A lot of cryptocurrency coins lie on a dark surface background. View of cryptocurrency tokens, Bitcoin, Ethereum, Zcash, OES, and Dash saw from above on a black background


Avi Rozen/iStock Editorial via Getty Images

I’ll start this off by addressing the elephant in the room. This is not fun. Pure and simple. And I’ve been wrong on every bullish Bitcoin (BTC-USD) article this year. Not only are we witnessing the return of wild volatility to the downside in the cryptocurrency market, but we’re seeing just how dependent on low rates and easing the broader financial system really is. Everything seems to be the same trade at this point. You’re either long dollars or you’re short dollars. And if you’re sitting in speculative assets like cryptocurrencies, so called “stable” coins, or tech stocks, you’re short dollars.

The Wrecking Ball

The standard 60/40 portfolio has been getting wrecked this year. Equities are down. Bonds are down. If you have been a believer that Bitcoin is digital gold, you’ve been pretty disappointed as well.

YTD Performance

YTD Performance (Seeking Alpha)

Year to date, gold is one of the only things that has actually protected portfolios from calamity. Despite puking over 8% in purchasing power each of the last two months, cash has been a safe haven for investment portfolios as well. Cash isn’t trash as it turns out. And the dollar has been outperforming other fiat currencies as well.

Dollar Index

Dollar Index

Brent Johnson’s dollar milkshake theory seems to be holding up pretty well at the moment. The question is how long can this continue? The Dollar Index is already overbought on the daily, weekly, and monthly charts.

DXY RSI-14
4-hour 72
Daily 72
Weekly 82
Monthly 74

Source: Investing.com

Obviously, being overbought doesn’t mean the price can’t continue higher. Also, these kinds of technical trading indicators might not matter given the macro backdrop. The DXY also has a negative RSI divergence on the daily. That would be an indication of at least a short term pullback. But there is a considerable amount of strength in this dollar rally. Picking a top is very difficult if not impossible.

Stablecoin Blowup

The Terra (LUNA-USD) situation has definitely had a major impact on the broader crypto market. LUNA, which was a top 10 coin just a few days ago is now ranked closer to 300 after falling more than 99% from a $30 billion market cap down to under $75 million. Terra’s ecosystem also utilized a stablecoin called TerraUSD (UST-USD) for LUNA redemptions and high yield asset staking.

UST Peg Gone

UST Peg Gone (CoinMarketCap)

While it’s normal to have price fluctuations down to fractional pennies, stablecoins are supposed to maintain their peg to the US dollar on a 1 for 1 basis. UST did not do that and lost its peg earlier this week. As of writing, TerraUSD is trading at a little over 58 cents. Stablecoins have been a huge part of the cryptocurrency market. There are still 3 stablecoins in the top 10 crypto market capitalizations.

Cap Rank Market Cap Token
3 $82.2 billion Tether (USDT-USD)
4 $49.2 billion USD Coin (USDC-USD)
7 $16.8 billion Binance USD (BUSD-USD)

Source: CoinMarketCap

These “stable” coin assets have become a large part in the cryptocurrency system and the fact that they’re now potentially struggling to keep their pegs is definitely a problem. Terra had to liquidate Bitcoin to help defend its stablecoin peg. I’m not saying Tether is the next stablecoin to go down, but there was some interesting action overnight.

Tether Peg

Tether Peg (CoinMarketCap)

Even though Tether has since recovered and is trading at 99.6 cents currently, the peg started to fall apart last night as the coin dipped down to 95 cents. It’s something to keep an eye on.

Bitcoin

The technical setup in Bitcoin is getting very interesting. I have my eyes on a key level that in all likelihood will be tested in the coming hours and days. In the chart below, you can see with a weekly RSI of 31.6, Bitcoin is almost as oversold as it was during the 2018 Bitcoin bottom and more oversold than it was during the COVID crash in March 2020. That doesn’t mean the local bottom is in yet.

Bitcoin Weekly Chart

Bitcoin Weekly Chart

The immediate price level that I see as a potential support line is $26.2k. Bitcoin was very close to kissing that line in overnight trading but buyers stepped in a little earlier. Underneath that level, I view $23.8k as the next downside target bulls may try to defend. If that level fails to hold, I think the full capitulation event below $20k is coming and probably fairly quickly. At that point, if you’re a long term believer in Bitcoin, that’s probably a level to make larger buys.

The Return of Bitcoin Dominance

While nothing quite compares with the utter collapse of Terra (LUNA-USD), it was not uncommon to see coins in the top 50 by market cap that were down 40 or 50% intraday on Wednesday. While the declines in Bitcoin over the last few days have certainly made headlines, Bitcoin is actually outperforming compared to the broader cryptocurrency market overall. I think the longer we see issues with TerraUSD (UST-USD) and potentially now Tether (USDT-USD), long term holders of crypto assets will move some of their speculative capital to Bitcoin. Most coin tracking sites recognize Bitcoin dominance at roughly 44% currently.

Bitcoin Dominance

Bitcoin Dominance (CoinMarketCap.com)

However there is another way to view Bitcoin dominance and that’s by adjusting the full market comparison to other protocols that are focused on payments.

Real Bitcoin Dominance

Real Bitcoin Dominance (buybitcoinworldwide.com)

The chart above reflects the “real Bitcoin dominance.” This takes out the capitalizations of stablecoins, ICO tokens, and any crypto asset that is proof-of-stake or not focused on payments. For instance, Litecoin (LTC-USD) is included in this calculation but Solana (SOL-USD) is not. This figure tracks Bitcoin dominance currently at 67%.

No matter which version of Bitcoin dominance you want to use, it is important to note that when Bitcoin’s dominance is moving up it’s because the broad market is declining, generally speaking. And we’re seeing that now playing out. I don’t think this broad market decline is over. If anything, Bitcoin dominance looks poised to continue much higher.

Summary

To be clear, this is likely crypto winter. I’ll wear it. I’ve been wrong. I thought we’d see a six figure price tag on Bitcoin this year. I no longer believe that to be the case. Even though I suspect Bitcoin will get a sizeable relief rally in the weeks ahead, I think it’s going to be a while before the coin prints a new all time high.

If you are a long term holder of Bitcoin, this is similar to what happened in 2017. Bitcoin had a massive run up from a few hundred dollars to nearly $20k. During that run, there were thousands of other coins that came into the market through ICO, many did not make it. This cycle will be similar. Bad ideas will be purged so that the good ones can be pursued with more capital.

Less Than Two Weeks

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