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FEATURE Crypto Weekly
Bitcoin Is Coming Back, and That's Good News for the Market O
ver the past week, the cryptocurrency market value has already been wiped out by $600 billion. Stocks haven't fared much better either. Dow Industrials ended their worst five-day stretch since mid-2020 on Wednesday. However, Bitcoin's pain may be the stock market's gain. Bitcoin lost more than a quarter of its value in the past week and fell to around $28,000 on Thursday – a far cry from the record high of over $68,000 reached just six months earlier. Despite the decline in crypto outpacing the decline in stocks, Barry Bannister at Stifel believes that Bitcoin could act as a bellwether for capitulation among investors -- that point when the market can find a bottom. In a note, Bannister stated, "We monitor several factors which we believe will mark the capitulatory low for stocks. Among those factors is Bitcoin, a powerful speculative instrument, which we believe has downside potential of about $15,000." Stifel predicts the S&P 500 will decline another 5% from Wednesday's close of 3,985 if Bitcoin falls another 50% to $15,000, wiping another $540 billion off its market cap. In the early hours of Thursday, futures
May 2022 | Volume 26
were tracking the key index down 0.9%, which means we could be nearing a bottom of around 3,700. "Bitcoin is late to the risk capitulation, and a washout, which we see coming for Bitcoin, helps time an equity low," Bannister said. Crypto markets have been pressured by multiple factors, including the failure of stablecoins, which tie their value to a real asset, usually the U.S. dollar. TerraUSD's devaluation from its peg pushed Bitcoin prices down during the past week. The third-largest crypto and the bedrock of the crypto economy, Tether, also slipped off its peg this week, signaling further stress in the digital asset market. However, Bitcoin has also shown a correlation with other risky investments, such as stocks, especially tech stocks, over the past year. Stock prices have fallen in the year 2022 due to a rising interest rate environment, inflation and recession worries, and significant disruptions to supply chains from the Russia-Ukraine war and Covid-19 lockdowns in China. The Federal Reserve has already raised interest rates aggressively this year, and it is likely to keep doing so as inflation has
reached a four-decade high. As part of tightening monetary policy, the central bank is also expected to reduce its bond holdings and shrink its balance sheet. Yet Bannister believes one of the factors in this year's stock market crash--interest-rate increases-have not affected Bitcoin enough. "Equities thrive on excess liquidity, and a plummeting global M2 money supply (translated into dollars) negatively impacts the S&P 500, but more so Bitcoin," said Bannister. "Tighter financial conditions should sharply weaken Bitcoin as well, and we were surprised when Bitcoin had held $30,000 despite weak stock markets." The situation could deteriorate further. Bannister said that the final capitulation in cryptos may not come until the third quarter of this year. Bitcoin has proved to be sensitive to gross domestic product economic data—and usually falls when the manufacturing purchasing managers index drops. Stifel sees that happening into the third quarter of 2022, "indicating that a last, capitulatory Bitcoin drop may be still ahead."
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