Bitcoin's (BTC) reputation as a hedge against inflation has been damaged. Bitcoin holders always pointed out that because fiat currencies have an unlimited supply, they cannot serve as a hedge against inflation, but since bitcoin's supply is limited, it can act as such a hedge. Given the fact that inflation in the U.S. is at a four-decade high, and we have seen no evidence of bitcoin moving higher on the back of this data, this is a matter of some concern for HODLers.
Gold is the only asset that has been holding its value, gradually moving higher as inflation continues to haunt investors, while bitcoin has been plunging amid Wall Street concerns about a looming recession.
For the current crypto winter to end, bitcoin will need a new catalyst to rebuild its reputation and move higher, and investors also need assurance it can be a hedge against uncertainty. Many investors who added bitcoin to their portfolio as a risk-off asset have started to look at bitcoin differently. Over the past several months, bitcoin has rallied mostly when we saw a risk-on rally, showing a strong positive correlation between the U.S. stock market and bitcoin. So, we need to see bitcoin behaving once again as a risk-off asset and move independently from stocks.
Thirdly, the blowout that we have seen in the Defi and Stablecoin market has also become a matter of grave concern: the concept of long-term adoption has been adversely influenced, and investors have started to lose faith in this space.
How Will We Spot the End of Crypto Winter?
One of the major factors in the length of crypto winter will be the change in narrative from big banks like Goldman Sachs and BlackRock. During the crypto bull market, we saw many institutions get involved in the crypto space by investing in bitcoin mining companies or even buying bitcoin itself. If we see major institutions and hedge funds pivoting away from bitcoin directly or indirectly, that would prolong the crypto winter.
On the flip side, if we do not see any change in their narrative and if investors have taken the current sell-off as an opportunity to bag bargains, then we could see a rally in the price of bitcoin.
The recent news about layoffs amid crypto companies isn't necessarily bad news. Every successful business wants to make sure that they are keeping costs under control; however, such news does create pessimism, and I believe that in the coming weeks and months, we may hear other companies announce similar layoffs. Crypto companies tend to go on hiring sprees during bull runs, so if hiring picks up again in the future, that could be another sign that crypto winter is ending.
One final important point to pay attention to is the disposable income levels among retail investors. Currently, with inflation sitting at 40 years high, consumers have very little disposable income left. Their main priorities are to keep up with soaring energy and food bills as inflation affects their purchasing power. When inflation reaches its peak level in the U.S., possibly within the next couple of months, we could then begin to see some of that purchasing power becoming stable or even improving. At that stage, we could see retail investors coming back into the crypto market and supporting the price of bitcoin.
From a technical price perspective, both the weekly and daily time frames show that prices are way oversold as per the Relative Strength Index (RSI). This could bring in some bargain hunters, but overall price action suggests that we may see bitcoin dip below the $20K support level. This is due to the lack of bullish momentum behind its price, meaning we may even see a new consolidation area forming between the $20K and $15K price range if sentiment doesn't improve. Bitcoin could stay in this range for a few more months with further downside risk as a result.
Crypto winters aren't anything new; so far, we have seen nearly eight crypto winters, and each one of them has had unique features and some similarities. But when they end, we see bitcoin reaching new highs afterwards. While past performance is not indicative of future results, there's a good chance that we could experience the same outcome when this winter finally ends.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
Naeem Aslam
I am a former Hedge Fund Trader with over 15 years of experience in investment banking. During my early career, I was awarded a national award (Young Irish Broker) in 2010. Over the years, I have worked with Bank of America in equity trading and with Bank of New York in hedge fund trading. I specialize in Blockchain technologies (cryptocurrencies and digital assets) and Sustainable Investments. In my career thus far, I have also extensively covered Equities, Commodities and Forex.
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