The Bitcoin’s price closed below $20,000 last week as buyers succumbed to the monetary tightening pressure by the U.S. Federal Reserve. The Chairman of the American central bank Jerome Powell reiterated an aggressive hawkish stance at the annual Jackson Hole Economic Symposium in Wyoming Friday, causing a sharp decline in risk asset prices. 

Powell warned that he expects the Fed to continue raising interest rates in a way that will cause “some pain” for the U.S. economy. He added that the central bank “will use our tools forcefully” to tackle inflation, which is still near its highest level in more than 40 years. Markets appeared to react to the word “forcefully” as the Fed looks to tolerate short-term slowdown of the economy. 

The dollar emerged as the sole winner in last week’s trade as expectations of higher borrowing costs led to a sell-off in stocks, gold, and the crypto market. Moreover, the weakness in European economies added to the dollar’s strength. The macroeconomic conditions have made the dollar look like a “safe haven” in the short term and weakened the bullish prospect for Bitcoin. 

On top of that, fear around Mt. Gox reimbursement, potentially flooding the market with nearly 137,000 BTC (worth $2.7 billion), has added to the negative pressures. 

Currently, the only encouraging sign for Bitcoin buyers is the heightened negative sentiment in the market. However, with no positive catalyst in sight, the sellers will likely have the upper hand. 

Macro Headwinds

The sluggish Bitcoin price action in the first half of last week demonstrated the tension ahead of the Fed meeting. And expectedly so, it culminated in a steep crash after Jerome Powell’s hawkish comments on Friday. Based on the sell-off in a broad range of asset classes and further pressure from the Fed, it appears that risk-on assets will struggle in the weeks and months ahead.

Let’s look at some closely correlated asset classes to Bitcoin, such as technology-related stocks, the U.S. dollar, and gold. It makes it particularly challenging to predict a likely positive catalyst.

The U.S. dollar index, DXY, a measure of the dollar’s value relative to a basket of other strong currencies, recorded its highest daily closing price in the last two decades. Moreover, further aggressive rate hikes provide a continued tailwind for the dollar.

Technically, the DXY chart shows little resistance until 114 if the 109 level is cracked. A rising greenback does not bode well for Bitcoin when it’s trying to form a bottom. The reason is that it promotes apathy towards cryptocurrencies, which are performing just as terribly as stocks, pushing buyers away.

This year, the Nasdaq 100 index has undoubtedly been more closely correlated with Bitcoin than the S&P 500 index. The recent Nasdaq 100 index slump is another alarming sign for Bitcoin. According to its chart, the Nasdaq 100 index could reach lows of 10,000 unless a quick reversal above 12,800 occurs shortly.

And finally, we come to gold. Despite inflation rising over 9%, gold hasn’t performed well as an inflationary hedge this year. The yellow metal has the most potential to break down further over the coming weeks if we continue to see the U.S. dollar index break higher.

Although the correlation between gold and Bitcoin has decreased this year, I still believe that weakness in gold prices would be another opposing force for BTC to deal with. For the record, $1,688 is the breakdown level to watch if you are a gold bear.

This week’s focus will be on the jobs and manufacturing data from the United States economy. Based on Chair Powell’s comments in Jackson Hole that the economy could experience “some pain” with the current rate policy, it will take an extreme downfall in the jobs sector to make the Fed pause its current path, which is largely unexpected. Thus, the path of least resistance for BTC is to the downside. 

Economic calendar for this week. Source: Forexlive.

Contrarian Signs

Bitcoin’s recent drop below $20,000 has caused negative sentiment to spike. Additionally, the beginning of Mt. Gox reimbursements amplified bearish calls in the market. As seen previously, the market often reacts to the opposite side of popular sentiment. Thus, shorting Bitcoin at current levels may not be the best trade right now despite the headwinds. 

The creditors of the infamous Mt. Gox exchanges are finally expected to receive payments after eight years of legal proceedings and confusion. During this time, multiple discussions between the creditors and trustees saw some creditors being bought out by investment funds at a discount. Thus, fewer BTC will enter the markets than the total amount of 137,000 BTC. 

Moreover, the entire repayment process won’t happen in one go. There are different classes of creditors, some of whom have selected an early payment of a small amount. In contrast, others have accepted waiting for a more extended period to get maximum repayment. There’s also a difference between ones accepting cash, or cryptocurrencies in BTC and BCH. 

All-in-all, the selling pressure from the reimbursement will be distributed over a long period and is not likely to cause selling pressure immediately.  

Nevertheless, the above factors are causing the bearish bets in the market to amply. The funding rate for perpetual swaps turned negative last week as traders added to short positions. Short orders have dominated the longs since August 19, creating the possibility of a short squeeze. 

Bitcoin funding rate for perpetual swaps. Source: Glassnode. 

Additionally, spot holders are finally capitulating after months of resilient buying. The holdings of addresses holding less than 0.1 BTC appears to be peaking in the chart below, with recent drawdowns in retail holdings. This is a potential bottom formation sign. However, this may just be the beginning of a long drawn bear market. 

Bitcoin’s supply distribution chart. Source: Santiment

I am not optimistic about a bullish recovery because of the lack of involvement by institutional investors. Bitcoin investors must realize that institutional investors are already here, with many financial service firms offering crypto investment products. Thus, there won’t likely be a significant run if a new large entity joins the bandwagon. 

Moreover, existing whales do not seem excited about Bitcoin right now. A report by Coinshares shows $47 million worth of Bitcoin outflows from institutional funds, indicating a slight sell-off. The price-sensitive holders between 1,000 and 10,000 have stopped selling but are yet to engage in a buying spree. 

Overall, waiting on the sidelines along with large investors appears like the only safe option as Bitcoin struggles at the $20,000 level. The 2018 peak and former bullish resistance level will be a crucial turning point for the medium-term price action of the top cryptocurrency.

Bitcoin’s Future Path 

Technically, things look bleak for Bitcoin, especially after bulls failed to stage any meaningful recovery in August towards the $22,700 resistance level.

Last week’s low of $19,600 will be a critical pivot point to watch for Bitcoin. If we see sustained weakness below this crucial level, I think bears will start targeting the $17,000 support level.

If we were to see strength above the $19,800 level, then bulls could try to stage recovery back towards last week’s breakdown spot, at around $20,800. 

A move above $20,800, a former support-turned-resistance level, could inspire a challenge towards the $21,700 or even the $22,000 resistance level. 

And finally, a cautionary note. The recent bearish rising wedge breakout is only half-complete; it has yet to meet its full downside target of $18,000. 

BTC/USD Daily chart. Source: Trading View

 Still Watching $1,420 for ETH  

The troubles of Ethereum buyers augmented after a breakdown of the $1,720 level last week. Presently, the emphasis is back on the former all-time high for the second-largest cryptocurrency, around $1,420.

I mentioned previously that the former all-time high from 2018 could come back into focus if we failed to see strength above the $1,800 level. It now seems the market is setting up for a crucial technical test.

If sellers can break the $1,420 level with conviction, Ethereum could be in for weeks of considerable weakness. Sellers will probably look to target the yearly lows around $800. 

However, suppose buyers can protect the former all-time high. In that case, it could encourage technical traders and dip-buyers to purchase in anticipation of bullish recovery.

Finally, keep an eye on the monthly price close. Whether the price closes above or below the former all-time, around $1,420, will be extremely important this week.

ETH/USD Daily chart. Source: Trading View

Looking for Clues

Trading Litecoin probably looks pretty uninteresting at the moment compared to other coins with substantially greater price moves and more positive fundamentals.

With that said, I still think there’s merit in tracking this once-popular cryptocurrency to look for clues on broad market trends.

Currently, the charts look discouraging for Litecoin, ergo: a bad sign for total market capitalization. Litecoin could test the $33.00 or $30.00 support zone if the crypto market continues to slide lower.

We probably need to see sustained strength above the $65.00 level for the technical situation to change to the upside. If this fails to happen, I think a test of the yearly low is inevitable.

LTC/USD Daily chart. Source: Trading View

Yearly Lows

The logical conclusion for the market at this juncture is a technical test towards the current year’s lows, not only for Bitcoin but for a whole host of cryptocurrencies.

Should we see those lows broken, then I think it is a no-brainer that the entire cryptocurrency market will make another substantial stab lower, and the market capitalization of the crypto market could head back towards $500 billion.

However, if these yearly lows start to hold, it could inspire buyer confidence and possibly double-bottom pattern formation on daily charts of coins.

This week and September’s main point of contention will probably be whether prices break below the yearly lows or form a double-bottom. Bitcoin and the crypto market desperately need bullish fundamental catalysts to prevent a further price breakdown. I am unsure where this catalyst can come from at this stage.