According to a research report by the renowned investment research firm Bernstein, published on Monday, the recent resurgence in the cryptocurrency market can be attributed to a phenomenon known as mean reversion.
Mean reversion theory posits that asset prices, over time, tend to return to their long-term average or mean level. This is particularly evident in the case of bitcoin, the largest cryptocurrency by market capitalization. As many may recall, bitcoin experienced a significant decline of over 65% in the last year.
However, the recent surge in the market can be seen as a reflection of mean reversion, as the price of bitcoin and other cryptocurrencies return closer to their historical averages. This trend is likely to continue as the market matures and gains more mainstream acceptance.
Bernstein suggests that the mean reversion of crypto still has room to run and therefore advises caution when it comes to being bearish on the market at current levels. Historically, bitcoin has never had two consecutive years of negative returns, indicating that the market may not be as dire as it may seem.
Recent news from the cryptocurrency industry, specifically from crypto exchange FTX and the bankruptcy filing of crypto lender Genesis, has been less than favourable. However, the report suggests that the negative impact on the market may not be as severe as initially feared. The report states that “the potential overhang on the liquid crypto markets has receded.”
One of the reasons for this is that much of the expected selling pressure has been centered on illiquid private crypto assets rather than the more liquid markets. This suggests that while these events may have a short-term impact on the market, they may not have as significant of a long-term effect.
As negotiations between creditors and Digital Currency Group (DCG), the parent company of Grayscale, Genesis, and CoinDesk, continue, the likelihood of an immediate sell-off in the Grayscale Bitcoin Trust (GBTC) has decreased.
With the matters at hand now being dealt with through a court-mediated settlement, it seems that the “public crypto markets have been given some respite from any forced selling narratives.” This suggests that the overall sentiment in the market is one of relief, as the uncertainty surrounding the potential impact of a forced sell-off has been alleviated.
However, this is not to say that there aren’t risks involved in the crypto market, as volatility is inherent in any emerging asset class. The mean reversion theory only suggests that the market may be due for a rebound after such a significant decline. It is important to note that mean reversion is not a guarantee, and the crypto market remains highly speculative and unpredictable.
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