Anticipating the Crypto Crisis: Bitcoin Price Could Drop 35% (BTC-USD)


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The increase in the price of the most significant global indices, namely the S&P 500 (NYSEARCA:SPY) and the Nasdaq 100 (NASDAQ:QQQ) by 5% this week has contributed to the growth in investment interest in crypto -currencies, which are still under pressure. Economic The global situation continues to deteriorate due to rising inflation, which leads to an increase in the cost of mining equipment.

The economic growth of China, which is the second largest Bitcoin mining country, accelerated slightly in Q3 2022 but remains at multi-year lows. Moreover, youth unemployment remains high at 17.9% and, combined with falling house prices, these factors could exacerbate the housing crisis in China and put severe pressure on the economies of many Asian countries.

As a result, this will lead to an accelerated decline in investment interest in high-risk assets, which include cryptocurrencies such as Bitcoin (BTC-USD), Ethereum (ETH-USD), and Ripple (XRP-USD). However, despite the problematic macroeconomic and geopolitical situation in the world, the price of Bitcoin remains stable and continues to consolidate in a narrow price range since September 2022.

Source: N_Aisenstadt — TradingView

Source: N_Aisenstadt — TradingView

In this article, we will analyze the reasons indicating that the price of Bitcoin has not yet reached the bottom and therefore, in my opinion, shocks await the crypto industry, including many funds, including the Grayscale Bitcoin Trust (OTC: GBTC) and ETFs.

Competition among miners reaches multi-year highs

Despite continued downward pressure on the prices of various cryptocurrencies, Bitcoin’s hash rate reached a new all-time high of 257.7 Exahash per second, up 13.2% from the previous month. For those unfamiliar with cryptocurrencies, the hash rate indicates the total processing power of the mining equipment used in the mining process.

Source: Author's elaboration, based on Glassnode

Source: Author’s elaboration, based on Glassnode

However, as the hash rate increases, the mining difficulty, which shows how difficult it is to do a mathematical calculation to find a new block and, therefore, to receive a reward from it, also increases systematically. This indicator has increased by 47.1% from the peak reached in May 2021, during which the period was marked by a significant tightening of China’s policy on cryptocurrency trading and mining, which subsequently led to the emigration of the mining company to Kazakhstan and the United States. .

The sharp growth in mining difficulties over the past two weeks is negatively reflected in the increased cost of bitcoin mining, and so there is a decrease in cash flow for mining companies who desperately need to buy more. powerful and economical mining equipment. As a result, this creates additional financial burdens for the cryptocurrency mining industry, and in the face of tightening central bank policies, it will be more difficult for the company’s management to find funding for its activities.

Source: Author's elaboration, based on Glassnode

Source: Author’s elaboration, based on Glassnode

In late October 2022, revenue per Exahash hit a multi-year low of 3.44 BTC per Exahash per day, down 44.7% year-over-year. When converting this value of Bitcoin into dollars, the current situation is also deplorable for the industry, since the income of an Exahash is $67-72,000 per day. This figure has already fallen below the levels seen at the start of the fourth quarter of 2020 after the halving.

Source: Author's elaboration, based on Glassnode

Source: Author’s elaboration, based on Glassnode

One of the most important metrics for predicting Bitcoin price is Mining Pulse, which monitors miner activity and then compares the mining interval of a Bitcoin block to a target value of 10 minutes. If Bitcoin blocks appear slower than 10 minutes, it may indicate that miners are leaving the network due to a shock event triggering. As you can see in the chart below, after each multi-year peak in Bitcoin price, there was a period of bearish sentiment that ended with a dramatic miner capitulation.

According to my calculations, the next miner capitulation with a block interval increase of 20% from the target value will take place at the end of 2022 and will seriously test the strength of publicly traded companies such as Riot Blockchain ( NASDAQ: RIOT), Hut 8 Mining (NASDAQ: HUT) and HIVE Blockchain Technologies (NASDAQ: HIVE).

Source: Author's elaboration, based on Glassnode

Source: Author’s elaboration, based on Glassnode

Bitcoin price prediction based on mining parameters

The system developed and described in Glassnode and allowing the cost of mining Bitcoin to be estimated using fundamental parameters such as difficulty and issuance, it is possible to predict the most likely price ranges of ” digital gold”, reaching which the largest players in the market will begin to pursue an aggressive policy of accumulation of this asset. So, for example, the current estimated cost of mining Bitcoin, marked with a pink line in the table below, is $12,200. Referring to historical data, in most crypto crashes, including those that led to the miners’ capitulation, the price of Bitcoin reached exactly the minimum values ​​inferred by this model.

Source: Author's elaboration, based on Glassnode

Source: Author’s elaboration, based on Glassnode

The impact of the Fed interest rate on the price of cryptocurrencies

The Federal Reserve continues to raise the interest rate in order to fight inflation, which is still at a high level. Rising interest rates generally reduce appetite for high-risk assets like Bitcoin, while financial stocks and short-term government bonds are in their heyday. As a result, this means an increased likelihood that the cryptocurrency industry will continue to come under downward pressure until at least the end of 2023. The reason for this is the Fed’s latest forecasts, which call for increase the interest rate in the range of 4.25-4.50% by the end of 2022, and by 2023 it should be 4.50-4.75%, which will be the rate the highest in the last 16 years.

Source: Federal Reserve System

Source: Federal Reserve System

The stock market continues to react negatively to Fed rate hikes, particularly on concerns that the performance of companies that actively used loans during low interest rates in 2020-21, but now must issue bonds senior with a higher coupon rate and thus increase the cost of debt service. So, for example, Meta Platforms (NASDAQ:META) and Amazon (NASDAQ:AMZN) stocks suffered the most severe selling pressure this week due to a drop in operating profit in Q3 2022, at the times compared to the previous year and the previous quarter.

Looking at historical data, one can see evidence of a correlation between the Fed interest rate and the price of Bitcoin. So, on January 5, 2022, the FOMC issued a minute indicating the need to raise the rate. During the same day, the price of Bitcoin fell over $3,000, and five days later the drop was around 16.3%.

Source: N_Aisenstadt — TradingView

Source: N_Aisenstadt — TradingView

Looking at the 2018 crypto crash, Bitcoin price continued to decline during the Fed rate hike. However, once the Fed suspended policy tightening in early 2019, the downward pressure on Bitcoin price ended and the crypto market stabilized. And in the second quarter of 2019, the Bitcoin price reached $12,000, posting a 275% increase in just four months.

Source: Author's elaboration, based on YCharts

Source: Author’s elaboration, based on YCharts

Bitcoin Technical Analysis

When predicting Bitcoin price movement, I use Elliott Wave Theory because this method has been proven to work and when used correctly has relatively low error, especially when predicting Bitcoin price movement. cryptocurrency analysis. From November 8, 2021, a correctional wave (IV) began to form, in which wave Ⓦ formed in the form of a zigzag (“A”-“B”-“C”), and at the moment an intermediate wave ⓧ continues to form.

Moving from the weekly time slot to the 4-hour time slot, you can see the formation of the wave (Y) from October 17, 2022, which is included in the wave structure ⓧ. With a high degree of probability, this will take the form of a double zigzag and as a result, I expect the price of Bitcoin to reach $23,800-24,200. After that, the corrective movement of this asset will continue to the range of $12,700 to $13,600 per BTC, where smart money will start accumulating “digital gold” in anticipation of the formation of the latest global impulse wave “V” and Bitcoin halving in 2024.

Source: N_Aisenstadt — TradingView

Source: N_Aisenstadt — TradingView

Conclusion

Periods of low volatility are extremely rare for Bitcoin, and periods similar to the current situation could be seen both before the sharp crash in cryptocurrency prices in December 2018, and at the start of the epic first-half rally. 2019. Despite the price of Bitcoin falling more than 70% from multi-year highs and the slowing global economy, Bitcoin’s hash rate rose sharply this week to another all-time high.

On the one hand, it is a signal indicating an increase in interest in mining the largest cryptocurrency by market capitalization, but on the other hand, it reduces the margins of mining companies which are already struggling to liquidity. From a fundamental perspective, the cryptocurrency market continues to correlate with the stock market. Thus, in the current period of interest rate hikes by the Fed, there are no significant preconditions that would indicate the imminent start of a Bitcoin bull run.

Additionally, the current period of central banks resorting to policy tightening is leading to less appetite for high-risk assets, including cryptocurrencies. In terms of technical analysis, I expect a slight upward movement in Bitcoin price to the $23,800-24,200 area. However, this will be followed by a 40% retracement towards a strong support zone formed in the price range of $12,700-$13,600 per BTC.

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