The feeling of weakness persists not only among investors focused on the cryptocurrency market, but also on stock indices, which are experiencing one of the weakest semesters in the history of the stock market. On Friday, the liquidation of the cryptocurrency market accelerated.
What’s behind the inheritance?
Friday’s alarming reading of data from the US economy, which combined with already tarnished sentiment in the market, caused an avalanche of selling in indices that led to cryptocurrencies. Low consumer sentiment and surprisingly high inflation in the US economy are raising concerns about the Federal Reserve’s aggressive monetary tightening cycle. The cryptocurrency gains coincided with a period of unprecedented loose monetary policy, and that is not happening. The beneficiary of such an economic environment was, among others, Bitcoin and other smaller cryptocurrencies that are losing a lot today in the face of central bank policy changes and investor risk aversion.
Bitcoin’s anti-inflationary theory, which digital asset fans were trying to promote, has so far proven to be unfounded, and Bitcoin’s limited supply has proven to be an insufficient argument for increases. Cryptocurrencies as risky assets, similar to tech stocks, tend to lose first when investor sentiment weakens. At the same time, however, they can gain powerfully when risk appetite increases and mood improves. As with stocks, cryptocurrency valuations are primarily influenced by market liquidity and the price of silver. As early as the summer of 2020, there was an excess of the first, the second was ridiculously low. Now it spins at breakneck speed.
With rising inflation and uncertainty, retail investment opportunities are shrinking. Financial institutions are aware of this and may suspend larger purchases of cryptocurrencies until they are certain that the global economy will improve. Panic selling in the past has been a buying opportunity in the cryptocurrency market. However, there are still no events on the horizon that could induce large capital to return to the market.
Problems in the crypto market
Inflation and the price of money are not everything. The past few days have also been full of important events for the cryptocurrency market itself. The industry is grappling with declining confidence in digital assets and decentralized financial services promoted in 2021, independent of the banking system.
The Luna crash has sown a seed of uncertainty among investors, and recently they have been fueled by Ethereum network issues, the suspension of withdrawals from the largest cryptocurrency exchange, Binance, and a blocking of withdrawals and transfers to the Celsius decentralized financial system. Platform. The platform offered advanced forms of so-called “DeFi”, i.e. cryptocurrency loans or other forms of credit. At the moment, the project appears to be insolvent, which means losses of billions of dollars. The cryptocurrency market is concerned about broader regulator intervention and auditing, which could potentially expose fraud and financial pyramids in the DeFi space.
Investor concerns have also increased around the second largest cryptocurrency, namely Ethereum, whose long-awaited transformation to version 2.0 has again been pushed back by developers. All of this, combined with the terrible data in the economy and the selling off of the biggest stock indices, created the effect of a supply bomb that exploded in the crypto market, causing a massive sell-off.
When to expect a Bitcoin price rebound?
Bitcoin is a highly volatile asset, but over the past 12 years it has given investors returns well above those of the S&P500 index or stocks of big tech companies. The cryptocurrency market is characterized by “overreactions” and price swings of tens of percent are not unusual for its participants.
Predicting the low price seems extremely difficult at present, as the market and macroeconomic conditions are incomparable to the situation in previous years. Bitcoin slid below the 200-week moving average around $22,000, which in previous cycles has caused the price to drop several tens of percent further. During bear market periods, the price of Bitcoin fell by 85%, which would mean a drop in price to around 10,000 USD. The catalyst for such a move could be the possible collapse of the stablecoin Tether, which is seven times larger in market capitalization than Celsius and whose foundations are equally questionable.
At the same time, the situation must not repeat itself, in previous cycles, the involvement of institutions in the cryptocurrency market and the general awareness of crypto market participants were low compared to the current situation . Nonetheless, if central banks signal a more hawkish approach to the conduct of monetary policy and uncertainty in the broader market fails to find a stabilizing catalyst, it could lead to further disruptions in the digital asset market.
Bitcoin is currently struggling to maintain its 200-week moving average (SMA 200). Graph on a logarithmic scale. Source: xStation5
Eryk Szmyd and Mateusz Czyzkowski
XTB Analysis Department