The downturn in the crypto market might end up lasting for a shorter time than many expected. There are already encouraging signs that retail investors' risk appetites could be returning, given the mini-rallies we've seen this summer in some tokens. At the same time, some institutional investors appear to be preparing to take new positions in crypto, potentially leading to a broad-based market recovery.

So which cryptos will lead the rebound? Right now, the best candidates are Bitcoin (BTC -0.83%) and Ethereum (ETH -0.10%). They are the two largest cryptocurrencies by market cap, and both of them are the intense focus of investor attention heading into the fall. 

Bitcoin

Bitcoin has always set the tone for the crypto market, and there is no reason to think that this time will be any different. Most encouraging for investors is the fact that Bitcoin recently tested a key support level ($20,000) and now appears to be headed upward. The next key support level could be $30,000. If Bitcoin can maintain that threshold, then we could easily see the return of prices that we saw earlier this summer.

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Image source: Getty Images.

But far more important than retail investor sentiment will be the entry of big institutional investors into the crypto market. Cryptocurrency exchange Coinbase (COIN 4.68%) recently signed a deal with BlackRock (BLK 0.86%), the largest asset manager in the world, to provide crypto-trading support for wealthy private clients and large institutional investors. Any decision by the world's biggest pension funds, endowments, and foundations to get involved in crypto would immediately push up the price of Bitcoin.

Right now, BlackRock has nearly $10 trillion in assets under management, so even a 1% allocation to crypto from its institutional client base would significantly impact the crypto market. Moreover, since Bitcoin is the largest crypto by market capitalization, it is likely to be the primary target of these large institutional investors as they seek to deploy capital.

Ethereum

Ethereum is the other cryptocurrency that could lead the market recovery. All eyes are on the latest technological upgrade from Ethereum, known as the Merge. This is arguably one of the most anticipated events in the crypto market right now, as it will transition Ethereum from being a proof-of-work blockchain to being a proof-of-stake blockchain. This upgrade has tremendous real-world implications because it will make the Ethereum blockchain faster, more efficient, and easier to use. Right now, the complaint in the crypto world is that Ethereum is simply too clunky to use, as well as too expensive. Gas fees (the transaction fees paid to use the blockchain) have been a source of contention with developers and users. 

So if Ethereum is able to make the tech upgrade without any significant issues, this will have a huge impact on investor sentiment. Ahead of the Merge, in fact, investors have been moving into Ethereum in anticipation of a major move to the upside. And positive sentiment around Ethereum will help to improve the fortunes of similar blockchain projects that developers are using to create new gaming, entertainment, and metaverse offerings. 

Wild-card factors

Of course, the crypto market is highly volatile, so it is important to keep in mind that unexpected domestic or international events might derail any crypto recovery. Given that this is an important election year, any unexpected policy moves or major news items in the fall could have uncertain consequences for a fragile market that's just now trying to regain its footing. A war with China over Taiwan or any escalation in the Russia-Ukraine conflict could also put the brakes on any nascent crypto rebound as investors seek out less-risky assets in a more chaotic world.

However, if the market is going to rally in the final months of 2022, Bitcoin and Ethereum will almost certainly lead the way. Once these two cryptos start heading higher and show their staying power, it will signal to investors that now is the time to get off the sidelines and back into the crypto market.