Bitcoin took a heavy fall with a 70% plummet from its peak in November 2021, wiping $2 trillion off the value of the entire cryptocurrency market.
The past few weeks have seen the crypto asset trade at a tight range between $19,000 and $22,000 without any major catalyst to the upside, leaving traders guessing where the bottom is.
Factors that can help the market hit bottom
Macroeconomics like the soaring inflation and the Federal Reserve hiking interest rate has not just affected stocks it is also impacting Bitcoin.
Cryptocurrencies have also correlated with the US stock markets, reaching the same highs and lows.
Fears of a recession are lingering, but an improving macroeconomic situation could help the crypto market hit bottom.
CK Zheng, the co-founder of cryptocurrency-focused hedge fund ZX Squared, believes there is a way for the market to stabilize.
“I think if inflation is under control, the economy is under control, there’s really no serious recession,” he explained.
Vice president of corporate development and international at crypto exchange Luno Vijay Ayyar shared that a controlled economy and inflation could be vital in helping the crypto market find a bottom.
“If we see signs of this month or even over the next few months, it would give more confidence to the market that a bottom is in across all risk assets, including equities and crypto,” said Ayyar.
An end to leveraging
The increasing number of leverage in the system has contributed to the crypto boom and bust cycle, creating a contagion. More lending platforms have emerged that promise retail investors high yields for depositing their crypto.
Last month, Celsius was forced to pause withdrawals after facing a liquidity issue. Its business model was put to the test when prices crashed.
Voyager Digital filed for Chapter 11 bankruptcy protection after crypto-focused hedge fund Three Arrows Capital defaulted on over $670 million from the company. BlockFi and Genesis were also exposed to 3AC.
“The deleveraging process we don’t know if it is complete or not,” said Zheng. “I think it is still in the process of washing out the weak players.”
James Butterfill, head of research at CoinShares, said miners who use specialized high-power computers to validate transactions on crypto networks could be next in the washout.
As crypto prices fall under pressure, more mining operations could be unprofitable. In addition, Butterfill pointed out that some mining startups that raised funding and ordered equipment have either failed to deliver or turn it on.
“A collapse in one of these mining startups or the associate lender is likely and would help define a trough to the crypto market,” he said.
Ayyar explained that trading patterns could define a bottom for the market, saying there could be a “capitulation candle,” where Bitcoin price drops further before “moving back up strongly.”
He also noted that the same happened in 2020 when Bitcoin fell by more than 30% in a day before climbing back up in the following weeks.
Another pattern could be an “accumulation phase” that sees Bitcoin hitting bottom and spending a few months trading within a range before climbing higher.
Both possibilities could see Bitcoin drop to either $13,000 to $14,000 – a 30% drop from Wednesday’s price. Zheng believes the prices are a possibility, but if institutional investors step in, it could help support prices.