Crypto investors face more uncertainty after rocky start to 2022

Investors are bracing for more gyrations in bitcoin and other cryptocurrencies, as worries over a hawkish Federal Reserve threaten to squelch risk appetite across markets.

The volatility traditionally associated with cryptocurrencies has been on full display in recent weeks. Bitcoin, the largest cryptocurrency, is up by around 33 per cent since January 24 and recently traded at $43,850, rebounding from a tumble that cut its price in half from November’s record high. Its main rival, ether, is up around 45 per cent since January 24 at around $3,200, following a nearly 56 per cent nosedive from its record high of $4,868, also in November.

While proponents of cryptocurrencies once touted their lack of correlation to other assets, bitcoin and its peers saw huge gains over the last two years, rallying along with stocks as the Fed and other central banks pumped unprecedented levels of stimulus into the global economy. Bitcoin is up 1,039 per cent since March 2020 and ether has risen 2,940 per cent, though the rallies in both cryptocurrencies have been interrupted by numerous-stomach churning selloffs.

Their recent volatility has come amid a broader market selloff driven by investors recalibrating their portfolios to account for a more aggressive Fed, which is now expected to raise rates as many as seven times this year as it fights surging inflation. The benchmark S&P 500 index is down 5.5 per cent year-to-date, while the tech-heavy Nasdaq has lost 9.3 per cent.

Worries that an aggressive central bank tightening cycle going forward will hamstring risky assets has made it difficult for some traders to maintain their bullish outlook on bitcoin and other cryptos, an asset class already identified with intense volatility.

Escalating tensions in Ukraine, where Washington warned a Russian invasion could begin any day, could also spark broad market moves, investors said.

Bitcoin has “really become the ultimate momentum trade and there are so many risks that can trigger a 40 per cent drop out of nowhere,” said Ed Moya, senior analyst at Oanda.

Bitcoin’s volatility hasn’t stopped some analysts from trying to gauge the currency’s fair value or point out potentially important price levels.

Analysts at JPMorgan estimate bitcoin’s current fair value at around $38,000 — some 15 per cent below its recent price — based on its volatility in comparison with that of gold, another asset investors often use to hedge their portfolios against inflation and economic uncertainty.

Vanda Research, meanwhile, said in a recent note that most of the bearish bets on a weaker bitcoin price were entered at around $47,000, and “there could be a large short-squeeze if the aforementioned threshold is crossed, and retail investors return to crypto-trading.”

Meanwhile, correlations between bitcoin and the S&P 500 reached an all-time high on Jan 31, according to data from BofA Global Research, undercutting the case for those hoping to use the cryptocurrency as a hedge against market turbulence.

Cryptocurrencies “are going to remain very volatile going forward, but there are significant players on both the institutional side and the retail side that are still growing, so the interest is still growing,” said Oanda’s Moya. — Reuters