Bitcoin moved under $20,000 last week due to 40-year high inflation in the U.S. and the largest one-time benchmark rate hike of 75 basis points by the Federal Reserve since 1994. The situation worsened as the price decline exposed some large investors to liquidation and possible insolvency, increasing the fear of a catastrophic contagion in the market.

The centralized crypto lender and fixed earning platform, Celsius, has suspended withdrawals on its platforms, raising suspicions around the company’s ability to meet customers’ liabilities. Celsius has been adding more Bitcoin to lower its liquidation price, with reports suggesting that the current liquidation price for its borrowings is between $13,000-$16,000.

If the sellers successfully trigger this liquidation, it will not only result in losses for its clients, the accompanied sell-off of its ETH and BTC collateral should add to the overall selling pressure. On top of that, leading crypto venture capitalist and hedge fund Three Arrows Capital, estimated to hold $10.5 billion in total assets under management, also faces bankruptcy.

While these are the prominent companies that the market has become aware of in the last few weeks, there may be numerous other smaller entities and treasuries that deal in crypto, currently facing a deep liquidity crisis.

Marco Getting Worse

I see very little to get excited about in the near term as downside risks still prevail, even at current pricing. Moreover, the upside could be further capped over the coming weeks if inflation data for June is hot again.

Last week Chair Powell said, “Hikes will continue to depend on incoming data, but either 50 basis points or 75 basis points increase seem more likely for the next meeting.” This is bad news for stocks and crypto.

Putting aside the Celcius and Three Arrows Capital situation, there’s a likely built-up of a warlike situation between China and Taiwan, which could act as a potent bearish catalyst.

This story has completely flown under trader’s radar, with liquidations and the Federal Reserve taking precedence. But China’s new directive for using its military for non-war purposes paves the way for an invasion of Taiwan under the misnomer of a ‘special military operation.’

The directive could provide Beijing with the cover it needs to launch an assault on Taipei without the legal complications or international condemnation of declaring war.

On the bright side, the Grayscale ETF announcement could capture the market’s attention over the coming weeks and potentially provoke a bounce. Overall, it’s still a fragile market, and extreme trader losses coupled with low liquidity don’t add to the confidence in the asset, so I am not counting on the Grayscale ETF to be approved.

Economic calendar for this week. Source: Forexlive

Looking ahead to this week, Fed Chair Powell is scheduled to testify before Congress on Wednesday and Thursday. He will likely stick to the playbook from last Wednesday, as little has changed since the latest rate decision.

Economic data will be vital as we advance. The effort from the Fed to curb U.S. inflation threatens to slow economic growth and increase unemployment. Retail sales and jobs have already turned south this month. This trend should continue having an adverse impact on risk assets.

Waiting for the Bottom 

Last week’s price decline brought the on-chain indicators closer to oversold levels, but not enough to confirm a bottom. The percentage supply held in profit is reduced to 50%, which marks the threshold of the oversold region (in green). However, based on historical data, sellers will likely trap more profitable holders shortly, up to 60% of the total supply.

Percentage of Bitcoin’s supply in profit reached 50%. Source: Glassnode

The above metric paints a binary picture of the percentage of wallets in profit or loss. A similar metric, relative unrealized profit/loss, visualizes the total profits/losses in dollar terms. Thus, it not only measures if BTC is held profitably or not but also the extent of the profits/losses.

According to the relative unrealized profit/loss ratio (NUPL), holders could likely incur more losses in the near future. During the 2015 and 2018 bear markets, the NUPL metric tagged lows around -0.4. Currently, the 7-day moving average of this metric reached parity with the March 2020 flash crash levels of around -0.05. Thus, an argument for a further decline in prices sounds reasonable at this point.

7-day moving average of net relative unrealized profit/loss. Source: Glassnode

This brings me to the last portion of the analysis, which is an evident capitulation of retail holders. Although, currently, Santiment’s Supply Distribution chart shows quite the opposite. Bitcoin wallets with less than 0.1 BTC (worth ~$2,000) continued to increase their holdings last week, showing no fear of capitulation.

BTC supply distribution chart. Source: Santiment

In conclusion, we still don’t have comprehensive on-chain proof that the bottom is in at this point. And, based on previous bear markets, last week’s capitulation was only the beginning. BTC and the crypto market will likely face a lot of selling pressure on rebounds for the next couple of months.

$20,000 Danger

Bitcoin cracked the $20,000 level last week, marking a severe technical turning point that sets up the potentiality of more significant losses.

To understand the importance of the $20,000 level, as not only a primary psychological level for the market, but one that is bonafide former breakout resistance now turned critical support, you have to look back in history.

$20,000 resistance basically stood in place from January 2018 as the level to break. Once buyers broke above it in late 2020, Bitcoin never looked back and quickly posted a 100% gain.

The big question is, now that the $20,000 level has been breached, just how low can Bitcoin go from current levels?

I am a big fan of MACD divergence and 10x liquidation level data. The daily time frame shows bearish MACD price divergence down towards the $12,000 level, while 10x liquidations extend down towards $9,000. Both would be reasonable targets if BTC breaks below $20,000 and $16,300.

BTC/USD Daily price chart. Source: Trading View

ETH to $500.00

Ethereum breaking under $1,390—last cycle’s peak—should be a concern to any ETH bull, as it outlines the stark reality that the second-largest crypto could be headed back to bargain basement levels.

I suspect that the $800 level will not survive as well, although it is a premium and interesting technical spot where the ETH/USD pair could gravitate towards this week.

Looking dispassionately at the daily price chart, it is far more likely that we will see Etheruem moving towards $500, if we see Bitcoin tagging $12,000 or even $9,000. The potential liquidation levels of on-chain ETH loans extend down to $375, making it a honey pot for liquidators.

I don’t see much to stop the down move at present, and the pace at which the crypto market is shedding its gains is actually concerning me that $500 may not be the low.

ETH/USD Daily price chart. Source: Trading View

Total Madness

The Crypto Total Market Capitalization chart has been a primary tool in determining the direction of the crypto market over recent years and one I continually lean on.

Last week’s breach of the $850 billion level was the writing on the wall for the crypto market cap, marking the breakdown of critical technical support and a make-or-break reversal zone.

Like Bitcoin, the Crypto Total Market Capitalization chart currently has negative price divergence extending down to much lower levels. The negative divergence extends down to the $475 billion level.

Mark my words, the risks are very high for a complete market capitalization price collapse if the market continues to trade below the $850 billion level.

Crypto Total Market Capitalization Daily price chart. Source: Trading View

It’s Bad

Without mincing any words, I think the scale of the losses in the cryptocurrency market are both worrying in terms of the speed but also the sheer disregard for the technicals.

As I have been mentioning recently, the Grayscale ETF could cause a brief market pop. But an approval is far from a certainty at this present moment in time. With the crypto landscape so uncertain, it is unlikely that the SEC will dare to approve an ETF after the recent debacles with Terra Luna, Celsius, and potential Three Arrows Capital contagion.

Moreover, the macro economic and political backdrop are unlikely to get any better soon, and my fear is that crypto is going to become a big causality, especially if another war emerges or the U.S. economy falls into a recession.