(Kitco News) The crypto space saw another sudden crash over the weekend as Bitcoin and Ethereum posted significant losses, eroding future price outlooks.
Bitcoin was below $28,000 on Sunday, down 6% during the last week. And Ethereum witnessed even bigger losses, touching a low of $1,433 — the lowest level in about a year and a half — and now trading down 15.6% on the week.
The key macro driver hurting the crypto space, which has largely been trading like a risk-on asset, was another hot inflation release. In May, inflation ran at an annual pace of 8.6% in the U.S. — a fresh 40-year high — versus the expected 8.3%.
In response to the inflation data, Mohamed El-Erian, chief economic advisor at Allianz, told CNBC that the Federal Reserve would have to get even more aggressive with rate hikes.
“He needs to regain control of the inflation narrative … now he’s losing total control,” El-Erian said, referring to the Fed Chair Jerome Powell. “He’s got to move because, if he doesn’t, he’s going to be chasing the market, and he’s not going to get there.”
Inflation has not peaked, El-Erian added. “We need something to happen to stop this inflationary process broadening throughout the economy.”
Why were Ethereum’s losses so significant?
And even though the macro-environment also weighed on Ethereum, the world’s second-largest cryptocurrency sold off more due to the upcoming Merge problem. The Merge refers to Ethereum’s transition to the more energy-efficient proof-of-stake protocol from the proof-of-work protocol, which Bitcoin also uses.
The delay with the Merge comes from the so-called difficulty bomb, a code within Ethereum meant to increase the computing difficulty for mining. It is designed to kick miners off the blockchain gradually. Once implemented and completed, the Merge for the proof-of-stake system could proceed shortly after.
With the proof-of-stake protocol, miners are no longer needed. Instead, people would stake their coins to check new transactions and add them to the blockchain. This would potentially consume 99% less energy than proof-of-work.
What impacted the price of Ethereum was developers delaying the timing of the difficulty bomb to resolve some bugs that came up during the Merge on Ropsten, one of Ethereum’s oldest test networks. Earlier, Ethereum’s co-founder Vitalik Buterin signaled that the Merge could happen in August if there were no significant issues. But this difficulty bomb delay could postpone that August date.
Following the latest selloff, which once again pushed prices below the $30,000 level, analysts are turning more bearish on Bitcoin.
Fairlead Strategies founder and managing partner Katie Stockton told Kitco News that Bitcoin’s short-term outlook is “deteriorating.”
“Bitcoin has seen its daily stochastics turn lower after a muted reaction to short-term signs of downside exhaustion, which we view as a bearish short-term development. The weekly stochastics have failed to turn higher from oversold levels, which also suggests a relief rally is unlikely, for now,” Stockton said.
The poor performance in the equity market also weighs on Bitcoin. The level to watch is whether $27,000 can hold. If not, there is a risk of a drop towards $19,000.
“For bitcoin, risk now appears heightened of a retest of long-term Fibonacci support (~$27.2K), noting intermediate- and long-term momentum gauges point to more downside. A breakdown (consecutive weekly closes below $27.2K) would increase risk to secondary support in the $18.3K-$19.5K range,” Stockton said.
Last week, U.S. Treasury Secretary Janet Yellen added heat to the debate on whether Bitcoin should be part of anyone’s 401(k) retirement plan.
“It’s not something that I would recommend to most people who are saving for their retirement … To me, it’s a very risky investment,” Yellen said at an event organized by the New York Times last week.
Yellen also didn’t rule out the idea that Congress could even potentially start to regulate what assets can be part of a retirement plan.
This comes after Fidelity announced that it would allow Bitcoin as an option in their retirement plans. “I’m not saying I recommend it, but that to my mind would be a reasonable thing,” she said.
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