Crypto World Crosses Fingers in Hopes Contagion Has Run Course

The cryptocurrency market has been nothing short of a financial soap opera in 2022, and the drama continued this week when the lender Celsius Network filed for bankruptcy protection. Yet there is one important place where the drama has cooled off noticeably: the actual prices of the largest digital tokens themselves.

Bitcoin climbed almost 8% in the final three days of the work week, while Ether surged 20%. Neither of the two dominant tokens has set a new low point in this bear market for almost a month. Bitcoin has been hugging the closely watched $20,000 round number, while Ether is hovering near $1,000.

The relative stabilization in the charts is fueling hopes that contagion may have run its course following the spectacular collapse of tokens on the Terra blockchain, a wipeout that also sent hedge fund Three Arrows Capital and brokerage Voyager Digital into bankruptcy court. While much of the crypto world’s leverage is not recorded on blockchains, and therefore hidden from scrutiny, what is visible is encouraging, according to James Check, lead analyst at Glassnode.

“I do think that the vast majority of the forced selling has already happened,” Check said in an interview. “Essentially, the market seems relatively stable.”

There are two important sources of potential sellers that are left, Check caveats. One is Bitcoin miners, who have seen the value of their hardware plunge along with the price of the token -- stress that could worsen if Celsius’s mining subsidiary starts unloading some of its 80,850 rigs to raise capital. The other is traders who will indiscriminately sell risk assets of all kinds if the stock market starts to collapse again.

On that front, this week did bring some potential good news for the laser-eye set. For one thing, the S&P 500 remains about 5% above its bear-market low from last month. And the 40-day correlation between Bitcoin and the Nasdaq 100 Index has receded to the weakest level since January, suggesting that the two are less vulnerable to lockstep moves in either direction.

Fresh catalysts are needed to push prices decisively one way or another, according to James Malcolm, head of foreign exchange and crypto research at UBS. One good sign that the market could be normalizing, though, is the strong performance of second-tier tokens such as of Matic and Aave.

“What we’re seeing in crypto at the moment is a situation where individual stories matter a little bit more,” he said. “Some of that’s related to new products, some of it is related to tech upgrades and some to business tie-ups. So we seem to be slipping into a more-conventional market.”

All that said, this famously mercurial asset class has proven time and again that picking a bottom -- or a top -- is a perilous endeavor. And any green shoots that appear to be emerging in this crypto winter will likely need nourishing from macroeconomic factors, which are currently being driven by sky-high inflation and the Federal Reserve’s determination to snuff it out with higher interest rates.

“I wouldn’t want to extrapolate too much on it,” Marc Chandler, chief market strategist at Bannockburn Global Forex, said of the recent stabilization in crypto prices. “To me, the quieter tone you’ve seen in crypto this week may be a reflection of a lack of participation as people try to figure out what to do in this environment, in which the Fed is clearly tightening.”