Bitcoin Prices Rally, but Fail to Break $20,000. Why Cryptos May Slide Again Soon.

Bitcoin and other cryptocurrencies rallied on Tuesday, but digital assets continue to trade at depressed levels amid pressure from cracks in the crypto industry and a selloff in the stock market.

The price of Bitcoin rose 2% over the past 24 hours to $19,700, falling short of breaching $20,000—a key level it plunged through last week. The largest digital asset is trading at less than one-third its all-time high near $69,000, reached in November 2021, but has held above its $18,000 bottom that was hit during the trough of a selloff in mid-June.

“The price, although it has continued to fall for more than six months, still has a potential downside,” Yuya Hasegawa, an analyst at crypto exchange Bitbank, wrote in a note on Monday. The analyst has a weekly target range for Bitcoin of between $12,000 and $24,000—an outlook that implies potential for significant volatility.

“Technical and on-chain metrics show that the current price is closing in on the oversold areas,” Hasegawa said, but he added that there are reasons to be cautious about ‘buying the dip’ or prematurely calling a bottom in the Bitcoin selloff.

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“In case of another selloff, it could trigger capitulations from Bitcoin miners,” Hasegawa noted. “The market should keep in mind that there could be a larger-than-expected downside movement.”

One of the latest risks to the digital asset space has come from struggling Bitcoin miners, who expend vast amounts of energy to “mine” crypto—keeping transactions processing smoothly and being rewarded with tokens in turn. Amid falling Bitcoin prices and high energy costs, miners could face pressures to unload their crypto to fund operations, adding sell pressure into a downward market.

However, miners are far from the only problem facing digital assets, which are deep down in the dumps. Bitcoin just capped its worst quarter since 2011, a year in which it breached the $1 mark for the first time, while Ether notched its worst quarter on record.

At the top of the list of issues for Bitcoin is stocks. Cryptos should, in theory, trade independently of mainstream finance. In reality, they have shown to be correlated to other risk-sensitive assets like stocks, which are in a bear market. The S&P 500 is down 20% this year and the tech-heavy Nasdaq is 30% in the red, and the S&P 500 just finished its worst first-half in more than 50 years.

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Driving the stock market and crypto selloff are fears that the Federal Reserve will be unable to avoid causing a slowdown as a result of much tighter monetary policy. Facing the highest inflation in decades, the Fed has already moved aggressively to raise interest rates and is expected to continue doing so, risking plunging the U.S. into a recession by denting economic demand.

A wave of economic data in the week ahead—including the latest U.S. jobs report on Friday—as well as minutes from the Federal Reserve’s June meeting will be closely watched as investors focus on monetary policy expectations. These could provide new catalysts for a move in stocks that could ripple through to cryptos.

Downward pressure on Bitcoin prices has also come from crypto itself, with the meltdown of stablecoin Terra, breakdowns in the digital asset lending space, and the bust of a major hedge fund threatening wider contagion. The laundry list of cracks among crypto financial service providers grew this week, with trading and lending platform Vauld—backed by Coinbase Global (ticker: COIN)—becoming the latest firm to halt customer withdrawals.

“Fear and uncertainty has led to Bitcoin becoming extremely cheap according to many on-chain indicators.,” Marcus Sotiriou, an analyst at digital asset broker GlobalBlock, wrote in note Monday—echoing Hasegawa’s analysis that cryptos look attractive from a technical standpoint.

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“However, until we see a slowdown with inflation and/or crypto companies improving their own financial stability, we can expect the downtrend to continue.”

Beyond Bitcoin, the rest of the crypto space was exhibiting similar price action—rallying on Tuesday but remaining at significantly depressed levels.

Ether, the second-largest digital asset, surged 5% to above $1,100. The token underpinning the Ethereum blockchain network remains far below its all-time high last November near $4,900. Smaller tokens, called altcoins, also gained, with Solana up 3% and Cardano 1% higher. Memecoins—initially intended as internet jokes—also ticked higher, with Dogecoin and Shiba InuSHIBUSD –1.27% both 1% into the green.