Total market capitalization for crypto currencies has declined by 14% over the past week and bearish sentiment is creeping back in as the major assets continue to be sold off.
One market sentiment indicator has now flipped into “extreme fear” suggesting that further losses could be imminent. The crypto “fear and greed index” analyzes emotions and sentiments from different sources and combines them into one metric.
The index is currently reading 23 or extreme fear. Over the past couple of months, sentiment has slid from above 80 in early November to the low twenties. On Jan. 8 the index slumped to a six-month low of 10.
The last time there was such a shift in market sentiment was in May 2021, when crypto markets corrected by around 50% in the months that followed.
The current crypto market correction stands at around 33% from its Nov. 10 all-time high of a little over $3 trillion.
Blame the Fed
Industry observers and analysts are increasingly blaming the U.S. central bank for the loss of confidence in crypto investment at the moment.
On Jan. 9, economist and trader Alex Krüger posted a lengthy tweet to his 114,000 followers on why he thinks the Fed’s hawkish shift could cause further damage to markets.
The Fed has rapidly changed stance in an effort to slow the stimulus efforts and increase interest rates with faster balance sheet normalization, “the latter is worrisome enough to trigger a bear market,” he added.
The speed at which the Fed has changed its policy is worrying analysts as the central bank plans to reverse the asset purchases it made under quantitative easing (QE). This is bad for crypto markets and likely to be the cause of the 15% dump so far this year. Krüger explained:
“Crypto assets are at the furthest end of the risk curve. Just as they benefited from extraordnarily lax monetary policy, they suffer from unexpectedly tight monetary policy, as money shifts away into safer asset classes.”
JonesTrading chief market strategist Michael O’Rourke said that the “Federal Reserve’s seemingly perpetual asset purchases have been the cornerstone for crypto investing.” The Fed reversing QE means that the USD will strengthen which means that crypto assets will inadvertently weaken against it.
Where to Next for BTC?
On Jan. 6, chief executive of crypto investment management company Galaxy Digital, Mike Novogratz, told CNBC that he expects the bottom to be around $38-$40K. Bloomberg’s January Crypto Outlook report suggested lower targets of $30K for BTC and $2K for ETH prices.
At the time of writing, Bitcoin was trading at around $42,247 after gaining just 0.5% on the day. The bears are gathering strength, however, so further losses are likely.
