The hype surrounding cryptocurrencies seems to be fading.
The cryptocurrency market has been strong all year, but that momentum appears to be coming to an end as April draws to a close. The overall market has fallen, but the big players are leading the way.
Bitcoin (BTC -5.07%) Stocks have fallen 4.7% since the market closed on Monday. Ethereum (Ethereum -6.62%) It has fallen by 6.5%. dogecoin (Doge -6.48%) 6.1% off. And it continues to be a bad week, with the token falling 9.7%, 8.1%, and 18.2% in the past seven days.
Cryptocurrency ETFs have reached saturation
The arrival of Bitcoin exchange-traded funds (ETFs) on the U.S. market brought billions of dollars of new investment into the industry and sent Bitcoin skyrocketing, pulling the overall market. But that didn't happen in Hong Kong.
Yesterday, Bitcoin and Ethereum ETFs were introduced in Hong Kong, but on the first day only $8.5 million of Bitcoin ETF trades and $2.5 billion of Ethereum ETF trades were made. This may indicate that demand for crypto ETFs is waning.
The fate of the Binance founder
Another cloud hanging over cryptocurrencies is the Seattle verdict against Binance founder Changpeng “CZ” Chao. He pleaded guilty in November to one count of violating the Bank Secrecy Act, but prosecutors are seeking a three-year prison sentence.
It is unclear what will happen with CZ, but as has happened with previous lawsuits and complaints, the crypto industry has had to fight for both regulatory clarity and industry misconduct. Investors were reminded of that today.
Momentum trading may be over
Even more worrying for crypto investors is that the driving force behind the rally over the past six months has disappeared. Investors have been in a “risk-on” mindset since mid-2023 and are now faced with the reality of a slowing economy and higher interest rates for longer than previously expected.
Cryptocurrencies were thought to hedge some of these economic woes and offset the inflation caused by money printing. Still, the reality is that crypto trading is correlated with higher-risk assets such as growth stocks. And when earnings fall even slightly below expectations, many growth stocks fall.
Barring an improvement in economic growth or investor risk appetite, cryptocurrencies may remain at their highest levels for some time.
How can cryptocurrencies regain their mojo?
What I'm looking forward to next year's growth is the utility that virtual currencies will bring to the financial market. Companies are testing or beginning to use cryptocurrencies and blockchain for applications such as financial payments and bond issuance, but these are just scratching the surface of potential use cases. However, market value is still driven by hype and speculation rather than actual utility.
I believe that tokens that add utility are best for long-term investments. In that case, meme coins like Dogecoin and tokens like Bitcoin, which are expensive to use for transferring funds, may be buried. Blockchain is coming, but not all tokens will have value when it does.
Travis Hoium has a position in Ethereum. The Motley Fool has positions in and recommends Bitcoin and Ethereum. The Motley Fool has a disclosure policy.
