Bitcoin dropped 8.4% yesterday as other risk markets capitulated. As an alternative instrument, cryptocurrencies should have a low correlation to stocks. However, this is not the case. It currently has a 78% correlation with the Nasdaq and an 80% correlation with the S&P 500. Thus, as the market turned risk-off yesterday, bitcoin was one of the casualties.
Given that bitcoin is priced in dollars, the tightening cycle of the Fed has put the cryptocurrency under pressure. The central bank has already delivery 75bps this year, with 50 bps of that coming on Wednesday. With inflation so rampant, future increases and balance sheet reduction will continue to apply pressure on bitcoin as higher yields make risk less attractive.
In this environment, consider the weekly bitcoin chart:
Bitcoin has declined by over 45% since its November high, putting it firmly in a bear market. However, price action for 2022 has been largely sideways. Technically, the cryptocurrency has charted a rising wedge (converging turquoise lines). Unfortunately, this pattern is a continuation pattern, and the price has broken down. To project a possible target, we can apply a measured move (turquoise verticals) to the breakout. This calculation gives us a price target of $25,000 for bitcoin - a further 30% decline.
However, a word of warning about forecasts: the variables in the financial market are continually in flux, meaning that expectations often change. Sometimes measured moves are hit, and sometimes they aren't. In this regard, keep an eye on the stochastic. We note that it has rolled over. If it hits 20 and holds (blue arrow), the crypto will be under momentum pressure to the downside. This bearishness will assist in reaching our projected target.
Senior Market Specialist
Russell Shor joined FXCM in October 2017 as a Senior Market Specialist. He is a certified FMVA® and has an Honours Degree in Economics from the University of South Africa. Russell is a full member of the Society of Technical Analysts in the United Kingdom. With over 20 years of financial markets experience, his analysis is of a high standard and quality.