As bitcoin nears support at $30,000, analysts are divided on what happens next. Some see that level holding and a return toward $40,000. Others point to weak demand, and say further declines are likely.
"We believe that there is not much downside in the short term as we trade near the bottom end of the $30,000-$42,000 trading range," Delta Exchange CEO Pankaj Balani said. "In the short term, the macro environment does not look weak, with broader markets continuing to rally and U.S. tech stocks posting all-time weekly highs."
The S&P 500, Wall Street's benchmark equity index, rose 1.4% on Monday, signaling a reevaluation of risk in financial markets following last week's drubbing. Asian shares traded higher early today as Federal Reserve Chairman Jerome Powell's comments quelled taper fears.
In written remarks prepared for his testimony before the House Select Subcommittee released yesterday, Powell reiterated his view that a recent uptick in inflation would prove short-lived. Stocks, commodities and bitcoin took a hit last week while the dollar rallied on the Fed's unexpectedly hawkish tone on interest rates.
Balani foresees a bounce to $40,000 in coming weeks. Singapore-based QCP Capital said it expects bitcoin to continue trading in the range of $30,000 to $40,000.
"With retail now going short, the market will be primed for short squeezes," QCP Capital said in its Telegram channel on Monday. "Historically, whenever retail starts going short like this, the market has tended to find it hard to perpetuate the downtrend."
The firm pointed to the recent negative funding rate in perpetual futures listed on FTX, Deribit, and BitMEX as evidence of retailers' short bias. The funding rate is the cost of holding long/short positions. A negative print implies that many traders are bearish, or holding short positions.
Bitcoin bottomed out in the first quarter of 2019 with negative funding rates, and rallied sharply in the following three months. Negative rates observed after the March 2020 crash and in third-quarter 2020 also marked price bottoms.
QCP's preferred trade remains a short strangle – an option strategy aimed at benefiting from consolidation/impending drop in price volatility. It involves selling the same expiry call and put options at strikes equidistant from the spot market price.
According to Amber Group, some investors have been selling puts below $30,000 – a sign they are expecting the key support to hold. Selling options or strategies like short strangle are quite risky and better left to big firms and institutions with ample capital supply.
Others are less sanguine, with Stack Funds saying the cryptocurrency could drop below $30,000.
"We are still witnessing moderate incoming flows from family office and high net worth individuals, however, the demand has slightly dampened since May," COO and co-founder of Stack Funds Matthew Dibb said. "Given the recent price action, we expect that bitcoin will likely break $30,000 in the short term, while still increasing in market-cap dominance."
Crypto finance services provider Amber Funds and OKEx exchange also considered the slowdown in demand.
"There's no direct evidence showing people in China are buying the BTC dip. As shown in the ChaiNext tether (USDT) OTC index, the value hovered at 99 for the last few weeks in June, which shows a slight discount in trading USDT," Matthew Lam, an analyst at crypto exchange OKEx, said.
"There is little evidence of dip demand. People are still sidelined," Amber Funds said in a Telegram chat.
With the demand side weak, sellers may succeed in pushing the cryptocurrency down on the back of consistent negative regulatory news flow out of China.
Dibb said charts also appear bearish. The daily chart MACD histogram, an indicator used to gauge trend strength and trend changes, has fallen below zero, signaling an end to the consolidation and potential for a fresh sell-off.
"The cryptocurrency needs to reclaim $40,000 for any meaningful recovery," OKEx's Lam said.
Bitcoin is trading near $31,500 at press time, having dropped by 11.17% on Monday, the biggest single-day decline since May 19, according to CoinDesk 20 data.