Macro crypto currency market outlook

Bitcoin remains confined to a well-defined downtrend off the record high from November 2021. At this stage, any rallies are classified as corrective, with a lower top sought out ahead of the next downside extension below the yearly low around $25,000, and down towards a measured move target at $20,000, which also coincides with massive previous resistance turned support in the form of the record high from 2017. A break back above $40,000 would be required to suggest the market is finally ready to resume the longer-term uptrend.

We’re coming out of another ugly month for bitcoin, with the asset extending declines from April and closing out the month down 18%. Year to date, bitcoin is down 32% against the Dollar, and has traded off over 60% from the record high in late 2021. The story for ether is even gloomier. Ether was down 31% in May against the US Dollar. Year to date, ether is down 48% against the Buck, and has traded off as much as 65% from the record high in late 2021.

The downturn in crypto assets has been mostly attributed to macro themes, with slower growth and rising inflation stoking fears of global recession and triggering a massive risk liquidation. Given the maturing nature of the asset class, it comes as no surprise to see it trading more like a risk correlated market right now. Having said that, what is clear, is that bitcoin is the safer option within the crypto space, which has easily accounted for bitcoin’s strong wave of relative outperformance against ether and other cryptocurrencies during this downturn.

Another driver of crypto weakness in May was the Terra Luna debacle. The collapse in the stable coin led to some $60 billion in losses, inviting more attention around the need for stricter regulatory oversight. Indeed, a regulatory framework is welcome, but there is worry that an event like this could lead to unnecessary and counterproductive overregulation which would ultimately punish the rest of the space and stifle innovation.

On a positive note, we believe events like these should be taken as a constructive sign for the space. Ultimately, despite the intense setbacks, the crypto market has held up relatively well to the shock, reflecting an absence of systemic risk. This should be taken as yet another successful stress test as the asset class continues to grow and institutional adoption ramps up.

Looking ahead, we continue to see risk for additional downside on account of the global economic outlook and prospect that higher inflation and slower growth will lead to more of a shakeup in risk assets, which will open more downside pressure in crypto. At the same time, we also believe we are getting closer to levels where the longer-term value proposition of crypto will be too difficult to ignore at such discounted prices. Below the respective yearly lows in bitcoin and ether are next key support levels at $20,000 and $1,400 respectively. We think additional setbacks beyond these levels should be short-lived.