Bitcoin is firmly a risk instrument
The market has hammered cryptocurrencies over the last two months. As a result, FXCM's crypto basket, Cryptomajor, dropped close to 33%. This fall is an astounding decline and begs whether there is value in the crypto market. In addition, market participants are dumping risk assets as macroeconomic conditions act as headwinds, firmly lumping bitcoin in this category.
Bitcoin is down 17.5% for the month, ten days into May, exacerbating the losses incurred during April. Bitcoin is trading at levels last seen in July 2021 and is just shy of $32,000. That's a long way off from its November high of $68,966 and below the near-term psychological level of $40,000.
"Crypto bulls have long believed that bitcoin is a safe haven. However, market movements certainly put that debate to rest," said Russell Shor, a senior market specialist at FXCM.
"Bitcoin is currently oversold on some time frames," Shor said. "However, any bounces are short-term targets for the shorts, and caution is warranted."
Like other alternative assets, bitcoin and cryptocurrencies, in theory, should trade with little correlation to traditional risk markets. But the recent sell-down in this class suggests that their correlations are closer to 1 than previously thought. The Nasdaq, a growth index, is down over 24% for 2022 - declines over 20% are bear markets. The S&P 500 is down 15.6% for the same period and, whilst severe, does not qualify as a bear market. On the other hand, Bitcoin has underperformed and is down over 30% for the current year to date.
On 23 March 2020, the Federal Reserve announced a policy of unlimited quantitative easing. It would purchase an unlimited amount ("in the amounts needed") of Treasury and mortgage-backed securities to support financial markets. This policy provided a tailwind for bitcoin and other cryptocurrencies as the USD devalued due to the central bank's QE policy.
From the announcement date until its bottom on 25 February 2021, FXCM's dollar basket, the USDOLLAR, declined over 10% due to the increased money supply from the Fed's bond-buying activity. At the same time, bitcoin (valued in dollars - BTCUSD) appreciated by a monstrous 778%.
However, markets are forward-looking and began discounting the normalising of policy and reductions to the Fed's balance sheet. As a result, since 25 February 2021, the USDOLLAR has appreciated by 10.6%, and bitcoin has lost 46.5% of its value.
The policy environment is incredibly challenging for risk assets, cryptocurrencies and bitcoin included. In addition, this hiking cycle is defined by aggressiveness due to the Fed acting late and the subsequent onset of rampant inflation. The Fed had initially characterised the current inflation as transitory before being forced to retire that word in a senate hearing in late November 2021. However, in a perfect storm of disruption, Russia's invasion of Ukraine, and the severe Chinese lockdown restrictions due to a resurgence of Covid-19 in that country have made the economic environment that much more acute.
Supply chains have been dislocated, raw materials prices have increased substantially, and fuel has been added to the fire of inflation.
The required rate of return
Nominal rates have increased in light of potentially dangerous stagflation, but real rates are also now positive. Moreover, risk premiums have shot up as market participants demand more for their risky endeavours. Consequently, the present values of risk assets are under immense pressure. As a result, and as per above, stock markets and cryptocurrencies have collapsed as investors' sentiment soured.
The required rate of return may still be in flux. This week's inflation numbers will be considered carefully, and any surprises to the upside are likely to increase this premium, launching the next round of selling. Any signal that suggests a more aggressive Fed will act as a headwind, adding to an already challenging environment.
Bitcoin's intrinsic value
Given that heightened risk in the financial markets, safety and quality will be at the forefront of investors' minds. Given the drop in BTCUSD from its November high and its underperformance for the year, crypto bulls can hardly make a safety case. However, is bitcoin considered value at its current price?
Consider the words of Warren Buffet, one of the most successful investors of all time. At the annual Berkshire Hathaway shareholder meeting, an attendee asked Buffet if he had changed his negative view of the cryptocurrency. His answer was, "If you ... owned all of the bitcoin in the world and you offered it to me for $25, I wouldn't take it. Because what would I do with it? I'll have to sell it back to you one way or another. It isn't going to do anything. Whether it goes up or down in the next year or five years or 10 years, I don't know. But one thing I'm sure of is that it doesn't multiply, it doesn't produce anything. It's got a magic to it, and people have attached magic to lots of things."
This answer is an indictment of Bitcoin, given Buffet's track record.
BTCUSD bulls are quick to point out that the cryptocurrency is limited in supply and that it is capped at 21 million coins. That is so, but it hardly makes a case for value. Furthermore, even though some vendors have adopted bitcoin as a viable payment option - transaction costs aside (which are down over the year) - the volatility of the cryptocurrency makes it an unlikely candidate to be used for most transactions. One may argue that bitcoin cash (BCHUSD) is the more appropriate crypto to use when transacting. However, it suffers from too much volatility to make for a viable alternative. It has a higher standard deviation relative to its value than bitcoin over a 20-week calculation period – 21% vs 12.6%. The FXCM USDOLLAR basket's 20-week standard deviation is only 1.6% of its current value.
So, bitcoin seems to lack a store of value when the greenback is revaluing, and it lacks utility.
Moreover, it is worth mentioning that it lacks anonymity as well. For example, after the West imposed sanctions on Russia following its invasion of Ukraine, there was a concern that Russia could bypass these via the cryptocurrency markets. However, both Coinbase and Binance have blocked any trading by sanctioned individuals. Moreover, the US Treasury Department's regulation of cryptocurrencies to enforce sanctions further flies in the face of any anonymity claims.
Bitcoin target over the medium-term
Given this, traditional technical analysis suggests a lower price than current levels, even after its massive decline from its November high. The price target is considered a medium-term target, given that it is established on a weekly chart.
Using the November high to anchor the last impulse, BTCUSD charted a rising wedge pattern (converging turquoise lines). This price action is considered a continuation pattern, given its size and position in the price action. We note that the price has broken down from the rising wedge, and there is a good chance this is the next impulse of a greater downtrend, especially given the cryptocurrency's fundamentals. Using the first impulse as a yardstick, we can apply a measured move to gauge a possible target near $20,250. This move is a severe 35% decline from the current price.
However, a word of warning about forecasts: the variables in the financial market are continually changing, which filter down to market expectations. Therefore, sometimes measured moves are hit, and at other times 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 if the projected target is acieved.
We will continue to monitor the cryptocurrency market and bitcoin. Specifically, we will assess the macroenvironment variables for any changes that may influence our current view. However, given the recent tightening of policy, the rate adjustments and dollar support, this market faces headwinds. Moreover, the short-term picture does suggest that bitcoin is oversold. Given the above fundamentals, any bounces in the short-term are in danger of being targeted by cryptocurrency shorts.
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.