Bitcoin liquidation leaves Mom and Pop buyers with a bag

(Bloomberg) — There is a hold back on cryptocurrencies when prices crash sharply like this: selling sheds short-term nonbelievers, known as weak hands, bolstering the industry in their wake.

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It’s a simplistic way of thinking about all those who joined the market as the price of Bitcoin soared to an all-time high at the end of last year – including small local institutions and investors, many of whom are awash in water. their investment now.

A measure called the MVRV – which divides the market capitalization by the average purchase price – shows that short-term holders, on average, bought Bitcoin at around $47,500. Another metric, called the spend-output-to-profit ratio (SOPR), indicates that this type of investor is selling at a loss right now, according to an analysis by Genesis Global that uses Glassnode data.

And it wasn’t just those who held the coin for a few months. Crypto firm Grayscale Investments said at the time that more than half of the traders who held cryptocurrency at the end of 2021 acquired it that year. The average price of Bitcoin in 2021 was hovering around $47,300. It was approaching $32,000 on Monday in New York trading.

Stefan Ollet, CEO of FRNT Financial Inc. “Too many people have definitely gone down, anyone who bought BTC for the first time in 2021 has gone down.”

Crypto enthusiasts have long argued that digital assets will hold up well during turbulent times. Many said that Bitcoin will prove to be a good way to hedge against inflation thanks to limited supply. It was also supposed to hold up better amid economic and geopolitical crises because it is not tied to any government and has no central authority.

Instead, digital asset investors are experiencing an environment that has put a lot of risky assets on the hook this year. The Federal Reserve and other central banks are raising interest rates to combat inflation at a time when the economic backdrop is weakening. In this environment, Bitcoin, the largest digital asset by market capitalization, has been halved since the November record. It has seen five consecutive weeks of declines and only one positive day out of 11 sessions, including Monday.

“Cryptocurrencies are a very risky asset,” said David Spica, president and chief investment officer at GuideStone Capital Management. “This should be a good inflation hedge.” wrong. It is a speculative asset that will not perform well in an environment like this.”

Analysts noted that during its crash, Bitcoin largely moved in tandem with other riskier assets. Its association with technology stocks has been particularly evident, with both the coin and the Nasdaq 100 reaching their highest levels in November. The 90-day correlation coefficient for bitcoin and the technology scale now stands above 0.68, the highest such reading in Bloomberg data going back to 2010. A coefficient of 1 means that the assets are moving at a steady pace, while minus -1 shows that they are moving in opposite directions.

“Anyone who has bought technology stocks over the past year is underwater as well, and I put it all together,” said Peter Bokfar, chief investment officer at Bleakley Advisory Group.

To be sure, not all short-term investors are necessarily retail – a lot of active institutions have also started to plunge into cryptocurrency in recent years. However, the crypto-craze has caught the attention of a lot of local traders who were stuck at home during the pandemic and who spread money in a market that surged in 2020 and 2021.

Plus, the average purchase price is just average — which means that getting Bitcoin to that level again doesn’t have to break all of these investors again, said Noel Acheson, Head of Market Insights at Genesis. “There will likely be more, because short-term holders are more likely to panic sell, and therefore the average purchase price is likely to fall quickly,” she said.

As for what it might take for Bitcoin to recover its old highs, no one is guessing. In the meantime, many expect that the coin and other cryptocurrencies will come out stronger on the other end. The changeover process will leave behind long-term HODLers who aren’t afraid enough to offload their possessions. In his year, famous investor Mark Cuban Tho tweeted that cryptocurrency is going through the same lull as the early internet.

However, the Fed is still unable to bring down inflation through a series of interest rate increases, and bitcoin, and other riskier assets, could stumble throughout the year in a tighter monetary policy environment.

“Bitcoin is under tremendous selling pressure,” said Stephen McClorge, CIO at Valkyrie Investments. “Except for one unusual event, it wouldn’t surprise me to touch $25,000 before we start seeing some form of stabilization. However, we are more likely to see sideways trading into the fourth quarter than we expect to see a rally driving us through the summer.”

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