The recent strength in the cryptocurrency market is likely due to a return to the mean, investment firm Bernstein said in a Jan. 23 report, making it the largest crypto asset by market capitalization. He mentioned that one Bitcoin (BTC) has fallen more than 65% in 2022. Mean-reversion is the theory used in finance that the price of an asset tends to revert to its long-term average value or average level.
Bernstein advises caution against being bearish at current levels as crypto mean reversion still has room to go. He added that Bitcoin has never had two consecutive years of negative returns in its history.
While the bankruptcy filings of crypto exchange FTX and crypto broker Genesis are negative news, “a potential overhang in the liquid crypto market has receded,” the report said. Much of the selling pressure was in private crypto assets with low liquidity, he said.
Creditors and Digital Currency Group (DCG), which owns Grayscale, Genesis and Coindesk, are in talks to settle the risk of an immediate sale of Grayscale Bitcoin Trust (GBTC). With the whole situation now under court control, “the cryptocurrency market appears to be somewhat freed from the forced-sell scenario,” he said.
However, Bernstein analysts Gautam Chhugani and Manus Agrawal said that this means more “cryptocurrency (sidestream stablecoins) internal capital is being deployed. “Therefore, it is unlikely that this is the beginning of a sustained price increase.”
“We have yet to see a new capital allocation to sustain this uptrend.”
The news that Hong Kong is about to allow retail investors to trade crypto assets has also contributed to the positive sentiment in the crypto market, the report adds.
｜Translation: coindesk JAPAN
｜Editing: Toshihiko Inoue
｜Original: Bernstein: The Bounce in Cryptocurrencies Is a ‘Mean Reversion’ Rally