The first trading week of 2022 was nasty for both the stock market and cryptocurrency market, with Wednesday’s Fed Minutes being chalked up as the reason for a sell-off in both markets. However, there is evidence that points to another highly-relevant reason for crypto’s flash crash.
Kazakhstan made headlines Wednesday morning in regards to political turmoil and civil unrest as the result of a sharp rise in fuel prices to start the year, which saw Kazakhstan's government being forced to resign due to violent protests. In the process of Kazakhstan’s complete government shutdown, the state-run internet provider Kazakhtelecom shut down its services and effectively turned off the internet for the entire country.
The situation in Kazakhstan is unfortunate, but what could this have to do with the cryptocurrency market?
Well, if you remember China’s nationwide ban of domestic cryptocurrency mining activities, that situation forced Chinese miners to sell/export their hardware and equipment outside of China. Mining operations moved to countries like Kazakhstan after being expelled from China because of the belief that low energy costs would make cryptocurrency mining more efficient and cheaper.
Kazakhstan’s government invited the migration of crypto miners with open arms, hoping that the industry would unlock a massive revenue stream for the country.
In fact, the chart below indicates that Kazakhstan saw the largest increase in its national contribution to Bitcoin’s global hash rate (the computing power used by the network) since China began its sweeping crypto bans.
Due to Kazakhstan’s estimated ownership of roughly 13% of the global Bitcoin mining industry and the news of the country’s internet going offline, Fear, Uncertainty, and Doubt (FUD) were unintentionally stoked in the global crypto markets.
In reality, Bitcoin’s hash rate (the computing power used by the network) didn’t crash like many were expecting it to and seems to still be relatively unaffected by the whole Kazakhstan ordeal.
Wednesday’s FOMC minutes clearly put a ton of selling pressure on the stock market, which in turn saw the same happen in crypto. With the addition of Kazakhstan FUD, we saw crypto dive even deeper on Thursday.
Of course, a bit of a sell-off after reaching a new all-time high of $69,000 may not be too surprising, but nobody was expecting Bitcoin to drop -42% in 2 months.
Fortunately, our market benchmark has found long-term support and looks to be done selling for the time being.
For the time being it appears that Bitcoin is done selling off (let's hope), and is holding the 4-month support level set between $40,500-$41,000.
If this is in fact the bottom for the crypto market’s 2-month selloff, we would be looking for a major reversal and an explosive move up back towards $53,000 which would reestablish the late-2021 trading range.
This would require a roughly +30% move for Bitcoin, which isn’t all that hard to fathom after we saw a +37.5% comeback in the coin after the May 2021 crash… which only took 8 days.
However, even in the famously volatile crypto realm, a +30% move doesn't just happen out of nowhere. An institutional short-squeeze would be one possible thing that could spur this move.
IntoTheBlock Research shows that the ratio of Bitcoin’s Open Interest relative to its Market Cap has reached its highest level in over a year.
The last time this happened marked the bottom of the 2021 crash, and will hopefully mark the bottom of this crash at $40k.
For now, our CryptoPulse Quant has gone back into cash as a safety play to avoid further downside risk. We’re looking for Bitcoin to regain support above $44,500 for the time being, and monitoring newer Defi’s like Avalanche (AVAX) and Solana (SOL) to reestablish their recent bullish trends and possibly propel them to new highs if the market is ready to turn around here.
If the major stock indices fail to recover on Monday, expect Bitcoin to flirt with a deeper correction to $31,000.
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