The cryptocurrency market is going through dire turmoil this week, along with the traditional stock market. As bad as things seem, experts told Cryptoslate that the worst is not over yet.
Russell Thomson, CEO of digital asset management firm LibertyRoad Capital, told Cryptoslate in an interview:
“There’s no sign of a bottom yet. And we need to put a bottom in place for this market to rally.”
Simply put, things have to get worse before they can improve.
Bitcoin (BTC) is currently trading around $20,500, an 18-month low — down more than 70% from an all-time high of $69,000 in November 2021, according to Cryptoslate data.
Ethereum (ETH), the second-largest cryptocurrency, is trading just above $1,100 — over 76% below its all-time high of over $3,200 in February 2022.
What caused the crash?
A few reasons directly contributed to the current slide in cryptocurrency prices.
First, the sell-off in the crypto market started when the U.S. inflation data was released on June 10, Marcus Sotiriou, a cryptocurrency analyst at digital asset broker GlobalBlock, told Cryptoslate in an email.
Inflation in the U.S. reached 8.6% in May — a 40-year high. The increasing inflation has been partially triggered by the increasing oil prices owing to the Ukraine-Russia war and has affected countries across the world.
Meanwhile, inflation in the Eurozone reached a record high of 8.1% in May and central banks across the region hiked interest rates on June 16.
The U.S. Federal Reserve announced the largest interest rate hike since 1994 on June 15 to combat the ongoing inflation, anticipating a recession in the coming months. This is going to reduce liquidity as all forms of borrowing become expensive.
The U.S. inflation announcement sent stocks tumbling — the S&P 500 fell by over 7% while the Dow indices slipped by over 6% within 5 days. Nasdaq also dipped by around 4% since the announcement.
But what does the fall in stocks have to do with cryptocurrency? The crypto market has become increasingly co-related to the traditional financial market. This means when stocks go down, so do cryptocurrencies.
Sotiriou said:
“I think this [inflation] is a bigger contributor to the decline we have seen, as it results in a more hawkish Federal Reserve – they are now forced to remove more liquidity from the market in order to bring down inflation.
When liquidity is removed, risk-on assets are hit the hardest, which includes crypto.”
Cryptocurrencies are risky assets and, therefore, the first to be sold during times of liquidity crunch and distress.
Inflationary hedge
To compound problems further, Celsius, one of the biggest crypto lenders with over $11.8 billion in assets as of May, halted withdrawals and transfers on June 13.
According to Sotiriou:
“The crypto markets are crashing partly due to the insolvency risk of one of the biggest lending platforms Celsius, after it has been widely speculated that they have been irresponsible with client funds.”
There have been claims that Celsius, despite their denials, may have had exposure of up to $500 million in UST, which collapsed in early May.
Moreover, around $1.5 billion of their assets are tied up in stETH on the Beacon chain and with stETH trading at a discount to Ether. Sotiriou said there are concerns that:
“If clients try to redeem positions, Celsius will run out of liquid funds to pay them back.”
Staked Ether on Lido is supposed to trade 1-to-1 with Ether but its price can vary according to market demand.
Similarly, there’s Three Arrows Capital, which “looks like they’re going to be filing for bankruptcy. They’re certainly in trouble,” Thomson said. He added that:
“There’s a lot of lending which has been going in this ecosystem, which is coming now under severe stress.”
And these lenders continue to add more collateral to avoid liquidation, like Celsius. Despite this addition of collateral, if Celsius fails to avoid liquidation, it stands to go insolvent. Such an event could have a massive impact on the ecosystem, affecting nearly 1.7 million investors.
When is the bear market going to end?
As Thomson said, the crypto market has to hit bottom before it can begin to recover. In line with Thomson, Sotiriou also expects a further fall in crypto prices. He said:
“I think there may be more downside for crypto due to the severe impacts of the Celsius liquidity crisis…I think many are fearful of a liquidation cascade occurring with the likes of Celsius being margin called, and now having a liquidation price of around $17,000 on their BTC position.”
As per Thomson’s estimates, Bitcoin’s price could fall below $17,000 before the recovery begins. He said:
“Our price target [for Bitcoin] has been around somewhere between $17,000 and $20,000.
Unfortunately, I think that the actual price target now is lower than that. And the main reason why I’ve revised that down is because of this collateralized lending that’s in the market.”
However, Thakral said that Bitcoin could “thin support” at the $20,000 level, while he expects Ethereum to “sit on wafer-thin support” at $1,100.
Thomson said the recovery timeline depends on when the market reaches the bottom, which could be as early as the week of June 13. He added:
“We could get this bottom in place this week. It’s possible. It’s much more likely than people think… if that happens, then we could put a bottom in place, and Bitcoin could start actually making a move and decoupling from the Nasdaq.”
With the accelerating inflation and approaching recession in the U.S., the market’s recovery would depend on how long the recession lasts and how “deep or shallow” it is, Thomson said. However, he added that if Bitcoin continues to trade in the current range, it could be “weeks or months” before we start seeing a recovery.
Sotiriou expects the market to recover around the fourth quarter of this year, which is when he sees the inflation piping down. But he added:
“I think the bear market could extend until the end of the year, but I think 2023 will be positive for U.S. equities and crypto.”
Shivam Thakral, CEO of crypto exchange BuyUcoin, told Cryptoslate:
“The markets will rebound with some relief in the inflation and relaxation of interest rates by central banks around the globe.
The strict monetary policies are not considered favorable for the growth of businesses and we can expect a thriving business environment once again with more liberal monetary policies in place.”
Although experts are still uncertain about the exact timeline of recovery, they are all bullish on Bitcoin in the long term.
Thomson said he expects Bitcoin to reach $100,000 by the end of 2023. But the actual path to recovery depends on:
“what happens, how quickly it happens, how quickly the breakdown happens, whether we get a bottom in place for the market to rally.”
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