The crypto bear market took a break after a volatile week and reaching local lows. However, the closer June is, the more millions of cryptocurrency investors' hearts shrink. The first month of summer will be marked by the beginning of the procedure to withdraw liquidity from the financial system. The stock market has been the main beneficiary of the trillion-dollar injections, but digital assets have also broken records during the coronavirus crisis. With this in mind, the fall promises to be painful.
The US Federal Reserve plans to seize more than a trillion US dollars per year. On the one hand, this practice will return the value of securities to fair levels. This will have a painful but salutary effect on the market. But it is important to consider that this will turn out to be a more negative development for the crypto market, as as of May 25, Bitcoin is trading below its fair value for the first time since July 2021. There is no doubt that the correlation with stock indices and the withdrawal of liquidity will further reduce the real value of the cryptocurrency.
It is also important to understand that such a significant withdrawal of liquidity is carried out extremely rarely. For investors, this is a dark place where impulsive and premature reactions take place. This is fraught with increased volatility and a sharp decline in cryptocurrency quotes. Given that large investors have already taken advantage of the surge in volatility during the attack on the algorithmic stablecoin UST, there is every reason to believe that such manipulations will continue. This could lead to a sharp outflow of investment in crypto funds, as happened last week. According to a CoinShares report, investors massively withdrew funds from Bitcoin amid an update of the local bottom of the volatility index.
Another negative aspect is the lack of a clear understanding of the markets exactly how the process of liquidity withdrawal will take place. If the Fed sells bonds on the balance sheet, this could lead to significant liquidity problems. The main victim will be the stock market and due to correlation, digital assets will also suffer significantly. JPMorgan analysts believe that despite the fall in stock indices, investors are not fully aware of the negative impact of the starting quantitative tightening program.
The main problem is that the reduction of the balance sheet by more than a trillion US dollars will lead to the destruction of the chains created in the period 2020–2021. In many ways, everything will depend on the specific method of withdrawing liquidity, but even transactions with debt or mortgage bonds will negatively affect entire economic sectors. Under such conditions, the cryptocurrency market will also become a loser due to a decrease in investment activity and a complete disregard for high-risk and highly volatile assets.
From a technical point of view, this will mean the full implementation of two bearish patterns on the Bitcoin daily timeframe. The cumulative downside potential from Head and Shoulders and Bear Flag patterns is in the $15k–$20k area.
If we take the percentage of the price drop from the all-time high to $15k, we will see that this is 78%. This indicator is quite consistent with the full implementation of the downward trend in the bear market. But on the other hand, it is important to remember that the current situation was unparalleled in the past, and therefore it is likely that we can expect a decline to the level of $8k–$10k.
