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What happened
There was a big bounce in cryptocurrencies on Tuesday as investors bought risk assets in a big way. Not only is the S&P 500 up 2.1% at 11:30 a.m. ET, the Nasdaq Composite is up 2.8% and many high-growth stocks that have been beaten up over the past few weeks are up double digits.
Three of the most notable moves in cryptocurrencies are Cardano ( ADA -4.84% ) trading 6.9% higher over the past 24 hours, Polkadot ( DOT 2.13% ) gaining 14.7%, and Solana ( SOL -3.52% ) rising 3.5%. Those are nice moves for investors, but keep in mind that the cryptocurrencies are down 11.1%, 15.3%, and 3.9%, respectively, over the past week.
Image source: Getty Images.
So what
I see two major reasons for today’s move, with the biggest being the market overall moving higher. Cryptocurrencies have actually traded right along with tech and growth stocks over the last few months although often exaggerating the market’s moves, and today is no different. This is part of what’s known as a “risk-on” trade in the market because investors are bidding up risky assets.
More important long term is the fact that India is discussing legislation that would put rules around the cryptocurrency industry. According to a report from Bloomberg, assets would need to be declared and would be taxed like other securities, but there were indications that India wouldn’t try to create its own cryptocurrency or ban crypto altogether.
Investors are trying to determine what the rules of the crypto market will be long term. As huge markets like China and India set out their rules it could potentially bring billions of people into the crypto market or block them altogether, as China has done. For now, it appears that people in India will be allowed to enter the crypto market, even if there are some rules for their investments.
Now what
The sell-off of cryptocurrencies that began about a month ago seems to have paused as values rise again. But I’m cautious about being too bullish on crypto assets at the moment. The Federal Reserve and Congress don’t seem keen on adding more money or stimulus to the market right now, and that could remove some money from the market.
Panic selling is never a great idea, but this is a great time to take a step back and look at the value cryptocurrency is adding to the market long term. In the case of Cardano, Polkadot, and Solana, their leaders are thinking about utility and lower transaction costs, which I think will add long-term value. This may be a rocky ride as volatility continues, but for cryptocurrencies that can add real value to users and businesses — not just an asset to trade — there’s still upside ahead for investors holding these cryptocurrencies long term.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.
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