Crypto Hemorrhage

Cryptocurrencies had a rough weekend. A massive sell-off hit the sector on Saturday and sent the price of Bitcoin below the $18K mark, the lowest level since the end of 2020. Ethereum fell below $900, as smaller cryptocurrencies followed their major peers to the south.  

Sunday saw a rebound as some dip buyers piled in on belief that Bitcoin may have cheapened enough to catch an interesting dip, but cryptocurrencies remain on slippery ground as factors that triggered this weekend’s sell-off are still in play. And the level of stress in the market intensifies, both from the macro and industry-specific perspectives.   

From the macro perspective, the Federal Reserve (Fed) is pulling back monetary support to fight the soaring inflation, and the tighter monetary conditions pull the rug from under the feet of risky assets like cryptocurrencies. Unfortunately, the worry of a tightening Fed - and other central banks - is here to stay until we see a significant and persistent drop in inflation. At this week’s semi-annual testimony, Fed Chair Jerome Powell will repeat the bank’s strong commitment to fighting inflation, which could send the risk assets further south.  

From the industry perspective, as the money pours out of the crypto industry, we see some industry giants having trouble keeping their business together, and that adds another level of sector-specific stress. Over the past couple of weeks, we saw the Terra, which was supposed to be a stable coin collapse to zero. Last week, Celsius, which is one of the biggest crypto lenders, suspended withdrawals and even account-to-account transfers to prevent people from a virtual bank. On Friday, Babel finance froze withdrawals and redemptions hinting that if the crypto meltdown continues, we could see more of the crypto institutions take similar measures. And, again on Friday, Three Arrows Capital, said it considers asset sales, and bailout following heavy losses it incurred during this year’s sell-off.  

The mix of discouraging news, and the sharp price declines now convince the long-term holders to pull out the white flag.  

Pricewise, given that the $20K has been cleared, the next wave of sell-off would be a test for the $15/17K support. Below, we could see a further meltdown to $10K.  

On the upside, we will likely see some decent resistance within the $22/25K range. But a positive breakout will take a stronger collective effort and belief to happen, as the FOMO (fear of missing out) about a skyrocketing train is no longer the reality. The reality is that Bitcoin could fall further, and it is no longer a piece of cake to be a crypto investor, as it is no longer a piece of cake to be a stock investor. 

Traditional markets 

Stock markets saw some relief at the end of a heavily stressful trading week, which saw the biggest weekly loss since March 2020 on the back of a 75bp hike from the Fed, a 50bp hike from the Swiss National Bank, a 25bp hike from the Bank of England, and an emergency meeting from the European Central Bank to fix the fragmentation issue at the heart of Europe to be able to fasten the rate hikes as well, without causing a renewed debt crisis in the eurozone.  

Sentiment is mixed and investors lack direction this morning.

FTSE futures are down on cheaper oil and firmer pound.  

In the FX space, the US dollar index is softer this morning, leaving some space to breathe for other currencies. The EURUSD is better bid above the 1.05 and Cable gains above 1.22. Gold is a touch below the 200-DMA. The precious metal remains under the pressure of soaring yields, which also reduces its potential as a safe haven hedge to falling markets. 

US crude is below $110 per barrel this morning, which is perhaps the best news this Monday. Joe Biden sent a letter to US oil refiners last week, telling the industry that he is unhappy they are making above-normal profits at a time of war, and asking them to find solutions to increase efforts to refine more. Some producers, including Exxon (NYSE:XOM) responded that it’s possible that the US uses short-term solutions, the ones that are put in place in case of natural catastrophes and unexpected events to allow increasing supplies, but in the longer term, the government should also promote investment through clear and consistent policy supports. The problem is, the US, like other countries, wants to move away from fossil fuel, which in turn makes investing in refining facilities – that have a payback period of around a decade, significantly less meaningful for oil companies.  

As such, falling demand due to a global economic slowdown is the most effective short-term solution to pause the oil rally.