The possible improvement in macroeconomic data, the change in investment habits and the “weeding out” of weak projects and companies in the cryptocurrency sector could lead Bitcoin and the broader market to new lows and the finding of a new bottom, according to analysts on CNBC.
Notably, the value of Bitcoin has recorded a 70% drop from its November highs, with total losses of $2 trillion in the cryptocurrency sector.
In recent weeks Bitcoin has been hovering between $19,000 and $24,000 with no positive catalysts, complicating investors’ assessments of what lies ahead.
Here are some factors that could help stabilize Bitcoin:
Macroeconomic data
Bitcoin has been particularly affected by the tightening of monetary policy, rising inflation and the downward trend in equities.
Cryptocurrencies are seemingly charting a similar trajectory to US markets. Although there are concerns about the creation of an economic recession, the potential improvement in the macroeconomic picture could – at the very least – help the cryptocurrency market to find its bottom.
“I believe that if inflation is controlled, the economy will be controlled and a severe recession will be avoided,” said the co-founder of cryptocurrency hedge fund ZX Squared, CK Zheng.
Notably, the updated US inflation data hovered at a higher level than expected, raising concerns of an even more aggressive strategy from the Fed. Nonetheless, there is some evidence to suggest that inflation is stabilizing.
According to Luno’s vice president Vijay Ayyar, “if there are signs of control in the economy and inflation, this will help the cryptocurrency market in finding a new floor.”
A similar view is expressed by CoinShares executive James Butterfill, according to whom “a looser Fed and a pause in the upward trajectory of the dollar exchange rate could help the crypto market”. Butterfill pointed out that “a Fed policy change and further decline in the dollar exchange rate may take place after the central bankers’ meeting at Jackson Hole in late summer.”
Deleveraging
One of the main components of the recent rise and collapse of the cryptocurrency market was the expanded leverage of the system which exacerbated and facilitated the contagion of the crisis in the sector.
Lending platforms that promised high returns to customers like Celsius are facing a significant liquidity problem after implementing their own “capital controls” last week so as to avoid a “digital bank run” on the platform.
The other well-known, by now, aspect that highlights the problem is hedge fund Three Arrows Capital (3AC) which was driven into bankruptcy due to its significant exposure to the algorithmic stablecoin TerraUSD which collapsed.
At the same time the bankruptcy of Voyager Digital which had $670 million exposure to 3AC was also painful. Other companies that had lent to 3AC such as BlockFi and Genesis are also facing problems.
According to Zheng, “we don’t know if the deleveraging process has been completed. I believe that the weeding out of the weak ‘players’ in the market is still going on. When the contagion stops, the cryptocurrency market may find its new bottom.”
Concern also prevails in the cryptocurrency “miners” sector since, according to Butterfill, these companies may be the next victims of the crisis.
Investments
According to Ayyar, some of the investment habits may indicate the new market bottom. Ayyar pointed out that there may be a sharp drop in Bitcoin which will dismantle the other weak companies in the sector and clear the landscape, leading the popular cryptocurrency to an immediate recovery.
If such a thing takes place “it will be an indication that liquidity is at stable but lower levels and the market is ready to recover,” underlined Ayyar who recalled that such a thing took place in March 2020 when the value of Bitcoin fell over 30% in just one day before recording a steady rebound in the following weeks.
At the same time, the change in investor positioning could cause a longer-term decline in Bitcoin’s value to new lows until it recovers.
According to Ayyar, in both cases the price of Bitcoin could fall to $13,000 – $14,000, a decline of 30% from last Wednesday’s price.
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