The upwards traction in the cryptocurrency market appears to have slowed to a stall overnight and a market-wide pullback is looming after a wild ride pushed multiple cryptos to new all-time highs on Wednesday on the back of a crypto market frenzy and hype-fuelled trading.
On the back of a relative pickup in risk aversion from early morning AEST, risky assets have started to gradually pull back as the market has reached levels considered as overbought thresholds by technical traders. More on this below.
As of press time, Bitcoin (BTC) is changing virtual hands at US $55,400 (down from US $58,100), Ether (ETH) at US $3,370 (down from US $3,520), ripple (XRP) at US $1.52 (down from US $1.67), Binance Coin (BNB) US $614 (down from US $650), cardano (ADA) at US $1.53 (down from US $1.64), Dogecoin (DOGE) at US $0.57 (down from US $0.63), ChainLink (Link) at US $46 (down from US $48), UniSwap (UNI) at US $38 ( down from US $42) and Polkadot (DOT) at US $40 (down from US $41).
U.S. Treasury Secretary Janet Yellen sat at a WSJ event that the US government at the moment does not have an adequate regulatory framework to deal with cryptocurrency issues, such as “money laundering, Bank Secrecy Act, use of digital currencies for illicit payments, [and] consumer protection.”
“I frankly don’t think we have a framework in the United States that is quite up to the task of putting in place a regulatory framework that we need in the future”.
Her comments could also be interpreted as a possible regulatory framework being or to be developed by the US government to deal with the new challenges posed by cryptocurrencies and blockchain.
Her comments about a possible interest rate hike to keep the economy from overheating could also affect investors’ willingness to take extra risk with the non-traditional assets.
Meanwhile, US President Joe Biden on Wednesday defended his plan to double the top capital gains tax rate in the country from its current rate of 20% to almost 40%.
“This is about making the average multimillionaire pay just their fair share. It’s not going to affect their standard of living a little bit,” he said during an event at the White House.
Biden’s CGT hike would negatively impact crypto holders who are sitting on large amounts of unrealized gains, and would encourage profit taking before the proposal is legislated.
At the same time, as reported earlier it is hard to say if Biden’s tax plan will smoothly clear the US Congress hurdle given some Democrats, let alone most Republicans, are likely to oppose the proposed steep increase.
Overbought is a term used in RSI technical analysis to describe a condition when an intensified buying pushes the price too far up usually after a sharp percentage increase in short period of time. The RSI is most typically used on a 14-day timeframe, measured on a scale from 0 to 100, with high and low levels marked at 70 and 30, respectively. The RSI provides signals that tell investors to buy when the currency is oversold and to sell when it is overbought.
Although just because currencies have gone up or down too much does not mean that they still cannot go even higher or lower, the overbought and oversold conditions, especially after resistance levels (attempts run out of steam to push higher or lower) indicate the traction whichever way is exhausted and the pullback is imminent.
Note a pullback should not be confused with a reversal as a pullback is a temporary pause or dip which might actually quickly turn into an upward momentum while a reversal is a more long-term drop against the otherwise prevailing trend. It happens because bargain hunters usually see pullbacks as an opportunity to top up their wallets and support the price upwards. Some indicators, including moving averages and pivot points can be used to decide whether a pullback is actually turning into a reversal.
It is important to note that the range in price swings at the moment shows any possible pullback would likely be limited in the magnitude due to strong support under the current levels.
Despite the downside risks, positive traction might be possible if there comes further significant improvement to increase risk appetite.