Talking Cryptocurrencies

Cryptocurrencies, like the indices, managed to erase some of the losses from the weak end of last week. Bitcoin slipped below $40,000 for the first time in a month over the weekend and tested $38,500 level. Now the ‘king of cryptocurrencies’ has erased some of the losses and attempts to return above $40,000 pulling altcoin valuations up again. At the same time, however, there are growing concerns around a deepening of the declines, which are supported by, among other things, the previously proven 4-year bull market phases of the cryptocurrency market and the macroeconomic environment:

  • On average, halving of the Bitcoin network occurs every 4 years or so. It means a reduction in the supply of new Bitcoins and 50% lower miners rewards;
  • The price tends to rise just before halving and reach a price peak about a year after. The last halving occurred in the spring of 2020, the next one will take place around February/March 2024. During three previous Bitcoin cycles, this scenario has worked each time;
  • Bitcoin’s price tended to lose even more than 80% during the ‘cryptocurrency winter’, while a significant portion of altcoins fell more than 90%. Some smaller cryptocurrencies never returned to record valuations in subsequent cycles;
  • Bitcoin is still trading below the 200-session average which helps bears identify the trend and indicates that the ‘line of least resistance’ is still pointing downwards;
  • The announced Ethereum network ‘merge’ has once again been postponed by the developers to Q4 of 2022 or early 2023. Originally, the event was supposed to take place in June or July;
  • The information was provided by Tim Beiko, one of the developers overseeing Ethereum’s transition to an organic ‘proof of stake’ method of validating new blocks which could cause a possible ‘supply shock’;
  • Investors have been eagerly staking their tokens on the Ethereum network to benefit from the announced returns of up to 11%, which will underpin the network’s operation under the new Proof of Stake model. However, the rewards for staking are likely to be lower, around 4 or 5%. However, the amount of staked Ether continues to grow. 
  • The ArkInvest fund interested in investing in Ethereum and Bitcoin pointed to the possible risk of an outflow of investors from the ETH network and a related drop in the token’s valuation if the validators (who approve transactions in the Proof of Stake system) for whatever reason decide to move to another cryptocurrency network. Analysts compared this risk to the CDO loan products of the 2008 crisis and pointed to a systemic threat to the entire cryptocurrency industry. 
  • At the same time, ArkInvest assumes a Bitcoin valuation in excess of $1,000,000 and remains optimistic about the future of Ethereum; The number of ETH tokens being staked at Lido is growing and currently stands at over 13 million. 

While the amount of ETH being staked increases, rewards for validators which lock in their tokens to provide liquidity on the network decreases. Source: Lido

  • The adoption cycle of new technologies according to Geoffrey Moore presented in ‘Crossing the chasm’, describing ‘discontinuous innovations’ may indicate that the current phase of the cryptocurrency market is crucial and is on the precipice because ‘visionaries’ and ‘early adopters’ want to convince ‘pragmatists’ to use blockchain technology, which is the crucial and most difficult stage of the adoption cycle. Discontinuous innovation ‘changes the rules of the game’ and involves a transformation of the system (in this case, the financial system), which raises internal and external risks, including the risk of possible blocking of change by some entities (central banks);
  • The vision of a hawkish Fed tightening monetary policy and fears of an economic slowdown caused by high inflation, geopolitical crisis and problems in the supply chains of basic products for the economy, such as food or semiconductors, paralyze investors and have a negative impact on valuations of risky assets;
  • Some investors believed that cryptocurrencies could provide an alternative and  hedge against the actions of central banks which are weakening fiat currencies due to loose monetary policy. However, recent price reactions show that the cryptocurrency industry is reacting nervously to deteriorating market sentiment. At the same time, however, Bitcoin is still trading above price level from 24th February when Russia’s launched its invasion on Ukraine, the price has since behaved ‘calmer’ than many US tech companies;
  • Because of the influx of institutional investors, the cryptocurrency industry today may be reacting in a way that is uncorrelated with previous cycles, which occurred when the market was ‘narrow’ and thus vulnerable to manipulation and moves by a few major token holders. The record supply freeze in the Bitcoin network of up to 64% addresses could fuel renewed increases if demand hits and shows that a sizable portion of investors are not interested in selling their tokens at current prices. Cryptocurrencies have surprised investors many times and this time they can do it again by changing the previous ‘rhythm’ of growth. However, the scenario of deepening declines is still real, because the vision of tightening monetary policy in the U.S. and the general market sentiment makes investors uncertain and less inclined to risk. 

Bitcoin, D1 interval. The price of BTC has been in a downtrend since November 2021 and according to the concept of the line of least resistance sellers theoretically are still in control. Head and shoulders formation appeared on the chart,and potential break below neckline around $37,000 could lead to cascading sell-off. At the same time, from the beginning of 2022 successive local price lows are drawn higher, which may herald an attempt to reverse the trend and negate the formation. The key resistance is located  around $41,700, which coincides with the 23.6 Fibonacci retracement. Source: xStation5

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