Analysts at Bank of America think current downdraft in cryptocurrency prices could be a harbinger of more pain ahead. They don’t think the sell-off will be limited to the crypto markets, and see the selling pressure in the oil space as part-and-parcel of a much wider movement out of risky assets.
According to a report that Reuters reproduced, Bank of America thinks that the action in crypto markets suggests that another “flash crash” could be near. Modern markets are more-or-less directed by trading algorithms, which opens up the door to sudden movements that may make little sense to the humans that can’t react in microseconds.
Bank of America strategists said that:
“Ingredients of flash crash rising … bond, FX, equity volatility all trending up, vicious deleveraging events, dislocation risk via abnormal spreads … triggers could be violent U.S. dollar move and/or shock macro data forcing abrupt GDP and earnings downgrades.”
The idea that cryptos and oil are correlated is a new one. The crypto market is still tiny. Over the last week it fell below the $200 billion USD level. That is smaller than many companies that are traded on major exchanges.
Strategists at Bank of America see this ongoing selling pressure as evidence of a bear market in the crypto space, and perhaps a broader bias away from risk. There couldn’t be a direct connection between a sell-off in the crypto space and established markets, and cryptos are far too small to affect the wider equity and commodity exchanges.
It is true that the crypto space and crude oil have been sold hard over the last month. Industrial metals like copper were hit hard earlier this year, but unlike cryptos and oil, copper prices have been steady over the last month.
A Question of Sentiment
Analysts at Bloomberg Intelligence (BI) also think that BTC prices are heading lower. According to a report published on November 16, BI thinks that BTC could fall as far as $1,500. That would represent a fall of at least another 60% from current levels, which are lower than many in the crypto community thought were possible.
The fall from last year’s highs has been brutal for investors who entered the market late. Current levels are already far below the highs that BTC hit last December, and another major leg down would create near-total losses for anyone who bought cryptos in the late months of 2017.
Travis Kling told Bloomberg he “didn’t sleep well” as a result of the Bitcoin Cash hard fork, and that, “There’s a small chance that, it’s difficult to estimate, that something really bad could happen related to Bitcoin Cash that could then impact the entire crypto market.”
BI analyst Mike McGlone seemed to be on the same page. He was quoted by Bloomberg as saying, that the recent fall, “was sparked by the pump for the Bitcoin Cash hard fork.” He went on to posit that the, “pump that began a few weeks ago, got the market a bit too offsides with speculative longs playing for the good-old days. But this is an enduring bear market.”
The End of BTC?
The should be little doubt left that the prices paid for BTC last year were almost wholly speculative in nature. Much of the hype surrounding the first crypto was clearly unjustified, and now people who made major investments in the sector are being hit hard as the price-floor appears to be giving way.
Read: Is Bitcoin in a Bubble?
It would be a mistake to underestimate the kind of psychological damage that a speculative bubble can create. The rapid price rise in crypto prices during 2017 demanded the world’s attention, and today people everywhere are watching the sector implode. In time, cryptos may rise from the ashes, but it could take much longer than anyone expects.