After the deluge, what’s next for crypto?

May 2021 was the roughest month for cryptocurrencies since 2018, with ether (ETH) down more than half its May peak of $4 325. Bitcoin was slightly better off with a 46% drop from its April peak above $63 000.

Not surprisingly, it was the smaller altcoins that took the brunt of the beating. XRP, a cryptocurrency that has gained favour as a vehicle for payments and remittances, was down 61% from peak to trough.

Cardano is down 55% from its May peak of $2.45, Stellar was down by half and Polkadot by 67%.

All told, the crash wiped $1.3 trillion off the total market cap of cryptos.

Find out how to still make money from crypto in a bear market.

Should we be worried? “No, because cryptocurrencies are a relatively immature market, about a decade old. One should expect periods of extreme volatility and whiplashing prices from time to time,” says Jon Ovadia, CEO of crypto exchange Ovex.

These are brutal crashes by any measure, but not particularly unusual, adds Ovadia. At the time of writing, bitcoin (BTC) had recovered 10% from its recent lows, ETH and XRP were up about 30% and Cardano rebounded 35% from its recent low of $1.06.

“Many new entrants to the crypto market are shocked by the extent of the crashes in price we have seen over the last few weeks, but this is something we constantly have to remind our clients about – cryptocurrencies are notoriously volatile and drops of 50% or more should be expected from time to time,” says Ovadia.

“The one thing that we can say with certainty is that the crypto markets will remain volatile for a while. Just this week we have seen rebounds in some cryptos of 30% or more.”

Ovadia says after peaking at $20 000 in December 2017, BTC suffered a crash of 84% over the next year. ETH went down by 90% over the same period, and obituaries were being written for cryptos in prestigious financial journals.

This time, those predictions are less shrill. Mark Yusko, chief investment officer of the hedge fund Morgan Creek Capital Management, predicts a quintupling in the price of BTC over the next five years.

Just four years ago, the big investment banks were famously hostile to bitcoin. JP Morgan Chase leader Jamie Dimon called it a “fraud” and a “tulip bulb” – but by 2018 Dimon said he regretted his comments.

Most investment banks now have dedicated crypto and blockchain research teams. Forbes reported a leaked Goldman Sachs report from the bank suggesting ETH could overtake BTC as a store of value.

That’s because ETH and the Ethereum blockchain stand front and centre in a new decentralised finance (DeFi) space that many believe will replace banks as the primary source of lending and interest over the next decade. These financial services are being built on the Ethereum blockchain and are being rolled out at dizzying speeds – though Ethereum’s high costs (or ‘gas’ fees) and clunky network is battling to keep up, even as it goes through multiple technical upgrades.

That clunkiness and the high costs open a door for competitors such as Cardano and Polkadot, both of which have better architecture but are far behind in terms of adoption. Another competitor is Binance Chain, a centralised exchange that allows users to do much the same as on Ethereum, but with greater efficiency and lower costs.

Non-fungible tokens (NFTs) are a recent addition to the DeFi space. These allow for the monetisation of digital art and collectables, and most NFTs are built on Ethereum.

Ovadia says it remains uncertain whether the crypto market has bottomed for the time being and advises against trying to time market tops and bottoms.

“That is a proven way to lose money in the crypto market. Those who try to call the bottom of the market may get it right from time to time, but they will eventually make a serious error that can result in losses.”

Ovadia says crypto arbitrage is a well-established method of profiting from price differences in crypto assets that are traded on different exchanges. For example, bitcoin frequently trades at a 2-5% premium on SA exchanges relative to overseas ones.

“It is possible to exploit these price differences and profit from them – which is what arbitrage is all about. It can be tricky and technically challenging for individuals to do this on their own, so we have set up a service at Ovex to take care of the logistics of arbitrage and to remove as many of the risks as possible.”

To participate in crypto arbitrage, South African residents can take advantage of the R1 million a year discretionary allowance, and the R10 million a year foreign investment allowance (for which tax clearance from the SA Revenue Service is required).

Ovadia says one of the key risks Ovex has eliminated is capital risk: “As part of the 1% fee we charge as an exchange, we are able to ensure that the client suffers no capital loss. In other words, in the unlikely event of a loss on an arbitrage trade, we cover that loss.”

Find out more about Ovex’s arbitrage service.

Brought to you by Ovex.

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