Crypto’s $US1tr collapse is testing the faith of the true believers

The Bloomberg Galaxy DeFi Index of digital coins involved in decentralised finance fell 14 per cent in the past week.

Meanwhile, the Biden administration is preparing to release an initial government-wide strategy for digital assets as soon as next month and task federal agencies with assessing the risks and opportunities that they pose, according to people familiar with the matter.

That weighed on Bitcoin enough to send it to within a whisker of $US34,000 on Saturday.

“Fear and unease among investors is palpable. If we see a bigger selloff in equities, expect the Fed to verbally intervene to calm nerves and that’s when Bitcoin and other cryptos will bounce.”

Antoni Trenchev, managing partner at Nexo.

Bitcoin’s decline since its November high has wiped out roughly $US600 billion and greater than $US1 trillion has been lost from the aggregate crypto market. While there have been much larger percentage drawdowns for both Bitcoin and the aggregate market, this marks the second-largest ever decline in dollar terms for both, according to a Friday note from Bespoke Investment Group. The largest ever occurred last summer, when a decline that peaked at the end of July wiped out $US646 billion for Bitcoin.

Roughly 290,000 traders had their positions closed over the 24 hours through Friday evening in New York, with liquidations totaling more than $US1.1 billion, according to data from Coinglass.

It remains to be seen if Bitcoin’s tumble below the psychological level of $US40,000 will serve as an inflection point. Crypto proponents say heavy liquidations often serve to cut out the froth in easy-win asset speculation, helping to solidify new bottoms in the market.

“Fear and unease among investors is palpable,” said Antoni Trenchev, managing partner at Nexo. “If we see a bigger selloff in equities, expect the Fed to verbally intervene to calm nerves and that’s when Bitcoin and other cryptos will bounce.”

As the dust settles, key technical indicators show things could be about to look up for Bitcoin. The fall in the crypto’s price on Friday triggered a drop below the lower band of its trading envelope. Traditionally, this has been a sign that the selloff might be overdone, and a reversion to the mean is in play but Saturday’s nudge lower suggests the bears remain in charge.

“For now, Bitcoin is up against the wall after falling below $US40,000. A swift bounce above that key technical and psychological level can’t be ruled out,” added Trenchev. “Failing a quick reversal, I’m not excluding Bitcoin re-tests $US30,000 before the Fed changes tack, but that ought to be the bottom, at least in the mid-term. And from there, I think we can have a nice leg up.”

Bitcoin has been trading largely in tandem with the Nasdaq 100, whose members include high-growth tech stocks that have been dinged during this year’s selloff. That makes sense to Art Hogan, chief market strategist at National Securities, who said that it’s useful to think of cryptocurrencies as living in the same space as other speculative sectors, including special-purpose acquisition companies (SPACs) and electric-vehicle makers.

Loading

“When we’re in an environment where all of those riskier assets are selling off, crypto is going to find itself doing the same,” Hogan said. “When the Nasdaq 100 or any of the other more-speculative, rapid-growth, momentum-type asset classes start to gain some traction, so will cryptocurrencies.”

Bloomberg