Does this crypto rally have legs?

Today's price action in the crypto sector signals that perhaps this momentum-driven rally will continue.

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

What happened

The positive momentum in the cryptocurrency space we've seen to start this week is showing no signs of slowing. As sentiment related to the broader market continues to take a bullish tone, investors are seeing some impressive intraday moves in popular tokens. This is evidenced by today's 24-hour moves in meme tokens Dogecoin (CRYPTO: DOGE) and Shiba Inu (CRYPTO: SHIB), which surged 6.6% and 5.6%, respectively, over the past 24 hours as of 12:20 p.m. ET. Cardano (CRYPTO: ADA) also saw an impressive move higher, gaining 4.4% over the same period. 

These moves appear to be driven by a changing narrative in the crypto sector. Yes, all the same headwinds continue to plague digital currencies right now. The Federal Reserve still appears to be looking to aggressively quash inflation and shrink the money supply. For investors, higher-risk assets are vulnerable to devaluation in such an environment. 

However, the recent announcement that the highly anticipated Ethereum merge has a tentative date of Sept. 19 in place has provided investors with something positive to look forward to. With that and moves by other networks such as Cardano, which is undertaking its own Vasil hard fork upgrade, optimism around key upcoming catalysts appears to be drowning out the rather loud negative catalysts that have reigned supreme this year.

So what

Aside from hard-core crypto maximalists, Dogecoin and Shiba Inu are two meme tokens that are generally viewed as too speculative to touch. However, one important feature these tokens provide is insight into the overall mentality of retail investors, as well as a gauge of investor sentiment more broadly. When speculators feel that a momentum-driven rally may have legs, tokens that are more volatile are often sought out as trades to capitalize on short-term moves.

Thus, when we see Dogecoin and Shiba Inu make multiple substantial daily moves higher (in sequential fashion), the speculative juices start to flow once again. Those betting on another bull market being just around the corner have been looking for such indicators for some time.

Indeed, the Ethereum merge has been a highly discussed event in the crypto sphere for a while. This catalyst, which has been delayed multiple times, is often viewed as what may take the future of decentralized finance, non-fungible tokens, and other crypto-related segments to the next level. As a core piece of the infrastructure supporting the overall crypto ecosystem, that's a good thing for all tokens. 

Now what

This week's impressive rally, as always, needs to be put in context. The overall crypto market, which is hovering around a $1 trillion valuation, is down approximately two-thirds from its peak of approximately $3 trillion late last year. Thus, while it's great to get excited about near-term price action with some popular cryptocurrencies, much more of the same will be needed to erase the incredible losses we've seen this year.

Additionally, it's unclear just how long traders and speculators will continue to bid up various cryptocurrencies before taking profits. The pump is great, but the dump is often not. And while many may stick around regardless of the volatility (those true long-term investors out there), traders and speculators will likely pull the plug at some point. 

Accordingly, true long-term investors may want to be patient with this recent rally. We're seeing a similar theme play out in the stock market, with many calling this a bear market bounce. We'll only find out later whether this was a sustainable rally off the bottom, or another head fake. But for now, playing it safe and incorporating appropriate risk management protocols in one's investing strategy appears to be the best way forward. 

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

Chris MacDonald has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has positions in and has recommended Ethereum. The Motley Fool Australia owns and has recommended Ethereum. 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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