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After a very rocky month of trading, the cryptocurrency market ended May on a high note. Nevertheless, the crypto market environment will likely remain challenging in June.
Cryptocurrency prices have been under major pressure since the beginning of 2022 as investors rotate out of risk assets like technology stocks. Market participants have become increasingly concerned that the Federal Reserve will be unable to curb persistently high inflation without pushing the U.S. economy into a recession.
The minutes from the Federal Open Market Committee’s (FOMC) May meeting suggest the Fed is prepared to deliver multiple 50 basis point (bps) interest rate hikes in coming months. That suggests the risk-off market sentiment will continue in June.
May Crypto Performance
Bitcoin (BTC) prices dropped more than 20% in May to finish the month below $33,000.
Ethereum (ETH) prices dropped more than 30%, closing out the month below $2,000 ahead of the planned Ethereum 2.0 transition from a proof of work consensus mechanism to a proof of stake model later this year.
Bitcoin prices are now down more than 32% year-to-date, but BTC has held up better than most major altcoins. ETH is down 46% so far in 2022. Polkadot prices have fallen 62% this year, while Solana (SOL) prices are down 72%.
The Crypto Market Is Bearish
Alkesh Shah, head of digital assets strategy for Bank of America, says cryptocurrency prices have come under pressure from three primary headwinds: high inflation, rising interest rates and recession risk. However, he says there’s no need for long-term cryptocurrency investors to panic.
“The market has corrected about 40% to 45%, and the media is writing as if it’s the end of the sector, that we’re entering a crypto winter,” says Shah.
Instead, Shah believes most major cryptos are likely stuck in a trading range until the U.S. economic outlook improves.
Crypto could break out of its trading range for a couple of solid reasons, says Shah. “The sector not only has assets with actual cash flows, such as Ethereum with $10 billion of transaction fees last year, but also we’re seeing major institutional adoption,” he says.
Institutional Buyers Helped in May
Institutional investors may be largely responsible for the positive price movement in Bitcoin and Ethereum in the closing week of May.
Marcus Sotiriou, analyst at UK-based digital asset broker GlobalBlock, says there has been about $520 million of inflows into cryptocurrency-backed funds so far in 2022. He says these inflows are particularly impressive given the negative price action in the crypto market this year so far.
“It indicates that institutions and high-net-worth individuals have been net buyers throughout this bear market,” says Sotiriou. “I think this is further evidence that while current macro headwinds exist, Bitcoin’s supply is being transferred from weak hands to those with long-term conviction.”
Cryptocurrency market weakness has wiped out more than $1 trillion in value so far in 2022. Fortunately, Goldman Sachs estimates cryptos only account for about 0.3% of U.S. household wealth.
A large amount of cryptocurrency is concentrated in the hands of a relatively small number of “whale” investors, according to Goldman, which suggests the cryptocurrency sell-off has had little impact on the economy as a whole or the wealth of the average American.
Shifts in the Stablecoin Market
Investor confidence in the stablecoin market was tested in May when Luna, which is associated with stablecoin TerraUSD (UST), completely collapsed.
TerraUSD is an algorithmic stablecoin that relies on Luna to maintain its $1 value. Unfortunately, the crypto market sell-off caused UST to lose its dollar peg in May, and Luna crashed all the way to $0.
Terra has already launched a new version of Luna as a replacement, but the collapse of the original Luna and UST wiped out $60 billion in combined value and raised uncomfortable questions about just how stable stablecoins really are.
The cryptocurrency market already has a reputation for being extremely volatile and dangerous. The Luna debacle may undermine investor confidence in stablecoins, which are designed to maintain value and are generally considered among the safest crypto investments.
The global stablecoin market is worth about $159.6 billion. Tether (USDT) is currently the largest stablecoin with a market capitalization of more than $72.5 billion. Tether briefly lost its peg to the U.S. dollar in May as well, as investors withdrew $7 billion from the stablecoin during the Luna crash.
The big winner from the instability in Tether may be USD Coin (USDC). USD Coin’s market cap grew from around $42.9 billion on May 1 to nearly $54 billion entering June. USDC provider Circle announced in late May that it will begin providing weekly reports on its reserves and liquidity to reassure investors.
Crypto Market Moves to Watch in June
In June, Ethereum will take the next major step in the crypto’s transition to a more energy-friendly proof of stake verification system.
The Ethereum network has been running two parallel blockchains since April, its legacy chain that operates using proof of work and a test chain that operates via proof of stake.
Ethereum plans to combine the two parallel chains together in August in an update it is calling “the merge. In June, Ethereum plans to update its test network Ropsten in a key trial run for the merge.
The key risk for cryptocurrency investors in coming weeks may be the possibility of a softening U.S. economy.
On the inflation front, cryptocurrency investors should keep an eye on the Labor Department’s U.S. Consumer Price Index (CPI) report for the month of May, which will be released on June 10. The CPI data will update the market on how well the Fed’s initial interest rate hikes are working to ease inflation.
The June Fed meeting on June 15 could also be a major crypto market mover. Investors are anticipating another 50 bps interest rate hike, but any updates from Fed Chair Jerome Powell during his press conference on the health of the U.S. economy could be an important market catalyst.
Finally, investors should monitor ongoing developments on the cryptocurrency regulation front. Securities and Exchange Commission (SEC) Chair Gary Gensler said in April that the SEC plans to register and regulate crypto platforms, and the SEC recently announced it has nearly doubled the size of its cryptocurrency unit.