BITCOIN AND ETHEREUM KEY POINTS:
- Bitcoin and Ethereum are down nearly 75% from their 2021 highs
- While cryptocurrencies have crashed and recovered before, the macro environment is getting tougher for risk assets.
- Restrictive monetary policy and growing distrust in the cryptocurrency industry may prevent digital tokens from making a strong comeback in the near term.
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Bitcoin (BTC/USD) and Ethereum (ETH/USD) are down nearly 75% from their November 2021 all-time highs as speculative appetite has waned amid high inflation, rising interest rates, rising recession risks . a series of cryptocurrency scandals.
Cryptocurrencies have crashed and recovered before, so it is natural to wonder if the same cycle will repeat itself. For example, both Bitcoin and Ethereum fell more than 80% from their peak in 2018, but continued to hit new highs in the following 36 months.
Could something similar happen this time? It’s hard to say for sure, but the conditions that fueled the boom in 2020-2021 have eased. At that time, governments and central banks around the world flooded their economies with liquidity Minimizing the damage caused by the coronavirus health crisis and preventing lasting economic damage.
The graph below shows how the money supply, measured by M2, has grown in recent years in the US, China, the Eurozone, Japan and the UK. From February 2020 to February 2022, M2 increased by nearly $20 trillion to $91.45 trillion, the highest in the previous seven years combined.
MONEY SUPPLY FOR SELECTED COUNTRIES AND REGIONS (M2).
Pandemic-related stimulus fueled the voracious speculative frenzy that swept markets, supporting most assets, including digital tokens. But now the outlook is turning more hostile, with monetary authorities around the world rapidly withdrawing accommodation to fight inflation. For example, the Fed raised rates by 375 basis points this year, embarking on its most aggressive tightening campaign since the 1980s.
With an increasingly restrictive monetary policy stance and a tighter fiscal stance by several governments, risk assets will continue to struggle in the short term, but cryptocurrencies will face another headwind: loss of trust. Recent scandals such as the collapse of FTX have damaged confidence in the industry, and it may take years to restore that confidence.
Extreme volatility in the space will also hinder further adoption, as institutional investors will increasingly be reluctant to include cryptocurrencies in their portfolios as a diversification strategy, given the high-risk market structure. Recent price movements have also disproved the idea that these tokens can act as a safe haven during times of market stress.
In the current environment, Bitcoin and Ethereum may remain biased to the downside in the near term. Over the longer term, a rebound remains a possibility given the disruptive nature of blockchain technology, but any recovery will be extremely slow and non-linear as the era of easy money recedes.
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BITCOIN AND ETHEREUM WEEKLY CHART
Bitcoin and Ethereum Chart made using TradingView
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— Written by Diego Colman, Market Strategist for DailyFX