Here’s what the market wants to see

An improvement in macroeconomic factors, a particular trading pattern and a further shakeout of companies and projects could be the key ingredients required for bitcoin and the broader cryptocurrency market to the bottom, industry insiders told CNBC.

Bitcoin has fallen more than 70% from a record high in November with around 2 trillion dollars which has wiped out the value of the entire cryptocurrency market.

In recent weeks, bitcoin has traded within a tight range between $ 19,000 and $ 22,000 without any major catalyst for the upside and traders trying to figure out where the bottom is.

Here are some of the factors that can help the crypto market to find a floor.

Bitcoin has been damaged by the macroeconomic situation with soaring inflation that has forced the US Federal Reserve and other central banks to raise interest rates, which has damaged risk assets such as equities.

Cryptocurrencies have seen some correlation with US stock markets and have fallen in line with equities.

There are also fears of a recession, but a better macroeconomic picture could help the crypto market find its way to the bottom.

“I think if inflation is under control, the economy is under control, there is no really severe recession,” then the market will stabilize, CK Zheng, co-founder of a cryptocurrency-focused hedge fund ZX Squared, told CNBC in an interview.

US inflation data for June came hotter than expected on Wednesday, reinforcing fears that the Fed will become more aggressive in the fight to tame rising prices. However, there are some signs that it may reach the top.

According to Vijay Ayyar, vice president of business development and internationally at the crypto exchange Luno, if there are clues that the economy and inflation “come under control”, it can help the crypto market to find a bottom.

“If we see signs of this this month or even over the next few months, it will give more confidence to the market that a bottom is in all risk assets including stocks and crypto,” Ayyar said.

Meanwhile, a “softer” Fed and the peak of US dollar strength could help the market find a bottom, according to James Butterfill, head of research at CoinShares. Butterfill said weaker economic prospects could pressure the Fed to slow the tightening.

“A turnaround in Fed policy and the ensuing peak of DXY [dollar index] will also help define a real floor, we think this is likely to happen at the Jackson Hole meeting at the end of the summer, “Butterfill said, referring to an annual meeting with central bankers.

One of the main features of the recent boom and bust cycle in crypto has been the amount of influence in the system and the infection that has caused it.

First, there have been lending platforms that have promised retail investors high returns for depositing crypto. One of these companies is Celsius, which last month was forced to suspend withdrawals as it faces a liquidity problem. This is because Celsius lends this crypto from its depositors to others who are willing to pay a high return, and then collects the profits. That profit will then pay for the return Celsius offers to its private customers. But when prices crashed, that business model was put to the test.

Another company that highlights the problem of excess influence is the cryptocurrency-focused hedge fund Three Arrows Capital or 3AC, which was known for its bullish efforts in the industry. 3AC has a comprehensive list of counterparties to which it is linked and which it has borrowed money from.

One of them is Voyager Digital, which applied for Chapter 11 bankruptcy protection after 3AC defaulted on approximately $ 670 million from the company.

A number of other companies, including BlockFi and Genesis, also reportedly had exposure to 3AC.

Three Arrows Capital has thrown itself into liquidation.

“We do not know if the gable reinforcement process is complete or not. I think it is still washing out the weak players,” Zheng said, adding that when there are no more surprises with companies collapsing, it could help the market find a bottom.

CoinShares Butterfill said that so-called miners, who use high-power specialized computers to validate transactions on crypto networks, could be the next victims of the leaching. With cryptocurrencies under pressure, there will be many mining operations that are unprofitable. Butterfill notes that there has been some start-up of mining operations that recently raised funds and ordered equipment that has either not been delivered or turned on.

“A collapse in one of these mining startups or the associated lender is likely and will help define a sediment for the crypto market,” Butterfill told CNBC.

Lunos Ayyar explained some of the trading patterns that can help define a bottom for the market. He said it could be a “capitulation light”, where the price of bitcoin falls even more and “wipes out the last remaining weak hands” before “moving sharply up again”.

If this happens, it indicates that “liquidity has been captured at lower levels and the market is now ready to go up again,” Ayyar said.

He noted that this happened in March 2020 when bitcoin fell more than 30% in one day before steadily climbing over the following weeks.

A second pattern could be an “accumulation phase” where bitcoin bottoms out and spends a few months trading within a range before moving higher.

In either case, it could cause bitcoin to fall further to between $ 13,000 and $ 14,000, which will be a drop of about 30% from the price of cryptocurrency on Wednesday.

Zheng from ZX Squared said that bitcoin of between $ 13,000 and $ 15,000 is a possibility. But if institutional investors step in, it could help support prices.