How a Bitcoin market “in extreme fear” compares to the past and what to expect next

stablecoin USDTerra or UST USTUSD,
once in the top 10 largest cryptocurrencies by market cap, lost its 1:1 peg against the US dollar, falling as low as 6 cents on Friday, according to CoinDesk data. LUNA LUNAUSD,
another cryptocurrency that supports UST fell to near zero from above $80 in early May, with its market cap shrinking by more than $40 billion since early April.

It marks “the largest wealth-destroying event in the short history of crypto markets” since Bitcoin was created in 2019, crypto trading firm QCP Capital wrote in a note Friday.

Explained: Why does UST, LUNA crash? Collapse of a once $40 billion cryptocurrency explained

Meanwhile Bitcoin BTCUSD,
fell to $25,402 on Thursday, its lowest level since December 2020, before recovering to around $30,000 on Friday, according to CoinDesk data. The Bitcoin Fear and Greed Index is currently at one of its lowest points, indicates extreme anxiety.

the largest stablecoin, briefly fell as low as 96 cents against the dollar on Thursday before bouncing back to $1.

More than 400 billion dollars has been squeezed out of the crypto market in the past seven days, according to CoinGecko. All sectors within the crypto space have seen double-digit losses over the period, with cryptocurrencies related to Web 3, the so-called next-gen internet, seeing the biggest losses averaging 41%, according to analysts at Messari.

The series of events could herald the start of another “crypto winter,” said one industry participant, echoing a common thread this week on Twitter.

Some are more optimistic. “It’s a pattern. If we look at what happened in 2014, the crash happened and there is a lot of panic. People say, oh, crypto is dead. It’s not coming back. But of course it came back,” Mike Belshe, founder and CEO of crypto infrastructure provider BitGo, told MarketWatch in an interview.

Certainly, the industry is still nascent and lightly regulated, while the high-risk crypto market remains volatile.

Bitcoin Drawdown

At a Thursday low of $25,402, Bitcoin was 63% below its all-time high of $68,990 in November. The percentage of the pullback is larger than the 54% drop from the July 2021 cycle high, but smaller than in other bear markets.

The chart below shows Bitcoin’s previous drawdown from each cycle high.

glass node

In March 2020, Bitcoin was up to 77% below the cycle high, according to Glassnode data. In bear markets in January 2015 and December 2018, Bitcoin capitulated at lows of 85.5% and 83.8%, respectively, from local highs, according to Glassnode data.

market Bottom?

Some said Bitcoin is nearing a “generational cyclical bottom.”

Bitcoin’s Thursday low is close to its realized price, the aggregate cost basis of investors on the chain, which currently stands at $24,000, Will Clemente, lead insights analyst at bitcoin mining firm Blockware Solutions, wrote in a note on Friday. “Any prices below the realized price should be considered extreme value,” Clemente wrote.

Historically, every time bitcoin’s price approached the realized price, it indicated a buying opportunity, Clemente said in a recent interview with MarketWatch.

It’s also worth watching Bitcoin’s 200-week moving average price, which usually signals a cyclical bottom, Clemente said. It is currently just above $21,500.

Nevertheless, great uncertainties remain on the financial markets, as the price movements of all shares show.

Read: Despite the recovery, the S&P 500 is hovering dangerously close to a bear market. Here the number counts

“I think this is just the beginning of an ongoing decline in crypto,” Jay Hatfield, chief investment officer at Infrastructure Capital Management, said in a recent interview with MarketWatch.

Hatfield partially attributed Bitcoin’s strong return in 2020 and 2021 to the Federal Reserve’s quantitative easing policies. “We had an unprecedented surge in Fed liquidity, buying $120 billion worth of securities a month. And now we’re going to have an unpredictable shift to a reduction in liquidity for $95 billion a month,” Hatfield said.

“The Fed hasn’t even started quantitative tightening yet. They just said they will,” Hatfield said.

Hatfield estimated Bitcoin could fall to $20,000 by the end of this year and said in the worst-case scenario, it could revert to its pre-pandemic levels, which were around $10,000. “I’m not predicting we’ll make it, but $10,000 would be a reasonable goal,” Hatfield said. Hatfield compared Bitcoin to Cathie Wood’s flagship Ark Innovation ETF ARKK,
that’s more than 70% below its peak and around the same level as March 2020.

Read: While Ark’s flagship fund has fallen 76% from its peak, Cathie Wood still considers her stocks “low-value territory.” How a Bitcoin market “in extreme fear” compares to the past and what to expect next

Brian Lowry

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