Crypto correction continues

The past week has seen crypto markets move sharply downwards. The price of the largest cryptocurrency bitcoin fell by about ten percent, the price of the second largest cryptocurrency ether by about seven percent, and the total value of the rest of the crypto market by about six percent.

BTC, ETH and rest of the crypto market

The past week has been a continuation of a correction movement that has now lasted more than seven weeks, starting in early March after bitcoin reached a new all-time high of around $74,000. From this top, the prices of the largest cryptocurrencies have come down by about 20-30 percent, and many smaller tokens have seen price drops of 30-60%.

Bitcoin, ether and the total value of the crypto market 3-5/2024

With bitcoin price dropping slightly more than the rest of the market, bitcoin dominance, which describes bitcoin's share of the total value of the crypto market, fell by about 1.5 percent, ending up at about 54 percent. The ETH/BTC ratio, which describes the ratio of the two largest cryptocurrencies, on the other hand, rose by around three percent, ending up at around 0,505.

Bitcoin dominance and the ETH/BTC ratio

When the crypto market moves down, we usually see the rest of the crypto market fall more than bitcoin. During the last week, this relationship has been the other way around, as bitcoin has weakened faster than the rest of the crypto market, which may be something worth paying attention to. An “alt-coin optimist” could see this as a sign of the strength of alt-coins and that the ratio of the total market value of alt-coins to bitcoin, which has been declining for a long time, could be finding its bottom and soon turning around. A more pessimistic view would be that this is only a momentary overvaluation of alt-coins, and that the inevitable mean reversion will mean a particularly strong downward movement for alt-coins, especially if at the same time bitcoin's dollar price decline continues.

Weakening of the rest of the crypto market against bitcoin 2022-2024

In the downward-trending market, the best price development of the Kvarn X service tokens was seen from the TRX token of the Tron (+7%), Cosmos' ATOM token (+4%) and Polkadot's DOT token (+0%). On the other hand, meme coin Dogecoin (DOGE, -15%), Hedera's HBAR (-13%) and Algorand's ALGO token (-13%) saw the biggest price declines of the week.

The strongest and weakest price moves of the week in the Kvarn X selection

How deep correction?

Bitcoin's downward movement last week took it below the $59,000-$60,000 support level for the first time during this correction. After this support level has broken, the question naturally arises as to how low the price drop can continue after this? From a technical analysis perspective, the next potential support level could be around $52,000, which could mean another drop of around ten percent.

Breaking of support level around $60,000 and possible support level at $52,000

What makes the current price level of around $58,000 particularly interesting is that it is quite close to the average cost basis of the Bitcoin spot ETF inflows. Since their launch in January, BTC spot ETF’s have had a net flow of capital (=also taking outflows into account) worth of more than ten billion dollars. At the moment, it is not yet clear what kind of investment strategies and risk tolerance the investors who have taken advantage of this new avenue of crypto-investing are operating with. Because of this, it will be interesting to watch over the next week how the investors who ended up sitting on losses for the first time in the history of the Bitcoin spot ETF will act, and whether their reactions to the market will cause more selling pressure.

Taking a slightly longer-term view, bitcoin price can be seen to be still above its 20-week moving average (SMA). However, there is not much marginal anymore, with the 20-week average already rising to around $55,500. If this moving average, which is often considered an indicator of a bull market, will not work as a support level, it may test the faith of many crypto investors in the continuation of the upward trend. We consider it quite likely that if the level of $55,500 does not hold, the price could go all the way to $52,000.

Bitcoin price and 20-week moving average

GDP and PCE raise concerns about stagflation

During the last few weeks, the data points obtained on the state of the macroeconomics have brought at least somewhat dark clouds in the investor outlook. The Q1/2024 statistics published last week said that GDP in the United States grew by only 1.6% year-on-year, which was significantly below expectations. The growth rate was only about half of the previous Q4/2023 rate (3.4%) and only about a third of the Q3/2023 rate.

In addition to slower-than-expected economic growth, last week there were indications of more stickier inflation than expected. The PCE index, which describes the price development of personal consumption, published last week, told that annual inflation was 2.8% in March. Excluding typically volatile food and energy prices (so-called "Core PCE"), annual inflation was 2.7%. Both numbers were higher than expected, and well above the US central bank’s two percent inflation target.

Combined, these indications of slowing economic growth and possibly re-accelerating inflation, have even raised concerns about possible stagflation. Typically consisting of low economic growth, high unemployment and high inflation, stagflation has traditionally been quite a toxic combination for riskier asset classes.

The signs received now are just early indications of the possibility of stagflation, and our view is that based on these, the investor should not be making any dramatic decisions. However, it is useful to be aware that in the possible macroeconomic development paths over the next few years, one possible scenario is also the stagflation, which, if realized, would probably mean price declines in higher-risk asset classes. Kvarn Pulse will monitor the situation in the coming months, as more macroeconomic data comes in.

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