The rotation from bitcoin into ether could point to a 2017-style correction in the crypto market, research firm says
- The surge in prices for cryptocurrencies this year "has a whiff of deja vu", reminiscent of bitcoin's rally in 2017, said Vanda Research on Monday.
- Bitcoin's rally four years ago was followed by a correction and a jump in interest in then-lesser known cryptocurrencies like Ether.
- Bitcoin and Dogecoin have slumped after hitting all-time highs this year.
Prices for Bitcoin and other cryptocurrencies have boomed this year, in part on growing acceptance of digital assets by Wall Street and corporate America, but a broader correction in the market appears to be brewing and it's reminiscent of bitcoin's slide in 2017, one research firm said Monday.
Bitcoin so far in 2021 pushed above $1 trillion in market capitalization and hit an all-time high of $64,804.72 on April 14, the same day that Coinbase, the largest cryptocurrency exchange in the US, began trading as a public company. Dogecoin last week surged to a record high of over $0.73, according to CoinGecko, and ether, the token tied to the Ethereum blockchain, on Monday notched a record high of $4,221.20. Bitcoin and ether are the two largest cryptocurrencies by market capitalization.
"The meteoric rise in cryptocurrencies has a whiff of deja vu," to bitcoin's move in 2017 when a months-long rally catapulted it to become the best-performing crypto asset, said Vanda Research, which tracks retail investing activity, in a note Monday.
"When the rally started to look tired in November [2017], investors rotated to lesser-known altcoins like Ripple and Ethereum, which quickly became household names, too," wrote Ben Onatibia, head of markets at Vanda Research. Ripple then peaked in early January 2018 while Ethereum held to its gains until mid-to-late January of that year, he said.
"In the months that followed, cryptocurrencies cratered as retail investors rushed to the exit," he said.
Now, the crypto market is in the midst of "precisely the same hot potato game," that took place four years ago.
"Under the pretext of institutional support, retail investors started rotating out of speculative retail stocks and pouring their money into Bitcoin," Vanda Research said in its note. Following the most recent peak, retail buyers have flocked to dogecoin and ether, echoing what transpired in 2017.
Bitcoin's jump this year has been supported as more big firms have stepped up their activity into the crypto market. Electric vehicle maker Tesla in February said it invested $1.5 billion in bitcoin and CEO Elon Musk said it would start accepting bitcoin as payment for its cars. Meanwhile, Goldman Sachs has formed a new cryptocurrency trading desk and PayPal started allowing US consumers to use their cryptocurrency holdings to pay at millions of its online merchants.
But Bitcoin has dropped 13% since its all-time high less than one month ago, trading below $57,000 on Monday. Dogecoin has tumbled 34% since last week's high, slumping below $0.50 on Monday after dogecoin enthusiast Musk talked about the meme token during his gig hosting "Saturday Night Live" over the weekend.
"Despite Elon Musks' attempt to boost Dogecoin this weekend ... it has failed to climb back to year-to-date highs. If and when Ethereum suffers the same fate, the cryptocurrencies will likely face a wave of redemptions," said Onatibia. He noted that Musk's SpaceX satellite company has said it will accept the meme cryptocurrency as payment for the company's mission to the moon in 2022.
"Indeed, open interest data from different crypto exchanges shows that there has been a rotation from Bitcoin to Ethereum since the Coinbase IPO. We think a correction in crypto would push retail investors back into equities, where some of their favorite stocks are now trading at a significant discount vis a vis the February highs," said Vanda Research.