This is what the market wants to see

Cryptocurrencies fell in 2022.

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Improved macroeconomic factors, a particular trading model, and further shake-up of companies and projects could be the key ingredients needed to bitcoin and the broader cryptocurrency market to ground, industry players told CNBC.

Bitcoin has fallen over 70% from its all-time high in November, with close to $2 trillion wiped from the value of the entire cryptocurrency market.

Over the past few weeks, Bitcoin has been trading in a tight range between $19,000 and $22,000 without any major upside catalyst, and traders have been trying to figure out where the bottom is.

Here are some of the factors that can help the cryptocurrency market find a foothold.

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Bitcoin has been hit by a macroeconomic environment with rising inflation that has forced the US Federal Reserve and other central banks to raise interest rates, hurting risky assets like equities.

Cryptocurrencies showed some correlation with US stock markets and fell along with stocks.

There are also fears of a recession, but an improvement in the macroeconomic picture could help the crypto market find a bottom.

“I think if inflation is under control, the economy is under control, there won’t be a really serious recession,” then the market will stabilize, S.K. Zheng, co-founder of cryptocurrency-focused hedge fund ZX Squared, told CNBC.

June US Inflation Data came hotter than expected on Wednesday, fueling fears that the Fed will become more aggressive in its fight to contain prices. However, there are some indications that he may be peaking.

According to Vijay Aiyar, vice president of corporate and international development at crypto exchange Luno, if there are signs that the economy and inflation are “getting under control”, this could help the cryptocurrency market find a bottom.

“If we see signs of this this month, or even within the next few months, it will give the market more confidence that the bottom has been reached across all risk assets, including equities and crypto,” Aiyar said.

Meanwhile, according to James Butterfill, head of research at CoinShares, a “softer” Fed and a spike in US dollar strength could help the market find a bottom. Butterfill said the weaker economic outlook could push the Fed to slow down policy tightening.

“The turnaround in Fed policy and the subsequent peak in DXY [dollar index] will also help determine the true bottom, which we believe is likely to happen at the Jackson Hole meeting in late summer,” Butterfill said, referring to the annual meeting of central banks.

Is deleveraging coming to an end?

One of the key features of the latest boom and bust cycle in cryptography has been the number of levers in the system and the infection that caused.

First, there are lending platforms that promise high returns to retail investors for depositing their cryptocurrency. One such company is Celsius., which was forced to suspend withdrawals last month due to liquidity issues. This is because Celsius lends this cryptocurrency from its contributors to others willing to pay high returns and then makes a profit. This profit is then expected to be used to pay for the yield that Celsius offers to its retail clients. But when prices fell, this business model was put to the test.

Another company that highlights the issue with excess leverage is a Three Arrows Capital or 3AC hedge fund focused on cryptocurrencies., who was known for his bullish bets on the industry. 3AC has an extensive list of counterparties with whom it is associated and from whom it has borrowed money.

One of them is Voyager Digital, which filed for Chapter 11 bankruptcy protection after 3AC defaulted approximately $670 million from company.

A number of other companies, including BlockFi and Genesis, have also reportedly been affected by the 3AC.

Capital Three Arrows plunged into liquidation.

“We don’t know if the deleveraging process is complete or not. I think he is still in the process of washing out the weak players,” Zheng said, adding that when there are no more surprises with the collapse of companies, this can help the market find a bottom.

Butterfill from CoinShares said that the next victims of laundering could be the so-called miners, who use specialized powerful computers to verify transactions in crypto networks. As cryptocurrency prices are under pressure, many mining operations will be unprofitable. Butterfill notes that some mining startups have been the last to raise funding and have ordered equipment that was either not delivered or included.

“One of these mining start-ups or an associated lender is likely to collapse, which will help determine the bottom in the cryptocurrency market,” Butterfill told CNBC.

Trading model

Luno’s Aiyar explained some of the trading patterns that can help spot market bottoms. He said there could be a “surrender candle” where bitcoin’s price would fall further and “wipe out the last remaining weak hands” before “moving strongly up.”

If that happens, it means “liquidity has been locked in at lower levels and the market is now poised to bounce back higher,” Aiyar said.

He noted that this happened in March 2020, when bitcoin fell over 30% in a day before rising steadily in the following weeks.

The second pattern could be an “accumulation phase” where bitcoin bottoms out and spends several months trading in a range before moving higher.

In both cases, this could see bitcoin drop further from $13,000 to $14,000, roughly 30% below the cryptocurrency’s price on Wednesday.

Zheng of ZX Squared said Bitcoin could be worth between $13,000 and $15,000. But if institutional investors step in, it could help support prices.