WikiFX report: Bitcoin hit by economic headwinds, Luno report says

BITCOIN has come off its week low of US$39,000 (RM164,000) to trade at US$41,886, while ethereum is tracking closely, as the crypto market was impacted by rising interest rates and uncertainties in financial markets.

“The macroeconomic headwinds could be a natural catalyst for the currently idle crypto market,” Luno Malaysia country manager Aaron Tang (picture) stated in a weekly report by Luno Malaysia and Arcane Research.aid.

According to him, the correlation between the financial markets and the crypto market is nearing all-time highs.

“Bitcoins correlation to ethereum and the broader market has seen a steady rise over the last few months, approaching closer to the highs from the bear market of 2018 and 2019,” he noted.

On Monday, the bitcoin-ethereum correlation sat at 0.90, closing in on its all-time high of 0.95 from May 2020.

Current observations suggest an overall risk-averse sentiment in the crypto market and a low desire to rotate into altcoins.

Interestingly, the previous high correlation periods were caused by sudden price declines, whereas the recent trend has seen a steadier growth.

“This suggests the market has tended to move in the same direction throughout the last year, with altcoins being generally more volatile,” he said.

Tang said this high correlation illustrates diversifying into altcoins to reduce risk is a complicated process.

The report noted the VIX Index remains at elevated levels, illustrating the fear in the broad financial markets is high.

The elevated VIX is caused by several factors. The initial primary driver of the VIX increase can be ascribed to hawkish central banks as quantitative easing is coming to an end in the US, and several rate hikes are expected in the coming years, he stated.

Moreover, he said Russias invasion of Ukraine has further contributed to elevation of the VIX, adding more complexity to the market, leading commodities to soar while the implications of the Western sanctions further enlarge the uncertainty in the market.

“This caused the VIX to close at a 14-month high on March 7. The high fear in traditional markets is likely one of the key contributors to bitcoins poor performance so far this year,” Tang added.

As most on-chain metrics are red this week, the report stated there was a largest decline in the daily transaction fees in the crypto market.

“Over the past seven days, the daily transaction fees have plummeted 44% as miners managed to confirm the awaiting transactions that were cramming the mempool,” he said.

Concurrently, the fees share of miner revenue sits close to historical bottoms at only 1.1%.

The daily transaction volume is down 9% to US$5.4 billion corresponding to the low spot volume seen over the past seven days.

“However, the block production rate has grown by 4% over the past seven days and is now 6.11, a bit higher than the target of six blocks per hour,” he further said.

The Luno-Arcane report expected BTC to undergo a difficulty reduction of 1.5% last Thursday due to a low block production rate at the beginning of the current difficulty epoch.

“This difficulty reduction combined with the growing hashrate will likely further increase the block production rate, and we may see a much higher block production rate over the next two weeks than usual,” he said.