Is Bitcoin Still Relevant in Financial Markets?

The economy is still recovering from the COVID-19 outbreak, though new problems have emerged. Now inflation is out of control, and the central bank is trying to fix it by raising interest rates.

The US Consumer Price Index (CPI) statistics were released on October 13 and were higher than expected (+8.2% year-on-year), which had a negative impact on the price of Bitcoin. However, the global economy is also facing an energy crisis, a problem that affects Europe more than the United States due to its heavy dependence on Russian gas and raw materials. This problem is not limited to inflation.

The conflict in Ukraine and subsequent sanctions against Russia have heightened geopolitical turmoil and economic uncertainty in the east. In addition, one of the world's largest economies is facing the threat of Evergrande's default and China's zero COVID policy, which has disrupted global supply chains.

The US dollar index appears strong compared to other major currencies. In November, both the Bank of England and the Federal Reserve raised interest rates by 75 basis points. This quantitative tightening strategy aims to tighten the money supply and reduce price pressures. This strategy may continue into next year or even longer. However, the possibility of global recession and stagflation remains very high, so no country can feel safe relying solely on central bank monetary policy.

Bitcoin and the economy

Bitcoin has shown that it is not immune to the current world turmoil. Although Bitcoin prices were initially uncorrelated with traditional finance, a correlation began to emerge in 2016.

The idea that Bitcoin is considered "digital gold" has become popular due to its scarcity and difficulty in mining (mining), as well as its function as a store of value. As many people consider Bitcoin to be a risky investment, it has become correlated with these traditional stocks, just like the S&P 500 and Nasdaq 100.

As of now, Bitcoin’s 40-day price correlation with gold is 0.50 (it was around zero in August). Bank of America strategists Alkesh Shah and Andrew Moss said:

“As macro uncertainty persists and a market bottom emerges, investors could view Bitcoin as a relative safe haven,” the report said. “This is indicated by the decelerating correlation with SPX/QQQ and the rapidly rising correlation with XAU.”

Tragic incident

The collapse of Terra/LUNA, forced liquidation of Three Arrows Capital, and bankruptcy of Celsius are the main macroeconomic variables that have led to a bear market in the cryptocurrency ecosystem. There is also the upcoming EU regulations on Bitcoin mining and existing profitability issues in the industry to consider.

Despite all the aforementioned negatives, Bitcoin has managed to maintain a price range of $19,000 to $20,000 with historically low volatility. The Bitcoin price is currently showing exceptional stability, even recently matching the volatility of the British Pound.

On the other hand, the market has seen huge volatility and price shocks following rumors of an imminent choice by the Federal Reserve. Mike McGlone, chief commodity strategist at Bloomberg, believes that this is why Bitcoin could rise after a significant discount and eventually outperform the S&P 500. He believes that Bitcoin’s limited quantity and deflationary strategy could help restore previous price levels.

Since the last flash crash in mid-June, prices have been very stable, but as we all know, this stability doesn't last long. This suggests that the more time passes, the more likely a sharp breakout (bullish or bearish) will occur. The longer the price stagnates, the stronger the breakout will be.

Additionally, open interest in Bitcoin futures is hitting a new high as liquidations hit a record low. A lot of liquidity is accumulating here, so when prices start to move again, there will be a bigger boost.

Strategist Benjamin Cowen predicts that after a further decline of 15%, Bitcoin will rise to "fair value". Available data suggests that we are currently undervalued by about 50% compared to fair value. According to Cowen, we may have to wait until early 2024 to observe such an increase.

Goldman Sachs strategist Kamakshya Trivedi holds an opposing view, arguing that the U.S. dollar index’s record high since 2002 could pose a threat to the currently bearish Bitcoin market.

Doomsday prediction: Will the 2018 decline happen again?

Some analysts are speculating that the market conditions of 2018 (low volatility followed by a sharp decline) could be repeated today. We have the same 10% trading range and anticipate a major event is imminent.

Compared to our current cycle, liquidity is leaving exchanges and fewer new addresses are being created, while the 2018 cycle saw an increase in addresses being sent to spot exchanges. This is a significant difference between the two cycles. An analyst at CryptoQuant believes that this should indicate that there will not be a situation like 2018.

How about the "Halloween Effect"?

In the past, the fourth quarter has been very good for Bitcoin, with a bullish pattern starting in October and intensifying in November. As a result, in 2022, people are jokingly calling October "Uptober" and November "Moonvember."

Can we still expect the fourth quarter of 2022 to be just as positive? It’s hard to predict, but given the unfavorable macroeconomic environment and the current geopolitical situation, it’s hard to imagine the same rally we experienced last year. After all, the Bitcoin market hasn’t shown any real signs of recovery in the past ten months. We also have to remember that Bitcoin’s status as a “safe haven” could help support prices despite the unfavorable global situation, especially during these difficult times.

Transaction data analysis

Filbfilb studied the liquidation information of the Bitfinex exchange. He concluded that the downward breakout will have greater momentum. Compared with the bear market, the bullish breakout will be "less severe" because the liquidity above $20,500 is mainly 10x leverage, while the liquidity below $18,000 is mainly 10x leverage, 5x leverage, and 3x leverage.

in conclusion

The Bitcoin market is currently at a standstill. After two months of consolidation, Bitcoin price volatility must begin again. Despite a rather bleak overall economic outlook and its correlation with real-world events, investors may still believe in the importance of Bitcoin as a safe-haven asset and digital gold. A major breakout in Bitcoin price is expected, accompanied by additional volatility.

After the price breaks out of the $19,000 resistance level, two scenarios are possible: a short-lived price drop followed by a bullish rebound (V-shaped rebound); or a longer and deeper price decline.

No matter what happens, Bitcoin will continue to be the most advanced technology of the past decade, enabling financial freedom and complete sovereignty over wealth. In the past, Bitcoin has experienced many major bear markets, but has always been able to bounce back.