What’s next for Bitcoin as market sentiment sours?

Recent market volatility pushed Bitcoin below $20,000, marking the first time in its history it had sunk lower than the previous cycle peak.

Since November 2021, Bitcoin has shown sporadic signs of weakness. But it wasn’t until recently, following the Terra LUNA/UST implosion and the subsequent industry-wide deleveraging, that a bear market was confirmed.

Over the last ten days, BTC has been ranging between $17,700 and $21,800. But the question on everyone’s mind is, what happens next for Bitcoin?

Were the maxis right all along?

Since the November 2021 top, approximately $2 trillion has left the digital asset space. Bitcoin has generally fared better than the altcoins but has still lost almost 70% of its value over the last eight months.

This can be attributed to many things, including the conflict in Eastern Europe and general macroeconomic factors that taper demand for cryptocurrencies. However, the single most influential event was the Terra UST de-peg, which directly wiped out $60 billion. As the scandal unfolded, it called into question the soundness of crypto investing as a whole.

As the collapse was happening, and since, numerous allegations came to light suggesting Terra was a scam from the beginning. This included claims Terra founder Do Kwon had siphoned tens of millions of dollars on a monthly basis, known vulnerabilities in the Mirror Protocol that were covered up and exploited by an insider, and money laundering through shell companies.

Since then, things have gone from bad to worse as tumbling prices have exposed an industry that’s overexposed and overleveraged industry. For example, liquidity problems at Celsius have been linked to the platform’s use of the Terra ecosystem to generate yield, among other risky plays.

Similarly, bad bets and unsecured loan agreements at Three Arrows Capital (3AC) draw similar concerns. But unlike Celsius, as an investment firm, 3AC is closely tied to numerous projects in the space, triggering worries about the “contagion” spreading further.

As a response, Bitcoin maximalists came out in force, arguing that only BTC is sound money and everything else is degen finance. The CEO of Swan, Cory Klippsten, recently tweeted that an optimal crypto investment strategy would entail a significant Bitcoin allocation with no leverage.

Centralized finance company equities are NOT Bitcoin (including @swanbitcoin, my company).

The VAST majority of your portfolio allocation to the space should be simple BTC, with no leverage.

If you're doing it for "price exposure" or "industry exposure," you're doing it wrong.

— Cory Klippsten (@coryklippsten) June 25, 2022

Likewise, Michael Saylor recently called all altcoins unregistered securities and slammed the practice of cross-collateralizing with Bitcoin as detrimental to its price.

“What you have is a $400 billion cloud of opaque, unregistered securities trading without full and fair disclosure, and they are all cross-collateralized with Bitcoin.”

Key flashpoints in the coming weeks are whether Celsius will file for bankruptcy and if 3AC has the funds to pay back its creditors. With that, the industry is bracing for what happens next, especially regarding the market leader.

The macroeconomic influence

CryptoSlate reached out to two industry leaders to gauge their opinions on what’s to come for Bitcoin.

Mike Boroughs, the co-founder of investment managers Fortis Digital, expressed caution for Bitcoin given the challenging macroeconomic environment, particularly with the Fed signaling its intent to continue hiking rates.

The impact of this, said Boroughs, “is that rates become a headwind, as BTC is highly correlated with high-growth tech stocks.” He continued by pointing out that, in a high-rate environment, fear over future earnings doesn’t justify lofty valuations for risk-on assets.

“the market punishes [BTC and high-growth tech stocks] the most for higher rates because their cash flows are further out in the future and therefore worth less today when discounted back at higher rates.”

On whether the recession is already here or not, the Fortis Digital co-founder referred to the most common measure, two-quarters of negative GDP growth, adding that “we very possibly could be seeing [recession] right now.”

He also mentioned an alternative measure, in a two percentage point or more increase in the unemployment rate, which hasn’t happened yet. But considering the fragility of the labor market, Boroughs expects this to occur in the coming months.

Unless the Fed pivots on its hawkish stance, Bitcoin will “continue to have a hard time the rest of the year,” said Boroughs.

The future of Bitcoin’s development

As mentioned, Bitcoin has closely mirrored the performance of tech stocks in recent times, leading to criticisms it’s not a safe haven or inflationary hedge.

However, the issue may be related to analyzing BTC through a legacy TradFi lens. By email, William Cai, the co-founder of fund managers Wilshire Phoenix, said that classifying Bitcoin as a currency is inaccurate because its price drivers differ from significant fiat currencies.

Similarly, labeling it as digital gold is also imprecise because BTC has behaved as a risk-on asset in times of market stress.

“No one analogy captures bitcoin, but each analogy can be useful in examining bitcoin price behavior in different market environments, and to understand bitcoin better as an asset in totality.”

Nonetheless, Cai puts forward the theory that Bitcoin is going through an evolution. Meaning that BTC once behaved as a currency but is now acting as a risk-on asset and may soon evolve into a global commodity.

Regarding a timeline for this transition to come into effect, Cai expects Bitcoin to continue acting as a risk-on asset in the short to medium term. But, as markets return to normal, he expects the transformation to kick, which may be years away.

“The decorrelation, or the correlative benefit, to other assets will return as normalcy and calm return across markets. We don’t foresee any specific triggering event that would mark a drastic change in price behavior of bitcoin relative to other assets.”

As a global commodity, Bitcoin would perform as a safe haven asset does.

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