Concerns about a hawkish Federal Reserve are threatening to dampen risk appetite across markets, so investors are ready for additional gyrations in bitcoin and other cryptocurrencies.
In recent weeks, the volatility that has always been associated with cryptocurrencies has been on full show. Bitcoin, the most popular cryptocurrency, has risen by roughly 33% since January 24 and is currently trading at $43,850, after a drop that saw its price fall by half from its November peak. Its major competitor, ether, has risen roughly 45 percent to around $3,200 since January 24, after plunging nearly 56 percent from a record high of $4,868 in November.
While proponents of cryptocurrencies once boasted about their lack of correlation to other assets, bitcoin and its peers have seen massive gains in the last two years, rallying alongside stocks as the Federal Reserve and other central banks pumped unprecedented amounts of stimulus into the global economy. Since March 2020, bitcoin has increased by 1,039 percent, while ether has increased by 2,940 percent, despite multiple stomach-churning selloffs in both cryptocurrencies.
Investors recalibrating their portfolios to account for a more aggressive Fed, which is now forecast to hike rates as many as seven times this year as it fights soaring inflation, has caused their recent volatility. Year to far, the benchmark S&P 500 index is down 5.5 percent, while the tech-heavy Nasdaq is down 9.3 percent.
Concerns that an aggressive central bank tightening cycle may cripple riskier assets in the future has made it difficult for some traders to retain their bullish stance on bitcoin and other cryptos, an asset class that is already known for its high volatility.
Investors noted that rising tensions in Ukraine, where Washington has warned that a Russian invasion might start at any time, could cause broad market movements.
Bitcoin has “truly become the ultimate momentum trade,” according to Ed Moya, senior analyst at Oanda. “There are so many dangers that might precipitate a 40% decline out of nowhere.”
The volatility of Bitcoin hasn’t deterred some analysts from attempting to determine the currency’s fair worth or identifying potentially significant price levels.
Based on its volatility in comparison to gold, another commodity investors frequently use to hedge their portfolios against inflation and economic instability, JPMorgan analysts put bitcoin’s current fair value at around $38,000 – almost 15% below its previous price.
In a recent report, Vanda Research stated that most negative bets on a lower bitcoin price were placed around $47,000, and that “if the aforementioned threshold is crossed, and retail investors return to crypto-trading,” “there might be a major short-squeeze.”
Meanwhile, according to data from BofA Global Research, correlations between bitcoin and the S&P 500 hit an all-time high on January 31, undermining the case for those seeking to utilize the cryptocurrency as a hedge against market volatility.
Investors will be looking for minutes from the Fed’s most recent monetary policy meeting, which are expected to be released next week. As the corporate earnings season progresses, Walmart and chipmaker Nvidia Corp will be among the corporations releasing results.
Some investors are bracing themselves to ride out bitcoin’s price swings, wagering that the long-term value proposition of blockchain technology, the built-in supply limit, and the network effect it generates would outlast the volatility.
Jurrien Timmer, Fidelity’s director of global macro, compared the current turmoil in cryptocurrencies to the instability in tech stocks during the dot-com era more than two decades ago, a boom-and-bust cycle that left just a tiny group of companies standing.
“Amazon and Apple are still alive, and they’re bigger than ever, and the belief is that bitcoin will be the same,” he explained. “However, it is not immune to the tidal surges of supposition and emotion.”
According to Timmer’s supply/demand estimates, Bitcoin might hit $100,000 as soon as 2023.
Others argue that mature cryptocurrencies such as bitcoin and ether will not offer the kind of staggering increases they have seen since their inception.
Instead, they’re looking to the universe of new, alternative coins that are being produced to take advantage of the money flooding into the crypto realm, such as the metaverse and NFTs, which, according to PitchBook, received $30 billion in venture capital investment last year.
Cosmos, Terra Luna, and Polkadot are three cryptocurrencies that have lost about 20.5 percent, 38 percent, and 25.5 percent year-to-date, according to coinmarketcap.com.
One of the key issues for investors in 2022, according to Lily Francus, director of quantitative research strategy at Moody’s Analytics, will be understanding the risks associated with them and decentralized finance.
Cryptocurrencies “Are going to be quite volatile going forward,” said Moya of Oanda. “However, there are important players on both the institutional and retail sides who are still developing, so interest is still growing.”