For bitcoin to bottom here’s what the market wants to see — and it could mean a further 30% drop

An improvement in macroeconomic factors, a particular trading pattern and a further shakeout of companies and projects could be the key ingredients required for bitcoin and the broader crypto market to bottom, industry players told CNBC.

Bitcoin has plummeted more than 70% from its record high in November with around $2 trillion wiped off the value of the entire cryptocurrency market.

For the last few weeks, bitcoin has been trading within a tight range between $19,000 and $22,000 with no major catalyst to the upside and traders trying to figure out where the bottom is.

Here are some of the factors that could help the crypto market find a floor.

Bitcoin has been hurt by the macroeconomic situation of soaring inflation that has forced the U.S. Federal Reserve and other central banks into hiking interest rates which has hurt risk assets such as stocks.

Cryptocurrencies have seen some correlation with U.S. stock markets and have fallen in tandem with stocks.

There are also fears of a recession but an improving macroeconomic picture could help the crypto market find the bottom.

“I think if inflation is under control, the economy is under control, there is no really severe recession” then the market will stabilize, CK Zheng, co-founder of a cryptocurrency-focused hedge fund ZX Squared, told CNBC in an interview.

U.S. inflation data for June came in hotter-than-expected on Wednesday, deepening fears that the Fed will get more aggressive in its fight to tame rising prices. However, there are some signs it could be peaking.

If there are clues that the economy and inflation are “getting under control,” that could help the crypto market find a bottom, according to Vijay Ayyar, vice president of corporate development and international at crypto exchange Luno.

“If we see signs of this this month or even over the next few months, it would give more confidence to the market that a bottom is in across all risk assets including equities and crypto,” Ayyar said.

Meanwhile, a “softer” Fed and the peaking of U.S. dollar strength, could help the market find a bottom, according to James Butterfill, head of research at CoinShares. Butterfill said a weaker economic outlook could push the Fed to slow down its tightening push.

“A turn around in Fed policy and the consequent peaking of the DXY [dollar index] would also help define a true floor, we believe this is likely to happen at the Jackson Hole meeting at the end of the summer,” Butterfill said, referring to an annual meeting of central bankers.

One of the key features of the latest boom and bust cycle in crypto has been the amount of leverage in the system and the contagion that has caused.

Firstly, there have been lending platforms that have promised retail investors high yields for depositing their crypto. One of those companies is Celsius, which last month was forced to pause withdrawals as it faces a liquidity issue. That’s because Celsius lends out this crypto from its depositors to others willing to pay a high yield and then pockets the profit. That profit is then supposed to pay for the yield Celsius offers to its retail customers. But as prices crashed, that business model was put to the test.

Another company that highlights the issue with excess leverage is crypto-focused hedge fund Three Arrows Capital or 3AC, which was known for its bullish bets on the industry. 3AC has an extensive list of counterparties that it is connected to and has borrowed money from.

One of those is Voyager Digital, which filed for Chapter 11 bankruptcy protection after 3AC defaulted on roughly $670 million from the company.

A number of other companies including BlockFi and Genesis also reportedly had exposure to 3AC.

Three Arrows Capital has itself plunged into liquidation.

“The deleveraging process we don’t know if it is complete or not. I think it is still in the process of washing out the weak players,” Zheng said, adding that when there are no more surprises with companies collapsing, that could help the market find a bottom.

CoinShares’s Butterfill said so-called miners, which use specialized high-power computers to validate transactions on crypto networks, could be the next victims of the washout. With crypto prices under pressure, there will be many mining operations that are unprofitable. Butterfill notes there have been some mining start-ups that raised funding last and ordered equipment that has either not been delivered or turned on.

“A collapse in one of these mining startups or the associate lender is likely and would help define a trough to the crypto market,” Butterfill told CNBC.

Luno’s Ayyar explained some of the trading patterns that might help define a bottom for the market. He said there could be a “capitulation candle,” where the price of bitcoin drops even further and “wipes out the last remaining weak hands,” before “moving back up strongly.”

If this happens, that indicates “liquidity has been captured at lower levels and the market is now ready to go back up,” Ayyar said.

He noted that this happened in March 2020 when bitcoin fell more than 30% in a day before steadily climbing over the subsequent weeks.

A second pattern could be an “accumulation phase” where bitcoin bottoms and spends a few months trading within a range before moving higher.

In both cases, that could see bitcoin drop further to between $13,000 to $14,000, which would be a roughly 30% drop from the cryptocurrency’s price on Wednesday.

Zheng of ZX Squared said that bitcoin at between $13,000 and $15,000 is a possibility. But if institutional investors step in then that could help to support prices.