Bitcoin is testing key technical support levels after a more than 30% plunge from a record high hit just over a month ago. One is the 55-week moving average — which in the past has sometimes provided a floor for selloffs — while another is a level of about $44,100 implied by a Fibonacci study of the rally from the March 2020 trough to the November 2021 peak. The world’s largest cryptocurrency has already broken below a trendline drawn from the beginnings of its surge during the pandemic. So according to a “traditional” definition we are in bear town. Is the market bearish now? Yes. Do that equate to a bear market. No. BTC is still only putting in a higher low and has defended key support around 42k. Losing that would be bad news. 52k ish would be the bull flip.
Cryptocurrency billionaire, Mike Novogratz, doesn’t see the light in the short-term for Bitcoin. Novogratz says the downtrend could continue until Bitcoin drops to $42,000. Then, he believes bitcoin would be ready to rally after finding support at the important $40k level.
The prolonged crypto downtrend has created the longest stretch of fear in the crypto market. The market has been in extreme fear for one straight month – the longest stretch since April 2021, when the market was in extreme fear for two months.
The Bitcoin market has tip-toed into “extreme fear” territory as the Federal Reserve prepares to meet Wednesday to decide its next move regarding interest rate and quantitative easing policies. BTC is trading at around $48,000 at the time of writing, nearly 30% below its November all-time high of $69,000.
The Fear and Greed Index analyzes market sentiment and emotion from different sources to crunch a number from zero to 100. The closer the index is to its lower bound, the more fearful the market is at the moment. The inverse is true for greed, when people begin purchasing bitcoin out of fear of missing out (FOMO). The metric is currently at 16, denoting extreme fear.
As mainstream media reports expectations for the Fed’s meeting, citing a reasonable probability that the central bank will attempt to curb inflation through a faster interest rate hike, financial markets stand ready to switch its investment thesis. Although the move isn’t likely to come until next year, the Fed has been moving quickly to prevent consumer prices from soaring well above its 2% target.
The market expectation for a faster wrap-up of asset purchases isn’t speculative. At the end of last month, Federal Reserve Chair Jerome Powell said the central bank’s bond-buying program could end sooner than planned amid rising inflation rates and a more robust U.S. economy. Powell added that he and his fellow policymakers would discuss whether it would be appropriate to “wrap up our purchases a few months earlier.”
However, tapering is just part of the deal, and an increase in interest rates is the natural follow-up action. Ever since the beginning of the pandemic, the Fed has kept interest rates near zero in an attempt to further increase market liquidity and economic relief to participants. Altogether, that dynamic prompted investors to seek riskier assets as their traditional investments couldn’t yield big profits any longer. If the Fed raises interest rates quickly and before anticipated, the broader market is expected to switch to risk-off mode and plug into “safer” investments as the risk-reward ratio favors traditional money-making strategies.
For most investors, Bitcoin is still considered a risky investment. Although the digital monetary network has demonstrated time and again its ability to shield investors from inflation and loose economic policies and enable true financial sovereignty for those who can’t access traditional banking, its early stage in the adoption curve and status as a young development has many remaining skeptical. As a result, a broader risk-off movement is expected to affect the Bitcoin market as well.
It’s unclear whether that would play out, however, as Bitcoin has demonstrated an ability to swiftly recover from somewhat harmful events. After China banned bitcoin mining and then bitcoin trading, the network is now stronger than before and has even more hash rate power backing its consensus protocol. An eventual sell-off in Bitcoin caused by a more aggressive take by the Fed might end up having the same result — a sharp upside after irrational fear is flushed out of the market.
Crypto products are innovative and will ultimately transform the next generation of financial services products and delivery systems. There is no stopping that progress. Blockchain and technologies like it boast of relying on a new “peer-to-peer” system of transaction validation instead of traditional trusted intermediaries such as banks.
Global financial services markets come under strain when there is a rapid migration of money and capital from traditional sources to alternative systems. The events leading up to the financial panics of the 1980s and 2008 are evidence of that. Simply replace money market funds and subprime mortgages with crypto assets, and the picture gets a little clearer.
But even more concerning is the obvious insecurity of the internet. Can crypto banks and exchanges guarantee that the coins they store will always be there in the morning, or that the data they control is protected?
Similarly, should central banks be introducing digital currencies because they can, or only when they know that they will withstand the unrelenting cyberattacks that will inevitably come? In such an increasingly insecure ecosystem, it is hard to imagine crypto assets not aggravating financial stability risks, even before the impact of quantum computing is felt and every form of online security today must be revamped.
The potential threats created by cryptocurrencies would be easier to deal with if we had a safer and more secure internet, greater online transparency, smarter regulation, global online security protocols, absolute authentication and standardized rules of conduct in the virtual world backed up by enforcement capabilities. Unfortunately, we don’t have any of those things.
We must do a better job of balancing the innovation, speed, efficiency and attractiveness of new crypto products with their potential impact on the security and stability of financial systems. If we do, we will avoid a larger economic price tag down the road. The choice is ours to make.