Bitcoin has hit its lowest level since last summer and its price could drop further.
The cryptocurrency market is under stress. Bitcoin has been hovering around $40,000 for several months, although it has also seen strong price swings up and down, peaking at $69,000 last November. Today, the cryptocurrency hit its lowest level since July 2021, around $32,000 on Monday around 3 p.m. How to explain such a fall?
To understand what is happening now, you have to go back to the start of the war in Ukraine on February 24, bitcoin had held up quite well despite its high risk, which made it almost a “miracle” for Vincent Ganne, technical analyst financial markets. This scenario was only short-lived, with bitcoin failing to become a safe haven and eventually moving in line with the stock market.
Because in recent months, we have observed an increasingly strong correlation between bitcoin and the Nasdaq. While the cryptocurrency market (bitcoin and other cryptos combined) is much smaller – with a current capitalization of $1.5 trillion – than the Nasdaq, a drop in the US tech index is felt more significantly in this market. If paradoxically, the correlation between bitcoin and the Nasdaq was not observed in the first days of the war in Ukraine (at 0.20, see below the graph), it has resumed in intensity since the beginning of March.
“This was done very gradually: there is a withdrawal from the cryptocurrency market, the volume of transactions is very low, there are uncertainties about political regulation in Europe and we are dealing with capital liquidity which are leaving risky asset classes”, emphasizes Vincent Ganne.
The linear correlation coefficient between bitcoin and the Nasdaq today remains strong, reaching 0.77. In other words, when the stock markets go up, the price of bitcoin tends to go up. Conversely, when they dive the cryptocurrency unscrews. Also, since the beginning of the year, bitcoin is down 31%. That is a drop fairly close over the period to that of the Nasdaq (around -24%).
It must be said that the context is particularly gloomy. Global economic slowdown, out-of-control inflation in many countries, rising interest rates, rapidly tightening monetary policy in the United States or even China’s difficulties in managing the waves of Covid… A combination of elements which caused equity markets to plunge, which led to other risky assets including bitcoin. The crypto star had not experienced such a drop since this summer, when the Chinese state decided to close mining farms in the country.
A “falling knife” effect
According to Vincent Ganne, it is possible that the cryptocurrency market is experiencing a “falling knife” effect scenario, according to the stock market adage that “you can’t catch a falling knife”. In other words, investors are advised to wait to be sure that the decline is over before repositioning themselves on an asset.
“We haven’t experienced this despite the war, but if the $30,000 / $33,000 zone for bitcoin is broken, we will enter this “falling knife effect”, towards $20,000. This is the price long-term purchase that 90% of traders expect: which means that in the event of a dropout, I do not think that we will go below 20,000″, explains Vincent Ganne.
If we focus on the 20 largest cryptocurrencies in terms of capitalization according to the site of Coinmarketcap, i.e. having a cumulative value greater than 7 billion dollars, we note that they have all fallen over the last 3 months, like bitcoin (-25.70%) or even ether (-24, 06%). The only exception: the cryptocurrency luna, up 4.46% over the last three months, although the cryptocurrency has been on a downtrend for a month. The trend is the same in the last 7 days, the 20 biggest cryptocurrencies are falling except for the tron cryptocurrency (+12%).