This is an opinion piece by Mike Ermolaev, PR and Content Manager at Kikimora Labs.
Setting the Context: Fundamentals of the Global Economy
The economy is still recovering from the COVID-19 outbreak as new problems arise. We are now in a period of runaway inflation and central banks are trying to remedy this by raising interest rates.
US CPI (Consumer Price Index) data, released on October 13, was higher than expected (8.2% year-on-year), which negatively impacted the price of bitcoin. But inflation is not the only problem, the world economy is also grappling with the energy crisis, which affects Europe more than the United States, due to its heavy dependence on natural gas and raw materials. Russians.
On the Eastern side, the war in Ukraine with the ensuing sanctions against Russia, adds further geopolitical instability and economic uncertainty. Additionally, China’s zero COVID policy is disrupting the supply chain worldwide, and Evergrande’s default is undermining one of the world’s largest economies.
If we look at the major currencies, the dollar index looks strong, compared to the others. The Federal Reserve raised interest rates by 75 basis points in November and the Bank of England raised interest rates by the same amount. This quantitative tightening policy aims to reduce the money supply and ease the pressure on prices. It is likely to continue into next year and beyond. However, a global recession and the risk of stagflation are still very strong, so no country can feel immune to central bank monetary policy.
Bitcoin correlation with the economy
Bitcoin has shown that it is not immune to this global turmoil. Although the price in its infancy was independent of traditional finance, the correlation began to appear in 2016.
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The idea of bitcoin as “digital gold” became popular because the two shared scarcity and difficulty of mining (mining), while fulfilling the role of a store of value. Since many view bitcoin as a risky asset, its correlation with the S&P 500 and Nasdaq-100 has become visible – no different from traditional stocks.
At the time of writing, bitcoin’s 40-day price correlation with gold is at 0.50 (after hovering around zero in August). According to Bank of America strategists Alkesh Shah and Andrew Moss:
“A decelerating positive correlation with SPX/QQQ and a rapidly increasing correlation with XAU indicate that investors may view bitcoin as a relatively safe haven as macro uncertainty persists and a market bottom remains to be seen.”
Negative events
Some macroeconomic factors in the broader cryptocurrency ecosystem contributed to a bear market: the collapse of Terra/LUNA, the forced liquidation of Three Arrows Capital and the bankruptcy of Celsius being the main ones.
Incoming EU bitcoin mining regulations and the current bitcoin mining profitability crisis should also be taken into consideration.
Bitcoin: present and future
Despite all the above adverse events, bitcoin managed to keep its price in the $19,000-$20,000 range, with record volatility. Currently, we are seeing unusual bitcoin price stability, which has even recently matched the volatility of the British pound.
On the contrary, equities experienced high volatility and a see-saw price pattern, also following speculations on future Fed decisions. According Mike McGlone, Bloomberg Chief Commodity Strategistthis is why bitcoin may rise after a steep discount and possibly beat the S&P 500. He believes that the finite supply and deflationary approach of bitcoin could help it recover to previous price levels.
Since the last flash crash in mid-June, the price has remained fairly stable, but we know that it rarely stays still for too long. This means that the probability of a sudden breakout (bullish or bearish) increases over time. The longer the price remains inactive, the stronger the breakout will be.
Bitcoin Price Consolidation
Additionally, open interest in BTC futures is higher than ever, with liquidations hitting an all-time high. A lot of liquidity is accumulating here, which means that there will be an even stronger impulse when the price starts to move again.
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According to strategist Benjamin Cowen, bitcoin should reach its “fair value”, after falling another 15%. “Right now, the data suggests that we’re about 50% undervalued to fair value.” Cowen thinks we may have to wait until early 2024 to see this increase happen.
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Goldman Sachs strategist Kamakshya Trivedi has a different view, saying the US dollar index, posting record highs since 2002, could be bad news for the currently bearish bitcoin.
A bearish scenario: could the 2018 decline repeat itself?
Some analysts are wondering if the 2018 scenario (low volatility, then big price drop) can happen again today, as market conditions look quite similar. We have the same 10% trading range and we know something is going to happen soon.
Comparison between BTC price 2022 (top) and 2018 (bottom) using eight-hour candles. (Source)
A remarkable difference between the two cycles is that in 2018 there was an increase in addresses sent to spot exchanges, whereas in our current cycle we are seeing liquidity moving away from exchanges and few new addresses are created. According to a CryptoQuant analyst, this should mean we won’t see a similar scenario to 2018.
A 2018/2022 comparison of spot exchange deposit addresses. (Source)
What about Uptober and Moonvember?
Historically, the fourth quarter is a great time for bitcoin, with uptrends starting in October and increasing in November. Thus, the months of October and November were renamed colloquially “Uptober” and “Moonvember” – at least that’s what happened in 2021.
Can we still expect such a bullish Q4 in 2022? It’s hard to say, but the unfavorable macroeconomic situation and geopolitical problems make it harder to imagine the same recovery as last year. After all, the bitcoin market has been down for 10 straight months and we don’t see any particular signs of recovery yet.
It should also be kept in mind that, despite the negative global scenario, bitcoin’s role as a “safe haven” may help give the price additional strength, especially in these troubled times.
Exchange data analysis
The liquidation data on the Bitfinex exchange has been analyzed by filbfilb. He concluded that a breakout up would have less momentum than a breakout down. In fact, liquidity above $20,500 is mostly 10x, while liquidity below $18,000 is mostly 10x, 5x, and 3x, meaning a breakout up would be “less sharp” than a breakout. bearish.
Bitfinex liquidation chart. (Source)
conclusion
We are currently witnessing a period of stasis in the bitcoin market. Bitcoin price is set to start moving again after two months of consolidation. The overall economic scenario does not look bright at all, and bitcoin is correlated to real-world events, but investors can still recognize digital gold, the safe haven role of the most popular cryptocurrency. A sharp breakout in bitcoin price is expected, with further volatility to come.
Possible scenarios can be: a quick fall and then an upside recovery (V-shaped bounce) or a longer and deeper price crash, after the breakout of the $19,000 resistance level.
Whatever happens, bitcoin will remain the most innovative technology of the past decade, enabling financial freedom and direct control over one’s own wealth. Bitcoin has historically seen many periods of steep declines and has always recovered from them.
This is a guest post by Mike Ermolaev. The opinions expressed are entirely their own and do not necessarily reflect those of BTC Inc. or Bitcoin Magazine.
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