The crypto market is experiencing a downward trend, where will the future direction go?

The crypto market in July did not rebound as expected. Instead, a series of negative news intensified investor panic, leading to a drop in Bitcoin prices, which in turn caused a comprehensive decline across the entire crypto market. Despite the heavy blow to the market, multiple positive factors combined, and many believe that the crypto market may start to see a turnaround in the fourth quarter of 2024.

Major bearish factors in the current market

Bankruptcy of the exchange compensation triggers market panic

The compensation issues of a certain bankrupt exchange have attracted high attention from the market. The potential selling pressure of a large number of crypto assets once triggered market panic on June 24, causing the BTC price to drop to around 60000 dollars.

With the compensation officially starting on July 5th, BTC has broken below the support level of 60,000 USD under heavy selling pressure. During this process, BTC miners have shown signs of capitulation. Historical experience indicates that this usually means the price has hit bottom. The last comparable decrease in hash rate occurred in 2022, when the trading price of Bitcoin was 17,000 USD.

A co-founder of a certain capital believes that most market participants are not aware of the severity of the potential drop in Bitcoin's four-month volatility range. The closest similar situation we can find is the range from May 2021, when Bitcoin and altcoins also experienced a parabolic rise. Currently, cryptocurrency leverage is close to historical highs (excluding CME), but in this case, our range duration is longer (18 weeks compared to 13 weeks), and extreme liquidation has not yet occurred.

The initially estimated low point of $50,000 may be too conservative, and we might see a more extreme pullback to the $40,000 range. Such a pullback could cause significant damage to the market and may require several months of consolidation/downward trend (recovery period) before a reversal to an upward trend could occur.

The German government sells Bitcoin

Recently, the German government transferred more than 10,000 bitcoins in batches to crypto exchanges and market makers. This action caused the price of bitcoin to briefly fall below $55,000. However, according to information from data platforms, during the US stock market closing period, the German government address reclaimed 2,898 bitcoins, amounting to approximately $163 million.

Data shows that the German government's sell-off plan is nearly halfway complete. Since the sell-off began last month, its Bitcoin holdings have decreased from nearly 50,000 to 27,461, with the current holding valued at approximately $1.5 billion.

Despite the market downturn, data released by an asset management company indicates that the inflow of digital asset investment products reached $441 million last week. Among them, Bitcoin investment products accounted for the largest share of the total inflow of crypto products ($398 million), with a proportion as high as 90%. Regionally, the inflow of funds mainly came from the United States, amounting to $384 million. Other significant buying came from Hong Kong, Switzerland, and Canada, while Germany experienced an outflow of $23 million.

The Bitcoin mining market is bottoming out.

Recently, the price of Bitcoin dropped to $54,000 (now recovered to $57,000), making survival even more difficult for miners who are already facing a sharp decline in profits due to the halving. According to surveys, if the price of Bitcoin falls to $54,000, only ASIC miners with an efficiency of over 23W/T can be profitable, and only a few models of miners can barely sustain.

The miners' selling behavior is also considered to be part of the reason for this price drop. In order to cope with cash flow issues after the halving, the sell-off by mining companies continues, with 30,000 bitcoins from miners entering the market in June alone.

Data from a certain mining pool shows that, based on an estimated energy cost of $0.07 per kilowatt-hour, only ASIC miners with a power efficiency of 26 W/T or lower can achieve profitability when the price of Bitcoin is $54,000. Specifically, certain efficient models break even at Bitcoin prices of $39,581, $43,292, and $48,240. Other common models, however, need the price of Bitcoin to exceed $51,456, $53,187, and $54,424 respectively in order to be profitable.

Fortunately, as the price of Bitcoin decreases, small and medium-sized mining farms are gradually shutting down, and the difficulty of Bitcoin mining is rapidly declining, signaling the end of miner capitulation. On July 9th, data showed that the Bitcoin mining difficulty was adjusted down by 5% to 79.5T, with the average hash rate across the network in the past seven days being 586.72EH/s. Since May, the amount of Bitcoin sent to exchanges for sale by miners has significantly decreased, and over-the-counter trading volume has notably declined. On June 29th, the total trading volume at the OTC desks of mining companies had been exhausted, indicating that selling pressure has eased.

Positive Factors Worth Paying Attention To

The repayment plan of large exchanges is expected to drive the market to new highs.

According to a revised reorganization plan and disclosure statement submitted by a certain bankrupt exchange to the U.S. Bankruptcy Court in Delaware this May, it is estimated that the total value of assets collected and converted into cash available for distribution will be between $14.5 billion and $16.3 billion, exceeding the $11 billion owed to customers and other non-government creditors. The excess cash will be used to pay interest to the company's more than 2 million customers.

Currently, the exchange has obtained court approval, and creditors can choose to vote on the compensation plan for cryptocurrency in cash or physical form. Creditors must vote by August 16, and the judge will decide whether to approve the plan on October 7. Once approved, the exchange will repay creditors within two months, with the expected timeframe being from the fourth quarter of 2024 to the first quarter of 2025.

Although the final compensation method has not yet been determined, a certain encryption analyst believes that, given that most clients are cryptocurrency enthusiasts, this funding of up to $16 billion will enter the crypto market and become a major catalyst for price increases. Bitcoin is expected to break $120,000, Ethereum will break $12,000, and other altcoins will rise by 10 to 50 times.

The expectation of interest rate cuts is clear.

The Federal Reserve's decisions on interest rate hikes and cuts are one of the important factors affecting Bitcoin prices, and rate cuts typically boost the market.

Recently, the Chairman of the Federal Reserve stated that inflation pressures in the United States have eased, but the Fed needs more data to prove that the inflation risks have passed before deciding to cut interest rates. If rates are cut too early, inflation may rise again; if rates are cut too late, it could lead to a slowdown in economic growth or even trigger a recession.

Although the timing of interest rate cuts has not yet been determined, the latest economic data from the United States indicates a slowdown in economic growth. For example, the non-farm payroll data for June was significantly revised down, and the unemployment rate rose to 4.1%, the highest level since November 2021, leading to an increase in market expectations for interest rate cuts. According to data platforms, as of July 9, the market expects the probability of the Federal Reserve cutting interest rates at the September meeting to rise to 73.6%, while the probability of keeping rates unchanged is 22.9%.

The encryption accounting system will soon take effect.

In December of last year, the Financial Accounting Standards Board of the United States released the first version of accounting rules for encryption digital currencies, requiring companies holding Bitcoin or Ethereum to record the changes in the value of their coins at fair value and reflect them in net income. The new rules will take effect for fiscal years beginning after December 15, 2024, and will apply to both listed and non-listed companies for the 2025 fiscal year.

For crypto assets, this change in accounting standards means that certain large listed companies will be able to record the highs and lows of their cryptocurrency holdings. This will drive further compliance in the crypto market and attract liquidity injection from mainstream financial markets.

Bitcoin Price Trends After Each Halving

There are only three types of market trends: upward, downward, and sideways. Regardless of how the future market changes, it ultimately cannot escape these three patterns. Trying to predict the direction of the market is a foolish act; we only need to know how to respond if the market moves in a certain direction.

If the market breaks through the current resistance level and holds above 69000 points, it can be seen as the beginning of an upward trend.

Two possible scenarios for an increase:

1. Approaching previous highs but not breaking through: The market may be close to previous highs but has failed to break through, or it may have only slightly broken through and then retreated. In this case, do not be fooled by the market's illusion, and do not chase the highs. You may not even need to exit your position, just reduce part of your holdings, especially if you feel your position is too heavy.

2. Breaking previous highs and maintaining new highs: If the market breaks the previous high and continues to make new highs, and holds for at least more than 3 days. At this point, pay attention to the strength of the breakout, observing whether there is a strong surge or a fluctuating upward trend within 3 days to 1 week. If the trend is strong, with a rapid increase after the breakout, you can hold and wait for a significant pullback (at least around 10% pullback) before adding to your position. If the trend is not strong and the increase is slow, it is recommended to reduce your position when new highs are reached to prevent false breakouts.

Currently, the possibility of continued increase is relatively low. If the second scenario arises and the trend after the breakout is not strong enough, be alert to the risk of a significant drop.

Reference for the market conditions before and after the previous halvings:

Second Halving (2016.07.10)

Before this halving, Bitcoin surged by 78% within a month. After the halving benefits were realized, it saw a deep pullback, falling 30% within a week, with the maximum drop reaching 40%. Then it started to rise again, going from under $500 to nearly $20,000. After the halving, the price corrected by 30%.

Third Halving (2020.05.12)

In 2020, due to the historically rare black swan event of 312, the market experienced a significant drop before the halving. Ignoring this negative factor, Bitcoin also saw a 20% pullback in the week leading up to the halving. There was a rebound after the halving, but it did not rise significantly, and the market went through fluctuations. After the high point before the halving in early May, it fluctuated until the end of July before breaking upward, oscillating for a full 3 months, during which there were also two instances of a pullback of over 10%.

From the previous two halvings, it can be seen that Bitcoin tends to experience a pullback around the halving. The market widely expects Bitcoin to rise after the halving this time, but what will happen this time? Further observation may be needed.