This is an opinion editorial by Mike Ermolaev, head of public relations and content at Kikimora Labs.
Setting the Context: Fundamentals of Global Economics
The economy is still recovering from the COVID-19 outbreak as new problems emerge. We are now in an era of rampant inflation and central banks are trying to remedy this by raising interest rates.
US CPI data (consumer price index), published on October 13, came in higher than expected (8.2% year on year), a negative impact on the price of bitcoin. But inflation is not the only problem, the world economy is also struggling with the energy crisis, which affects Europe more than the US, due to its strong dependence on Russian natural gas and raw materials.
On the eastern side, the war in Ukraine and the subsequent sanctions on Russia, add more geopolitical instability and economic uncertainty. Also, China’s zero-covid policy is disrupting supply chains worldwide, with Evergrande’s default weakening one of the world’s largest economies.
If we look at the main currencies, the dollar index seems strong, compared to 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 policy of quantitative tightening aims to reduce the money supply and lower price pressure. 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 safe from the monetary policy of the central bank.
Correlation of Bitcoin and the economy
Bitcoin has shown itself to be not immune to this global turmoil. Although the price in its early stages was independent of traditional finance, correlation began to show in 2016.
The idea of bitcoin as a “digital gold” has become popular because both share the scarcity and difficulty of extraction (mining), as well as fulfilling the role of being a store of value. Since many people see bitcoin as a risk 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 has reached 0.50 (after being around zero in August). According to Alkesh Shah and Andrew Moss, strategists at Bank of America:
“A slowing positive correlation with SPX/QQQ and a rapidly rising correlation with XAU indicates that investors may view bitcoin as a relatively safe haven as macro uncertainty continues and a market bottom remains to be seen.”
Some macroeconomic factors in the larger cryptocurrency ecosystem have contributed to a bearish market: the Terra/LUNA collapse, the forced liquidation of Three Arrows Capital and the bankruptcy of Celsius are the main ones.
The incoming regulation of bitcoin mining by the European Union and the current profitability crisis of bitcoin mining must also be taken into account.
Bitcoin: Present and Future
Despite all the negative events above, bitcoin could somehow keep its price at $ 19,000-$ 20,000, with record-low volatility. Currently, we are observing the unusual stability of the bitcoin price, recently even matching the volatility of the British pound.
Conversely, stocks experienced high volatility and whipsaw price action, also following speculation about future Fed decisions. According to Mike McGlone, Bloomberg’s chief commodity strategistThat’s why bitcoin can rise after a steep discount and eventually beat the S&P 500. He believes that bitcoin’s finite supply and deflationary approach can help it recover its previous price levels.
Since the last flash crash in mid-June, the price has been pretty steady, but we know it rarely sits still for too long. This means that the probability of a sudden breakout (bullish or bearish) increases over time. The longer the price stays idle, the stronger the breakout will be.
Additionally, BTC futures open interest is at an all-time high, and liquidity is at an all-time low. A lot of liquidity is accumulating here, which means there will be an even stronger impulse when the price starts to move again.
According to strategist Benjamin Cowen, bitcoin is expected to rise to “fair value,” after falling another 15%. “Right now, the data would suggest that we are about 50% undervalued compared to where the fair value is.” Cowen thinks we may need to wait until early 2024 to see that increase happen.
Goldman Sachs strategist Kamakshya Trivedi has a different opinion, claiming that the US dollar index, which shows record values since 2002, may be bad news for the currently bearish bitcoin.
A Bearish Scenario: Could the 2018 Drop Happen Again?
Some analysts have wondered if the 2018 scenario (low yields, then big price drops) could happen again today because market conditions look good. We have the same 10% trading range and we know something is going to happen soon.
A notable difference between the two cycles is that in 2018 there was an increase in addresses sent to spot exchanges, while in our current cycle we are observing liquidity moving away from exchanges and not many new addresses have been created. According to a CryptoQuant analyst, this should mean that we will not witness a similar scenario to 2018.
What about Uptober and Moonvember?
Historically, Q4 is a good time for bitcoin, with bullish trends starting in October and increasing in November. So the months of October and November were renamed “Uptober” and “Moonvember” – at least, this is what happened in 2021.
Can we still expect an optimistic Q4 in 2022? It’s hard to say, but the negative macroeconomic situation and geopolitical issues make it harder to imagine the same rally we saw last year. After all, the bitcoin market has been down for 10 months in a row and we don’t see any particular signs of recovery at the moment.
We must also keep in mind that, despite the negative global scenario, the role of the “safe haven” of bitcoin can contribute to give the price some additional strength, especially in these troubled times.
Data exchange analysis
Liquidation data on the Bitfinex exchange was analyzed by filbfilb. He concluded that an upward breakout would have less momentum than a downward one. In fact, liquidity above $20,500 is mostly 10x, while liquidity below $18,000 is mostly 10x, 5x and 3x, which means that a bullish breakout would be “less brutal” than a bearish one .
We are currently witnessing a period of stasis in the bitcoin market. The bitcoin price needs to start moving again after two months of consolidation. The overall economic scenario does not seem bright at all, and bitcoin is related to real-world events, but investors can still recognize digital gold, the safe role of the most popular cryptocurrency. A major bitcoin price breakout is predicted, with new volatility to come.
The possible scenarios can be: a quick dump and then a bullish recovery (V-shaped rebound) or a longer and deeper price collapse, after breaking through the $19,000 resistance level.
Whatever happens, bitcoin will continue to be the most innovative technology of the last decade, allowing financial freedom and direct control over one’s own wealth. Bitcoin has historically witnessed many bearish strong times 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.