Bitcoin Is Nearing a ‘Selling Climax’ Amid Crypto Market Stress. Where Is the Bottom?

The first half of Bitcoin’s fall can be blamed, in large part, on the stock market. While cryptos should theoretically trade independently of mainstream financial markets, Bitcoin has become largely correlated with other risk-sensitive assets like stocks—and especially tech stocks. 

The

S&P 500
index declined 2.9% last Friday while the tech stock-heavy

Nasdaq
lost 3.5%. It was a painful day as investors fretted about how inflation at a multi-decade high may force the Federal Reserve and other central banks to fight high prices with aggressively tight monetary policy and higher interest rates. Doing so risks a recession—an environment that isn’t rosy for risky bets like tech stocks or cryptos.

It looked like more of the same fears were rocking the stock market on Monday, with the S&P 500 down 3.5% by midday and the Nasdaq an eye-watering 4.2% lower. That will be weighing on the crypto space as well.

But the damage to Bitcoin and its peers goes beyond that. Many of the largest tokens have lost 20% in the last day, with the total market cap of the crypto economy down more than 15% to $950 billion.

Ether,
the second largest crypto, slid 21% to below $1,200. Smaller cryptos, or altcoins, were unspared, as Cardano dropped 16% and Solana fell 20%. Memecoins—initially intended as internet jokes—also felt the pain, with

Dogecoin
and Shiba Inu down 21% and 17%, respectively. Terra, the “stablecoin” that used to trade at a $1 peg but collapsed last month, lost another 20% to less than 1 cent.

It’s a far cry from last November, when Bitcoin was at an all-time high near $69,000, Ether flirted with $4,900, Terra was among the hottest new crypto projects, and the digital asset economy was valued close to $3 trillion.

As selling pressure has spread across the crypto landscape in the last day, cracks are emerging and significant market participants are breaking down.

“Many think it is mainly due to fear surrounding the insolvency risk of one of the biggest lending platforms Celsius, after it has been widely speculated that they have been irresponsible with client funds,” Marcus Sotiriou, an analyst at digital asset broker GlobalBlock, wrote in a note.

Citing a need to “stabilize liquidity and operations while we take steps to preserve and protect assets,” Celsius—which held almost $12 billion in cryptocurrency deposits in mid-May—announced Sunday that it was stopping customer withdrawals.

“Counterparty risk is becoming a serious concern in the space,” Stéphane Ouellette, the CEO of crypto derivatives broker

FRNT Financial
,
wrote in a note. “Celsius appears to be the first major platform suggesting it may have difficulties paying back customer deposits. The focus now turns to the threat of contagion, though at this time there are no apparent immediate, knock-on effects.”

Similar to the May meltdown of the TerraUSD stablecoin and its associated token, Luna, which saw some $400 billion wiped from crypto’s market cap in the course of a week, decentralized finance (DeFi) is to blame.

Celsius seems to have liquidity issues—the platform was heavily exposed to Terra—with the latest problem stemming from a derivative based on the Ether token called Staked Ethereum, or stETH. Widely used to facilitate the lending and borrowing of other cryptos, stETH has been trading at a significant 5% discount to Ether.

“The biggest problem Celsius have currently seems to be their $1.5 billion position in stETH,” Sotitriou wrote, adding that it “raises concerns that if clients try to redeem positions, Celsius will run out of liquid funds to pay them back.”

So where is the near-term bottom for Bitcoin?

At least one analyst believes the market will take cues more from macro factors than crypto-native news. Yuya Hasegawa, an analyst with crypto exchange Bitbank, noted the selling pressure could last until Wednesday, when the Fed’s monetary policy committee announces its next move on interest rates.

“From the technical perspective, Bitcoin has broken down from a month-long rage and seems like it could go further down to the $20,000 psychological level or make a stop at around 200-week moving average, which is currently at $22,400,” Hasegawa wrote in a note. “The market could finally be seeing a selling climax in the near term.”

Another analyst sees the bottom as being potentially lower than that. 

“Bitcoin tends to retrace anything between -46% to -63% below the 20-month moving average,” wrote the trader behind the Monday edition of the popular Rekt Capital newsletter, which is focused on technical factors in the crypto market. “We’ve seen -46%, -52%, and -63% retracements below the 20-month moving average.”

A 46% drop would put Bitcoin at $22,000, while a 52% decline would see the largest crypto hit $19,000. A 63% slide would take traders down to $15,500, Rekt noted.

“But we also know that Bitcoin doesn’t stay below this moving average forever.”

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