Bitcoin sheds $10k and Ethereum is down $1k in 4 days, what's next for crypto

January 25, 2022

New York (Jan 25)  Yesterday, Bitcoin shed $10,000 off its price and Ethereum lost $1,000 in just four days. And the brutal crypto selloff might not be done just yet, according to analysts.

This chaotic exit from the crypto space coincided with the massive plunge in equities as the U.S. stocks head for the worst month since March 2020.

Kicking off the new week, market sentiment remains firmly risk-off, with investors gearing up for an aggressive Federal Reserve monetary policy announcement on Wednesday and quickly rising Russia-Ukraine geopolitical tensions.

"Markets are picking up this week where they left off on Friday — in full risk-off mode. As we have posited, the risk-off impulses are coming from a variety of factors that perhaps make up a perfect storm ahead of the FOMC meeting this week," said BBH's global head of currency strategy Win Thin. "Besides the expected hawkish hold from the Fed, markets now have to contend with ever-rising tensions between Ukraine and Russia as well as sharply weaker PMI readings."

This risk-off sentiment has really hurt the crypto market, which saw $130 billion wiped off over the last 24 hours. Since reaching their new all-time highs back in November, both Bitcoin and Ethereum are now trading more than 50% lower.

At the time of writing, Bitcoin was trading at $34,333.25, down 2.9% on the day. And Ethereum was at $2,241.30, down 8.2% on the day.

The prospects of a much tighter monetary policy weigh very heavily on risk-on assets, including crypto.

"March liftoff remains fully priced in, as are three more hikes in 2022. Two more hikes are currently priced in for 2023 that would result in a terminal Fed Funds rate of 1.75%, added Thin. "We continue to believe this is too low and needs to move higher to at least 2.0-2.25%. If inflation proves to be stickier, the Fed may have to move the Fed Funds rate into the 2.5-3.0% range.

 

  

This massive selloff is showing investors that bitcoin might not be a great hedge against inflation, said Exinity chief market strategist Hussein Sayed. "Cryptocurrencies failed to protect portfolios as a hedge against the market turmoil or higher inflation. Most digital assets have lost a quarter to a third of their value this year, with Bitcoin, the most prominent digital token dropping to a six-month low at $34,625," Sayed said.

Also, the rising geopolitical tensions between Russia and Ukraine are adding uncertainty to an already very cautious marketplace. Over the weekend, the U.S has issued an order for diplomats' family members in Kyiv to leave Ukraine, citing the "continued threat of Russian military action."

The U.K. government, in the meantime, said that Russia is plotting to install a pro-Kremlin government in Ukraine. And on Monday, NATO announced it was sending more ships and jets to Eastern Europe.

What's next?

Analysts are warning that if the selloff in stocks is not done, the weakness in crypto could continue to accelerate. More downside is possible, said UTXO Management senior analyst Dylan LeClair.

"Is more downside to come? Maybe, especially if equities continue to tank and contagion hits credit markets," LeClair said. "Question is, when does marginal selling by macro funds turn into marginal buying? The reality is there are a few hundred trillion worth of bonds w/ negative real yields - contracts guaranteed to lose $. When, not if, the Fed reverses course on tightening, expect $BTC to fly."

However, the long-term outlook remains intact for bitcoin, and the best-selling author of "Rich Dad Poor Dad" Robert Kiyosaki said that he would be buying more of the world's largest cryptocurrency once it tests $20,000.

"Your profits are made when you buy, not when you sell. Price of Bitcoin crashing. Great news. I bought BC at $6K and 9K. I will buy more if and when BC tests $20k. Time to get richer is coming," Kiyosaki said over the weekend.

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