Why Bitcoin could be ready to fall further

Amid mounting monetary policy pressures from central banks, Bitcoin (BTC-USD) is trading like “an overpriced tech stock,” one analyst has noted. That could potentially spell poor performance for the next few months.

Bitcoin started this week trading above $40,400 on Sunday before its early Monday morning correction, where it slipped below $39,000 during Asian trading hours. Following Monday’s recovery, the largest cryptocurrency briefly surged above $42,000 before calming down at $41,168 on Wednesday afternoon.

Meanwhile, the global market cap for all crypto assets is currently $1.90 trillion, a 2% up from $1.85 trillion in the past month, according to Coinmarketcap.

No one really knows how Bitcoin, which accounts for 40% of the entire crypto market, will perform relative to stocks in this cycle of monetary tightening. One analyst predicts the next few months could be rocky given how tech stocks fell during the Fed’s previous tightening cycle.

On major centralized crypto exchanges, buyer interest in Bitcoin has fallen to a 10-month low, according to a report by blockchain research firm Kaiko.

BTC and ETH trading volume (Kaiko)

Last week’s trading volume for blue-chip cryptocurrencies bitcoin and ether (ETH-USD) hit the lowest level since June 2021.

Of more concern to analysts is the ever-increasing correlation between cryptocurrencies and risky tech stocks, best tracked by the Nasdaq. Netflix is ​​down more than 35% after reporting gains on Tuesday that showed it was losing subscribers for the first time in 10 years. Citing the easing of pandemic restrictions on the decline, some analysts are beginning to see it as the latest swan song for the sector as the Nasdaq Composite has sold off 15% so far this year.

“The technology sector has had a tough year due to the drastically changing interest rate environment, and results like Netflix’s aren’t helping,” Oanda analyst Craig Erlam wrote in a research note on Wednesday.

Amid the sell-off, Bitcoin’s 30-day correlation to tech stocks has surged to highs not seen since the pandemic tech gains in July 2020, according to Vetle Lunde, an analyst at digital asset manager Arcane Research.

BTC correlation with the Nasdaq

BTC correlation with Nasdaq (Arcane Research)

Bitcoin’s 10- and 30-day correlation to the Nasdaq Index is up into 2022. Currently at 0.7, a correlation of 1 signals that Bitcoin and the Nasdaq index are in lockstep. At the same time, its trend has turned negative with gold and the strengthening US dollar.

During monetary tightening, the technology drawdown can be coupled with rising interest rates, making borrowing more expensive. The result means they will have less potential capital to grow their business.

But as Lunde points out, Bitcoin isn’t reporting gains, so it shouldn’t be expected to sell off amid rising interest rates, and hence its correlation with technology should only be temporary.

Lunde told Yahoo Finance that the correlation between the two is “probably caused by [algorithmic] Traders bundling BTC with technology leading to growing correlations, in addition to investors looking to de-allocate both BTC and Nasdaq to reduce risk under the uncertain regime.”

Sean Farrell, vice president of digital asset strategy at Fundstrat, also pointed to the increasing correlation between Bitcoin and technology in a research note last week.

If Bitcoin continues to trade like an “overpriced tech stock” during a rapid tightening cycle like this, Farrell predicted the asset could see a steeper sell-off over the next few months as the Federal Reserve begins to “trim its balance sheet.” ”

Using the performance of the Invesco ETF (QQQ), which closely tracks the Nasdaq, Farrell observed that during the Federal Reserve’s previous tightening cycle of 2017-2019, technology stocks continued to post gains in an environment of rising interest rates.

“However, as rate hikes coincided with an acceleration in quantitative tightening, QQQ saw a massive decline,” he told Yahoo Finance.

Performance of QQQ during the previous Fed tightening cycle

Performance of QQQ during the previous Fed tightening cycle (Fundstrat)

While it can be difficult to pinpoint exactly what quantitative tightening will do to the market this cycle, Farrell warned that if the correlation doesn’t break, the fallout from the impact of reduced liquidity on the technology could drag Bitcoin lower.

“Given the macro setup, I think we’re primed for another challenging period of yearly lows. Up to this point we have seen major buyer support for Bitcoin at the $33k-$35k levels this year. I’m not sure we’re venturing too far beyond that,” added Farrell.

Of course, both Farrell and Arcane Research’s Lunde are unconvinced that BTC’s high correlation with technology will remain.

Lunde suggested that a break in correlation could stem from a structural shift in the market, such as “new companies exploring BTC-related strategies, new respectable investors promoting Bitcoin, or developments in nation-state adoption.”

Although bitcoin’s value is a constantly evolving target, ardent proponents most often compare it to digital gold. Earlier this month, Galaxy Research’s Alex Thorn told Yahoo Finance he sees it as “an option for a future where Bitcoin is treated like a digital gold-like commodity.”

— Dani Romero contributed to this article.

David Hollerith covers cryptocurrencies for Yahoo Finance. follow him @dshollers.

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