Uncertainty in cryptocurrencies to persist

Investors are bracing for more gyrations in bitcoin and other cryptocurrencies, as worries over a hawkish Federal Reserve threaten to squelch risk appetite across markets. The volatility traditionally associated with cryptocurrencies has been on full display in recent weeks.

Bitcoin , the largest cryptocurrency, is up by around 33% since January 24 and recently traded at $43,850, rebounding from a tumble that cut its price in half from November’s record high. Its main rival, ether, is up around 45% since January 24 at around $3,200, following a nearly 56% nosedive from its record high of $4,868, also in November.

While proponents of cryptocurrencies once touted their lack of correlation to other assets, bitcoin and its peers saw huge gains over the last two years, rallying along with stocks as the Fed and other central banks pumped unprecedented levels of stimulus into the global economy. Bitcoin is up 1,039% since March 2020 and ether has risen 2,940%, though the rallies in both cryptocurrencies have been interrupted by numerous-stomach churning selloffs. Their recent volatility has come amid a broader market selloff driven by investors recalibrating their portfolios to account for a more aggressive Fed, which is now expected to raise rates as many as seven times this year as it fights surging inflation.

Worries that an aggressive central bank tightening cycle going forward will hamstring risky assets has made it difficult for some traders to maintain their bullish outlook on bitcoin and other cryptos, an asset class already identified with intense volatility. Escalating tensions in Ukraine, where Washington warned a Russian invasion could begin any day, could also spark broad market moves, investors said. Bitcoin has “really become the ultimate momentum trade and there are so many risks that can trigger a 40% drop out of nowhere,” said Edward Moya, senior analyst at Oanda.

Bitcoin’s volatility has not stopped some analysts from trying to gauge the currency’s fair value or point out potentially important price levels. Analysts at JPMorgan estimate bitcoin’s current fair value at around $38,000 - some 15% below its recent price - based on its volatility in comparison with that of gold, another asset investors often use to hedge their portfolios against inflation and economic uncertainty. Vanda Research, meanwhile, said in a recent note that most of the bearish bets on a weaker bitcoin price were entered at around $47,000, and “there could be a large short-squeeze if the aforementioned threshold is crossed, and retail investors return to crypto-trading.”

Meanwhile, correlations between bitcoin and the S&P 500 reached an all-time high on January 31, according to data from BofA Global Research, undercutting the case for those hoping to use the cryptocurrency as a hedge against market turbulence. Investors next week are expecting minutes from the Fed’s most recent monetary policy meeting, due out Wednesday. Walmart and chipmaker Nvidia Corp will be among the companies reporting results, as corporate earnings season rolls on. Some investors are steeling themselves to ride out the volatility in bitcoin, betting that the long-term value proposition of blockchain technology, the built in supply limit, and the network effect it produces, will endure despite frequent price swings.

Jurrien Timmer, director of global macro at Fidelity, likened the current speculation in cryptocurrencies to the turbulence tech stocks experienced during the dot-com era more than two decades ago, a boom-and-bust period that saw a comparatively small group of companies left standing. “Amazon is still around and Apple is still around and they’re bigger than ever and the thinking is that for bitcoin that will be the same,” he said. “But it is not immune to those waves of speculation and sentiment.”

Bitcoin could reach $100,000 as soon as 2023, Timmer has said, based on his supply and demand models. Others believe mature cryptocurrencies like bitcoin and ether are unlikely to deliver the kind of eyewatering gains they have notched since their founding. Instead, they are looking to the universe of new, alternative coins that are being created to take advantage of the money pouring into the crypto space, including the metaverse and NFTs, which saw $30 billion worth of venture capital investment last year, according to PitchBook