Have Bitcoin and Ethereum Reach a Support Level or Has the Bear Market Just Started?

It’s not exactly breaking news that cryptocurrencies aren’t doing too well in 2022 as we approach the middle of the year.

Where are we now?

The two largest cryptocurrency projects, Bitcoin (BTC) and Ethereum (ETH), reached highs around $ 60,000 and $ 4,800, respectively, by the end of 2021 and have since seen their value plummet. Bitcoin is now hovering around $ 20,000 while Ethereum barely surpasses $ 1,100 as the hype surrounding technology has disappeared and many investors have left the industry with markets falling this year.

Continued supply chain disruptions, tougher monetary policy, and international relations are just some of the factors that have led to a bearish market. However, although the S&P 500 may have recently marked a 20% decline since the new year, the crypto market has fallen nearly 60% during that time. Not surprisingly, the most volatile asset class is being hit hardest than most markets and there are many factors that are cooling fashion technology.

The big question of where the bottom of this bear market is yet to be seen. Ironically, it could be the Fed’s next decisions that could have the biggest impact on these projects that are so proud that they don’t require central authorities.

Which is affecting prices now

Crypto, for many investors, is simply a numbers game where traders bet on whether currencies will rise or fall in value equivalent to the game. But true enthusiasts and long-term owners believe that the underlying blockchain technology will actually be used in the future and has some intrinsic value. Unfortunately, the developments in cryptography that are used in everyday life have not expanded as those cryptographers expected.

El Salvador had mixed results with its adoption of Bitcoin as a national form of currency. The country reported that the greater attention it has received for its adoption has increased tourism, but its residents have not used it as payment as expected and most companies still do not accept Bitcoin as a form of payment. Meanwhile, in the United States and other nations, the currency is not being accepted in most places and those who do simply accept it to become the relevant dollar or national currency.

Meanwhile, an additional problem for Ethereum (or side effect of progress according to the point of view) is that its change from a working test model (PoW) to a participation test model (PoS) is leaving many miners without source of income. The participation test model will not require the same level of power consumption of graphics cards and mining computers as its current model. While this is great for energy efficiency and environmental concerns, thousands or even millions of miners will be left without a source of income as a result. Ethereum 2.0 should be a massive step for cryptocurrency, but when those directly involved in the process from the start are left behind, additional growth pains are likely to occur.

Which will affect prices

In the future, though, it could be future interest rate hikes that actually move the prices of cryptocurrencies as the value of the dollar and other fiat currencies moves with changes in rates. But in addition to the strength of other currencies, higher interest rates will increase the opportunity costs of investing in unprofitable assets. Speculative assets are always hard hit with higher rates and crypto is perhaps the new king of speculative asset classes.

Moreover, although Bitcoin and other cryptocurrencies were almost seen as a class of non-cyclical assets that were not correlated with the rest of the market due in part to their comparisons with gold, the reality is that the cryptocurrency market is increasingly tied to stocks and to actions. it is more correlated with current market sentiment, but much more volatile.

With that in mind, stocks entered a bearish market this year due in part to aggressive monetary tightening with rising rate hikes as the Fed seeks to control inflation. A recent move of 75 basis points was just the beginning as the central bank seeks to consider another 75 points at its July meeting. Economists project that the federal funds rate will reach 3.4% at the end of the year alone. Higher rates have already held back many speculative stocks this year with major technology and cyclical companies such as Apple (AAPL), Microsoft (MSFT), Amazon (AMZN) and Alphabet (GOOG) falling by at least 25%. With more significant rate hikes projected in the year, don’t expect relief for one of the most speculative asset classes out there.

In addition, there is another important component that has to do in the future with the prices of cryptocurrencies. Companies like Microstrategy (MSTR) that own large amounts of crypto and could receive a margin call if prices go down. Microstrategy has not yet faced one, but has 129,218 bitcoins at an average price of $ 30,700 at the end of the first quarter of 2022.

The average price looked great about six months ago, but now it’s being pretty awful with Bitcoin at a total of $ 10,000 below that average cost. Microstrategy bought its Bitcoins with a mixture of money and debt, so the proportion acquired in loans may not be large enough for a margin call, but it can get to that point very soon if current trends continue. If you get to that point and Microstrategy and other companies are forced to sell a portion of their cryptographic holdings, then this downward decline could just be starting.

Bitcoin may have some support at $ 20,000, but it also had support at around $ 30,000 and $ 40,000. Not to mention that it was just over two years ago when Bitcoin fell to about $ 5,000 during the pandemic. Cryptocurrencies are off to a tough start this year and may seem like an attractive low-buying opportunity to many, but it could still be just the beginning of a prolonged bear market.

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