After its worst week in over eight months, bitcoin stabilized relatively during the previous weekend. This came after a very harsh sell-off that saw the largest cryptocurrency in the world shed hundreds of millions USD in fiat. These amounts were the liquidations of previous market bets, where stop-loss mechanisms triggered themselves as the price began to fall. An identical situation came about not just in the bitcoin network, but all other digital currencies. The stabilization came around 35,000 USD at the end of the previous week and signaled an end loss of over 1.6 percent in the final 24 hours. Overall, more than 1.5 billion USD in BTC trading positions was liquidated in a space of three days.
This equates to a loss of 19 percent since the sell-off began and marks the worst period for the crypto domains since May 2021. Back then, fears of a new China crackdown sent the market in a fearful mode. That was further eroded by the tweets from Elon Musk, the CEO of Tesla Motors. He managed to quickly and effectively bring attention to the wasteful nature of the BTC mining system and the amount of power its blockchain uses to stay working. That includes a range of potential environmental harms that come from the use of energy that is not of the renewable source. Now, all eyes are on the market tickers and where the price will go further, but the sentiment around the most recent drop in value remains very pessimistic.
Unlike last May, when China and Elon Musk have been rocking the crypto world, this time around the fears lie mostly in the US Federal Reserve. Many believe that the FED will move swiftly in the next couple of months to tighten the US monetary conditions. These have been at their loss leaves in many years on account of the COVID-19 pandemic striking the US and the rest of the world. The stimulus that the FED dished out, worth trillions of USD, is now slowly coming to an end, at least according to analysts.
The same stimulus is one of the key reasons behind the rise in the bitcoin price and those across the cryptocurrency domain. It fueled the bull run of 2020 and 2021, which included the jump to the all-time high price of bitcoin set last November. Back then, BTC token hit the value of 69,000 USD. Now, the shakeout dropped the same cryptocurrency to a roughly halfway point from its highest record price. For many, this is yet again a very stark reminder of the insanely high level of volatility in the cryptocurrency market.
In any bull run, there are a range of factors that elevate a particular cryptocurrency or the entire market. In the case of the latest one, the biggest driver by far has been a huge surplus of fiscal stimulus. All of it came as a means of fighting against the COVID-19 pandemic and the monetary and fiscal stimulus meant that there was free money to be tied into so many different things. But, the free money period seems to be coming to a close, especially when it comes to the US and its FED. As the pipelines to that extra cash dry up, many risky things and investments will feel the pinch.
One of them is the technological stock, which has been falling in a roughly similar manner as crypto. But, the amounts of loss in the case of crypto are much higher and the drops take place in a much faster manner. At the same time, new bullish drivers are nowhere to be seen and that goes for institutional investors. As these big companies and hedge funds stay on the sidelines, the price of crypto can go only down.
Low Institutional Demand
No matter how much individuals, even famous ones like esports superstars, promote cryptocurrencies, the key factor for their recent success was the level of institutional demand. That included companies like MicroStrategy and Tesla Motors making purchases of bitcoin worth billions of USD. In those scales, any movements of individual whales are almost irrelevant, as a few dozen million USD in bitcoin represents very little in comparison to over a billion USD in bitcoin that MicroStrategy alone possesses. So, any meaningful recovery will have to come on the heels of institutions deciding to once again put their trust in digital tokens like bitcoin and add them to their corporate coffers.
The problem is that presently, those buyers are simply not stepping up and buying the dip. For a strong reversal of that pattern, a lot of money needs to come precisely from those institutions – until then, even if crypto whales, El Salvador, and similar entities rush in at particular moments, even their collective strength will not tip the scales enough to reverse the trend.
The path forward for the crypto community is most definitely highly volatile. The direction of that volatility will be in many ways charted out over the coming days through the FED decision and the access to cheap money. But, with the COVID-19 pandemic slowly winding down in its present form with the arrival of the less dangerous omicron variant, chances are that things are not bright for the risky assets. That means that the overall sentiment for the market will turn bearish, even potentially triggering a new crypto winter.
For many, such a scenario is more than plausible, having in mind how long this run lasted and under what unusual pandemic circumstances. One thing is certain – a much larger crypto field of both users and services will usher in that new chapter, whatever it might be. This expansion and user adoption are the ultimate silver lining in any scenario. With the rise of the price of BTC tokens, the popularity of the same digital currency and other crypto tokens expanded as well. Thanks to it, even a potential crypto winter will give way to a crypto spring sooner or later.