The cryptocurrency has been quite volatile in recent weeks
Investors are poised for further changes in bitcoin and other cryptocurrencies, as a hawkish Federal Reserve worry threatens to dampen risk appetite in the markets.
The volatility traditionally associated with cryptocurrencies has been on full display in recent weeks. Bitcoin, the largest cryptocurrency, is up nearly 33 percent since January 24 and recently traded at $43,850, rebounding from its price drop of less than half from November’s record high. Its main rival, ether, has risen nearly 45 percent since January 24 to nearly $3,200, after a nearly 56 percent drop from its record high of $4,868 in November.
While proponents of the cryptocurrency once pointed out its lack of correlation with other assets, bitcoin and its peers have seen huge gains over the past two years, with stocks rallying as the Fed and other central banks looked to encourage stimulus in the global economy. Pumped to an unprecedented level. Bitcoin is up 1,039 percent since March 2020 and ether is up 2,940 percent, although rallies in both cryptocurrencies have been hampered by many-belly churning sell-offs.
Their recent volatility comes amid a broader market sell-off, prompting investors to rebalance their portfolios to account for the more aggressive Fed, which is now expected to raise rates by up to seven times this year as it fights rising inflation. fights with. The benchmark S&P 500 index is down 5.5 percent year-on-year, while the tech-heavy Nasdaq is down 9.3 percent.
There are concerns that an ongoing aggressive central bank tightening cycle will hamper riskier assets, making it difficult for some traders to maintain their bullish outlook on bitcoin and other cryptos, an asset class known as Already identified with intense volatility.
Investors said rising tensions in Ukraine, where Washington warned a Russian offensive could begin any day, could also fuel a broader market move.
“Bitcoin has really become the ultimate momentum trade and there are many risks that could trigger a drop of anywhere from 40 percent,” said Ed Moya, senior analyst at Oanda.
Bitcoin’s volatility hasn’t deterred some analysts from trying to gauge the currency’s fair value or pinpoint potentially important price levels.
Analysts at JPMorgan estimate bitcoin’s current fair value to be around $38,000 — about 15 percent off its recent price — based on its volatility compared to gold, another asset investors often hedge their portfolios against inflation and economic uncertainty. use to hedge.
Meanwhile, Wanda Research said in a recent note that most bearish bets on a weak bitcoin price were recorded at around $47,000, and that “a major short-squeeze could occur if the above threshold is exceeded.” , and retail investors fall back on crypto-trading.”
Meanwhile, the correlation between bitcoin and the S&P 500 hit an all-time high on January 31, according to data from BofA Global Research, which is the case for those hoping to use the cryptocurrency as a hedge against market turbulence. reduces.
Investors are anticipating minutes from the Fed’s most recent monetary policy meeting next week on Wednesday. Walmart and chipmaker Nvidia Corp will be among the companies reporting results as corporate earnings season gets underway.
Some investors are bracing themselves for an exit from volatility in bitcoin, betting that the long-term value proposition of blockchain technology, the underlying supply limits, and the network effects it generates, will remain the same despite persistent price fluctuations. .
Jurienne Timmer, director of global macros at Fidelity, compared the current speculation in cryptocurrencies to the turmoil tech stocks experienced more than two decades ago during the dot-com era, a boom-and-bust period in which companies compared The small group was left standing.
“Amazon is still around and Apple is still around and they are bigger than ever and the thinking is that the same will happen for bitcoin,” he said. “But it’s not untouched by those waves of speculation and emotion.”
Timmer has said based on his supply/demand model that bitcoin could reach $100,000 by 2023.
Others believe that mature cryptocurrencies like bitcoin and ether are unlikely to deliver the kind of eye-watering gains they have made since their inception.
Instead, they are looking to a universe of new, alternative coins that are being created to take advantage of the money pouring into the crypto space, including Metaverse and NFTs, which raised $30 billion in venture capital last year. The investment was seen, according to Pitchbook.
According to Coinmarketcap.com, some altcoins include Cosmos, Terra Luna and Polkadot, which are down about 20.5 percent, 38 percent and 25.5 percent, respectively, year-on-year.
Lily Franks, director of quantitative research strategy at Moody’s Analytics, said that understanding the risks associated with them and decentralized finance is going to be one of the main challenges for investors in 2022.
“Cryptocurrencies” are going to be very volatile going forward, said Oanda’s Moya, but there are significant players on both the institutional side and the retail side that are still growing, so interest is still rising.
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