Can cryptocurrency bounce back in May?

Digital currencies are facing a lot of headwinds these days, but there’s still time for a happy ending this month.

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This article was originally published on All figures quoted in US dollars unless otherwise stated.

April was pretty rough for investors of digital currencies. All eight of the world's most valuable cryptocurrencies -- not including stablecoins -- posted double-digit percentage declines. Stocks and bonds also took big steps back last month, but crypto led the sinkers between the three asset classes. 

It's frustrating. Investors who turned to crypto as a way to diversify into alternative assets aren't seeing a disconnect between cryptocurrencies and the stock market. The downticks and volatility have been even worse through the Wall Street drawdown. Things look pretty bleak right now, but is it too early -- or perhaps too late -- to throw in the towel? Let's go over the grim landscape before ending on a more promising note.

Tales from the crypto

There are plenty of good reasons for the recent retreat of cryptocurrencies. Gas fees for Ethereum (CRYPTO: ETH) transactions continue to be high, briefly spiking late last week as a result of a popular non-fungible token (NFT) marketplace release. With the next phase in Ethereum's migration to a proof-of-stake model possibly not completed by next month, it could be another confidence crunch.

Even more conservative crypto investors are getting smoked. Crypto has become popular among income investors with some wiggle room when it comes to risk. Many exchanges and decentralized finance platforms allow investors to earn healthy interest by allowing the stablecoins and riskier tokens to be staked, loaned out, or otherwise pledged by the platform operator. April was brutal on that front. Many platforms have been reeling back the available yields, and regulatory concerns have seen some options bow out of certain regional markets. 

It also doesn't help fans of staking stablecoins in pursuit of healthy income that bond rates themselves are on the rise. You can buy an inflation-indexed Series I savings bond today directly from the U.S. Treasury with an annualized interest rate of 9.62% for the next six months. The rates adapt to inflation rates every six months -- and investors lose three months of interest if the bonds are redeemed within one to five years -- but it does make riskier crypto money makers less attractive. 

Inflation has hurt another way. Consumer savings rates will be challenged as folks have to spend more on essentials. The end result is less money to invest in any market. 

Things don't have to end badly for crypto traders. We've seen sharp corrections and crashes in the past. Ethereum and its digital peers have always managed to claw their way back. Geopolitical unrest could also inspire more international traders to diversify away from their home fiat currencies. 

Ethereum itself will eventually complete its transition to Ethereum 2.0. High gas fees may continue to be problematic, but there are other cryptocurrencies specializing in ways to make transacting in Ethereum easier, faster, and cheaper.  

It's not easy to call a bottom after crypto corrections. Technical analysis may be the same, but investors don't have the same fundamentals and valuation ratios to assess the way they do in sizing up equities. The crypto market still has time to work its way through -- and ideally out of -- the April malaise in May. 

This article was originally published on All figures quoted in US dollars unless otherwise stated.

Rick Munarriz has positions in Ethereum. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has positions in and has recommended Ethereum. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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