Metadoro: Bitcoin Is Getting Ready for Extreme Volatility

The leading cryptocurrency continues its complacency run in a narrow taring range between $19,000 to a $20,000 per coin. But this should not fool anyone as Bitcoin continues to gravitate to the lower margin of this range and there is a record open interest in Bitcoin futures.

This may mean a volatility storm could be on the horizon and this may push prices strongly in either direction. This is the point of many suggestions but the main question is why do cryptocurrency prices have to rally as many think they should. The technical picture might seem to be in favour of a recovery but as there are more negative drivers on the fundamental side, a downside scenario could be considered to be more likely.

The primary strong downside factor is the contraction of liquidity in the financial markets across the globe. Rising food and energy prices are hampering consumer demand while only the banking sector seems to be benefiting from the tightening of the monetary policy. But even the banks, like Credit Suisse, are suffering and in turn they would be more likely to park large capitals into safe haven assets like U.S. Treasuries.

Recession fears are picking up steam as the risks of another great downturn, like the one in 2008, are rising even more with every single passing day. Wall Street consensus of a recession starting within the next six months was at 49% in the beginning of August, and these risks were estimated at 63% in the beginning of October.

As the crypto market is very young it is difficult to establish strong consistencies. But inflows and outflows of capital could certainly indicate the direction of the market, as is does for other segments of the financial sphere.

Moreover, the crypto market has never survived a financial crisis, as the last one was in 2008-2009, when there was no crypto market at all. There are also huge disbalances as the majority of crypto enthusiasts believe Bitcoin should be added to the portfolios at current levels, or at least investors should continue to hold their long positions. Only 10% of market players believe Bitcoin should be sold at current prices. Such situations usually manifest the ideal bearish market where prices could be easily cracked down.

The other side of the puzzle is that there are actually fewer buyers in the market. Institutional investors who were interested in digital assets are already in the market. Digital assets are only a small part of their business that is under strict risk management control, including macroeconomic risk valuations. In the downturn scenario these investors are likely to escape into the safe haven assets like the U.S. debt and it seems they have been greatly moving in this direction for the last few months.

Risky assets, including stocks and cryptos, are likely to be dumped as soon as economic contractions hit corporate profits badly, and this may happen by the end of this year.

Three major central banks, the Federal Reserve (Fed), the European Central Bank and the Bank of England, have clearly highlighted their hawkish intentions as they are continuously raising their interest rates. Fed officials have recently voiced the need to raise interest rates to 4.75% by the end of 2022 to bring inflation under control. So, another two jumbo interest rate hikes in the U.S. are likely to happen. 

In such a turbulent environment and lack of liquidity Bitcoin prices are more likely to dive further to $15,000 per coin with a possible rebound to $18,000, and a further downside wave towards $10,000 in the mid-term.

The Head of Analytical Department Metadoro 

Disclaimer: This article is provided for informational purposes only. It is not offered or intended to be used as legal, tax, investment, financial, or other advice