BTC Under $20,000: When Can Crypto Make a Comeback?

Key Points

• H1 2022 was ugly for crypto, with the Fed scrambling to catch up to inflation and with growth fading.
• With Bitcoin currently down around 70% versus November 2021 highs, investors are asking whether the bottom is in.
• Various historically reliable indicators are signaling it is, though elevated economic uncertainty suggests that conditions will remain bumpy for now.

An Ugly First Half

As the second half of 2022 gets underway, crypto investors are glad to see an end to what was an unequivocally ugly first half of the year. Bitcoin ended June at around $19,900 and with losses of over 57% versus the levels where it ended 2021 around $42,600.

In fact, the now-concluded second quarter of 2022 saw Bitcoin post its worst quarterly performance in over a decade after the world’s largest cryptocurrency shed around 56% in value. Generally, the losses experienced across the major altcoins were even worse.

At current levels near $19,750, Bitcoin is trading with losses of roughly 70% versus last November’s record highs in the $69,000 area. Analysts have blamed the losses on a significant deterioration in macroeconomic conditions which has contributed to a series of high-profile liquidation/coin collapse events in the crypto space over the last few months.

Starting with the former; the US Federal Reserve and other major central banks realized in Q4 last year that they had gotten their inflation forecasts completely wrong. Most central bankers, economists and government policymakers had thought that inflation would ease drastically in 2022 and had been calling the high inflation of 2021 “transitory”.

But with inflationary pressures failing to abate in Q4 2021 and accelerating further in the first half of this year in wake of Russia’s invasion of Ukraine and a series of severe Chinese lockdowns to contain Covid-19, central banks have had to react to protect their credibility.

The Fed, which had been forecasting rates at zero well into 2023 as recently as November, has now already raised interest rates by 150 bps this year and will likely raise rates to around 3.5% by December. The central bank is currently signaling rates nearing 4.0% in 2023, but also saying that rates could go way higher than this if inflation fails to abate in the second half of this year.

The hawkish shift from major central banks as they scramble to tackle inflation, even if this risks tilting the US and other major economies into recession, has created a toxic environment for speculative risk assets as investors position their portfolios more defensively given all the uncertainty.

The big losers have thus been the likes of the US tech sector and cryptocurrencies. The collapse in cryptocurrency prices has also resulted in a series of high-profile blow-ups of overly levered crypto hedge funds and exchanges, including Three Arrows Capital and Celsius Network. The collapse of the Terra blockchain back in May after algorithmic stablecoin UST lost its peg and resulted in LUNA hyperinflation has also sent a lasting chill across the crypto space.

Meanwhile, the crypto industry is in a clear recession. Many high-profile crypto exchanges and investment service providers such as Coinbase, Gemini and BlockFi have announced plans to reduce employee headcounts.

To put it lightly, things have been pretty bad this year in the crypto space.

Long-term Optimism

But long-term crypto believers remain upbeat. Numerous surveys suggest that the global adoption and awareness of crypto and its potential uses continue to spread. Regulators across the globe (aside from in China) appear keen to implement regulation that fosters (as US Treasury Secretary Janet Yellen put it) responsible innovation in crypto technology.

Indeed, many long-term crypto investors believe that well-designed crypto regulation could be a game-changer for the industry as it would open the door to greater institutional investment in the space. A flood of capital from major global pension funds and asset managers into regulated cryptocurrencies/blockchain projects could lift prices across the board, they argue.

A cursory look across crypto social media suggests that many of the most high-profile Bitcoin believers/influencers remain just as strong in their conviction that the cryptocurrency will transform the world for the better as ever.

Naturally then, those who are optimistic about crypto’s long-term potential might see current valuations as highly attractive.

But many dip buyers might remain somewhat nervous about whether the bottom is in.

Indeed, the aforementioned economic uncertainties surrounding inflation, slowing growth and central bank tightening remain unresolved. According to Ross Mayfield, an investment-strategy analyst at Baird, a lot of pain has been priced into Bitcoin, but “that’s not to say it can’t go much lower in the near term”.

“The Fed will continue to raise interest rates, and if we enter a recession, there will be even less appetite for highly risky and speculative assets,” he told Bloomberg recently. “It’s definitely facing a challenging environment going forward”.

That’s the pessimistic or at least more cautious view. Many other analysts have come out recently to argue that Bitcoin is showing signs of having bottomed, or at least being close to bottoming.

Bitcoin “Tourists” Almost Completely Purged, Says Glassnode

On-chain data analytics firm Glassnode on Monday said that “the Bitcoin network is approaching a state where almost all speculative entities and market tourists have been completely purged from the asset”. To back up this claim, the firm cites data showing a decline in the number of daily active addresses (and entities), as well as a fall in daily transactions.

the number of addresses with a non-zero Bitcoin balance has continued to advance to fresh all-time highs and recently surpassed 42.3 million, Glassnode pointed out. In past Bitcoin bear markets, there has typically been a fall in the number of wallets with a non-zero. Glassnode said this indicates an “increasing level of resolve amongst the average Bitcoin participant.”

When assessing whether a bear market has run its course, investors often focus on metrics that indicate capitulation. Once the weak hands in a market have been wrung out, the stage is set for a rebound, or so conventional investment wisdom says. Thus, some might interpret Glassnode’s claim that Bitcoin tourists (the weak hands) have been almost completely purged as an indicator that the bottom might be in.

Beyond just the growing dominance of strong-handed investors, “the case for Bitcoin bottom formation is one grounded in… historically significant lows in numerous macro oscillators, and a strong confluence with prices hovering in striking distance of several bear-market pricing models,” analysts at Glassnode added.

Miner Selling and SOPR Both Hint at Bottom, Says CryptoQuant

Senior CryptoQuant analyst Julio Moreno recently argued that a major “capitulation event” is underway amongst Bitcoin miners, which has in the past been a strong signal of a Bitcoin market bottom. As of 25 June, miners had moved around 23,000 Bitcoin to exchanges (presumably to be sold), the highest such flows since China’s Bitcoin ban in May 2021.

Meanwhile, analysts at CryptoQuant separately said that an indicator called the “spent output profit ratio” (SOPR), an indicator which says whether Bitcoin investors are selling at a profit or loss, is hinting at a bottom could be close. When SOPR goes above 1.0, it suggests Bitcoin is being sold at a profit and when it goes under 1.0, it suggests the opposite.

CryptoQuant analysts said that, in late June, the 14-day moving average SOPR score of BTC investors who had held onto coins for at least 155 days had fallen to 0.62. Historically, when this SOPR score fell under 0.50, that indicated a market bottom.

When Can Crypto Make a Comeback?

With various indicators with a track record of predicting past bear market bottom flashing once again, it seems that all crypto investors now need to do is wait for economic uncertainty to clear up a little before the next bull market can begin.

Not that this is going to be easy to judge. What really needs to happen for crypto prices to begin a broad, lasting recovery is for inflation to come back under control, global economic growth to pick back up again and for central banks to ease off on the rate hikes (and maybe even start cutting again).

No one knows if and when all of this is going to happen, although US bond and money markets point to an assumption that inflation in the US will fall back under control during 2023, setting the stage for rate cuts in late 2023/2024.

Things could thus remain bumpy in crypto for a while and picking the bottom exactly will be near impossible. Things might get worse before they get better. But crypto investors playing the long game should remain confident.