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Cryptocurrency investors should be breathing a sigh of relief right now. And not just because the price of bitcoin is on the rise again.
In fact, the recent climb in crypto prices isn’t even the most important thing that’s happened this year. The real reason to celebrate is the crypto market is behaving like, well, a market.
Don’t mistake volatility for irrationality. Everything about the cryptocurrency market this year has been “rational.”
When there was bad news in the crypto market, the price of bitcoin and other cryptos dropped. That’s what happened early this year when China moved to ban access to offshore exchanges and South Korea decided to implement strict KYC (know your customer) rules for exchanges.
The market dipped again this spring when India banned banks from processing payments for cryptocurrencies. China, South Korea and India are three of the most important crypto markets in the world.
If there’s a disruption in those markets, crypto prices are going to drop. Throw in the SEC signaling it’s going to crack down on initial coin offerings in the United States and you get the environment for a massive sell-off. That’s what happens in a true market.
Similarly, when there was good news, prices went up. As we noted last week, we’ve seen some pretty good news recently. Venture capital firm Andreessen Horowitz has begun hiring for a separate crypto fund. Goldman Sachs made its first crypto hire. Nasdaq is mulling over a crypto exchange. And crypto prices are going up again.
Once again, this is the way a market is supposed to behave. When there’s bad news, the market usually goes down. When there’s good news, the market usually goes up.
This is exactly how the stock market works. The market soared when the Trump administration began rolling back regulations and signed a major tax cut into law. And it dipped when it looked like the U.S. was headed for a trade war with China.
In a way, the crypto market is more rational than the stock market. We’ve seen instances where strong durable goods and home sales data have sent stock prices down. Strong jobs reports have had the same effect recently as well.
Why is it so important that the crypto market is behaving like a “true” market?
Markets are predictable. Investors can look at the available data and, with reasonable certainty, identify where the markets are headed, where the various inflection points might be, when to time investments and what makes for a good investment.
You can’t do that in an irrational environment, but you can in a rational environment. The crypto market is proving to be perfectly rational. And rational markets are great investment vehicles.