Crypto Market Under Pressure as Exuberance Gives Way to Caution

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The cryptocurrency market has lost value over recent hours as exuberance gives way to caution, but supply and demand fundamentals suggest this should only be a technical pullback.

The capitalisation of the crypto market fell by 6% to $2.6 trillion in the 24 hours heading into Friday.

The selloff comes after Bitcoin finally breached its 2021 all-time high, touching the $72,850 mark, before selling pressures built.

"The market mood seems optimistic, and investors are keeping an eye out for any signs of exuberance," says Manuel Villegas Franceschi, an analyst at Julius Baer.

Franceschi says the driving force behind recent Bitcoin demand has been "an overwhelming demand for the physically-backed exchange-traded funds (ETFs) amid a low market depth backdrop."

Further upside pressures come ahead of the Bitcoin halving event, which should limit supply further. The reward for mining new Bitcoin blocks will be halved, decreasing the number of new Bitcoins entering circulation, contributing to a reduction in inflation.

"Halving has the potential to impact the price of Bitcoin. The reduction in mining rewards can lead to a supply deficit, which historically has been accompanied by a rise in the price of Bitcoin," explains Passimpay, a crypto payment gateway for business.

Bitcoin's weekly issuance is roughly 6,300 tokens, but Franceschi explains this "is utterly dwarfed when contrasted against the ETFs' token demand in the past weeks, which is about 40,000 tokens."

Therefore, the current selloff seems to be more of a correction than a fundamental reappraisal of the crypto market's outlook.

"Obviously, new historical highs are a trigger for selling. Some players are taking profits, which raises the question of whether there will be enough hot buyers at current levels or whether the majority will prefer to wait for a deeper correction," says Alex Kuptsikevich, Senior Market Analyst at FXPro.

Kuptsikevich says the $65.0-65.5K and $60.0-60.5K areas are potential targets from here, as they contain important round levels (significant for retail) and the 76.4% and 61.8% Fibonacci retracement lines.

One potential fundamental negative that can weigh on the crypto market is doubts about the approval of physically-backed Ethereum ETFs in the U.S.

According to Franceschi, the approval of Ethereum ETFs "stand on weaker footing".

He explains that regulators from the Securities Exchange Commission (SEC) have not displayed the same proactivity in the matter:

"The Howey Test, which is a common precedent used by the SEC, states that an investment of money, in a common enterprise, with the expectations of profits, derived from the efforts of others, might bring further concerns; the reason is specifically regarding Ethereum’s burning mechanism’s contingency on network activity. If the burning mechanism does not offset the staking emissions, the blockchain simply enters an inflationary state."

Should institutions fail to get approval for Ethereum ETFs, we would imagine a great portion of the recent speculative interest in the crypto market will deflate.