Prices of cryptocurrencies have fallen dramatically over recent weeks. We take a look at what is driving the moves and the latest outlook. We also consider what is needed to build a sustainable recovery once more.
- The outlook for crypto has become increasingly tied to speculative markets, with a particularly high correlation to the US tech sector.
- Recoveries have looked to form in recent sessions, but there is much more needed to be seen
Major cryptocurrencies are speculative
There has been a huge shift in the broad market outlook in 2022. Concerns over tightening central bank monetary policy and a global slowdown driven by high inflation and the negative growth implications of war in Ukraine have seen risk appetite suffer.
Cryptocurrencies have had claims of being instruments to hedge against the meltdown of the global monetary system. However, during recent months (and especially since the start of the Ukraine war) they have become ever closely correlated to speculative assets.
Below, we chart NASDAQ 100 futures (a market covering futures of the top 100 tech stocks in the US) versus Bitcoin. The correlation between the two is historically very strongly positive, with the 21-day Correlation averaging +0.41 over the past 12 months. However, since the Ukraine war, this correlation has moved ever closer to +1 (which would be a perfect correlation). Subsequently, where the NASDAQ moves, Bitcoin also goes.
We can also see that other cryptocurrencies, such as Ethereum and Ripple are also showing close relationships with the direction of the US tech sector (which is a highly speculative area of the equity market. Below we show the performances over the past month.
Outlook for Bitcoin remains tough
Since late Thursday there has been something of recovery in cryptocurrencies. We will now look at what this has done to recovery prospects and how sustainable these moves might be.
For Bitcoin (MT5 code: BTCUSD) the price has fallen from around $48,000 in late March, down to almost hitting $26,600 last week. This is a fall of around -45% in seven weeks. Breaking below the June 2021 low of $28,780 took Bitcoin to its lowest level since December 2020.
The Relative Strength Index (RSI) hit 20 before recovery has set in over the past couple of sessions. However, this recovery still looks to be on shaky ground. There has been no classic buy signal on the RSI (needs a move above 30), whilst this morning a failure at $31,400 has already been seen. A rally that cannot sustain two consecutive positive candles does not hold much confidence.
The concern is that there is a huge overhead supply of around $33,000/$37,350. Much is made of Bitcoin traders being “HODL” investors (i.e. hold forever) however, there will be plenty of traders sitting overhead who are worried that a “crypto winter” has set in. This is a huge barrier to recovery now that needs to be overcome.
From a longer-term perspective, the technicals also show a recent breakdown from a rising wedge. This is effectively a longer-term bear flag. The market recently rebounded from the 61.8% Fibonacci projection c. $25,950) and is consolidating around the 50% Fib level. The recovery potential towards 38.2% Fib at $34,450 is still there, however, that would be the moment for the next big decision on traders.
Breaking above $34,450 would represent a rejection of the falling wedge and could suggest the appetite for a sustainable recovery towards $40,000 again (around the 23.6% Fib). For now, though, the longer-term outlook sees this falling wedge as a dominant chart pattern, with the key concern remaining to the downside.
Ethereum and Ripple also struggling to recover
Elsewhere in the crypto space, coins are also struggling to maintain recovery traction.
Ethereum (MT5 code: XETUSD) accelerated lower to hit $1774 last week before rebounding on Friday. This move is now in consolidation, as the overhead supply between $2150/$2490 (from the January to March lows) is a barrier to recovery.
Momentum is also still negative but is stretched below 30 on the RSI. There is recovery potential, but the move would need to move above $2490 and ideally get back above the 21-day moving average (currently $2610) to be meaningful for a positive recovery.
From a longer-term perspective, there is a hugely important support at $1698 which the bulls will need to hold on to.
It is similar with Ripple (MT5 code: XRPUSD). An accelerated sell-off hir a rebound into the weekend, but this has now begun to stall on Monday. For Ripple, the resistance is 0.4550/0.5880.
However, this is a market that looks increasingly bearish from a longer-term perspective. Accelerating away from the falling 21-day moving average (currently c. 0.5600) might give some room for a technical rally, but given the deeply bearish configuration on the RSI, there is a huge amount of recovery work that the bulls need to put in for a rally to be sustainable. As with several of the cryptocurrencies, this all looks to be a bear market rally for now before renewed selling pressure is likely in due course.
This material is for general information purposes only and is not intended as (and should not be considered to be) financial, investment or other advice on which reliance should be placed. INFINOX is not authorised to provide investment advice. No opinion given in the material constitutes a recommendation by INFINOX or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person.
