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Bitcoin and other cryptocurrencies have been especially volatile as the markets try to digest a tougher macro climate on the horizon.
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Bitcoin and the broader crypto market were trading higher ahead of a key Federal Reserve decision on monetary policy, expected this afternoon. Bitcoin was trading at around $38,100, up 4%, while Ether was ahead 6% to $2,600.
But crypto has been especially volatile as the markets try to digest new regulatory pressures and a tougher macro climate, including higher interest rates and tighter liquidity conditions. The outlook is hammering tech stocks, and cryptos aren’t being spared with Bitcoin and Ether down more than 40% from all-time highs last November, wiping out $1.2 trillion in the crypto market’s overall market cap.
The volatility reflects the fact that crypto is looking increasingly correlated to equities. It’s also an emerging asset class that trades 24/7 on a variety of centralized and decentralized-financial platforms. There are no orderly-trading mechanisms or circuit breakers that stock exchanges use to pause a steep price drop. Liquidity can also dry up quickly, amplifying the impact of a few large sell-orders.
Moreover, Bitcoin serves as collateral for borrowing other cryptos, and it’s used for pair trades with alt-coins in “smart contracts” on DeFi platforms. As prices for alt-coins tank, positions may be automatically liquidated if traders don’t add more Bitcoin as collateral. That can add to downward price momentum.
The market is now clearly on edge with a bias toward short positions, or traders expecting prices to decline. That’s evident in the futures market, where funding costs for perpetual futures contracts have turned negative. Demand for short contracts is so strong that short sellers are paying to open positions, pushing the cost, or funding rate, negative.
“That gives us a clue as to which way the derivatives market is positioned,” said Sean Farrell, head of digital asset strategy at Fundstrat Global, in an interview. “There’s high demand for Bitcoin short positions with funding rates going negative.”
One implication is that Bitcoin could bounce higher if the Fed policy turns more dovish than the market expects. Short traders could face a “squeeze” if Bitcoin prices jump, forcing them to buy Bitcoin to cover the positions. Conversely, if the Fed proves more hawkish than anticipated, long positions would be forced to liquidate, adding to the downward pressure in Bitcoin.
“The takeaway is that trading ahead of the Fed is tough sledding in either direction,” says Farrell.
Technical indicators, meanwhile, are all over the map. Relative strength indexes are neutral, implying that Bitcoin is neither oversold or overbought. But Bitcoin is trading well below its 200-day and 50-day moving averages, $48,700 and $44,900, respectively. That indicates key support levels have long been breached, making it more likely that Bitcoin could bust through other technical levels.
Some technical analysis indicates a floor at $33,000, where Bitcoin recently hit a bottom and buyers came in to support a move back up. But $29,800 is also a credible floor, based on historical patterns; Bitcoin fell to that low last July and then went on to rally to nearly $70,000.
“A lot of investors would back up the truck and open their checkbooks at prices around $29,000,” says Farrell.
Other analysts see support at $30,000. Mike McGlone, senior commodity strategist at Bloomberg LP, says that Bitcoin has found support at 30% below its 52-week moving average, which would be $30,000 based on the last year’s charts.
“That’s a key level to hold a floor and bounce back to the upper end of its trading range,” he said in an interview, noting that it’s been rangebound between $30,000 and $60,000.
“It’s been a range-trader’s delight between $30,000 and $60,000 for over a year,” he says. “Institutional holders are responsive buyers on an approach to $30,000, and I would see the tide rising at that level.”
Wilfred Daye, head of Securitize Capital, a digital-asset marketplace, also sees support at $30,000. But if Bitcoin drops below $30,000, its next stop could be $27,000.
That’s the price at which Bitcoin mining operations generally break even on their operating costs, he says. Miners earn Bitcoin as payments in exchange for processing transactions on the network; when the price falls below their electricity costs, it’s no longer profitable to keep the machines humming and they tend to scale back.
“A lot of miners will shut down their operations, and start selling Bitcoin to fulfill operating costs if prices hit $27,000,” says Daye. That, in turn, would add to downward price pressure.
And what happens if Bitcoin does drop to $27,000? “That’s a very scary thought,” he says, since it could usher in another “crypto winter” with prices falling more than 75% from all-time highs.
Write to Daren Fonda at daren.fonda@barrons.com