The new year has been upon us for less than a month, but the Great Crypto Crash of 2022 has already caused a lot of investors pain.
The risk aversion dogging Wall Street has infected cryptocurrencies, resulting in a dramatic sell-off in digital coins that yanked Bitcoin (BTC-USD) below $34,000. While the token recouped some of those losses, most analysts think there's more downside left to probe, especially with crypto's growing correlation with other risk-on assets.
Like stocks, Bitcoin's short-term outlook is being determined by a Federal Reserve that's taken a decisive turn toward fighting inflation — heightening fears of higher interest rates — and away from loose monetary policy that boosts cryptocurrencies.
One thing that Bitcoin still has going for it: a yearly return of more than 11% as of Tuesday that's more favorable than the current 7% rate of consumer inflation — the hottest in decades. That puts it in rare company; bonds, gold, commodities and real estate are also touted as legitimate hedges of inflation.
Even at its brief but bearish moment below $34,000, the cryptocurrency functioned as protection against soaring inflation, a thesis that isn't quite accepted as truth but is compelling nonetheless, especially for developing economies with limited access to financial markets.
History repeats itself: BTC below $14,000
Jon Wolfenbarger, CEO and Founder of Bull and Bear Profits, who previously told Yahoo Finance that he expected BTC to “get a powerful rally that could last a while," remains far less optimistic over the medium-term horizon.
The analyst cited a unique but strong historical pattern that suggests this BTC market cycle is no different than the previous two. It points to a whopping 80% retrenchment from its November peak above $68,000, which would put Bitcoin somewhere below $14,000 within roughly a year's time.
By looking at BTC’s past two four-year cycles sparked by its "halving" — a regular supply cut inherent in the token's code — Wolfenbarger found BTC rose by more than 8,000% from 2012 to 2013, and almost 3,000% from 2016 to 2017. In both cases, it then proceeded to fall by 80-83%.
Yet Wolfenbarger’s projections for this worst case scenario assumes that inflation will be tamed quickly (possible but unlikely), and that growth is slowing in several major economies based on leading indicators from the OECD (a very real outcome).
“Assuming there is a bigger than expected drop in inflation from economies opening up after the Omicron variant, in addition to the Federal Reserve tightening, then if I am thinking of Bitcoin as an inflation hedge, it's hard for me to be bullish this year,” Wolfenbager told Yahoo Finance.
“If we really see this worst case scenario play out for Bitcoin, whenever that’s done it would likely be an incredible buying opportunity for the long term," he added.
Decoupling and the Long Term holders
Wolfenbarger’s absolute worst case scenario for BTC also means a bearish outlook for the stock market.
By contrast, investment research firm Fundstrat suggested in a note to investors last week that a number of factors indicate this time might actually be different for BTC.
If the token outperforms high-growth, high-risk stocks in this environment, it could cause a decoupling trend where BTC’s risk ultimately falls below growth equities on a “legacy investor’s risk curve.” During Tuesday's session, Bitcoin briefly outperformed stocks before surrendering gains.
“Looking forward, we see 2022 as the potential year in which bitcoin decouples from its high-growth, risk-on narrative and moves further down the legacy investor’s risk curve on its way to realizing its ultimate use case as a global decentralized monetary system,” wrote Sean Farrell, vice president for digital asset strategy at Fundstrat.
Pointing out how “legacy investors” started allocating capital to BTC in 2021 — most notably in the form of publicly-traded corporations like Tesla, Microstrategy, Block (formerly Square), as well as the country of El Salvador putting the asset on their balance sheets — Fundstrat asserts the process has already begun.
Fundstrat and other Bitcoin analysts also point to the on-chain data around long term holders. Long term holders on the Bitcoin blockchain represent wallet addresses that haven’t moved BTC within a 155-day period. Analysts assume these investors aren't just refraining from selling, they buy more when the price falls and have been accumulating Bitcoin since before January.
Noelle Acheson, head of market insights at Genesis Trading told Yahoo Finance Live that “the amount of Bitcoin that hasn’t moved in the last year is almost 60%, and the majority of those addresses belong to holders who do see Bitcoin as a longer term store of value.”
Even with the worst-case, $14,000 bear scenario, Fundstrat's Tom Lee also posed the a hyper-bullish scenario for Bitcoin's own "de-risking," known as TINA (There Is No Alternative).
"With global real rates negative due to inflation, it will be difficult to realize real yield in bonds. This would enact an inflationary-driven “TINA” scenario, and some of the capital previously allocated to low yield bonds will be rerouted to bitcoin (in addition to equities)," Lee said.
David Hollerith covers cryptocurrency for Yahoo Finance. Follow him @dshollers.