The cryptocurrency market came alive and is gradually moving into positive territory after an aggressive sell-off at the beginning of the week. On Monday, Bitcoin fell to its lowest level since July 2021. The price tested the $33,000 level but failed to decline any further, which allowed buyers to seize the initiative again and return the rate into the $38,000 area.
Despite the local recovery, the medium-term market sentiment remains bearish. The scale of a recent decline indicates that the uptrend that began at the beginning of last year has reached its limit. Experts say the market is likely to enter a correction with the downside target around the $30,000 support. We share a similar point of view and expect BTC to slip back into the red zone and test the specified level.
The general fundamental backdrop favors the bears. The possible reason for such a significant deterioration in market sentiment when bitcoin dropped $33,000 was Russia's central bank's proposal to ban the use and mining of cryptocurrencies on Russian territory as it threatens financial stability, citizens' well-being, and monetary policy sovereignty.
Chinese authorities offered the same arguments more than a year ago when they banned all financial institutions and payment companies from providing services related to cryptocurrency transactions. If this proposal is approved, BTC mining may suffer significantly since Russia accounts for 11.2% of the global "hash rate" and is the third-largest cryptocurrency mining country.
Another factor that contributed to the downward dynamics of the cryptocurrency sector was the US stock market collapse and rising Treasury yields amid growing investor anticipation that the Federal Reserve could soon start to hike interest rates.
Market participants fear that record inflation will force the US regulator to reduce its stimulus more rapidly. Last year, it was the main growth driver for risky assets. If these expectations are justified and the Fed keeps ramping up its hawkish rhetoric, it will lead to further strengthening of the US dollar, which means a decrease in interest towards alternative assets, including the cryptocurrency market.
According to forecasts, the Fed will decide on the first rate hike at its March meeting. By the end of 2022, the Fed may raise its key interest rate 3-4 times. Such a pace of monetary policy tightening may result in even more severe losses for the US stock market.
The US stock market is strongly correlated with the BTC dynamic, which means that a decline in stock indices is likely to cause similar moves in bitcoin.