Cryptocurrencies like bitcoin are in a make-or-break moment

A plunge in bitcoin’s price following China’s crackdown has some analysts declaring the bubble has burst. Others say it is a steal at $US30,000. Who’s right?

Bitcoin’s wild ride took a dramatic turn overnight, with the cryptocurrency forming a dreaded “death cross”. (Photo by AFP)

Crypto is in a “make-or-break” moment after bitcoin’s wild ride took a dramatic turn this week but analysts remain split on which way it will go, with some declaring the bubble burst, and others convinced it is a steal at $US30,000.

China’s latest crackdown triggered the sell-off in cryptocurrencies pushing the digital currency to a five month low of $US28,800.

The People’s Bank of China on Monday told major banks and payments giant Alipay to stop facilitating crypto transactions. It came after China cracked down on crypto mining over the weekend in a move that saw it shut down 90 per cent of its mining capacity.

Investors quickly dumped crypto, with bitcoin forming a “death cross” on Tuesday overnight, meaning its 50-day moving average dropped below the 200-day moving average.

“Death cross” is a term used by technical analysts and is an indicator of negative price movement ahead.

It later stabilised to trade above $US32,000 but the latest whack, triggered by a Chinese regulatory crackdown, brings it to a 50 per cent plunge from its April high above $US64,000. Even with that big drop, it’s still trading three times higher than the $US9,600 it was at a year ago. Late Wednesday bitcoin was trading just under $US34,000.

“The investment case (for bitcoin) is a hard one; this is a liquidity-filled market,” says Chris Weston, head of research at broker Pepperstone.

“If the pace and the rate of change of growth in the Fed‘s balance sheet is going to decline — and we expect a formal announcement at the September meeting, and the Jackson Hole symposium to be the strong signal to the market — then I think a lot of these liquidity beneficiaries, such as the meme stocks, Bitcoin and crypto, will find headwinds.”

IG markets analyst Kyle Rodda said the outlook was “very bearish” in the crypto space following the moves by China.

“The (regulatory crackdown) is reasonably significant because a lot of the world’s crypto trading and mining activity actually happens in China, so it’s attacking a very large area of the market.

“It probably does reaffirm, whatever your view on bitcoin as a technology or asset class, that we were in something of a bubble for a little while there and the market got gripped by what can only be described as mania.”

That sentiment has now reversed in a big way, leading the bubble to burst, according to Mr Rodda, who warned of more pain to come.

“The drop below $US30,000 is significant because it’s a pretty big psychological level. We’d expect there to be buyers defending that level. We sort of saw that last night where it dipped below the $US30,000 but then buyers stepped in to bring it back off.

“But if you look at the trend in the market, it’s very negative.

“Despite the view that one of the apparent appeals of crypto is that it’s decentralised and cuts out the financial middle man, its long-term outlook is still very dependent on a progressive integration of the financial system.”

With China now refusing to take that step, bitcoin’s outlook is suddenly a lot more shaky, he said.

But not everyone agrees.

“I think it’s in the oversold territory. I see it stabilising somewhere between $US25,000 and $US50,000 in the next few months, and I think it will pop later in the year, Martin Rogers, the chief investment officer of KTM Ventures Innovation Fund, said.

“A lot of leverage has come out of it now. But in the long term I think it will be worth a lot more. Citibank took it to $US300,000, JP Morgan said $US500,000.”

Mr Rogers said he owns a “de minimus amount” of bitcoin, while his fund has holdings in crypto-themed investments.

Walking the floor at the Bitcoin 2021 Convention in Florida earlier this month. Picture: AFP

The cryptocurrency’s past major price plunges, in 2013 and 2018, saw it sink as much as 80 per cent from peak to trough. If that happens this time, bitcoin is on its way below $US15,000.

The next key support level to watch is $US20,000, Mr Rodda said.

“That‘s where the markets will be looking to next see whether there’s any buyers that step in and support the price.”

It is make-or-break time for crypto, according to Mr Weston.

“There’s a lot of people using that bottom end of the range to accumulate positions, so there’s every possibility we could trade into $US36,000 or so. If we get above $US41,000 and break out of the range, we’ll start talking about FOMO money again.”

But with the looming prospect of central bank tightening, led by the US Federal Reserve, bitcoin is no longer a momentum trade, he said.

“In fact, it’s showing negative momentum. So the best thing you can do as a trader, of course, if you’re losing, is get out of the position as quickly as you can.

I think you‘ve probably got a lot of hedge funds who are in the in the crypto space these days, and they work on rules. So if they’re seeing it go down then they’ll get out of the position. In fact you probably have a lot of people shorting crypto.”

Originally published as Cryptocurrencies like bitcoin are in a make-or-break moment