Concerns about a hawkish Federal Reserve are threatening to dampen risk appetite throughout markets; therefore, investors are ready for additional fluctuations in Bitcoin and other cryptocurrencies.
In recent weeks, the volatility that has always been associated with cryptocurrency has been on full show. Bitcoin, the most popular cryptocurrency, has risen by roughly 33 percent 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 biggest competitor, Ether, has risen roughly 45 percent to around $3,200 since January 24, after plunging nearly 56 percent from an all-time high of $4,868 in November.
While people in favor of cryptocurrencies once boasted about their lack of connection to other assets, Bitcoin and its counterparts have seen massive gains in the last two years, rallying alongside stocks as the Federal Reserve and other central banks pumped unparalleled amounts of stimulus into the international economy. Although the increases in both cryptocurrencies have been halted by multiple stomach-churning selloffs, Bitcoin has increased 1,039 percent since March 2020 and Ethereum has risen 2,940 percent.
Investors adjusting their portfolios to accommodate for a more assertive Federal, which is now forecast to hike rates as many as seven times in 2022 as it fights soaring inflation, has caused the recent volatility. Year to date, the S&P 500 index has dropped 5.5 percent, while the tech-heavy Nasdaq has dropped 9.3 percent.
Concerns that an aggressive central bank tightening cycle may cripple riskier assets in the future have made it challenging for several traders to retain their bullish stance on Bitcoin and other cryptocurrencies, 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 “really become the ultimate momentum trade,” according to Ed Moya, the senior analyst at Oanda. “There are so many risks that can trigger a 40% drop out of nowhere.”
The volatility of Bitcoin has not 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 economic instability and inflation, JPMorgan analysts put Bitcoin’s current fair value at approximately $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 could be a large short-squeeze.”
However, as per data from BofA Global Research, connections between Bitcoin and the S&P 500 hit a record high on January 31, undermining the case for those seeking to utilize the crypto 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, chipmaker Nvidia Corp and Walmart will be among the corporations releasing results.
Many investors are bracing themselves to ride out Bitcoin’s price swings, wagering that the long-term business model of blockchain technology, the network effect, and the built-in supply limit it generates would outlast the turbulence.
Jurrien Timmer, Fidelity’s director of global macro, compared the current turmoil in cryptocurrencies to the instability in tech stocks throughout the dot-com era more than 20 years ago, a boom-and-bust cycle that left just a tiny group of businesses standing.
According to Timmer’s supply and demand estimates, Bitcoin might hit $100,000 as soon as 2023.
Others argue that mature cryptocurrencies such as Bitcoin and Ethereum will not offer the kind of staggering increases they have seen since their inception.
Instead, they’re looking to the universe of new, alternative cryptocurrencies that are being produced to take advantage of the money flooding into the crypto realm, such as NFTs and the metaverse, which, as per PitchBook, received $30 billion in venture capital investment in 2021.
Oanda’s Moya believes that cryptos will continue to be extremely volatile in the future; however, major players on both the retail and institutional sides are still expanding; thus, interest is still increasing.
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