Why bitcoin’s recovery may not happen anytime soon

Cryptocurrency prices tumbled over the weekend and into on 9 May, with Bitcoin nearing a yearly low as investors continued to dump risky assets amid a tough stock market and challenging macroeconomic backdrop.

The price of bitcoin has fallen more than 10.2% over the past 24 hours to roughly $31,000, deepening losses from over the weekend after changing hands around $36,000 on 6 May. It puts the largest crypto at its lowest level since July 2021.

The latest selloff brings bitcoin to less than half the value of its all-time high of $68,990 reached in November 2021, and is a significant move away from the relatively tight range near $40,000 that Bitcoin has been trading around for months.

“Bitcoin has followed the lead of the equity market, extending lower after a weak April,” said Katie Stockton, managing partner at technical research group Fairlead Strategies.

“Short-term momentum has deteriorated,” Stockton said. “Bitcoin is no longer oversold from a short-term perspective. This creates additional risk.”

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Ether, the second-largest crypto, was down 10% to below $2,500, declining over the weekend after trading around $2,700 on 6 May. It’s now changing hands around the lowest levels since 2021.

Smaller cryptos, or “altcoins,” were not spared, declining on 9 May to further losses since 6 May. Solana and Cardano both fell around 12% to 15%. Luna, the token that plays an integral role in maintaining stablecoin TerraUSD’s peg to the US dollar, has dropped more than 30% since 6 May after selling pressure saw Terra de-peg over the weekend and 9 May. The incident with Terra has also rattled the crypto space more widely.

Memecoins — called that because they were initially intended as internet jokes rather than significant blockchain projects — also fell, with Dogecoin losing 13% and Shiba Inu 16% lower.

Bitcoin and other digital assets should, in theory, trade independently of mainstream financial markets. But the recent selloff in cryptocurrencies largely matches action in the stock market, and Bitcoin has largely shown itself to be correlated with other risk-sensitive assets like stocks, and especially technology stocks.

The tech-heavy Nasdaq Composite index has lost more than 25% this year, putting it in bear market territory, while the wider S&P 500 is down 16%. The S&P 500 notched its fifth straight week of losses on 6 May the worst run since 2011, and stocks were headed lower again on 9 May.

Investors face a challenging and dynamic monetary policy environment. The Federal Reserve has already moved aggressively to raise interest rates this year, and is only expected to keep going as the central bank fights historically high inflation. This risks significantly denting economic demand, causing a recession.

The continuation of severe Covid-19 lockdowns in China, which threaten to compromise global supply chains, limiting companies’ access to materials and only stoking inflation further, only complicates matters.

Against this backdrop, “risk assets” like tech stocks and cryptos are faring particularly badly as investor sentiment deteriorates, hurt in part because bond yields keep rising.

The yield on the benchmark 10-year US Treasury note neared 3.2% at points on 9 May, which would put it on track to close at the highest levels since late 2018. When yields climb, the math is tough for riskier assets: Higher yields reduce the extra return relative to bonds that traders expect to get from taking riskier bets.

So where will cryptos find the bottom? In the near term, volatility looks expected to continue, and a turnaround may not be coming anytime soon.

“Bitcoin may be on the course to restart a steep downtrend,” said Yuya Hasegawa, an analyst at crypto exchange Bitbank, who sees the largest crypto trading in a range of $30,000 to $38,000 this week.

READ Bitcoin, crypto prices slip as investors step back from risky stakes amid Fed moves

Looming large in the days ahead is inflation data for April. The US consumer price index is due on 11 May, and investors are likely to latch onto the number as the market keeps revising its estimates for how aggressive Fed policy will be.

If CPI grew more than 8.1% year over year last month, which is around what markets expect, investors could take that as a sign that the Fed will move more aggressively — and this could lead to continued selling.

“Although it will not be enough to reverse the market’s sentiment completely, lower CPI readings will suffice to support the price of bitcoin temporarily,” said Hasegawa. “Until then, the price has to maintain the $33,000 psychological level, which is also around 2022 low, to prevent the technical sentiment from aggravating further.”

Another negative sign for the crypto market is that institutional money may be leading the price pressure, according to Marcus Sotiriou, an analyst at digital asset broker GlobalBlock. Sotiriou said that preceding the recent drop, the price for Bitcoin listed on exchange Coinbase Global was at a discount compared to the Binance exchange.

“This is telling as a greater percentage of institutions use Coinbase compared to retail, whereas the opposite is the case for Binance,” Sotiriou said. “The price mismatch mentioned suggests institutions are not currently as interested as retail.”

Write to Jack Denton at jack.denton@dowjones.com

This article was published by Barron’s, part of Dow Jones