Bitcoin seems to have started the new year on the wrong foot. The crypto crackdown in China, the hawkish stance of the US Federal Reserve, the uncertainty surrounding the Omicron variant of COVID-19, and the resultant panic selling have all caused the oldest cryptocurrency to trudge through the mud this week.

At the time of this writing, Bitcoin was trading at $41,515.35 – nearly 40 percent down from its all-time high of $69,000, touched just a couple of months previously in November. Bitcoin entered 2022 at $47,000 and has since shed nearly 12 percent.

The price crash this week was triggered by a couple of factors. The US Federal Reserve’s December minutes raised the possibility of an interest rate increase as early as March. It also hinted at a potential reduction of the Fed's $9 trillion balance sheet.

Internet shutdowns in Kazakhstan also prompted the sell-off. The recent protests over rising fuel prices resulted in the internet cut-off causing distress to crypto miners. The current mining capacity in Kazakhstan accounts for 18 percent of the world’s Bitcoin mining hash rate (a measure of mining and processing power). The hash rate plunged 12 percent after miners went offline in Kazakhstan. A fall in the hash rate puts prices under pressure as it means the network is not as secure.

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After China's crackdown on bitcoin mining in June last year, about 20 percent of the Chinese mining capacity is estimated to have moved base to Kazakhstan, and 30 percent to the US, Shentu Qingchun, CEO of Shenzhen headquartered blockchain company BankLedger, told the Global Times on Thursday. Around 15 percent has reshuffled within China, Qingchun said.

However, industry veterans told Global Times that not all mining activity would be affected by the internet curbs. Some miners are already accessing satellite networks that are invulnerable to the disruptions faced by physical internet connections.

Bitcoin trading activity also shrank due to a drop in enthusiasm. On January 4, the trading volume translated to a mere $4.8 billion across exchanges. Data drawn from Kaiko and compiled by Messari showed the trading volume amounted to $13.1 billion last year. The current figure is significantly lower than the annual average of $9.2 billion.

Since Bitcoin's 20 percent nosedive last month, the trading volume has failed to cross $10 billion in a single day. During the notorious drop, crypto exposures worth $2.4 billion were liquidated by investors, per Coinglass.com data.

The open interest on Bitcoin futures that touched an all-time high of $17.4 billion in October 2021 has also now dropped over 39 percent to $10.6 billion, showed data from the Chicago Mercantile Exchange. Moreover, the first Bitcoin futures ETF debuted in the same month and was recorded as the most traded fund. After garnering $1 billion within two days and propelling the rally, the anticipation soon faded as the current Assets Under Management at the ProShares Bitcoin Strategy ETF still stand at $1.2 billion.

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Active addresses, indicative of trading activity performance, have also been on the decline. Messari’s compilation of CoinMetrics data showed the number of active addresses that once stood at 1.2 million last year has now dropped down to 9,71,000. This means more crypto is stored in cold wallets (offline devices) and is therefore out of circulation. When the amount of tradable Bitcoin drops, higher volatility can be anticipated. Akin to December’s flash crash, this could trigger a brief liquidity crunch in the crypto markets.

Aya Kantorovich, head of institutional coverage at FalconX, said, “I think you could see a very swift, very short flash crash that deleverages the open interest in the market very quickly, similar to what we saw in December.”

Bitcoin is presently hovering very close to the price levels it was at exactly one year ago ($40,797.61). It is witnessing consolidation in the range of $55,000 and $40,000 over the last month, and its support levels are now under pressure.

Experts are divided on the outlook. Some believe bitcoin will continue to be a store of value and will usurp the place of gold. Goldman Sachs believes Bitcoin has the potential to touch $1,00,000.

However, according to Sean Farrell, head of digital asset strategy at Fundstrat Global Advisors, cryptos could be in for more declines. The sector tends to trade like unprofitable, emerging-technology cloud stocks, which are also under pressure as rates increase, he told Barrons. “Whenever there’s a macro selloff in tech, crypto will be hit,” he said.

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While it is difficult to chart out the direction of the crypto, some indicators suggest the pressure might continue. The Fear and Greed Index that closely tracks the sentiment of investors towards Bitcoin, for example, has now ventured deep into the ‘extreme fear’ territory.

The index, which ranges between 0 (Extreme Fear) and 100 (Extreme Greed) currently stands at 15. This index is based on various metrics that gauge investor sentiment, including social media activity, crypto volatility, survey results, etc. The index had touched 16 last month at the onset of the Omicron variant of COVID.

Keeping all high volatility in mind, it is always advisable to monitor the developments and gain a thorough understanding of cryptocurrencies before investing.

(Edited by : Vijay Anand)