Crypto Week: “Falling Knives” to Hit the Market Hard

Bitcoin met its short-term target of $33,000 at the end of last week, but it continued to plunge 11.6% to $30,000 on May 9 to also meet its mid-term target. Altcoins plunged even further: Polkadot, Solana, Fantom, and many others lost about 20% of their market cap. No market setup to reverse the trend has been seen in the market so far, and it is likely to continue to plunge down further.

A bearish trend is intact with the possibility of Bitcoin dropping to $20,000. Any drop below this figure is seen to be unlikely as Bitcoin prices have never dropped below previous cycle peaks. However, any previous market levels could be broken at any time. The decline of the Bitcoin would most likely drag other digital assets down with it. A potential decline of 50-70% for the top-50 altcoins is a possible scenario.

Digital assets are greatly affected by the global financial situation with military conflict in Europe and COVID-19 outbreaks in China. The duration of this uncertainty is unknown. This nudges investors to move their capital to other safer assets, like the U.S. Dollar. American equity funds lost around $37 billion last week as investors withdrew their money, making it the largest single week of outflow since 2018.

Federal Reserve (Fed) officials are taking their time to calm down markets, as inflation has become the ultimate task for them to get under control. Nevertheless, there are some signs that the Fed is not inclined to push harder on monetary tightening. San Francisco Federal Reserve President Mary Daly said that inflation will come down to the Fed’s target of 2% in five years. "There's just too many supply chain bottlenecks, we're already through the first quarter, China's got COVID we've got the war in Ukraine, so I don't think we are going to get 2 this year, but I do think we are going to start coming down," Daly said at the end of April.

So, following this path, the Fed may smoothen the interest rate hike cycle, easing pressure on risky assets. However, such a possibility is not seen to carry much merit.

Recent sell-offs in the crypto market registered $1.6 billion in coin inflows, which is the

highest since October-November 2021. The inflow of cryptocoins into the market is considered negative as investors are trying to get rid of their digital assets, while coin outflows is considered positive as investors are moving their digital assets to cold wallets for storage for a long period of time. Only 60% of crypto wallets have been profitable this week, and they are down from 70% profitability last week. Similar figures were registered at the end of 2018, before a significant drop of 50% was felt in the market.

Another important factor to consider is that the overall volume of stablecoins decreased by $2.9 billion over the last 30 days. This is a very odd sign because usually the number of stablecoins in the market constantly increases. The decrease of the number of stablecoins circulating in the market may be further evidence of capital outflow from the industry. Fundamentally, the market is seen to be weak now. The appetite for risk has to be much higher in order for the situation to improve, and that is not possible without improving global sentiment in the financial market.