Ever since Bitcoin hit a record high near $69,000 in November 2021, cryptocurrency prices have fallen quite sharply and Bitcoin’s price even dropped about 40% in the beginning of 2022. To further add to losses, the Federal Reserve indicated intentions to begin reducing its balance sheet, in addition to what investors have already been preparing for — the tapering of bonds and raising of interest rates.
The crypto market looks to be moving in line with the broader macro environment right now, most likely due to an increasing overlap with the institutional investor base, such as macro funds that allocate to the cryptocurrency market as well.
With January tending to be a key month to gauge how year-end returns might look for equities, cryptocurrency fans should keep an eye on the S&P for clues on how Bitcoin could end the year. The correlation coefficient of Bitcoin and the S&P 500 was 0.35 as of Jan. 3, 2022, meaning that the two assets are moving more in sync than typically expected. A coefficient of 1 would mean the assets are moving together, a coefficient of -1 would mean they are moving in opposite directions. The correlation between Bitcoin and the S&P 500 has been trending upward since June 2021.
Erratic market movements are very much expected as the cryptocurrency market in 2022 has been a sea of red, which many have gone as far as to compare the bloodbath witnessed in the market to that of the ‘red wedding’ episode of the hit series, Game of Thrones. Since the start of the year, the cryptocurrency market has been taking a beating, but those who have been in the crypto space for years are familiar with the volatility that comes with the market. To them, it really just feels like a regular Tuesday. However, for the new cryptocurrency adopters, this situation might look dire and presented with both bull-traps and bear-traps, tricking the novice traders into FOMO-ing and panic selling altogether in this unpredictable market situation.
As many say, once Bitcoin sneezes, the entire cryptocurrency market catches a cold. This is evident because the altcoin market has seen significant declines with the majority posting double-figure losses. The altcoin market capitalization has lost approximately 31.60% from $1.35 trillion at the beginning of the year, to currently stand at $919 billion, losing approximately $431 billion in market capitalization.
With this, many are wondering why the market is taking such a beating at the beginning of the year, which has been historically bullish for cryptocurrencies. So, what next? This is my best stab:
Since crashing around the $32k area, Bitcoin has been slowly and painfully trying to make a move back to the upside with diminishing trading volume. However, it finally had a sudden pump into the $41k area and began to consolidate painfully sideways again between $41k-42k.
Does this sudden pump mean the moon mission is back?? Or is it merely a fake-out/market manipulation?
From technical analysis, this pump of an aggressive rally is somehow expected as a response to a massive overselling to the downside. However, coming from the swing low price action, it seems that Bitcoin’s price has a higher probability to come back to the downside, even though the price action would suggest that there is still a short term strength in the market.
As the retail investor seems to get more excited due to the pump and the fear & greed index has turned from extreme fear to neutral, it would be wise to be cautious and avoid being trapped on the wrong side of the market.
At this point of resistance, Bitcoin’s price does not look like it is going to have a real breakout to the upside even though it can move up above the $44k resistance area and have a run towards $50k. There may still be a strong resistance around the $52k area which imposes a possibility that Bitcoin will come back down and test the support at the $38k area, $36k area, $33k area, or even $30k area.
Disclaimer: not financial advice.