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Is the Bitcoin correction over?

Cryptocurrencies have taken a battering over the last few months. The price of the oldest and largest cryptocurrency, bitcoin, has dropped over 50 percent since November 2021. The broader market sell-off is one reason for the fall in its value. But the recent failure of other cryptos like terra have certainly not helped sentiment. Prices are currently stabilising around $30k so is this the start of a more prolonged rebound, or something deeper?

Bitcoin

Stable coins grab the attention

Many analysts state that what goes on in the crypto markets, generally stays there. That is to say, the wider market is not particularly bothered with all things crypto, so any volatility and fluctuations are a matter for digital currency traders and aficionados, and not general financial market participants. But the blow-up of “stable” coin TerraUSD and the largest stable coin, Tether grabbed mainstream headlines. The latter suffered its worst challenge with parity since late 2020.

Terra’s relatively small size means its fall from grace is not systemic to the wider digital market. What is more significant is the potential cracks in other stablecoins which may call into question the very foundations behind the whole industry. To recap, TerraUSD’s model was experimental, backed by an algorithm linked to its sister-token, luna, in order to keep its dollar peg in check. Normally, stablecoin operators are backed one-for-one with dollar-based reserves – enough to match the tokens in circulation. Terra’s $1 value started falling on last Monday and had plunged to under 15c by the end of the week.

Tether the bigger concern

Meanwhile, Tether fell close to $95 even though the peg was meant to be defended “at all costs”, causing widespread panic in the digital space. A prolonged failure on this peg would be seen as devastating for the wider crypto markets. This is because as much as 70 per cent of bitcoin purchases are made using this blockchain dollar alternative.

Many other cryptocurrencies were under severe strain last week. The potential for a total system collapse or some sort of “systemic risk” has entered the minds of traders and market watchers. The idea of a “Lehman moment” for the digital age has gotten closer.

Bearish consolidation or base building for bitcoin?

We wrote last week that we’d hit a record high in the correlation between Bitcoin and the tech-laden Nasdaq100. So, where does the Nasdaq goes so to Bitcoin and the other cryptos? Let’s not forget digital crypto markets have displayed death-defying longevity before, even if their safe haven status has been debunked. The 30% plunge in one day last year after the Chinese regulatory crackdown reinforces the former.

Technically, the dragonfly Doji candlestick does suggest some bearish trend reversal. Increased buying pressure has pushed prices back near the $30k level. This is the key level and pivot point. Bulls will want to push on towards trendline support/resistance around $38k. The spike low from last week is $25,338.

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