Bitcoin: The price turbulence is evident, but what does the future hold for the significant crypto asset?

Backdrop

The crypto market is known for the intense volatility driven by liquidity from across the globe. During the beginning of the pandemic, one of the major decisions by the Federal Reserve of The USA was to ease the interest rate norms, i.e., reducing the rate of interest and fueling the economy with sufficient resources (in monetary terms) to meet the requirements of normalcy in general for the public.

What happened to the crypto market space?

The reduction in the interest rates resulted in the outflow in the bond markets, and the resultant idle monies started moving into risky asset classes (in comparison to bond and debt market) such as equities and crypto space. The large fund houses also began investing in the crypto markets after witnessing the turmoil and tremendous opportunities in this space.

According to Reuters, “Total inflows into the sector were $9.5 billion as of Nov. 26, an all-time high. In 2020, total bitcoin inflows were $6.7 billion”.

Due to the increase in liquidity, there was immense growth in the crypto asset class, which can be seen in the below data at the beginning of the pandemic.

Source: Chainalysis

Source: Huobitech

What does the future hold?

In Q1 2022, the volatility in the crypto market space has been subdued, and also, we have witnessed a significant dip in the prices of the crypto markets. This resulted from continuous monitoring of the crypto market space and the introduction of the norms around the same, followed by the hike in interest rates by the federal reserve.

The taper hangs in the air. As discussed above, the non-stringent monetary policies were the cause of the free rise in crypto prices during the pandemic. With the pandemic showing signs of resolve, the Federal Reserve is on the brink of raising the interest rates back to normal, pulling out the money from the risky asset classes to move into the safe-havens.

The uncertainty on the regulatory front is slowly submerging and becoming stable as President Biden signs an executive order on government oversight of cryptocurrency that urges the Federal Reserve to explore whether the central bank should jump in and create its digital currency. There was a short-term spike in the crypto market space with the said order.

Among the two aspects of the scale, the taper effect is on one side and inflation on the other. With the prospects getting more vital for the hike in interest rates, the liquidity trims out as the money pumped in through Quantitative Easing (QE) is withdrawn, which blurs the immediate prospects of the crypto market leader, Bitcoin,  to set upon new highs in the market.

The below chart depicts the extreme run of the crypto asset and the intense volatility over the previous periods –

Source: Author’s Trading View Chart

Conclusion

To conclude, $BTCs prior performance, ($6,000 to $64,000 in FY 2020 – FY 2021) will not be a cakewalk. The global economic factors will play a key role for the $BTC and other cryptocurrencies in deciding the direction of the markets. The shift in the cryptocurrency market trend is still far off with roughly 20% to go (an example by $BTC, which looks slightly like a trend reversal above $45,000). Similarly, the entire market of cryptocurrencies will have to submit itself to wild decisions the policymakers create before regaining the all-time high market capitalization of ~ $3 Tn from the current valuation of ~ $1.7 Tn.

Below is the pricing structure of $BTC (on monthly trend) –

Source: Author’s Trading View Chart

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