Cryptocurrencies declined in 2022.
Chesnot | Getty Images
Industry players told Reuters that improvement in macro factors, a specific business model, and new corporate and enterprise restructuring could be the key components needed for Bitcoin and the broader crypto market.
Bitcoin has tumbled more than 70% from its all-time high in November, as nearly $2 trillion has been wiped out of the entire cryptocurrency market.
Over the past few weeks, bitcoin has been trading in a tight range between $19,000 and $22,000 with no major catalyst to the upside and traders are trying to figure out where the bottom is.
Here are some of the factors that can help the cryptocurrency market find a bottom.
Macro image optimization
Bitcoin has been affected by the macroeconomic situation of rising inflation that has forced the US Federal Reserve and other central banks to raise interest rates, hurting risky assets such as stocks.
Cryptocurrencies saw some correlation with the US stock markets and fell with stocks.
There are also fears of a recession, but an improvement in the macroeconomic situation could help the cryptocurrency market reach the bottom.
“I think if inflation is under control, the economy is under control, and there’s not a really bad recession,” then the market will stabilize,” co-founder CK Zheng told CNBC.
US inflation data for June came in warmer than expected on Wednesday, raising fears that the Federal Reserve could become more aggressive in its battle to rein in price hikes. However, there are signs that it has reached its peak.
If there are hints that the economy and inflation are “under control,” that could help the cryptocurrency market find a bottom, according to Vijay Ayyar, vice president of business development and international affairs at Crypto Exchange Luno.
“If we see signs of that this month or even over the next few months, that will give the market more confidence that there is a bottom for all risky assets, including stocks and cryptocurrencies,” Ayyar said.
In the meantime, a “softer” Fed and a sharp rise in US dollar strength could help the market find a bottom, according to James Butterfell, head of research at CoinShares. Butterfly said a weak economic outlook could cause the Fed to slow its push to tighten.
“A radical shift in Fed policy and the consequent surge in DXY [dollar index] It will also help establish a real bottom, which we think will likely happen at the Jackson Hole meeting at the end of the summer,” Butterville said, referring to the central bankers’ annual meeting.
The end of debt reduction?
One of the main features of the recent boom and bust cycle in cryptocurrency 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 cryptocurrency. One such company is Celsius, which was forced last month to suspend withdrawals because it is facing a liquidity issue. This is because Celsius lends this crypto from depositors to other loans to pay a high return and then take a profit. This profit is then supposed to be paid in return for the percentage return that the retail customer offers. But when prices collapsed, that business model was put to the test.
Another company highlighting the problem of excessive leverage is crypto-focused hedge fund Three Arrows Capital, or 3AC, which has been known for its bullish bets on the industry. 3AC has a long list of related counterparties that have borrowed money from.
One is Voyager Digital, which filed for Chapter 11 bankruptcy protection after 3AC defaulted on about $670 million in payments from the company.
A number of other companies, including BlockFi and Genesis, have reportedly been 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 always leaves out weak players,” Cheng said, adding that when there are no more surprises with companies failing, it may help. The market finds a bottom.
CoinShares’ Butterville said that so-called miners, who use specialized high-powered computers to validate cryptonet transactions, could be the next victims of the crash. With cryptocurrency prices under pressure, many mining operations will not be profitable. Butterfill notes that there have been mining start-ups that have finally raised funds and ordered equipment that has not yet been delivered or commissioned.
“It is likely that any of these mining startups or their associated lender will collapse and help define a bottom for the cryptocurrency market,” Butterfell told CNBC.
Ayyar de Luno outlined some trading patterns that can help define a bottom in the market. He said there could be a “capitulation candle”, as the bitcoin price drops further and “eliminates the last remaining weak hands”, before “sharply rallying”.
If this occurs, this indicates that “liquidity has been seized at low levels and the market is now ready to move to the upside,” Al-Ayyar said.
He noted that this happened in March 2020 when Bitcoin fell more than 30% in one day before rising steadily over the following weeks.
The second pattern can be an “accumulation phase” where the value of bitcoin drops and you spend a few months trading in a range before it rises.
Either way, this could lead to bitcoin dropping to between $13,000 and $14,000, which is a drop of nearly 30% from the cryptocurrency’s price on Wednesday.
Zheng of ZX Squared said that bitcoin in the $13,000-$15,000 range is a possibility. But if institutional investors step in, it could help support prices.