What a difference a few days can make. At the beginning of November, we saw bitcoin breaking above its 20-week moving average for the first time since March. A few days later, news of the FTX bankruptcy sent crypto markets in a tailspin. As the extent of the shortfall comes to light, and we learn more about the contagion from this event, we’ve gone from crypto analysts trying to pick a bottom, to the entire market wringing its hands and wondering just how bad this story is for crypto and how much worse it can get.
The short answer is that it’s very bad and can still get much worse. More on this in a moment. If we look at the technical picture, we can see bitcoin’s decisive rejection from the 20-week moving average. But perhaps more importantly, this event has caused the crypto market as a whole to plunge beneath its 200-week moving average. Even ether, which was one of the better performers throughout the bear market, and appeared to have held firm to its own 200-week MA as support, has now fallen below this level.
Bitcoin’s next support level is to be found at the 2019 high of $14k, roughly $3000 below its current price. The total market is currently trading around its 2018 high water mark of $770 billion. Should this fail, its next line of support is the pair of weekly closes at $690 billion on the weeks of January 1, 2018 and January 8, 2018, respectively. Ether still appears stronger than the rest of the market, the recent selloff is still technically a higher-low on the weekly timeframe.
Now, as to why all bets are off. There are currently too many unknowns in the crypto market surrounding this FTX debacle to be able to confidently pick a bottom. A spate of crypto lending firms have gone under since the collapse of FTX. Now Genesis, too, a major US-based crypto lender belonging to DCG (Digital Currency Group — the company behind the Grayscale bitcoin and ether trusts) is also rumoured to be insolvent. Dip-buyers could find themselves severely underwater should news of a Genesis bankruptcy break. If this were to put DCG in a difficult position vis-à-vis Grayscale it could be far worse. Then you have the complete uncertainty regarding a regulatory crackdown in the wake of the FTX collapse. And if all that wasn’t enough, you also have a Federal Reserve that doesn’t appear to be anywhere near to the pivot that would benefit risk assets.
All of the above are reasons why it may be reckless to be scouting a bottom in crypto market just yet. If history is anything to go by, then yes, crypto markets could be approaching the bottom. However, history also teaches us that following the low, crypto investors could also be in for an extended period of sideways action before the resumption of a bullish trend. On one hand, fortune favours the brave. On the other, capital preservation is the order of the day during bear markets. At HYCM we offer the ability to trade CFD on a variety of underlying cryptocurrencies with leverage.
