What happened
The selling that caused cryptocurrencies to plummet for most of the last week appears to be turning a corner. Most cryptocurrencies are up significantly on Tuesday, with many rising by double-digit percentages.
As of 1:30 p.m. ET, Polkadot (DOT +3.41%) had been up by as much as 6.5% in the last 24 hours, Crypto.com Coin (CRO +1.01%) had popped by as much as 8.5%, and Avalanche (AVAX +2.20%) had seen a gain of as much as 11.1%. At the time of this writing, those cryptocurrencies were up by 6.1%, 8.5%, and 11.3%, respectively.
Image source: Getty Images.
So what
The chatter in the crypto space continues to focus on the expectation that the White House and Congress are on track to impose new regulations and clearer rules on the cryptocurrency market. The Biden administration has said it will ask federal agencies to assess the risks and opportunities presented by cryptocurrency assets, which could be good or bad for the industry. For long-term investors, I think the stability of greater regulation will be a positive thing, but there are often unintended consequences.
Tuesday's trading seems like a positive for cryptocurrencies, but it's worth putting the day's action into perspective. Over the past week, Polkadot is still down by 23.2%, Crypto.com Coin is down by 8.9%, and Avalanche is down by 17.3%. The gains over the past 24 hours may be nothing more than a transient bounce off recent lows as hopeful investors buy the dip.
There's no indication that any fundamentals have really changed, and the stock market overall is trading lower again on Tuesday -- and the crypto market has lately tended to move in correspondence with the stock market. So it's unusual that cryptocurrencies would be up by so much when stocks are falling.
Now what
Cryptocurrency traders have gotten used to this kind of volatility over the past year, with valuations rising or falling by double-digit percentages on a regular basis. What I think we need to focus on with each of these cryptocurrencies is what's being built behind the scenes. Decentralized finance infrastructure, NFT marketplaces, and protocols that innovations can be built on will be keys for the future of the industry.
What's challenging is trying to accurately value a cryptocurrency while those utilities are being built. Right now, price trends are based largely on the flow of funds into or out of cryptocurrencies and growth stocks. Because funds are flowing out, valuations are trending downward. I don't see that trend changing in the short term.
If you're a believer in the future of cryptocurrencies, this could be a nice dip to buy, but don't be surprised if valuations fall further. The crypto industry is still immature, and it's unlikely that every cryptocurrency being traded today will survive as the industry matures. The ones that have utility built on top of them are the most likely to live on.
As much as Tuesday's moves might seem to signal the start of a recovery in the market, with higher interest rates coming and the Federal Reserve planning to start pulling liquidity out of the financial system, crypto's drop may just be beginning.
