Bitcoin Continues Swoon, Crypto Fear & Greed Index Reads 'Extreme Fear'

Bitcoin continued its five-day retreat Wednesday, losing about 34% in May and tumbling below $40,000 in what could be the worst month since November 2018.

A drop of 20% or more is considered a bear market.

The Crypto Fear & Greed Index, a measure of investor sentiment, registered 23 and reflected the market's "extreme fear."

Analysts said retail investors appear to be selling into the downdraft in response to Elon Musk's decision not to accept Bitcoin as payment for Tesla's electric vehicles.

In a series of tweets, Musk appeared to say Tesla had unloaded all or some of its $1.5 billion investment in the cryptocurrency. He later clarified that he hadn't sold any Bitcoin.

"In our view, this was sparked by Musk's flip-flopping on Bitcoin having a profound effect on new or less confident investors who take his view very seriously due to his success as a businessman," Jason Deane, Bitcoin analyst at Quantum Economics, in London told Newsweek. "Markets are often driven more by sentiment than fundamentals," he added.

BKCoin Capital logo
bkcoincapital.com

Kevin Kang, co-founder of BKCoin Capital, a Miami-based asset management firm, offered a similar view.

"There's a lot of fear in the market and we're seeing a lot of retail investor panic selling," Kang told Newsweek. "We have wiped out the entire rally since Tesla's $1.5 billion Bitcoin purchase announcement in February."

Carlos Betancourt, BKCoin Capital's co-founder, said there could be more turbulence ahead.

Carlos Betancourt BKCoin Capital LP
Carlos Betancourt, Founding principal, BKCoin Capital LP, Miami, Florida sees more turbulence ahead for Bitcoin. twitter.com

"Many continue to liquidate their long positions," he said. "Approximately $1 billion in long positions were liquidated overnight. Most of these long positions were leveraged. As they get liquidated, leveraged traders become frightened. We could see negative funding rates soon— shorts pay longs—which could potentially cause a squeeze."

But the downbeat market has created an opportunity for major companies and gutsy investors to buy the dip and increase their holdings at a good price.

Last week, Michael Saylor, CEO of Nasdaq-listed Microstrategy, said the company invested another $15 million in Bitcoin. His company is often credited with launching the bull market that sent Bitcoin to a record high.

He's not alone. At least 25 major companies have doubled their initial investment in Bitcoin.

"Bitcoin continues to be removed from exchanges and this is generally interpreted as a move to place newly purchased Bitcoin in secure long-term storage, a move that is typical or larger or institutional buyers," Deane said. "There is no evidence that any large holders have divested any significant positions at this time."

The analysts said Bitcoin's fundamentals remain strong and expect the market to rebound, but there will be no immediate miracles.

"In the last six months, dips have been bought quickly by investors," Kang said. "However, there's been too much selling to foresee any quick rebound this time. However, the narrative continues to favor Bitcoin in the long term with global debt to Gross Domestic Product ratio soaring to the highest level since World War II. Stanley Druckenmiller is forecasting hyperinflation as well as the U.S. potentially losing its global reserve currency status in the next 15 years and global banks continuing to adopt blockchain as well as Bitcoin as a new asset class."

Druckenmiller, a billionaire investor and CEO of Pittsburgh-based Duquesne Family Office, said Federal Reserve policies intended to support the economy during the COVID-19 pandemic threaten the long-term strength of the dollar.

"I can't find any period in history where monetary and fiscal policy were this out of step with the economic circumstances, not one," he told CNBC.

Others have expressed concern that massive federal spending could end the dollar's status as the world's reserve currency.

Long-term investors bet on Bitcoin's future price appreciation and some see the crypto as an inflation hedge.

Jason Deane
Jason Deane, analyst, Quantum Economics, London

Despite the sharp downturn, Quantum's Deane said the Bitcoin market will recover.

"The current cycle will probably run its course given the current sentiment, ultimately exhausting the bears," he said. "Long-term investors will look to acquire, short-term traders will try and ride the waves for profits, but there are solid reasons to believe that Bitcoin's upward trend will ultimately resume simply based on supply dynamics and continued increasing rates of adoption and development."

BKCoin Capital's Betancourt offered a Darwinian view of the market.

"We expect a turnaround," he said. "Folks that didn't get shaken out will once again begin to use leverage to go long."

The number of Bitcoin is capped at 21 million worldwide. If demand remains strong, the price should rise. In a bull market, new coins earned through mining can't keep pace with demand.

But manic price swings appear to be part of the market at this stage of Bitcoin's development.

"You can't have performance without volatility in a 'gold rush' growth phase which is where we are currently in terms of the journey to asset maturity," Deane said. "Cool heads and long-term vision are most likely to prevail."

In mid-day trading Wednesday, Bitcoin changed hands at $37,143.13, down 14.43% in the last 24 hours but still up 25.82% for the year. The all-time high is $64,829.14. The market cap is $694.19 billion, CoinDesk reported.

Market Pulse

Despite beating Wall Street's first quarter earnings estimates, Walmart's CEO expects the second half of 2021 "will likely have more uncertainty than a normal year."

Douglas McMillon CEO Walmart
Walmart CEO Douglas McMillon corporate.walmart.com

That may be a red flag and could mean trouble ahead if the uncertainty spreads throughout the economy.

But for now, things look good—especially for the retailer.

Walmart said first-quarter earnings beat Wall Street's estimates thanks to strong grocery sales and continued e-commerce growth.

The world's largest brick-and-mortar retailer said shoppers swarmed to its stores to spend stimulus checks as COVID-19 vaccinations increased and the number of new infections continued to decline.

Comparable sales, or those at stores and online sites operating for at least 12 months, increased 6% for the quarter ending April 30 compared with the same period a year ago.

U.S. e-commerce sales increased 37%, but it was the slowest growth for the company since the economy shutdown in early 2020 as part of the effort to contain the spread of the coronavirus.

Nevertheless, Walmart now looks for earnings to increase in high single digits this year. Previously, the company forecast a slight drop.

"Our results for the first quarter were strong. We're pleased with our sales momentum and adjusted (earnings per share) growth of 43% versus last year," CEO C. Douglas McMillon told Wall Street analysts on an earnings call. "We're pleased with our sales momentum and adjusted EPS growth of 43% versus last year... In the U.S., economic stimulus is clearly having an impact, but we also see encouraging signs that our customers want to get out and shop."

But he warned that the second half of the year "will likely have more uncertainty than a normal year."

This may be why:

Job growth has slowed, unemployment has ticked up and retail prices increased at the sharpest rate in about 10 years.

The Consumer Price Index (CPI), a measure of a basket of goods plus energy and housing costs, jumped 4.2% from a year ago.

Analysts surveyed by Dow Jones expected a 3.6% increase. The monthly increase was 0.8% compared with the anticipated 0.2%.

But it's only one month's data and no one is panicking just yet.

The U.S. Federal Reserve, the nation's central bank, said it expects inflation will rise above the 2% target this year and next, but then will decline.

Kinks in the supply chain have driven up prices. Automakers haven't gotten needed computer chips, slowing production, reducing dealer inventory and driving up prices for the limited supply of new cars at the showroom.

Gasoline prices have increased about 30% in the last year, including a 14% jump since February.

Many employers offer higher wages to attract and retain workers as the economy restarts, but some at the bottom end of the pay scale can get more by staying home due to an extra $300 in federal unemployment benefits included as part of President Joe Biden's $1.9 trillion stimulus package. At least 21 states have decided to end the additional payment to encourage people to return to work.

The University of Michigan said consumer confidence fell this month compared with April as higher-than-expected inflation hit the economy.

Inflation rose at the fastest pace since September 2008 and cut real income expectations to the lowest level in five years.

That could spark an inflationary spiral: Workers expect inflation to rise, demand – and receive – higher pay, which drives up production costs, boosts retail prices and leads to another round of wage demands and higher prices.

Consumer spending represents about two-thirds of the U.S. economy.

Employers added 266,000 jobs in April. The unemployment rate rose to 6.1%. Analysts surveyed by Dow Jones looked for 1 million new jobs and an unemployment rate of 5.8%.

The unemployment rate was 3.5% in February 2020, the month before the pandemic hit.

Some companies may be able to increase productivity with fewer workers. If so, that could lead to a higher continuing unemployment rate.

Few are fretting about stagflation, the pernicious mix of high unemployment and inflation that plagued the economy in the 1970s and was a factor in making Jimmy Carter a one-term president.

But what if higher inflation isn't "transitory" as the Fed Chairman Jerome Powell believes, what if unemployment remains higher than expected and what if the trillions of dollars Uncle Sam has injected into the economy have the unintended effect of pushing prices higher?

Who knows, it might drive more shoppers to Walmart.