Sophia’s Thoughts on Crypto After the Crash
The crypto market lost almost as much last week as it lost when FTX collapsed. Where can crypto go from here?
These are Sophia's Thoughts:
Unlike during the FTX crash, the current crash was not driven by shocking events in the crypto market. Instead, the crash was driven by investor anxiety and overreactions.
Sophia, our crypto intelligence bot, had momentarily turned bearish right after the crash. But, recently, it picked up new developments in social chatter that may provide a lift.
In particular, anticipation around a decision in the Grayscale vs SEC case and the new friend.tech application have hyped up the crypto conversation.
Going forward, we expect more volatility. The upside if Grayscale wins can be huge. The downside can be limited if sentiment continues to provide the strong support it has offered this year.
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🚀 Last week’s market performance
The market, along with Bitcoin (BTC), experienced a decline of over 10% following the downturn last week. The three biggest losers of the week were Conflux (CFX, -35%), Compound (COMP, -25%), and Apecoin (APE, -25%). The sole winner last week among the top 100 coins: THORChain (RUNE). It continued its impressive bull run from last week and registered an 18% increase. Sophia was mostly bearish last week amidst a tug of war between crypto sentiment and fundamentals.
🧐 What is your crypto mood today?
In each Sophia's Thoughts newsletter, we ask about your crypto mood. Your response to this question helps Sophia get a better sense of the pulse of crypto markets. And this ultimately translates into better insights for you when combined with Sophia's AI models. Your data empowers Sophia to provide you with even better intelligence going forward!
📉 What happened last week?
The cryptocurrency market recently experienced a significant downturn, losing more than 10% of its value in a week. The crash followed an unusually calm period. It was triggered by a series of events:
The Federal Reserve’s minutes reflected concerns about inflation.
The bankruptcy of Chinese real estate company Evergrande in the U.S.
Despite these events not fundamentally altering the crypto landscape, they led to a massive selloff. More than $1 billion in crypto positions were liquidated. The market’s reaction was more emotional than rational, highlighting the susceptibility of the crypto market to sentiment shifts and external news.
🕰️ Now vs then
The last time the crypto market lost more than 10% in a matter of a few days was when FTX collapsed in November 2022. The situation back then was a bit different, however. The crash in November 2022 was triggered by crypto-specific events. In particular, the at-the-time second largest crypto exchange FTX collapsed seemingly out of nowhere. Over the course of 10 days, it became clear that FTX had deceived investors. That it misused and misappropriated customer funds. And that it ran a highly risky and levered trading operation that secretly exploited the exchange’s token supply.
The revelations about FTX had a real impact on crypto sentiment. Prior to the FTX collapse, Sophia measured positive crypto market sentiment on social chatter. But sentiment crumbled and turned negative after the FTX collapse. In contrast, currently crypto market sentiment continues to be positive. Even though it has slightly cooled off from the peaks earlier in the summer. Strong sentiment continues to offer support for crypto prices.
🧠 What has Sophia been saying
Until the crash, Sophia had been mostly neutral on crypto amidst the low volatility cycle. Her mood changed right after the crash and turned bearish. Recent performance is an important fundamental metric for Sophia. So the fundamentals for coins appeared weaker once the crash took place. In the days after the crash, Sophia started measuring weaker support from social chatter sentiment. This perpetuated her bearish mood.
For today, Sophia expected a complete reversal. Her mood turned bullish last night. The boost in her mood was partially due to what seemed to be slightly undervalued fundamentals. But, mostly, Sophia was again picking up strong support from social chatter sentiment. We did not witness a bull run today given that Bitcoin briefly dropped below $26,000. However, Sophia’s insight into appreciating sentiment coincides with new developments in social chatter.
New hype arose around a new crypto application called friend.tech. It allows the monetization of social capital by enabling influencers to issue shares to participate in their conversation circles. Friend.tech dominated the conversation yesterday. The app generated more than $1.4 million in fees in 24 hours. It has reportedly paid out more than $2.5 million in profits to its users.
Another topic that dominated the conversation yesterday was the anticipated ruling in the Grayscale vs SEC case. Last year, the SEC rejected Grayscale’s application to turn its Bitcoin trust into an ETF. Grayscale then sued the SEC, arguing that the rejection was unjustified. Investors expected a decision to arrive today. And several analysts were estimating the probability of a Grayscale win to be 70%. The anticipation around this result really hyped the crypto conversation online. Many believed that, if Grayscale wins, then automatically all spot Bitcoin ETFs would be approved. For full clarity: They would not be. If Grayscale wins, it just means that the SEC would have to go back and decide whether they want to reject the Grayscale application for another reason. Or whether they do actually want to approve the application. That would have major implications for crypto. When the decision did not get released today, however, the hype quickly succumbed. Bitcoin fell below $26,000. Now, many are expecting a decision this Friday.
👀 What’s next
Last week’s market crash is unique because it was not driven by fundamental properties of the crypto market. It was due to investors being nervous at a time when crypto was abnormally calm. Given that not much has changed in terms of macroeconomic conditions or crypto fundamentals, the next steps for crypto will depend on how crypto sentiment develops.
A critical test will come when the Grayscale vs SEC decision is announced. If Grayscale wins, we can expect sentiment to boom again. A Grayscale win may not mean that spot Bitcoin ETFs are a sure thing. But we expect a similar development as when Ripple won its lawsuit. Back then, crypto sentiment became very positive and the crypto market gained 5% upon the decision announcement.
If Grayscale does not win, not much changes in the fundamentals of the crypto market. We continue to expect the SEC to announce its decision on the BlackRock, Fidelity, WisdomTree, and Ark Invest Bitcoin ETF applications next year. We may see some outflows out of crypto and a slight cooling of sentiment. But we don’t expect the worst case scenario to be as bad as after the last crash during the FTX collapse. That’s because sentiment is currently driven by die-hard crypto believers. They are unlikely to be deterred by a negative decision.
All in one, be prepared for more volatility. And let Sophia guide your way through the ever-changing crypto landscape.
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