Is the crypto market showing signs of recovery?

28 Jun, 2022
Is the crypto market showing signs of recovery?

The third week of June ended with a sprout of optimism in the crypto world, as analysts and traders tentatively grabbed onto signs that the massive turmoil in the digital currency market may be settling down.

"I love bear markets," tweeted Pomp, a crypto investor and analyst. "The critics are chirping. The tourists have left. The plebs are stacking. #bitcoin is unfazed. Soak it all in. Life is good. The cycle continues."

Inflation and rising energy costs in the U.S., coupled with the impact of the ongoing war in Ukraine, upended worldwide markets in June. However, this past week stock exchanges around the world slowly lit up green again, and with it, Bitcoin made its way tentatively into positive territory, as did many coins that suffered during the fall.

Losses for Bitcoin Miners Fueled the Fire

According to analysts, one of the primary factors impacting Bitcoin's sell-off has been the loss of income for miners.

In its weekly report, analysts at Glassnode pointed to the stress miners were under as the price of the world's first digital currency plummeted and mining activity dropped.

"Our investigation…uncovered the stress on miners' incomes due to falling revenues and rising production costs," Glassnode reported. "Miner behaviours now confirm that an ongoing miner capitulation phase is underway."

The analysts concluded that "the ongoing miner income contraction is worse than the Great Migration in May-July 2021. However, miners have faced worse days in 2018-2019 and 2014-2015 bear markets…"

"Bitcoin miners, broadly speaking, are feeling pain," Luka Jankovic, head of lending at Galaxy Digital, told Bloomberg. "A lot of operations have become net IRR negative at these levels. Machine values have plummeted and are still in price discovery mode, which is compounded by volatile energy prices and limited supply for rack space."

(IRR negative means the post-investment cash flow is less than the initial investment.)

Bloomberg summarized the situation succinctly:

"In an effort to salvage plunging profits, Bitcoin miners are turning sellers after seeing the price of the bellwether token more than halve in 2022. This past month, miners moved 23,000 Bitcoin to exchanges, representing the highest monthly flow since May 2021, when China initiated a crackdown on its domestic crypto industry, data from tracker CryptoQuant shows."

Institutional Investors may be fueling a rally

When the recent crypto market sell-off began, analysts pointed to institutional investors – those organizations that invest on behalf of others ­– as dumping out of the digital currency world. That's why some are citing those very same entities as the possible catalyst for a recovery.

"Despite the continuing shakeout in the crypto industry, analysts were eyeing key market indicators for signs that prices might have hit a bottom," CoinDesk reported. "Those include a narrowing of the so-called Grayscale discount…and – in a perverse twist of logic – data showing stock investors piling into an exchange traded fund designed to profit from further declines in the price bitcoin…"

Grayscale, a significant player in the retail side of the digital currency world, is waiting to find out if the Security and Exchange Commission will let the Grayscale Bitcoin Trust convert to an exchange-traded fund. The deadline to approve or reject the conversion is July 6. GBT dropped its discount to 29% from 34% a week ago.

"It might be a sign of stock traders bottom-feeding for bitcoin at a discount, or it might be a sign that traders think the conversion will win approval," Bloomberg reported. "Or it might be a sign that fears of a deeper liquidity crisis across the crypto industry might have passed."

U.S. Federal Reserve Chair Weighs in on Regulation

Many unfamiliar with the history of Bitcoin and digital currencies may view the recent sell-off as a sign that crypto is on its way out. But those who believe this nascent industry is still the way of the future remain staunchly on the side of crypto. And regulators continue to acknowledge the viability of digital currencies.

During last week's hearings on the U.S. Capitol Hill, Federal Reserve Chairman Jerome Powell was asked by lawmakers what action he would take regarding crypto regulation in light of the recent digital currency meltdown.

Powell replied that he saw "no financial stability risks" related to the crypto market, which is widely reported by the financial media. He also continued his support for developing crypto regulation.

"The same activity should have the same regulation no matter where it appears, and that isn't the case right now because a lot of the digital finance products, in some ways, are quite similar to products that have existed in the banking system or the capital markets, but they're just not regulated the same way," he said. "So, we need to do that."

The crypto market appears to be calm going into the final weekend of June, which may bring a sigh of relief for seasoned traders who have weathered crypto's ups and downs many times before.

"#Bitcoin is a lifeboat, tossed on a stormy sea, offering hope to anyone in the world that needs to get off their sinking ship," Michael Saylor, CEO of the U.S. software company MicroStrategy, told CNN in an interview this week. MicroStrategy holds a significant amount of Bitcoin. "We are witnessing the birth of a new industry during the worst financial crisis of our lifetime."

Joyce Pavia Hanson