Cryptocurrencies in trouble? Bitcoin price still below $40,000

The cryptocurrency market has shown recently that it is not disconnected from global financial markets, the price of Bitcoin and other cryptocurrencies is reacting in a very nervous manner. Will Bitcoin hold the key support zone above near $40,000? Can we expect a reversal of 'momentum’ ?

• Financial markets are anxiously awaiting the Fed's interest rate decision (consensus is for a 50bp hike and the announced start of a balance sheet reduction program). As a result, this week we can expect increased volatility in financial markets, including the cryptocurrency market;

• Historically, May has been the 4th best month for the Bitcoin price. In May 2011, Bitcoin's price was up 189%, in 2014 it was up almost 40%, in 2019 it was up 62% and in 2020 it was up almost 10%. At the same time, however, it was in May 2021 that the crash occurred during which Bitcoin lost nearly 40% of its valuation. The average gain in that month was 27% and the average loss was 16%. In a downward scenario, the cryptocurrency market could expect to return to the $32,000 zone, where a key demand zone was located in the summer of 2021;

• Some investors, due to the presence of financial institutions in the cryptocurrency market, expect a smaller range of further declines and volatility in the Bitcoin price, as well as a greater correlation with stock indices than in the past. So far, the second factor is working, with the Bitcoin price reacting in a similar way to the NASDAQ technology index. While we will have to wait for further price reactions, Bitcoin is approaching a key support zone from the summer of 2021;

• Ethereum developers have reported that the 'merge' has been postponed again for several months, which may have worried some investors. Ethereum's transition to the Proof of stake approval method has been announced for many months and was originally scheduled to take place sometime in 2021. Meanwhile, the date has been pushed back again from July to an unspecified later part of the year, one of the overseers of the network's upcoming 'fork', Tim Beiko, has spoken out on the subject. The effect of the transfer of Ethereum to PoS is supposed to be a freeze on the supply and mining of new tokens and a green, energy-efficient blockchain;

• ArkInvest Fund raised in the report the issue of the reward for 'staking' on the ETH network, the value of which may decrease as the number of stakers increases. This could pose a systemic risk to the operation of the entire network if there is an exodus of investors brokering approval of transactions on the Ethereum blockchain. The primary role of 'stakers' will be to approve transactions by locking their ETH tokens into the blockchain, in return for which they will receive rewards in the form of % from transaction fees similar to other blockchains that have recently gained popularity due to high rewards for staking (Luna, Solana);

• It is worth noting that the beginning of the year was one of the worst for the stock market in the entire history of the stock market. Such periods have often been followed by a rebound, which if Bitcoin maintains a positive correlation with the financial markets could also bring growth to the cryptocurrency market;

• Recently, Bitcoin has once again come under criticism - this time from Warren Buffett, who in the past has often spoken negatively about rising cryptocurrency valuations, equating them to gambling and the ingrained human need to speculate. According to the 'Oracle of Omaha', Bitcoin's price has been heading towards zero since its inception because, unlike stocks, it belongs to a 'non-productive' asset class. To date, however, Bitcoin's return since its inception continues to outperform the returns of the top U.S. stocks in the S&P 500 index.

The Bitcoin Sensitive Index shows losses among 19 companies such as Robinhood, Coinbase and Riot Blockchain related to the cryptocurrency industry. We see the index's valuation approaching the levels of the fall of 2020, when we saw the beginning of the upward cycle in the cryptocurrency market, and Bitcoin's recent declines are also 'spilling over' into the stock market. Source: Bloomberg, Fidelity

Below we take a look at some on-chain data that could potentially herald an upcoming rebound. The data shows that the cryptocurrency market is starting to mature as indicated by, among other things, the growing average volume of transactions online since 2020. Transactions above $10 million still account for nearly 40%. At the same time, inflows and outflows from exchanges that are usually speculative in nature are starting to wane, which may indicate a lack of interest in selling from long-term holders who are unwilling to sell their Bitcoin holdings. This potentially with the increasing difficulty of mining and high demand could cause a supply shock in the future. However, the falling NVT indicates that there is now a lot of catching up to do before the demand side. 

On-chain data shows that Bitcoin mining is getting harder and is on the ATH. Source: blockchain.com

The model shows the two-year median NVT ratio multiplied by the average current transaction volume. In this way, the model shows the implied valuation of Bitcoin given its use for value settlement. The 28-day (green) and 90-day (pink) models indicate a valuation of BTC between $32.5k and $36k. However, it is worth noting that both are starting to reach very low levels, which raises the possibility of a possible unwind. The green line is starting to wrap above the pink line which may additionally generate positive 'momentum' for future valuation. Source: Glassnode

The ratio of Put options to Call options and their trading volume indicates that market participants have been increasing exposure through Put options since the beginning of 2022, thus rallying a possible correction in the cryptocurrency market and hedging against excessive depreciation of BTC prices. Source: Glassnode 

BITCOIN price chart, W1 interval. Bitcoin, since falling below $4,000 on the day of the COVID pandemic outbreak, is still in an uptrend and has risen nearly 1000% from the covid bottom. However, the primary uptrend line was broken and the 'king of cryptocurrencies' was unable to stay above $40,000 at the beginning of the year. Since the beginning of the year, we can observe a head-and-shoulders-like formation whose potential 'neckline' is around $38,000, but its 'near shoulder' has still not been drawn. A fall below the $38,000 price could trigger a quick slide to the $30,000 levels, where we saw the first strong demand reactions in the summer of 2021, which coincided with the 61.8 Fibonacci retracement. The further movement of the Bitcoin price is likely to depend on the sentiment of the markets in connection with the upcoming FED meeting, so in the coming days we can expect large price movements that may determine the further direction of the cryptocurrency market. Source: xStation 5