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Here’s what the market wants to see

Cryptocurrencies have taken a tumble in 2022.

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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 crypto market to bottom, industry players told CNBC.

Bitcoin has plummeted more than 70% from its record high in November with around $2 trillion wiped off the value of the entire cryptocurrency market.

For the last few weeks, bitcoin has been trading within a tight range between $19,000 and $22,000 with no major catalyst to the upside and traders trying to figure out where the bottom is.

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

Improving macro picture

“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.

U.S. inflation data for June came in hotter-than-expected on Wednesday, deepening fears that the Fed will get more aggressive in its fight to tame rising prices. However, there are some signs it could be peaking.

If there are clues that the economy and inflation are “getting under control,” that could help the crypto market find a bottom, according to Vijay Ayyar, vice president of corporate development and international at crypto exchange Luno.

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

Meanwhile, a “softer” Fed and the peaking of U.S. dollar strength, could help the market find a bottom, according to James Butterfill, head of research at CoinShares. Butterfill said a weaker economic outlook could push the Fed to slow down its tightening push.

“A turn around in Fed policy and the consequent peaking of the DXY [dollar index] would also help define a true floor, we believe this is likely to happen at the Jackson Hole meeting at the end of the summer,” Butterfill said, referring to an annual meeting of central bankers.

Deleveraging coming to an end?

One of the key features of the latest boom and bust cycle in crypto has been the amount of leverage in the system and the contagion that has caused.

Firstly, there have been lending platforms that have promised retail investors high yields for depositing their crypto. One of those companies is Celsius, which last month was forced to pause withdrawals as it faces a liquidity issue. That’s because Celsius lends out this crypto from its depositors to others willing to pay a high yield and then pockets the profit. That profit is then supposed to pay for the yield Celsius offers to its retail customers. But as prices crashed, that business model was put to the test.

Another company that highlights the issue with excess leverage is crypto-focused hedge fund Three Arrows Capital or 3AC, which was known for its bullish bets on the industry. 3AC has an extensive list of counterparties that it is connected to and has borrowed money from.

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

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

Three Arrows Capital has itself plunged into liquidation.

“The deleveraging process we don’t know if it is complete or not. I think it is still in the process of washing out the weak players,” Zheng said, adding that when there are no more surprises with companies collapsing, that could help the market find a bottom.

CoinShares’s Butterfill said so-called miners, which use specialized high-power computers to validate transactions on crypto networks, could be the next victims of the washout. With crypto prices under pressure, there will be many mining operations that are unprofitable. Butterfill notes there have been some mining start-ups that raised funding last and ordered equipment that has either not been delivered or turned on.

“A collapse in one of these mining startups or the associate lender is likely and would help define a trough to the crypto market,” Butterfill told CNBC.

Trading pattern

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Here’s what the market wants to see

2022-07-14 18:27:04

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