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Digital asset prices have collapsed in 2022.
DreamstimeBitcoin and other cryptocurrencies slid back on Monday after rallying over the weekend. Digital asset investors are not immune to the fear of recession that has shaken wider markets, and the week ahead holds key catalysts that could see more volatility.
The price of Bitcoin fell 3% over the past 24 hours and was holding around $20,500, having traded near $22,000 after a Friday rally that continued over the weekend. The largest digital asset continues to change hands at less than one-third its all-time high near $69,000, reached in November 2021, but is well above the $18,000 bottom that was hit during the trough of a selloff in mid-June.
Other cryptos saw declines, too. Ether, the second-largest token after Bitcoin, lost 3% to below $1,150. Smaller cryptos or “altcoins” were similarly lower, with Solana and Cardano each shedding 3%, while “memecoins”—initially intended as internet jokes— Dogecoin and Shiba Inu slipped 4% and 2%, respectively.
It has been a rough ride for digital assets this year, with the market capitalization of cryptos tumbling to $920 billion from nearly $3 trillion in November 2021 as many if not most tokens lost upward of two-thirds of their value.
Drawdowns in prices have led to cracks in the crypto ecosystem, such as the meltdown of stablecoin Terra, breakdowns at lenders including Celsius and Voyager Digital, and the collapse of a major hedge fund threatening wider contagion.
But crypto’s correlation to stocks is to blame for most of the year’s declines. While Bitcoin and its peers should in theory trade independently of mainstream finance, they have shown to be correlated to other risk-sensitive assets like stocks, and especially tech stocks. And stocks are in a bear market, with the tech-heavy Nasdaq index losing 27% so far this year while the wider S&P 500 has slid 19%.
“The downtrend in the crypto market persists, due to increased fears of an incoming recession. The Google search volume of recession has skyrocketed in recent weeks,” Marcus Sotiriou, an analyst at digital asset broker GlobalBlock, wrote in a note.
Investors are nervous about the possibility of an economic slowdown. Facing the highest inflation in decades, the Federal Reserve has already moved to clamp down on red-hot prices with tighter monetary policy. The fear is that more aggressive interest-rate increases could dent economic demand to the point of spurring a recession.
News in the week ahead could provide more clarity on the inflation picture and how companies view the economy—which may be catalysts for stocks and cryptos alike. U.S. consumer-price inflation (CPI) data is set to be released Wednesday, with expectations that inflation will push to a new 40-year high of 8.8% year-over-year.
“The market seems to be bracing for potentially shocking numbers on Wednesday,” wrote Yuya Hasegawa, an analyst at crypto exchange Bitbank, in a note. “Bitcoin’s upside will likely be limited until then and its outlook for the latter half of the week will also depend on the results of the CPI.”
This week will also usher in the start of earnings season. Thursday sees Wall Street heavyweights lead the charge, with results from JPMorgan Chase (ticker: JPM) and Morgan Stanely (MS), before Citi (C) and BlackRock (BLK) on Friday.
“This is a very important season (aren’t they all) as the collapse in equities so far in 2022 is largely due to margin compression and not really earnings weakness,” wrote Jim Reid, a strategist at Deutsche Bank, in a note.
Solid earnings could signal that the economy is healthier than investors have feared. But that could be a doubled-edged sword; if the economy remains strong, the Fed has little reason to slow down the tightening of monetary policy, while wobbles in the economy could temper the pace of interest-rate hikes.
Nevertheless, even if investors get what they want from the inflation data and earnings, Bitcoin still faces a ceiling, according to Hasegawa, who has a weekly target range on the largest crypto of $12,000 to $24,000.
“A breakout from the current range is still unlikely even if the inflation data turns out to be significantly lower than expected,” the analyst wrote. Hasegawa noted that Bitcoin miners—who have been under pressure from higher energy prices and lower crypto prices—have been consistently adding deposit to exchanges, signalling more sell pressure ahead.
“And Bitcoin’s 200-week moving average, which is currently at around $22,600, seems to be a strong resistance for the price,” Hasegawa added.
Write to Jack Denton at [email protected]
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