Bitcoin breakout is making proponents wary of another fakeout

Bitcoin settled in near the top of the US$30,000 to US$50,000 range, wiping out losses for the year. PHOTO: REUTERS

NEW YORK (BLOOMBERG) - Bitcoin broke out of its narrowest trading range in months in the waning days of March following a rough start to the year. Now, as the digital token approaches another key trend line, investors are wondering whether they are being set up for disappointment again.

With the largest cryptocurrency settling in near the top of the US$30,000 (S$40,702) to US$50,000 range he had predicted just weeks ago, Mr Michael Novogratz said he was "more constructive" on crypto while also not providing a new forecast. The billionaire investor had warned earlier not to expect big gains in 2022 with the Federal Reserve raising interest rates.

Bitcoin traded within 10 per cent of its 50-day average price for 51 days through March 26, the longest stretch of tight trading since July 2020, according to data compiled by Bloomberg. The breakout last weekend wiped out losses for the year but left Bitcoin still trading about 30 per cent below its record high set in November.

Now, it is approaching what may be an even more important threshold - its average price over 200 days. The coin had, as of Friday, traded below that threshold for 95 days, the longest streak of bearish pattern since April 2019. After coming within 1 per cent of its 200-day average on March 28, it now sits about 4 per cent away.

Digital assets, like many other riskier areas of the market, have been beset by a Fed working on tamping down inflation, as well as turmoil sparked by Russia's invasion of Ukraine. That has left Bitcoin bobbing up and down all year.

"There seems to be a range where Bitcoin starts to look like a pong game," said Mr Chris Kline, chief operating officer and co-founder of Bitcoin IRA. "There are headwinds across markets, not just in crypto. We've got inflation that is not transitory. There is uncertainty around rate hikes and conversations about a recession. There is a lot of waiting on the sidelines."

Market watchers see an explanation that has become popular this year - that Bitcoin is moving in the same way that stocks are. Over the same period as the coin's mini-surge in March, the S&P 500 gained 6 per cent and rounded off its best month of the year. The 90-day correlation coefficient of the coin and the stocks gauge now stands at 0.55, among the highest such readings since Bloomberg started tracking the data. (A coefficient of 1 means the assets are moving in lockstep, while minus 1 would show they are moving in opposite directions.)

UBS strategists including Mr James Malcolm and Mr Alexey Ostapchuk, say it is difficult to find evidence of a broader pickup in interest around cryptocurrencies. They cite slack online search interest, and subdued futures volumes and funding rates.

"If you just looked at these charts, you'd say, 'Go away, nothing's happening. Wake me up some other time,'" Mr Malcolm, head of foreign exchange and crypto research at the bank. He described Bitcoin's trading as "still bang in the middle of the range" and says he is sticking to his view the year will be a difficult one for cryptos.

Mr Malcolm says we are in a moment when both bulls and bears can come up with a convincing narrative. "If you want to tell a negative story, we are still down 35 per cent from November. If you want to tell a positive story, we re up 45 per cent" from the January lows.

Analysts at Citibank looked at four models, including stock-to-flow, to try to value the coin, coming up with ranges between US$20,000 and US$152,000.

To be sure, crypto products are still seeing inflows, with Bloomberg data compiled by UBS showing digital-asset ETFs attracted roughly US$550 million over the past two weeks. That does not include a new Solana product from CoinShares that has around US$100 million under management, UBS said.

That leaves a lot of portfolio managers grappling with how they want to recommend crypto to their clients.

"From an investment standpoint, it should be viewed as something that is highly speculative and should not be a meaningful part of a client portfolio because of its very high levels of volatility and just uncertain utility over time," said Mr Jeremy Zirin, senior portfolio manager and head of private client US equities, UBS Asset Management. "I see it more as a speculative component of one's portfolio."

Ms Liz Young, head of investment strategy at SoFi, says that because crypto is a new asset class, it is likely to see a lot of volatility. The current moment is setting the historical precedent and investors and strategists are trying to figure out how Bitcoin behaves during different points of an economic cycle and what it is correlated with. But because it is still new to investors, it is difficult to label it as an inflation hedge or a store of value. "It is kind of done all of those things at different points in time."

"I tell people that are interested in crypto that it is okay to have a small portion of your portfolio in it," she said. "I don't think that it is an asset class that is going away. I do think that it is here and it is here to stay, but it will go through a lot of different price discovery phases in these next few years."

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