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Crypto Market Sentiment; More Dips Ahead?

cryptoknowmics.com 24 January 2022 09:00, UTC
Reading time: ~6 m

More than a trillion dollars in crypto-market worth has vanished in the blink of an eye. Last week and into Saturday (January 22), the shocking drop that has been a hallmark of digital assets in recent weeks continued to play out, with Bitcoin losing more than 15 percent at one point. The largest digital token has lost more than half of its value since its previous high, and many other cryptocurrencies have lost just as much, if not more. Superlatives abound when it comes to the carnage: Friday's drop resulted in the liquidation of more than $1.1 billion in crypto futures holdings, and more than $1 trillion in market value has been lost since the last peak. To put it another way, the meltdown is adding salt to an already infected wound.

"Digital-currency markets in total have been challenged this month," said Jonathan Padilla, co-founder of Snickerdoodle Labs, a blockchain company focused on data privacy. "There's definitely some pain there."

Even seasoned bulls are beginning to wonder aloud when the battering will stop. Mike Novogratz, a well-known crypto investor, speculated on Twitter that 2017 will be the year when people realize investing is a difficult profession. However, crypto enthusiasts have an endless supply of hope, and many believe that, with Bitcoin having already spent two-thirds of the year in the red, better times are on the way. Sellers will exhaust themselves at some point, and the market may soon capitulate, according to Matt Maley, chief market strategist for Miller Tabak & Co.

"When that happens, the institutions will return in a significant way," he said. "They'll have a lot more confidence to come back in and acquire them once the asset class has become more washed-out. They realise that cryptos aren't going away, so they'll have to return to them sooner or later."

The news cycle has been nonstop for a long time. Regulators in Russia, the United Kingdom, Singapore, and Spain have all announced initiatives that might stymie crypto businesses wanting to expand in those countries, while the US Federal Reserve's tightening monetary policy has traders expecting multiple interest rate hikes this year. According to people familiar with the situation, the Biden administration is planning to announce an initial government-wide strategy for digital assets as soon as next month, tasked federal agencies with examining the risks and opportunities they present. Bitcoin was weighted down enough by this that it came within a whisker of $34,000 on Saturday. Bitcoin's collapse since its November high has wiped off about $600 billion, and the total crypto market has lost more than $1 trillion. According to a Friday analysis from Bespoke Investment Group, while there have been significantly higher percentage declines for both Bitcoin and the aggregate market, this is the second-largest ever fall in dollar terms for both. Last summer, when a drop that peaked at the end of July wiped off $646 billion from Bitcoin, it was the largest ever.

'Panic Selling' Selling Like Hotcakes

After the stock market closed on Wall Street on Friday, a major sell-off in the cryptocurrency market accelerated. The selling appears to be feeding on itself, producing widespread panic. Altcoins are down significantly, with some falling by more than 30 percent, but the dips in Bitcoin (BTC) and Ethereum (ETH) are massive. Cardano (ADA) has likewise been down 13.4 percent in the last 24 hours, while Solana (SOL) has dropped a massive 19.1 percent. There's a lot of selling going on down the altcoin list. Liquidations are speeding up as investors with leveraged bets on rising crypto prices liquidate their positions. Gas expenses are skyrocketing as a result of this, particularly on the Ethereum blockchain. Gas is the fee you pay validators to process transactions, and it rises as the blockchain becomes more crowded. The problem with the current situation is that we have no idea when the selling will cease. When leverage and panic selling clash, the market can quickly plummet, particularly in the cryptocurrency market, which is open 24 hours a day. One thing to be concerned about is that some liquidy, or market makers who buy while others sell, may disappear over the weekend. It's hardly a coincidence that the panic selling began just after the stock market closed for the weekend on Friday afternoon.

Liquidation is off the Charts

According to Coinglass data, about 290,000 traders had their holdings terminated in the 24 hours leading up to Friday evening in New York, with liquidations totaling more than $1.1 billion. It's unclear whether Bitcoin's drop below the psychological milestone of $40,000 will act as a turning point. Heavy liquidations, according to crypto supporters, typically serve to cut through the froth in easy-win asset speculation, helping to consolidate fresh market bottoms. As the dust settles, significant technical signs suggest that Bitcoin's fortunes are likely to improve. The crypto's price dropped below the lower band of its trading envelope on Friday as a result of the price drop. Historically, this has been a warning that the selloff is excessive and that a reversion to the mean is in the works, but Saturday's move lower implies the bears are still in control. After plunging below $40,000, Bitcoin is currently up against the wall. It's impossible to rule out a quick ascent over that crucial technical and psychological level. If the Fed doesn't alter course quickly, I don't rule out Bitcoin re-testing $30,000, but that should be the bottom, at least in the short term. From there, I believe we can gain a significant advantage. Bitcoin has been moving in lockstep with the Nasdaq 100, which includes high-growth tech equities that have been hit hard by this year's selloff. Bitcoin's price has been oscillating about the $40,000 mark in recent days, but on Friday it fell to around $37,000, a level below which there isn't much support until the $30,000 level.

Conclusion: Bullish Bliss or is the Bull Market Over?

The cryptocurrency market has taken a beating since the beginning of the year, but for those who are used to the market's volatility, it feels like any other Tuesday. According to Trading View, the cryptocurrency market capitalization was at $2.25 trillion at the start of the year, with Bitcoin trading at $47,833 per coin. Only four weeks into the new year, the cryptocurrency market capitalization has dropped to around $1.58 trillion, a loss of $670 billion in market capitalization. This indicates the market has dropped by almost 30 percent since the beginning of the year. Bitcoin, as expected, is a big contributor to this trend, as it presently trades at $34,875, a price not seen since July 2021, and has lost about $13,000 since the beginning of the year. When Bitcoin sneezes, many believe the entire cryptocurrency market will develop a cold. This is evidenced by the fact that the altcoin market has experienced huge falls, with the majority of coins losing double digits. The market capitalization of altcoins has dropped by approximately 31.60 percent from $1.35 trillion at the start of the year to $919 billion, a loss of $431 billion in market capitalization. A bear market is defined as a market that has lost 20 percent of its value from a recent high. The Bitcoin market has most likely entered a bear market, as it has lost more than 50 percent of its value from its record high in November, while the market has also lost a much larger percentage, resulting in the second-largest decline in dollar terms. The crypto market is reacting to the same issues that are hurting risk assets around the world. Furthermore, there is still a long way to go before any bullishness emerges, as a bottom has yet to form and confidence has yet to return.

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