Cryptocurrencies have plummeted in 2022.
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Improvements in macroeconomic factors, a particular trading pattern and more change in companies and projects could be the key ingredients needed for bitcoin and the broader crypto market bottomed out, industry players told CNBC.
Bitcoin has plummeted more than 70% from its record high in November with around $2 trillion wiping out the value of the entire crypto market.
For the past few weeks, bitcoin has been trading in a narrow range of $19,000 to $22,000 with no major catalysts to the upside and traders trying to find a bottom.
Here are some factors that can help the crypto market find a floor.
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Bitcoin has been hit by the macroeconomic situation as soaring inflation has forced the US Federal Reserve and other central banks to raise interest rates, which has hurt risk assets. like stocks.
Cryptocurrencies have seen some correlation with the US stock market and have fallen in tandem with equities.
There are also recession concerns but an improved macroeconomic picture could help the crypto market find a bottom.
“I think if inflation is under control, the economy is under control, there is no really severe recession” then the market will be stable, said CK Zheng, co-founder of crypto-focused hedge fund ZX Squared , told CNBC in an interview.
US Inflation Data for June arrived hotter than expected on Wednesday, adding to concerns that the Fed will be more aggressive in its fight to tame price gains. However, there are some signs it could be peaking.
According to Vijay Ayyar, vice president of corporate and international development at crypto exchange Luno, if there are any clues that the economy and inflation are “under control,” that could help the market. Cryptocurrency market finds bottom.
“If we see signs of this this month or even in the next few months, that should give the market confidence that bottoms are in place across all risk assets including,” Ayyar said. stocks and cryptocurrencies”.
Meanwhile, a softer Fed and peaking 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 prompt the Fed to slow down the tightening process.
“A shift in Fed policy and the result is the top of the DXY [dollar index] will also help define a real floor, which we believe is likely to happen at the Jackson Hole meeting later in the summer,” Butterfill said, referring to an annual meeting of central bankers nurse.
Authorization coming to an end?
One of the key features of the latest boom and bust cycle in crypto is the amount of leverage in the system and the contagion caused.
Firstly, there are already lending platforms that promise retail investors high yields on depositing their cryptocurrencies. One of those companies is C, which last month was forced to halt withdrawals as it faced liquidity problems. That is because Celsius lends this cryptocurrency from its depositors to others who are willing to pay high interest and then profit. That profit is then supposed to pay for the yield that C provides to its retail clients. But when prices dropped, that business model was put to the test.
Another company highlighted the problem with excess leverage is the crypto-focused hedge fund Three Arrows Capital or 3AC, which is known for its bullish bets on the industry. 3AC has an extensive list of partners to which it is connected and has borrowed money.
One of them is Voyager Digital, file for Chapter 11 bankruptcy protection after 3AC defaulted on about 670 million dollars From the company.
Several other companies including BlockFi and Genesis were also reported to have been exposed to 3AC.
Three capital arrows it itself rushed into liquidation.
“The debt forgiveness process, we don’t know if it’s complete. I think it’s still in the process of getting rid of the weak players,” Zheng said, adding that when there are no more surprises about companies collapsing, that can help the market find a bottom.
CoinShares’ Butterfill says so-called miners, which use specialized high-powered computers to validate transactions on the cryptocurrency network, could be the next victim of a washout. With cryptocurrency price pressure, there will be many unprofitable mining operations. Butterfill notes that there have been a number of mining startups that have raised their final funding and ordered undelivered or unturned equipment.
“The collapse of one of these mining startups or an associated lender is likely and will help identify a bottom for the crypto market,” Butterfill told CNBC. CNBC.
Trading model
Luno’s Ayyar explained several trading patterns that can help determine the bottom for the market. He said that there could be a “speculative candle” where the bitcoin price falls further and “wipe out the last remaining weak hands”, before “strong again”.
If this happens, it shows that “liquidity has been captured at lower levels and the market is now ready to bounce back,” Ayyar said.
He noted that this happened in March 2020 when bitcoin fell more than 30% in one day before steadily increasing in the following weeks.
The second pattern could be an “accumulation phase” where bitcoin bottoms out and spends a few months trading in a range before moving higher.
In either case, that could send bitcoin down further from $13,000 to $14,000, a roughly 30% drop from the crypto price on Wednesday.
ZX Squared’s Zheng says bitcoin between $13,000 and $15,000 is a possibility. But if institutional investors get involved, that could help support the price.
