Don’t Fear Crypto, Embrace it

The cryptocurrency market is one of the most exciting financial opportunities of our modern times. First introduced through Bitcoin in 2009, around the time of the financial crisis with the aim of being an autonomous monetary system, its growth has been exponential. Early adopters and users of the currency are optimistic about its future but there is a negative bias of sentiment towards the market. This bias can significantly affect investor perceptions and actions in the crypto market.  

This year alone, market sentiment (based on the Crypto Fear and Greed Index) has been mixed. In January 2024, the index was at an average of 54 indicating a neutral sentiment to crypto by market participants. However, in July 2024 (and at the time of writing), the index was at 29, indicating fear among market participants about losing their capital. These complex sentiments are the result of several factors, such as market dynamics, economic conditions, regulatory developments, and emotional and psychological factors. But the negative bias in the industry has exacerbated the impact, as will be discussed below.  

Since 2023, Bitcoin and similar cryptocurrencies have had impressive performances with Bitcoin reaching an all-time high of $73,000 in March 2024. This set a positive tone for the currency and sentiment also reached an all-time high (averaging 88 on the Crypto Fear and Greed Index). However, the rapid price increase over the past several months has left some investors wary of the steep rise and cautioned that Bitcoin’s price could correct, falling significantly. Now market corrections aren’t unusual in financial markets, but during these periods negative sentiment can dominate, leading to a prolonged and more severe downturn than might be justified by actual market fundamentals. 

Additionally, the inherent volatility of crypto means that any negative news, via social media or news outlets, can cause price swings and exaggerated responses. Most notably, rumours and unverified news can spread quickly, causing widespread panic, and selling of a cryptocurrency. 

The cryptocurrency sentiment is also influenced by broader economic conditions, such as fiscal and monetary policy. Typically, when these policies are expansionary (low interest rates or tax cuts), the demand for riskier assets (like crypto) increases. And market sentiment tends to be positive.  

The regulatory environment has become critical to crypto market sentiment. The approval of Bitcoin and Ethereum ETFs by the U.S. Securities and Exchange Commission (SEC) is a major positive development. It signals the start of Bitcoin’s acceptance into financial institutions and has led to an increase in investor sentiment.  

At the same time, further regulation around cryptocurrencies is uncertain. In the UK, current regulations focus on Know Your Client (KYC), anti-money laundering (AML), combating the financing of terrorism (CFT) and capital gains tax on crypto trading tax. Further regulations are being considered, although what it will be and when it will be implemented is uncertain. This uncertainty is also exaggerated by the negative bias in the market, as news about potential regulation or government crackdowns can cause fear leading to panic selling, even if the actual impact of the regulation is minor or uncertain.  

Another element is the ongoing technological developments within the blockchain and cryptocurrency space. Ethereum, the second largest cryptocurrency by market cap, is undergoing significant upgrades aimed at improving its scalability and reducing transaction costs. Adding to the appeal of Ethereum will be the Dencun Upgrade, which will enhance its development, including Layer 2 protocols.  

Blockchain is also beginning to be adopted more, with more users understanding the security the technology offers. However, security breaches that do occur do lead to loss of confidence and panic selling. Again, this leads to an exaggerated effect on the whole crypto market, rather than only the affected company or currency.  

Emotions significantly impact an investor's decision-making, behaviour, and ultimately performance in financial markets. The first emotion and psychological factor is the fear of loss. Investors tend to fear losses more than they appreciate gains of a similar magnitude. This fear can drive investors to act more quickly and drastically to negative news. The second factor is the recency effect, in which investors often give more weight to recent events over historical ones. In the event of negative events that happen in quick succession, sentiment changes to negativity and can overshadow positive developments. The last factor is herd behaviour, a hardwired human behaviour.  The crypto market has a mixture of institutional and retail investors, but retail investors are more sensitive to market news as the losses faced are more impactful than on intuitional investors. As a result, retail investors will follow the trend of selling a cryptocurrency, without understanding the market, causing an exaggerated downward trend.  

While the traditional investment market is influenced by fewer factors than the cryptocurrency market, there is generally more of a negative bias towards the crypto industry. However, this bias can be mitigated in the following ways: 

Firstly, investors should seek a balanced view of market movements, by reviewing both positive and negative news sources. Secondly, unless investors are day-trading, they should seek long-term holds to mitigate the impact of short-term negative news. Thirdly, education on investment products, even in the crypto industry, is valuable and investors should understand the market dynamics and theory to ensure rational decisions are made. Lastly, investors should employ risk management strategies, such as stop-loss orders and portfolio diversification to cushion against the impact of sudden changes in market sentiment.  

The cryptocurrency industry is a new industry with much to offer the savvy investor. For institutions and family offices that are interested in diversifying their portfolio into crypto, Galahad AI LTD has developed a proprietary predictive AI technology that reduces risk in volatile markets while ensuring stable capital appreciation. Over the past 3 years, we’ve achieved annualised returns of 35%. For more information, please visit www.galahad.london and join us in pioneering AI financial trading. 

By Kavisha Gounden, Co-Founder and CEO of Galahad AI LTD.