Representations of the Bitcoin cryptocurrency are seen in this illustration, August 10, 2022. REUTERS/Dado Ruvic/Illustration
Dado Ruvic | Reuters
Bitcoins the lack of volatility lately isn’t a bad thing and could actually indicate signs of price “bottoming,” analysts and investors told CNBC.
Digital currencies have fallen sharply since a torrid run in 2021 that saw bitcoin soar all the way to $68,990. But over the past few months, the price of bitcoin has been bouncing stubbornly around $20,000, a sign that market volatility has subsided.
Last week, the cryptocurrency’s 20-day rolling volatility fell below that of the Nasdaq and S&P 500 indices for the first time since 2020, according to data from crypto research firm Kaiko.
Equities and cryptocurrencies are both down sharply this year as interest rate hikes by the US Federal Reserve and the strengthening dollar have weighed on the sector.
Bitcoin’s correlation with stocks has increased over time as more and more institutional investors have invested in crypto.
But the bitcoin price has stabilized recently. And for some investors, this easing of volatility is a good sign.
“Bitcoin has basically been in a range between 18-25,000 for 4 months now, indicating consolidation and a potential bottoming pattern, as we also see the dollar index reaching the top,” Vijay Ayyar said. , head of international at crypto exchange Luno, told CNBC in comments via email.
“In previous instances, like in 2015, we saw BTC bottom when DXY peaked, so we could see a very similar pattern playing out here.”
Antoni Trenchev, co-founder of crypto lender Nexo, said bitcoin’s price stability was “a strong sign that the digital asset market has matured and is becoming less fragmented.”
The End of Crypto Winter?
Cryptocurrencies have suffered a precipitous drop this year, losing $2 trillion in value since the peak of the 2021 rally. Bitcoin, the world’s largest digital coin, is down about 70% from its November peak.
The current so-called “crypto winter” is largely the result of aggressive tightening by the Fed, which raised interest rates in an effort to rein in soaring inflation. Big crypto investors with high leverage bets like Three Arrows Capital have been floored by price pressure, further accelerating the market’s slide.
However, some investors think the ice may be starting to melt.
There are signs of an “accumulation phase,” according to Ayyar, when institutional investors are more willing to bet on bitcoin given the lull in prices.
“Bitcoin being stuck in such a range makes it boring, but that’s also when retail loses interest and smart money starts piling up,” he said. Ayyar.
Matteo Dante Perruccio, international chairman of digital asset management firm Wave Financial, said he’s seen a “counterintuitive increase in demand from traditional institutional crypto investors at a time when, in general, you’d see the interest fall in traditional markets”.
Financial institutions have continued to take action in crypto despite falling prices and waning interest from retail investors.
Mastercard has announced a service that allows banks to offer crypto trading, having previously launched a new blockchain security tool for card issuers. Visa, meanwhile, has partnered with crypto exchange FTX to offer debit cards linked to users’ trading accounts.
Goldman Sachs suggested that we may be close to the end of a “particularly bearish” period in the latest cycle of crypto moves. In a note released Thursday, analysts at the bank said there were parallels to bitcoin trading in November 2018, when prices stabilized for a while before rising steadily.
“Low volatility [in Nov. 2018] was following a big bitcoin bear market,” Goldman analysts wrote, adding that the “crypto QT” (quantitative tightening) occurred as investors poured into stablecoins like tethers, reducing liquidity. he circulating supply of USD Coin – a stablecoin that is pegged to the United States dollar – has fallen by $12 billion since June, while the circulating supply of Tether has fallen by more than $14 billion since may.
Selling pressure also eased as bitcoin miners reduced their cryptocurrency sales, suggesting the worst may be over for the mining space. According to Goldman Sachs, publicly traded bitcoin miners sold 12,000 bitcoins in June and only about 3,000 in September.
Wave Financial’s Perruccio expects the second quarter of next year to be when the crypto winter finally ends.
“We will have seen a lot more failures in DeFi [decentralized finance] space, lots of small players, which is absolutely necessary for the industry to evolve,” he added.
All eyes on the Fed
James Butterfill, head of research at crypto asset management firm CoinShares, said it’s hard to draw too many conclusions at this point. However, he added, “we favor greater upside potential over further price declines.”
“The largest outflows of late have been in short Bitcoin positions ($15m this month, 10% of the AuM), while we have seen small but uninterrupted inflows into long Bitcoins over the past 6 weeks,” Butterfill told CNBC via email.
The main thing that would lead to an increase in bitcoin buying would be a signal from the Federal Reserve that it is considering easing its aggressive tightening, Butterfill said.
The Fed is expected to raise rates by 75 basis points at its meeting next week, but central bank officials are reportedly considering slowing the pace of future increases.
“Clients are telling us that once the Fed pivots, or gets close to it, they’ll start adding positions to Bitcoin,” Butterfill said. “The recent net short sell-offs are in line with what we are seeing from a fund flow perspective and imply that short sellers are starting to capitulate.”