Quarterly Investment Guide 2Q 2023: Bitcoin Outlook
by Arthur · April 2, 2023
The case for a new crypto bull market has been growing slowly since the beginning of the year and grew steadily stronger in March. Bitcoin , still the clear leader of the crypto market, just finished its third consecutive month of gains, ending up more than 20% in March. It also posted its best quarter (up more than 70%) since the first quarter of 2021, when the last bull run began. So far this year, crypto investors have overcome several hurdles – primarily the US regional banking crisis that demonstrated the diversity of the bitcoin narrative, a hostile regulatory environment as Washington considers action in the wake of the failure of FTX, and persistent inflation. At every turn, prices climbed higher anyway. Although some investors see this as the beginning of a new bull market, its strength and consistency may still not be signs that they can jump back in. Despite bitcoin’s lack of correlation with stocks, it remains sensitive to the macro economy, which remains fraught with uncertainty. BTC.CM= YTD mountain Bitcoin is up more than 70% this year “In terms of the next three months, it’s been all about the Fed for almost two years now, and the Fed is going to be data dependent,” said Joe Orsini , macro strategist and author by the blog “Signal vs. Noise”. “Do they have another increase in their system? It really depends on how the market takes a potential cut of just 50 basis points this year” for example, “and does that matter?” he added. For Orsini, the new bull market in crypto began on January 13, when bitcoin broke through its 200-day moving average. Furthermore, US regulators appear to be cracking down on crypto. Wells Fargo equity analyst Jeff Cantwell said in a note Friday that recent actions by the Securities and Exchange Commission “create additional uncertainty about space for investors.” Ram Ahluwalia, managing director of investment adviser Lumida Wealth Management, said to expect uneven prices from here. “Tactically, you can be bullish,” thanks to bullish sentiment in crypto after FTX and the improvement in market expectations around Federal Reserve policy, he said. “But a lasting secular bull market will have clarity and regulation to underpin it.” “We don’t have a clear regulatory framework for crypto,” he added. “When that framework is introduced, you will be closer to the beginning of a secular bull market.” Less liquidity, greater volatility Bull market or not, investors agree that there will be no straight line in the coming months. Juthica Chou, head of OTC options trading at Kraken, said the options market is still pricing in expectations of continued volatility – and that’s mostly a good thing. “Bitcoin needs to be volatile right now to grow in size and market capitalization,” she said. “It’s still so early, the market cap is around $500 billion, so it’s not big enough to serve as a global form of money yet. Volatility has to be high for it to reach that level of maturity, and when it’s high. enough in market value [then] you can expect volatility to come down.” BTC.CM= YTD mountain Bitcoin is up more than 70% in 2023 One of the main drivers of crypto’s March rally – the new illiquidity in the market – could also cause some pain for investors over the next quarter . When Silvergate and Signature Bank failed, they brought with them coveted payment rails that allowed businesses trading in dollars to “on board” into the crypto ecosystem – namely the Silvergate Exchange Network and Signet platforms. They were not only banks available to crypto businesses, but without them, it has taken a bit longer to move between the dollar and crypto, especially on evenings and weekends when traditional businesses are closed. “You can expect more volatility because there are thinner order books where there is no credit availability and it is more difficult to move in or out of,” said David Wells, CEO of Enclave Markets. “I haven’t seen the evidence that it’s going to affect bitcoin’s fundamental use case, it just means you have to be ready for bigger swings to both the upside and the downside.” Conor Ryder, analyst at crypto data provider Kaiko, said that while the March rally was kick-started by the banking crisis and the rediscovery of bitcoin’s utility beyond speculation, it was the illiquidity of the market that drove the price through the end of March. “Liquidity is at a 10-month low for bitcoin, which means there is less price support on both the upside and the downside,” he said. “When a rally starts in a low-liquidity environment, we can see larger price movements upwards. However, these upwards movements can just as easily be followed by large downward movements thanks to the lack of support below current prices, so investors need to approach markets with caution, at least until we see an improvement in crypto liquidity.” What Can Go Wrong While there is no clear definition in crypto of what constitutes a bull market, it is clear that there are several nuances in the market heading into the second quarter. The Federal Reserve pushed crypto into its bear market, and many thought it was the Fed alone that could pull it back. After March, however, there are “so many idiosyncratic risks involved in crypto that could definitely stop or even reverse” bitcoin’s uptrend, Wells said. Inflation and interest rate policy are still major influences. It would be a major setback if the market reverts to believing the Fed will raise short-term interest rates above 5%, according to Matt Hougan, chief investment officer at Bitwise Asset Management. Hougan believes crypto is currently in a multi-year bull market cycle with strong tailwinds. Lumida Wealth’s Ahluwalia said he does not expect the Fed to ease interest rates, while continuing to provide ample liquidity to the banking system. Sadie Raney, CEO of Strix Leviathan, was more optimistic about a Fed central bank. But she also mentioned regulatory updates as the main theme to watch in the coming quarter. “The biggest headwind to the bitcoin price may also be its biggest tailwind — regulatory clarity,” she said. “It seems unlikely that a divided Congress will produce clarifying legislation, which would keep large institutional pools of capital on the sidelines, depressing prices. That said, there are several digital asset lawsuits that could be brought to the Supreme Court… [which] may be inclined to make a more comprehensive statement on digital assets and provide much-needed regulatory clarity.” Bitcoin is headed for a bull market, Wells of Enclave Markets said, citing a more optimistic macroeconomic picture and increased use of crypto by companies such as Fidelity and BlackRock. Note that while he warned that another failure like FTX could drag the market down, in the meantime, investors should look at the regulatory risk in the market as Washington continues to find its way around the FTX collapse.” Regulators felt trapped by guarding wood [FTX] and possibly misled, so that you have this pendulum swinging in the direction of making sure that no more of these events happen – even if that means overcorrecting a little bit or tightening the standards to be more conservative and more cautious about this asset class , ” he said.
