Here’s what the market wants to see

Cryptocurrencies have fallen in 2022.

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An improvement in macroeconomic factors, a certain trading pattern and a further shake-up of companies and projects may be the key ingredients required for bitcoin and the broader cryptocurrency market to the bottom, industry insiders told CNBC.

Bitcoin has plunged more than 70% from its record high in November by about $ 2 trillion, wiping out the value of the entire cryptocurrency market.

In the last few weeks, bitcoin has been trading in a tight range between $ 19,000 and $ 22,000 with no major catalyst for the upside and traders trying to figure out where the bottom is.

Here are some of the factors that can help the crypto market find a floor.

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Bitcoin has been hurt by the macroeconomic situation of rising inflation that has forced the US Federal Reserve and other central banks to raise interest rates, damaging risk assets such as equities.

Cryptocurrencies have seen some correlation with US stock markets and have fallen in line with equities.

There is also fear of a recession, but an improved macroeconomic picture could help the crypto market find its bottom.

“I think if inflation is under control, the economy is under control, there is no really severe recession,” then the market will stabilize, CK Zheng, co-founder of a cryptocurrency-focused hedge fund ZX Squared, told CNBC in an interview.

US inflation data for June came hotter than expected on Wednesday, raising fears that the Fed will become more aggressive in its fight to tame rising prices. However, there are some signs that it may peak.

If there are signs that the economy and inflation are “coming under control”, it could help the crypto market find a bottom, according to Vijay Ayyar, vice president of corporate development and international at the crypto exchange Luno.

“If we see signs of this this month or even over the next few months, it would give more confidence to the market that there is a bottom across all risk assets, including equities and crypto,” Ayyar said.

Meanwhile, a “softer” Fed and the peak of the 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 pressure the Fed to slow its tightening.

“A reversal in Fed policy and the consequent high point for DXY [dollar index] would also help define a true floor, we think it will likely happen at the Jackson Hole meeting in late summer, “Butterfill said, referring to an annual central bank meeting.

Is there an end to downsizing?

One of the key features of the recent boom and bust cycle in crypto has been the amount of leverage in the system and the infection that has caused.

First, there have been lending platforms that have promised retail investors high returns for depositing their crypto. One of these companies is Celsius, which last month was forced to suspend withdrawals as it faces a liquidity problem. This is because Celsius lends this crypto from its depositors to others who are willing to pay a high dividend, and then pulls out the profits. That profit must then pay for the return that Celsius offers its retail customers. But as prices fell, that business model was put to the test.

Another company that highlights the problem of excess leverage is the cryptocurrency-focused hedge fund Three Arrows Capital or 3AC, which was known for its bullish bets on the industry. 3AC has a comprehensive list of counterparties from which it is affiliated and has borrowed money.

One of them is Voyager Digital, which applied for Chapter 11 bankruptcy protection after 3AC defaulted on about $ 670 million from the company.

A number of other companies, including BlockFi and Genesis, reportedly also had exposure to 3AC.

Three Arrows Capital has itself been thrown into liquidation.

“We do not know if the degering process is complete or not. I think it is still in the process of washing out the weak players,” Zheng said, adding that when there are no more surprises with companies collapsing, it help the market find a bottom.

CoinShares’ Butterfill said so-called miners using specialized high-power computers to validate transactions on krypton networks could be the next victims of the leaching. With cryptocurrencies under pressure, there will be many mines that are unprofitable. Butterfill notes that there have been some mining startups that recently raised funding and ordered equipment that have either not been delivered or turned on.

“A collapse of one of these mining startups or the associated lender is likely and will help define a precipitation for the crypto market,” Butterfill told CNBC.

Trading pattern

Lunos Ayyar explained some of the trading patterns that could help define a bottom for the market. He said there could be a “capitulation light” in which the price of bitcoin falls even more and “obliterates the last remaining weak hands,” before “moving up sharply again.”

If this happens, it indicates that “liquidity has been captured at lower levels and the market is now ready to go up again,” Ayyar said.

He noted that this happened in March 2020, when bitcoin fell more than 30% in one day before steadily climbing over the ensuing weeks.

Another pattern could be an “accumulation phase” where bitcoin bottoms out and spends a few months trading within a range before moving higher.

In either case, it could cause bitcoin to fall further to between $ 13,000 to $ 14,000, which would be a drop of about 30% from the price of cryptocurrency on Wednesday.

Zheng from ZX Squared said that bitcoin of between $ 13,000 and $ 15,000 is an option. But if institutional investors step in, it can help support prices.

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