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Bitcoin investors may be breathing a sigh of relief as prices stabilized following a rout this weekend. But the crypto market appears to be suffering from the same aversion to risk that is plaguing tech stocks and other assets as investors readjust to a confluence of dangers.
Bitcoin crashed overnight from Friday to Saturday, falling more than 20% from $57,300 to $45,000. Other cryptos plummeted too, slashing the value of the market by more than $300 billion to a global total of around $2.2 trillion.
Bitcoin has since steadied, even rallying a bit to trade around $49,100.
But new fears are stalking crypto markets, just as they are equities and other “risk assets.” Among them are worries about the economic impact of the Omicron variant of Covid-19. The virus could once again disrupt supply chains and global travel, delaying a global economic recovery that the markets had been counting on in 2022.
Also causing jitters is commentary from Federal Reserve Chairman Jerome Powell, who retired the word “transitory”—the term he and other officials have used to describe inflation—when discussing the state of the economy in Congressional testimony.
The Fed chief also said policy makers are likely to discuss ending bond purchases a bit sooner than previously anticipated, potentially scaling back on a mechanism the Fed had used to help the economy weather the pandemic. That has led to expectations that the Fed could start to raise interest rates sooner than expected.
Powell’s comments hit tech stocks hard, since they tend to be more sensitive to higher rates than other part of the equity markets, given that higher rates imply lower discounted present values for future cash flows. The remarks also indicate that global liquidity could tighten, raising the cost of leverage, or borrowing costs for financial assets.
The fear was evident in crypto markets on Friday as more than $2 billion in long positions were liquidated across global exchanges, including $850 million in Bitcoin futures. Investors can buy futures contracts with relatively small amounts of collateral, taking positions that amplify their exposure. That use of leverage appears to have been flushed out, with open interest in Bitcoin futures dropping by 70,000 contracts as of Sunday morning, down 18% from levels earlier in the week, according to Fundstrat Global Advisors.
The crash is now rippling through crypto-related stocks, exchange-traded funds, and trusts that trade on equity markets. Bitcoin-mining stocks like
Marathon Digital Holdings
(ticker: MARA) and
Riot Blockchain
(RIOT) were down 10% in early trading Monday. The
Grayscale Bitcoin Trust
(GBTC) was off 10%, as were futures ETFs such as the ProShares Bitcoin Strategy ETF (BITO).
Coinbase
Global (COIN), the large crypto exchange, was down 3.7%.
What comes next may depend on factors far beyond anyone’s control, including the spread of the Omicron variant, inflation expectations, and investor sentiment as the markets come to grips with lower growth estimates and higher interest rates.
Technical analysts, for their part, aren’t particularly bullish.
“This marks a shift in intermediate-term momentum, breaks short-term support and increases the risks of a more prolonged correction,” said Katie Stockton, a crypto technical analyst with Fairlead Strategies, in an interview. The area around $53,000 was a widely watched level for Bitcoin prices, she said, and when the market fell below that, it triggered stop-loss selling.
Nicholas Cawley, an analyst with DailyFX, echoed that sentiment. “A toxic combination of low liquidity, excessive leverage, and overconfidence led to this weekend’s crash with most cryptos printing multiweek lows as prices went into freefall,” he noted in a commentary.
“While the market is flashing a technical oversold signal, it is likely that the market is going to enter a consolidation phase in the weeks, and maybe months, ahead before it makes its next move,” he said.
Stockton says the long-term uptrend for Bitcoin remains intact. The next technical support level is $44,000, she said. If it falls below, prices may be heading back to the upper $30,000s, she believes. “This a corrective phase through which you want to manage risk,” she said.
Write to Daren Fonda at daren.fonda@barrons.com