What happened?

Following a burst of unfavourable news, near all-time highs and peak market exuberance set the setting for a market-wide sell-off. Many crypto assets dropped anywhere between -30% to -75% before beginning to trend somewhat upwards as the month progressed. The month of May 2021 gave a first taste to newcomers of how volatile the crypto market could be.

BTC ended the month down -35% at around $37,300, falling to values last seen in February and achieving its worst monthly return since November 2018. This drop occurred after China threatened to ban activities around cryptos and comments from Tesla's Elon Musk, who stopped accepting Bitcoin because he considers it an energy-intensive asset.

Source: Kraken

A few words on Bitcoin’s dominance.

Halfway through May, we have seen Bitcoin’s dominance fall to a multi-year low below 40%, showing that market participants are developing a greater taste for altcoins. That said, with the market seeing its biggest sell-off since March 2020, it's no wonder that BTC's dominance soared to an intramonth high of 48% before falling again at the end of the month. This tells us that Bitcoin does remain a safe-haven crypto asset in the ecosystem. BTC's inclination to outperform in the worst of market situations is reflected in this rotation.

Source: coinmarketcap.com

What about Ethereum?

In May 2021, Ethereum outperformed the market with a -3% loss and continues to attract a lot of attention, despite the massive sell-off. This is because market participants are choosing to go further out on the risk curve, i.e., they are ready to take on more risk and move away from Bitcoin. Also, market participants see more room for a price increase in Ethereum compared to Bitcoin. For Bitcoin to double or triple from here could be significantly more difficult compared to Ethereum. In addition, institutional investors are becoming increasingly interested in Ethereum. It is also important to note that there is a lot of ongoing developments in Ethereum with ETH 2.0 on the horizon and EIP-1559 which will make Ethereum deflationary. Finally, Ethereum provides staking options. Market participants now have an opportunity to generate a yield with crypto assets which is very appealing. 

How did DeFi and NFTs handle May’s massive sell-off?

Despite high levels of volatility and billions in liquidation, DeFi platforms were able to weather May's sell-off and keep the market flowing. This implies that there is an ongoing wave of innovation in DeFi, with a lot of future potential and opportunities. This is going to continue to be reflected in price, hence, DeFi’s relative outperformance for the month of May with a loss of only -27%. DeFi is part of the crypto ecosystem, and it is here to stay.

On the other hand, the NFT sector was the underperformer for the second month in a row, down -40% in May. After taking the crypto market by storm in Q1 2021, NFTs’ performance continues to cool down. Despite performing poorly, NFTs continue to see user growth and transaction volume amongst the largest platforms. Furthermore, there is still a lot of innovation and investments around the NFTs’ space with, for example, eBay launching a NFT marketplace. 

Where is Bitcoin and crypto headed in the near future?

It might be possible to see some consolidation for a little while with Bitcoin bouncing between the current $30-$42k range, but it is also possible that the price lowers a bit more. Market participants should keep an eye on open interests in the futures market and funding rates that will give insight about how the market is reacting to the current trend in price. And we also want to keep a close eye on the 50- and 200-day moving average for Bitcoin. If these two indicators intersect, a “Death Cross” will be formed. Historically, that suggests that prices could decrease and possibly, we could enter a bear market. That said, with the forthcoming Taproot activation and Lightning Network, the fundamentals around Bitcoin have never been stronger. Lastly, with the recent news of El Salvador, the first country adopting Bitcoin as legal tender, the turnaround we have been waiting for on Bitcoin for the past 10 years has finally arrived.