Here’s what the market wants to see
Cryptocurrencies fell in 2022.
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An improvement in macro factors, a particular business model and a fresh shake-up of companies and projects could be the key ingredients needed for bitcoin and the broader crypto market to bottom out, industry players told Reuters. CNBC.
Bitcoin has fallen more than 70% from its all-time high in November, with around $2 trillion wiped out of the value of the entire cryptocurrency market.
For the past few weeks, bitcoin has been trading in a narrow range between $19,000 and $22,000 with no major catalyst to the upside and traders trying to figure out where the bottom is.
Here are some of the factors that could help the crypto market find a bottom.
Improve macro image
Bitcoin has been affected by the macroeconomic situation of soaring inflation that has forced the US Federal Reserve and other central banks to raise interest rates, hurting risky assets such as stocks.
Cryptocurrencies have seen some correlation with US equity markets and have fallen along with stocks.
There are also fears of a recession, but an improving macroeconomic situation could help the crypto market find bottom.
“I think if inflation is under control, the economy is under control, there’s no really bad recession,” then the market will stabilize, co-founder CK Zheng told CNBC. cryptocurrency-focused hedge fund ZX Squared, in an interview.
U.S. inflation data for June came in warmer than expected on Wednesday, heightening fears the Fed might become more aggressive in its fight to rein in rising prices. However, there are signs that it could be peaking.
If there are hints that the economy and inflation are “under control,” it could help the crypto market find a bottom, according to Vijay Ayyar, Vice President of Business Development and International at Crypto Exchange Luno .
“If we see signs of that this month or even over the next few months, that would give the market more confidence that there is a bottom for all risk assets, including stocks and crypto. “Ayyar said.
Meanwhile, a “softer” Fed and the spike in US dollar strength could help the market find a bottom, according to James Butterfill, head of research at CoinShares. Butterfill said a weaker economic outlook could cause the Fed to slow its tightening push.
“A U-turn in Fed policy and the consequent spike in the DXY [dollar index] would also help define a real bottom, which we believe will likely occur at the Jackson Hole meeting at the end of the summer,” Butterfill said, referring to an annual meeting of central bankers.
End of debt reduction?
One of the main features of the last boom and bust cycle in crypto has been the amount of leverage in the system and the resulting contagion.
First, there were lending platforms that promised retail investors high returns for depositing their crypto. One such company is Celsius, which last month was forced to suspend withdrawals as it faces a liquidity problem. This is because Celsius lends this crypto from its depositors to other loans to pay a high return and then pockets the profit. This profit is then supposed to pay for the yield that Celsius offers to its retail customers. But when prices crashed, this business model was put to the test.
Another company highlighting the problem of excessive leverage is the crypto-focused hedge fund Three Arrows Capital or 3AC, which was known for its bullish bets on the industry. 3AC has a long list of counterparties to which it is linked and from which it has borrowed money.
One of them is Voyager Digital, which filed for Chapter 11 bankruptcy protection after 3AC defaulted on about $670 million from the company.
A number of other companies, including BlockFi and Genesis, were also reportedly exposed to 3AC.
Three Arrows Capital is itself in liquidation.
“The deleveraging process, we don’t know whether it’s over or not. I think it’s still weeding out weak players,” Zheng said, adding that when there’s no more surprises with collapsing businesses, that might help. the market finds a bottom.
CoinShares’ Butterfill said so-called miners, who use specialized high-powered computers to validate cryptonet transactions, could be the next victims of the washout. With crypto prices under pressure, many mining operations will not be profitable. Butterfill notes that there have been mining start-ups that have raised funds last and ordered equipment that have not been delivered or turned on.
“A collapse of either of these mining startups or the associated lender is likely and would help define a bottom for the crypto market,” Butterfill told CNBC.
Ayyar de Luno explained some of the trading patterns that could help define a bottom for the market. He said there could be a “surrender candle,” where the price of bitcoin falls even further and “clears out the last remaining weak hands,” before “climbing back sharply.”
If this happens, it indicates that “liquidity has been captured at lower levels and the market is now poised to move higher,” Ayyar said.
He noted that this happened in March 2020 when bitcoin fell more than 30% in one day before climbing steadily over the following weeks.
A second pattern could be an “accumulation phase” where bitcoin bottoms out and spends a few months trading in a range before rising.
Either way, this could see bitcoin drop to between $13,000 and $14,000, which would represent a drop of around 30% from the cryptocurrency’s price on Wednesday.
ZX Squared’s Zheng said bitcoin between $13,000 and $15,000 is a possibility. But if institutional investors step in, it could help support prices.