- Bitcoin dipped below US$40,000, a psychologically-important level of support, on multiple occasions this past week.
- Bitcoin has fallen below its 50-day moving average and that has some chart watchers concerned it could have risks to the downside.
Bitcoin continued to feel the effects of its ever-increasing correlation with U.S. equities, in particular tech stocks, as it dipped below US$40,000, a psychologically-important level of support, on multiple occasions this past week.
Slower-than-expected rises in core CPI data – which strips out volatile food and energy prices from inflation, provided a boost for U.S. Treasuries, but stocks, measured by the benchmark S&P 500 still slipped lower.
For the first time in over three weeks, Bitcoin has dipped below US$40,000 on more than two occasions this past week alone, while Ether also tested US$3,000.
At the time of writing, both Bitcoin and Ether are above US$40,000 and US$3,000 respectively, but there are signs that the broader cryptocurrency market will continue to face headwinds as the U.S. Federal Reserve begins hiking interest rates and appears determined to combat stubbornly high inflation.
Geopolitical turmoil has also dented risk appetite while technical analysts suggest that Bitcoin is in a “consolidation” phase with its upper boundary at US$47,500 and the lower boundary at US$36,500, which suggests that Bitcoin is well within its forecast range.
More disconcerting perhaps is Bitcoin’s role as a portfolio diversifier, with signs that the cryptocurrency is increasingly correlated with tech stocks and therefore more vulnerable to policy tightening.
Bitcoin has fallen below its 50-day moving average and that has some chart watchers concerned it could have risks to the downside.
But this is crypto and the charts don’t tell the full story because of the effect of narrative, that could see sudden reversals and more twists than a daytime soap opera.
Bitcoin has two major narratives from an investment perspective – on the one hand as a risk asset that is going to move in lockstep with other risk assets, like loss-making tech stocks, and the other narrative is as a store of value or inflation hedge – which would be ripe for accumulation especially if inflation continues to head higher.
Because most Bitcoin that is traded represents a small fraction of the amount in circulation, much will depend on which narrative investors who are either entering or exiting the cryptocurrency space buy into.
If more investors see Bitcoin as an inflation hedge, then its price should be expected to rise regardless of policy tightening, because the central bank measures are in response to soaring inflation, which feeds into Bitcoin’s investment narrative.
A quick inspection of the Bitcoin blockchain reveals far more accumulation than selling and with more Bitcoin being held in illiquid “cold wallets” or longer-term addresses, there’s just less Bitcoin available for macro investors or for new market entrants, meaning that price could swing violently either way.
