process reduces the supply of BTC and, if demand stays the same, should lead to price appreciation. The two previous instances, in 2012 and 2016, coincided with large increases in the price of BTC.
More broadly, there is a great variety of factors that impact crypto prices. An interesting way to assess the emotional state of the crypto market is the Crypto Fear & Greed Index. The index is composed of six data series: volatility of Bitcoin, trading volumes and price momentum, social media sentiment, surveys, Bitcoin market cap and Google trends for a range of Bitcoin terms.
After seven weeks of indicating “extreme fear” in the market, the index rallied steadily from the end of April and is now closer to a more neutral sentiment.
Fundamentally, the cryptocurrency market is driven by the volatility of the global financial markets, clear instances of real-life adoption of crypto coins and the regulatory landscape.
Unprecedented volatility in the global financial markets due to the Covid-19 pandemic has increased interest in using cryptocurrencies to hedge investment portfolios. Due to their decentralised nature, digital coins and tokens are likely to benefit when confidence in the global economy and banking system is low.
Some investors also use cryptos as a hedge against inflation. Paul Tudor Jones, for example, has recently disclosed that his hedge fund has a small position in Bitcoin as an inflation hedge.
Examples of mainstream adoption of blockchain technology are likely to drive price appreciation in the underlying coins. One recent example is a pilot project between New Balance and IOHK, to use the Cardano (ADA) blockchain in sneaker authentication. Another is the work Microsoft (MSFT) is doing with Ernst & Young to develop a blockchain solution for royalty payments for the Xbox.
On the regulatory front, there has been a notable change in the attitudes of politicians and central bankers. Various central banks are exploring the possibility of central bank digital currencies (CBDC), with the Swedish central bank launching a one-year pilot of e-krona in February. The e-krona uses distributed ledger technology, similar to blockchains that power cryptocurrencies.
More importantly, China is about to begin trailing its new digital currency, e-RMB, this month. The trial will be conducted across several cities, including Shenzhen, China’s fourth-largest city. China believes that a functioning e-RMB might provide an alternative to the dollar-denominated SWIFT network, reducing global reliance on the USD.
Accessibility of crypto derivatives, including futures and options, also plays a key role in the institutionalisation of the crypto asset class. After launching Bitcoin futures in 2017, CME followed it up with the introduction of options trading on its BTC futures contracts in January of 2020. Around the same time, Bitcoin options trading was also launched on the Bakkt platform as well as the Binance-backed FTX platform. As investors continue to wait for a cryptocurrency ETF, assets under management at Grayscale topped $3bn at the end of April. Grayscale manages the first publicly quoted trust for Bitcoin and other cryptocurrencies, with prices quoted on the OTCQX exchange.
All of the above developments are likely to drive increased adoption of cryptocurrencies. Tom Lee, Head of Research at Fundstrat Global Advisors, believes that it is a logarithmic function where if you double the number of users, you quadruple the value. This concept is key to his valuation target of $25,000 for Bitcoin and supportive of the long-term bullish trend in other cryptocurrency assets.
What are the top cryptocurrencies to invest in May 2020?
To help investors decide what crypto to invest in, we discuss five major coins and their prospects below.
Bitcoin continues to be one of the best cryptocurrencies to invest in. It was the first cryptocurrency in the world when it launched in 2009 and currently makes up approximately 65 per cent of the global cryptocurrency market capitalisation. We have already discussed the halving event and the price reaction in the two previous instances. Reduction in the supply of bitcoin should increase its scarcity and lead to price appreciation. BTC rallied into the halving event as investor sentiment improved and miners accumulated bitcoin, limiting the supply. It has given up some of the gains during the last few days and short-term volatility is widely expected.
Trade Bitcoin to US Dollar - BTC/USD CFD
The introduction of futures and options for bitcoin has allowed advanced price discovery and created an opportunity for institutional investors to participate in the market. Recently, some indicators point to short-term bearish sentiment from institutional investors. However, in the medium to longer-term, most investors remain bullish with Grayscale seeing a record $500m of inflows into its cryptocurrency products in the first quarter.
Ethereum is the second-largest cryptocurrency by market capitalisation. It is an open-source, distributed computing platform that is best known for its smart contract functionality. Ethereum network allows developers to program their decentralised applications inside the network. For example, both Tether and Augur run on the Ethereum network.
Independent of the public Ethereum chain, customised networks are being tested globally, including by Microsoft (MSFT), IBM (IBM) and JP Morgan (JPM). The long-term potential of the Ethereum network is based on its ability to execute smart contracts in any field, from energy grids to home mortgages, and verify digital ownership of assets.
In the short term, the Ethereum network is set to transition from Proof of Work (PoW) to Proof of Stake (PoS), creating Ethereum 2.0. A PoS network effectively eliminates the energy-intensive mining process and is more cost-efficient. The launch is now set for July 2020 and a successful upgrade is likely to drive increased adoption and support the price of ETH.
EOS is another cryptocurrency created to support smart contracts. It was launched by Dan Larimer, who before his work on EOS founded BitShares and co-founded the Steem blockchain. Similar to Ethereum, EOS offers developers a platform on which to build decentralised applications.
The bull case for EOS rests on the growth of smart contracts and its ability to take market share from Ethereum by offering a more scalable solution. EOS is also one of the better-funded initiatives in the cryptocurrency space as it raised an estimated $4bn through its initial coin offering.
Stellar has been around since 2014 and was originally designed based on the Ripple network. In fact, Stellar was a fork of Ripple’s XRP and developed its own code after the launch. It is an open-source, decentralised protocol that supports cheap international currency transactions.
This differentiates Stellar from Ripple, which has a certain degree of centralisation and is not truly open-source. One of the key features of the Stellar network is the distributed exchange that facilitates cross-border transactions between currency pairs at the best available exchange rate.
Globally, 1.7 billion people have no bank accounts and many more remain underbanked, lacking access to basic financial services. Stellar can support remittances and micropayments at scale, making it one of the best crypto to invest in for 2020 and beyond.
Cardano was founded in 2015 by Charles Hoskinson, co-founder of Ethereum. It is described as a third-generation cryptocurrency, following Bitcoin and Ethereum.
Cardano is a layered system, allowing peer-to-peer transactions on its blockchain layer and smart contracts on a separate layer. This multilayer network makes Cardano more flexible, scalable and secure. Any examples of real-world use, like the New Balance pilot project for sneaker authentication, are likely to push ADA higher.
Short-term forecast for the crypto market
While the long-term trend in cryptocurrency assets is undoubtedly bullish, in the short-term, the markets will continue to be driven by sentiment. A significant monetary stimulus by global central banks is pushing institutional investors to adopt cryptocurrencies as a hedge for inflation.
Furthermore, the halving of the block rewards provides technical support for bitcoin and other cryptos. If history is any guide, the asset class should experience steady price appreciation into the year-end.
So, does it mean that the top five cryptocurrencies are poised to hit fresh record highs? Follow Capital.com to always stay on top of the latest market developments and trends to spot the best trading opportunities.