The world’s largest cryptocurrency by market capitalization, Bitcoin, has been experiencing a vast sell-off since the beginning of the week, losing more than 25% before recovering some lost ground. Moreover, the broader crypto space has been following Bitcoin’s path amid increasing concerns over slowing global growth and a potential recession as major central banks tilt towards more aggressive tightening to combat rising inflation. In the last couple of days, two crypto trading platforms temporarily halted withdrawals and transfers, exacerbating the downfall and reminding investors that systemic risks in the crypto ecosystem are lingering.
Inflation remains the name of the game
Since the beginning of 2022, cryptocurrencies have been moving in tandem with equity markets, exhibiting a higher positive correlation with tech stocks. During that period, risky assets have been facing continuous downside pressures as investors appear to be moving towards defensive assets in the face of persistently high inflation and recession fears. The latest blow to risky assets was dealt on Friday by the May US CPI print, which came out hotter than expected at 8.6% year-on-year, debunking the peak inflation narrative.
Following that news, investors increased their bets over an upcoming 75 basis points rate hike at the July meeting, inflicting devastating damage in equity and crypto markets. More precisely, the tremendous selling interest caused the cryptocurrency market’s capitalization to plunge below $1 trillion for the first time since January 2021.
Unregulated nature poses an additional threat
As turbulence rippled through the crypto space in the past few days, leading cryptocurrency exchanges were forced to temporarily pause some of their features amid increasing market volatility. On Monday, Celsius, a popular crypto lending platform, announced that it had halted all crypto and money withdrawals, alongside swaps and transfers between different accounts, which lead to its own token CEL losing more than 50% on the news. Furthermore, another famous crypto exchange, Binance, ceased Bitcoin withdrawals for more than 30 minutes, attributing this move to technical issues, with rumors suggesting that this action was taken due to the ongoing crypto bloodbath.
In addition, crypto exchange companies have been increasingly stating that they plan to proceed with layoffs to curtail their operating costs. Specifically, last week, both BlockFi and Crypto.com reported that they would cut 20% and 5% of their staff respectively as the dramatic shift in macroeconomic conditions has been largely weighing on the broader tech sector. The aforementioned developments paint a gloomy picture for the outlook of the crypto space, which combined with the regulatory woes and the recent Terra collapse have significantly deteriorated investors’ sentiment towards cryptocurrencies.
Bitcoin collapses to fresh 18-month low
The recent sell-off in crypto markets caused Bitcoin’s price to fall to a fresh 2022 low, which is also an 18-month low, before bouncing back slightly.
Should negative momentum strengthen and the price dives beneath the recent low of $20,794, the November 2020 support region of $16,200 could act as the first line of defense. Further downside moves could then stall at the August 2020 resistance of $12,500.
To the upside, bullish actions could propel the price towards the $28,737 level, which is the 61.8% Fibonacci retracement of the 3,850-68,999 upleg. Higher, the 50% Fibo of $36,425 may prove a tough obstacle for the bulls to overcome.
