Markets are collapsing, but there is reason for optimism

Bitcoin dropped to $36,000. But is this really the time to despair? Markets should always be approached rationally, so we decided to prepare an analysis of the current situation. Also in order to understand how the markets can move.

And so…

It was a difficult month for the cryptocurrency market – at least, judging by the numbers: since April 2, the entire market has lost about 16 percent of its market capitalization, reaching a low of $1.39 trillion on April 18, but then rose again to a value of almost $1.82 trillion. Bitcoin and Ethereum have also lost 16.6 percent and 18.9 percent in value since last month.

In fact, however, this development has not been limited to the cryptocurrency market. For the S&P 500, one of the most important American stock indexes, April was the worst month in the last 52 years: it lost 13.3 percent compared to the beginning of the year. We will explain what the Bitcoin community and the DeFi market have to do with this development.

Market capitalization of the entire cryptocurrency market in April:

How are miners and investors behave now

Large investors took advantage of the moment when (according to Coinmarketrate.com ), Bitcoin fell below the $40,000 mark to enter the market. However, this did not lead to the fact that crypto assets significantly exceeded this mark. At the same time, a surprisingly large number of Bitcoin miners (more than ever in the last two years) have sold their long-term positions. This is also evident from the so-called Miner Position Index (MPI), which measures the total amount of money in positions sold by miners (see chart below).

In addition, various crypto funds have also sold positions worth about $97 million. This development can be traced to the example of the decision of the central bank of the Fed to reduce the volume of its bonds by $ 95 billion per month to protect against inflation.

Miners’ Position Index (MPI)

Price fluctuations in the market were not expected until it was reported that the Fed plans to raise interest rates by 50 basis points in May. In addition, another factor may be responsible for the decline in prices – this is evidenced by the red “candles” on the chart: the fall of Chinese stocks, commodities and the yuan. The restrictive policy of the People’s Republic regarding Covid 19 was further tightened on April 25, which led to a halt in industrial production, disruption of supply chains and, quite likely, the sale of BTC stocks.

Network Value Indicator for a Transaction (NVT)

Although the index of miners’ positions and the prices of crypto assets are very important figures, there is another indicator that experts are looking at very carefully these weeks: the so-called NVT (Network Value to Transaction) indicator. This measures the two-year median value of dividing the total cost of the network by its daily transaction volume, and then multiplies it by the current transaction volume.

Considering the value for 28 and 90 days, we can say that in both cases there are signs of a bottom. This development has historically preceded the periods when Bitcoin started to rally, as shown by the blue circles on the chart below in January 2019, May 2020 and September 2021. It will take some time to confirm a steady crossing of the 28-day line over the 90-day line, so you need to closely monitor developments.

Falling markets and the current state

And now, this day has come. The NASDAQ disaster led to the fall of Bitcoin and cryptocurrencies.

The name chosen by the American press is quite eloquent: “Technical crash”. NASDAQ lost more than 1,000 points, which was the worst day since 2020 for the world’s leading stock exchange. The main technology stocks have shown poor results, very bad, and, as readers should already know, they have long been strongly correlated with the BTC and the world of cryptocurrencies.

The cryptocurrency market has also fallen, with losses in some cases reaching double digits. Bitcoin even fell below $36,000, but then recovered and stabilized at the time of writing at around $36,500.

This is a low figure, considering that just a few hours earlier he was trying to overcome the $40,000 mark. All this happened in a whirlwind of events and changes in market sentiment that stunned even the most sophisticated market analysts. But let’s continue.

The first jubilation, but then the fear returned

The sequence of events was curious. After the expected rate hike in the US by 0.50%, the markets toasted, not least because Fed Chairman Jerome Powell practically ruled out the possibility of raising the rate by 75 basis points in the following months. Confidence in the Fed has also grown. Instead, just 24 hours later, the markets quickly reversed course, predicting a possible rate hike of 75 basis points in June, and starting a cascade of sell-offs that literally destroyed the already dilapidated stocks of technology companies.

It is not necessary to say that there is one problem. Powell certainly does not shine with authority in the face of impending hyperinflation, which, as markets fear, is already completely out of control, along with sluggish, if not completely absent, growth. And the nightmare of stagflation, which no one thinks it necessary to pronounce out of superstition, is becoming more and more concrete.

Therefore, the reaction of the markets is reasonable for once, although perhaps not too balanced. And it is precisely on the fact that it could be excessive that we can play our cards in the market, while the sixth consecutive week in the red for Bitcoin may end. What hasn’t been seen for a long time.

Maximum uncertainty among analysts, though…

Uncertainty among analysts is high not only regarding Bitcoin and Ethereum, which will continue to be an indicator of the entire sector, but also for the equity sector. Some say they haven’t seen a similar situation since the crisis of 2008-2009, while others are concerned about the Fed’s ability to reduce inflation to a more acceptable level.

Although, unlike Powell, experts do not believe that this is one of the fundamental reasons for maintaining inflation at all levels, especially energy, they are confident that some normalization of the situation will help. Of course, the stabilization of the political situation in eastern Europe is not yet on the horizon, but if a new balance can be found, we can be relatively confident that we will return to lower levels of inflation.

And one more thing: the market cannot “bleed” forever.

They usually have a very violent reaction, especially in situations with such a degree of uncertainty, and then try to adjust their course. The fact that a 75bp rate increase has already been assessed opens up two alternatives. Either this will really happen and nothing will change, as it has already been estimated, or with a decrease in the effective interest rate, the markets will recover significantly.

The reduction of the Fed’s balance sheet is also frightening. This will start gradually and will have a compressive effect on the markets, as a result of which even the most reliable bond rates will rise dangerously. Without the central bank’s “injections”, many economies may start to crack.

So, we enter the weekend with a mood that cannot be called calm in any way. The policy of Fed Chairman Jerome Powell could mean another turbulent month for cryptocurrencies.