Why Bitcoin Could Be Poised to Fall Further
One analyst noted that Bitcoin (BTC-USD) is trading like an “overpriced tech stock” because of tightening monetary pressures. That could cause the currency to deal with poor performance in the near future.
In Asian trading hours, bitcoin slipped below $16,000 after its correction in the early morning hours of Wednesday. In the afternoon of Thursday, the largest cryptocurrency briefly surpassed $17,700, then drifted back down to $17,168.
In other news, Coinmarketcap reports that the global market capitalization of all crypto assets currently stands at $1.90 trillion, up by 2% over the past month from $1.85 trillion.
During this cycle of monetary tightening, no one is quite sure how Bitcoin, which accounts for 40% of the total crypto market, will perform compared to the stock market. Considering how technology stocks fell during the prior Fed tightening cycle, some analysts project that the next few months might be tough.
According to a report from blockchain research firm Kaiko, buyer interest in Bitcoin has dipped to a 10-month low on major centralized crypto exchanges.
A drop in volume for Bitcoin and Ether (ETH-USD) had been recorded since June 2021, the blue chip cryptocurrencies last week.
For analysts, the ever-increasing correlation between cryptocurrencies and risk-on technology stocks, most easily measured by the Nasdaq, is most concerning. According to Netflix’s earnings report on Tuesday, the company lost subscribers for the first time in ten years. As a result, Netflix’s stock dropped more than 35% after the report. Having experienced a 15% drop in the Nasdaq Composite so far this year, some analysts are beginning to see the drop as the latest swan song for the sector due to easing pandemic restrictions.
As the interest rate environment has drastically changed, the technology sector has had a tough year, and results like Netflix do not help, Oanda analyst Craig Erlam wrote in a research note published Wednesday.
According to Arcane Research analyst Vetle Lunde, the 30-day correlation between Bitcoin and tech stocks has risen to levels not seen since a pandemic boosted technology earnings in July 2020.
The correlation between Bitcoin and the Nasdaq index has been rising through 2022. At 0.7, a correlation of 1 indicates that Bitcoin and the Nasdaq are performing in lock-step. At the same time, its relation with gold and the strengthening U.S. dollar has started to deteriorate.
When monetary tightening occurs, a cut in technology is often accompanied by higher interest rates, making borrowing more expensive. Businesses will consequently have fewer potential funds at their disposal to expand.
Yet, as Lunde explains, Bitcoin doesn’t report earnings, which means it shouldn’t be vulnerable to sell-offs amid rising interest rates; its correlation to tech should therefore be temporary.
According to Linde, the correlation between the two “is probably caused by [algorithmic] traders bundling crypto with tech, thereby increasing correlations, on top of investors desiring to de-allocate from both BTC and Nasdaq to de-risk under the uncertain environment.”
A research report last week by Sean Farrell, fundstrat’s vice president of digital asset strategy, noted the tightening correlation between cryptocurrency and technology.
As the Federal Reserve begins to “trim its balance sheet,” the asset might see a steeper sell-off as it continues trading like an “overpriced tech stock” during today’s fast tightening cycle.
Farrell observed that tech stocks continued to see gains even during a rising interest rate environment when the Federal Reserve raised interest rates from 2017 to 2019. This observation is based on the performance of the Invesco ETF (QQQ), which closely tracks the Nasdaq.
QQQ’s massive drawdown was caused by a combination of rate increases and the accelerating pace of quantitative tightening, he explained to Yahoo Finance.
In this cycle, it’s difficult to predict how quantitative tightening will affect the market, but Farrell warned the consequence of reduced liquidity on the tech market could drag down Bitcoin unless the correlation breaks.
In light of the macro set-up, I believe we could be in for another challenging period of lows for the year. As of this point, Bitcoin has seen strong buyer support between $33,000 and $35,000 this year. Farrell added, “I’m not sure we go too far beyond that.”.
BTC’s high correlation with tech is unlikely to persist, according to both Farrell and Lunde of Arcane Research.
The inverse correlation could be disturbed by structural changes in the market, including new companies pursuing BTC strategies, new investors touting bitcoin, or the adoption of bitcoin by a nation-state.
Despite the fact that Bitcoin’s value is constantly shifting, ardent supporters often compare it to digital gold. Alex Thorn, a researcher at Galaxy Research, told that he considers it a “many-to-one option for a future in which Bitcoin is treated as a digital gold-like commodity.”
