What Do Bitcoin Investors Need To Know In These Frozen Markets?

Bitcoin markets have been reasonably calm lately, showing little volatility as the year winds down. What key variables should investors keep in mind? Several analysts weigh in.

What Do Bitcoin Investors Need To Know In These Frozen Markets?

Bitcoin markets have been relatively calm lately. (Photo by Chesnot/Getty Images)Getty Images

Bitcoin markets have been relatively tame recently, with certain measures of the digital currency's volatility reaching multiyear lows. Earlier this week, the cryptocurrency's seven-day annualized volatility dropped to 10.64%, its lowest since July 2020. The digital asset has been moving within a reasonably well-defined range for the last few weeks, trading between $16,000 and $17,000, CoinDesk figures show. The relative lack of volatility has been even more impressive when one considers everything that has happened so far this year. The elimination of the terraUSD peg, the failure of once-prominent exchange FTX and the liquidation of Three Arrows Capital have all generated significant visibility. [Ed note: Investing in cryptocoins or tokens is highly speculative and the market is largely unregulated. Anyone considering it should be prepared to lose their entire investment.]

Keeping these developments in mind, several analysts gave their perspective on what market participants should watch out for going forward.

In the past, cryptocurrencies were frequently lauded for having little correlation to the price movements of other assets, a characteristic that made them useful when it came to achieving diversification. However, this situation has changed, as digital currencies have started to follow other asset classes, for example stocks, more closely over time.

Tim Enneking, managing director of Digital Capital Management, weighed in on this situation. 'The biggest variable affecting BTC at present is, unfortunately, correlation,' he stated.

'Assuming correlation remains high (and there is no reason to assume otherwise), crypto markets are beholden to fiat markets – which means inflation and interest rates,' he stated. 'Since interest rate increases (first derivative from freshman calculus) have already begun slowing, and they will almost certainly stop no later than mid-March (after probably a final 50 bps increase on Feb 1 and then a first and last 25-bps increase), I wouldn't look for a major breakout for BTC until then.'

Enneking was specifically referring to the numerous rate hikes Federal Reserve officials have implemented this year, which have resulted in the target range for the benchmark federal funds rate increasing 425 basis points since March.

Going forward, many market observers expect the Fed will increase the benchmark rate further, although nobody knows for sure how much it will rise.

Federal Open Market Committee members expect the federal funds rate to max out at 5.1% next year, according to the median forecast provided by officials who attended last month's policy meeting. These results were included in the Summary of Economic Projections, a document released December 14.

After commenting on the aforementioned developments, Enneking offered a short-term outlook for the digital currency.

'The good news is that BTC is putting in a really solid bottom – which, however, leaves everyone haunted by the seeming floor at $6k from late June to early November 2019, which felt like a strong bottom until it fell out and BTC went to $3+k for four months,' he stated.

'Since the fallout from Celsius, Terra/Luna, FTX, Alameda, etc., has slowed markedly, our feeling is that we're at or very near the bottom (which is $15.5k),' said Enneking.

'As strange as it feels to write this sentence, a couple good days on Wall Street, and we should see BTC threaten $20k.'

Joe DiPasquale, CEO of cryptocurrency hedge fund manager BitBull Capital, also weighed in on the cryptocurrency's short-term prospects.

'At the moment, many are predicting a capitulation to under $10k,' he stated.

'However, we don't think the chances of such a possibility are higher than Bitcoin bottoming around $13-$15k.'

Marc Bernegger, cofounder of crypto fund of funds AltAlpha Digital, also chimed in, offering a different take on the matter.

'Bitcoin already experienced similar phases in the past years which could be summarized as ‘times of ignorance and disinterest,'' he stated.

'We saw several very negative events in the last few weeks and months and many investors lost confidence in Bitcoin as a potential hedge during downturns of traditional markets,' said Bernegger.

'Many fundamentals indicate a bottom at the actual price levels and investors like hedge funds, family offices and asset managers wait on the sideline to (re)allocate part of their alternative assets into Bitcoin,' he added.

Disclosure: I own some bitcoin, bitcoin cash, litecoin, ether, EOS and sol.