Wednesday, February 8

What happened

Amid January’s broad-based rally in risk assets, certain cryptocurrencies have benefited more than others. Among the leaders in terms of year-to-date gains thus far are Cardano (ADA 8.05%), Polkadot (DOT 5.91%), and The Sandbox (SAND 6.62%), which have surged by roughly 50% or more in just a few weeks. However, as of 11:15 a.m. ET Wednesday, these three tokens had given up some of their gains. Over the prior 24 hours, they had declined by 5.6%, 4.8%, and 6.4%, respectively. 

As is the case with most recent rallies, the moods of equity investors and those focused on digital assets appear to be closely aligned. The relatively high correlation between the two asset classes continued Wednesday, resulting in some profit-taking in these three cryptocurrencies. 

Polkadot has seen strong developer interest to kick off 2023, becoming the leading blockchain in terms of development activity over the past month, according to crypto market intelligence platform Santiment. Accordingly, Polkadot’s chart has been mostly up and to the right thus far this year.

Other NFT-based cryptos such as The Sandbox have been rallying hard to start the year too. Thus, these two tokens’ falling price action Wednesday appears to mostly be tied to the broader market narrative.

Investors also appear to be pricing in some token-specific negatives that they have largely been shrugging off of late. For example, Cardano experienced significant network issues last weekend. Approximately half of the nodes on its network disconnected briefly before gradually coming back online. Initially, this led to cheers from investors who touted the resiliency of the Cardano network. That said, concerns around downtime could be a headwind for this token should another slowdown or shutdown occur. 


So what

The macro environment facing crypto investors features the same catalysts and headwinds that equity investors have been seeing of late, as well as some added sector-specific concerns. The regulatory environment surrounding digital assets appears to be evolving, though not necessarily in a positive way for investors. That said, the bullish sentiment in the stock market to start this year has spread out into more speculative assets, which has been great for cryptocurrency holders.

Wednesday’s profit-taking dip isn’t the first of 2023, and won’t be the last. With the overall crypto market cap recently surpassing the $1 trillion level once again, it’s clear that many investors are taking a risk-on approach to assets to start the year. It appears many are viewing the risks of staying on the sidelines as outweighing the risks of being in the market.

Now what

Accurately and consistently predicting where the crypto market will go in any short-term time frame is nearly impossible. Indeed, the sector’s price action to start the year, while positive for crypto investors, was hardly predictable. After the bludgeoning digital assets took in 2022, the general environment offered little in the way of hope for crypto investors, and there has been a relative lack of catalysts that could have sparked a rally.

Yet here we are with certain tokens up by 50% to 100% to start 2023. Despite some investors taking profits, more now appear willing to dive back into some of the more beaten-down cryptos. One thing’s for sure — it will be interesting to see where this sector goes from here.

Chris MacDonald has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Cardano. The Motley Fool has a disclosure policy.

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