Crypto collapse tests faithful's infinite supply of optimism

London

IN the blink of an eye, more than a trillion dollars in crypto-market value has evaporated.

The jarring downturn that's been a hallmark of digital assets in recent weeks continued to play out last week and into Saturday (Jan 22), with Bitcoin at one point losing more than 15 per cent during that stretch.

The coin, which is the largest digital token, has dropped more than 50 per cent from a recent peak, and many other cryptocurrencies have lost just as much, if not more. The carnage superlatives have been easy to come by: Friday's decline led to the liquidation of more than US$1.1 billion in crypto futures positions and overall more than US$1 trillion in market value has been destroyed since the last peak. In other words, the meltdown is pouring salt on an already-deep wound.

"Digital-currency markets in total have been challenged this month," said Jonathan Padilla, co-founder of Snickerdoodle Labs, a blockchain company focused on data privacy. "There's definitely some pain there."

Even long-time bulls are starting to wonder out loud at what point the battering might end. Famed crypto investor Mike Novogratz mused on Twitter that "this will be a year where people realise being an investor is a difficult job". But, crypto fans have an infinite supply of optimism and many are confident that with Bitcoin already spending two-thirds of the year in the red, better times could come soon.

At some point, sellers will become exhausted and the market could see some capitulation soon, said Matt Maley, chief market strategist for Miller Tabak + Co. "When that happens, the institutions will come back in in a meaningful way," he said. "Once the asset class becomes more washed-out, they'll have a lot more confidence to come back in and buy them. They know that cryptos are not going away, so they'll have to move back into them before long."

The news cycle has been relentless. Regulators from Russia, the UK, Singapore and Spain all announced interventions that could undermine crypto companies looking to grow in those regions, while tightening US monetary policy left traders anticipating several interest rate hikes this year. 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 US$34,000 on Saturday.

Bitcoin's decline since its November high has wiped out roughly US$600 billion and more than US$1 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 US$646 billion for Bitcoin.

Roughly 290,000 traders had their positions closed over the 24 hours through Friday evening in New York, with liquidations totalling more than US$1.1 billion, according to data from Coinglass. It remains to be seen if Bitcoin's tumble below the psychological level of US$40,000 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 US$40,000. 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 US$30,000 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. BLOOMBERG