Dead cat bounce in cryptocurrency market?

After a week of massive volatility and slump, cryptocurrencies have rallied across the board early Friday morning (AEST) in thin volume trading as bargain hunters and technical traders have been in play to provide a risk-off tone to reverse the tipping point.

As of press time, Bitcoin (BTC) is changing virtual hands at US $40,500, Ether (ETH) at US $2,750, ripple (XRP) at US $1.17, Binance Coin (BNB) US $394, cardano (ADA) at US $1.81, Dogecoin (DOGE) at US $0.39, ChainLink (Link) at US $30, UniSwap (UNI) at US $26, Polkadot (DOT) at US $28 and Stellar (XML) at US $0.48.

Light or thin volume can be used by traders, even large institutional entities for a tactical trading strategy to influence market direction and make profit in the short-term volatility. The strategy is to trade huge volumes in an illiquid or subdued market to move the market in the desired direction, which is usually assisted by other traders in euphoria who think the market is recovering.

If evil has one power, it is the power of illusion to mask reality. And in this case, it is the lack of any good news or positive outlook to fundamentally support high prices.

However, in addition to the still intact fundamental factors outlining what is behind the current market downturn, there have been further developments overnight in the US.

A few hours ago, the Treasury Department announced a plan to tighten regulations and control over cryptocurrency markets and cryptocurrency holders. According to the Biden administration’s proposal, any cryptocurrency movement or transfer worth over US $10,000 will be reported by the crypto exchanges and facilitators to the Internal Revenue Service (IRS).

“As with cash transactions, businesses that receive cryptoassets with a fair market value of more than $10,000 would also be reported on,” the Treasury Department said in a report.

“Cryptocurrency already poses a significant detection problem by facilitating illegal activity broadly including tax evasion”, the Treasury notes, adding  “this is why the President’s proposal includes additional resources for the IRS to address the growth of cryptoassets.”

In addition, US Federal Reserve chief Jerome Powell said in a video message that cryptocurrencies pose risks to financial stability and warrants greater regulation.

The crypto market was already rattled early this month by President Joe Biden’s proposal to double capital gains tax (CGT)  on the highest-income Americans. From the looming legislation aspect, the move made sense for US-based crypto investors to dump their holdings earlier since the tax would later disproportionally affect late sellers who get massive unrealized gains.

Therefore, the current rebound so far suggests it is a false dawn, also known among the experienced traders as a ‘dead cat bounce’. A dead cat bounce is a temporary, short-lived recovery of asset prices amid an intact downtrend and does not indicate a reversal of the overall declining trend.

However, such artificially inflated prices can easily leave many newbie investors hemorrhaging losses if they wade into the risky assets imprudently.

In reality, the markets tend to bounce multiple times at double-digit percentage points during big downturns.

As no one knows when the market reaches its floor, for those thinking about investing it’s important to remember that it is drip-feeding your money into the market might be a sensible approach rather than a rush to top up.

Just a month ago in mid-April, cryptocurrency holders were fumed as a sudden constellation of risk events triggered the forced liquidation of leveraged bets, wave of selling with pressure across the board. The flash crash has made many investors cautious to buy into an ongoing crash.

The vicious sell-off was indeed a costly lesson for the rookies who have been stuffing their wallets with ‘upside momentum’ crypto coins with a false sense of security, thinking their holdings could only climb.

Risk Warning: Cryptocurrency is a unregulated virtual notoriously volatile asset with a high level of risk.  Any news, opinions, research, data, or other information contained within this website is provided for news reporting purposes as general market commentary and does not constitute investment or trading advice. 

This news is republished from another source. You can check the original article here

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