Is A Bottom Forming In The Crypto Market?

There is still a substantial amount of concern over inflation and market risks - but are we starting to see a bottom form? Let's take a look at factors that could begin to solidify the start of a recovery.

Boom and bust cycles are natural in any market, but seasoned crypto investors know that those cycles can occur much faster than in traditional markets.

Are we seeing signs though that digital assets have found the next launchpad base?

In this report, we are going to take a look at several signals that have been forming which at least could provide some insights on what the next steps are in a market rebound.

Bitcoin Controls Crypto

Bitcoin has rallied around 25% after dropping to roughly $17,500 back on June 18 from a series of cascading events like the collapse of Three Arrows Capital and Terra.

Bitcoin still primarily dictates the crypto market, and when Bitcoin is happy, the market generally is. There are several factors showing that Bitcoin itself is edging back up which could drag the market up with it. Mining profitability and a NUPL above zero are two of those micro variables in the overall Bitcoin macro that we took a look at.

Mining Profitability

The Puelle Multiple is a metric that looks at the supply side of Bitcoin's economy - Bitcoin miners and the revenue they generate. With that said, the Puelle Multiple reading as of late July has found itself in the green box. This is similar to levels observed during the March 2020 Covid crash in addition to 2018 and 2015 previous market bottoms.

Source: LookIntoBitcoin.com

A Net Unrealized Profit and Loss Above Zero

The Net Unrealized Profit and Loss indicator, or NUPL for short, has climbed back above zero around the $22,000 price mark. From a historical perspective, major Bitcoin rallies have occurred as you can see from the below chart. You'll notice the climb out starting to occur in the last few weeks.

Source: LookIntoBitcoin.com

Macro Economic Factors & Sentiment

From inflation to sentiment, macroeconomic factors will have to turn more favorable if we expect to see a bottom form. There are some interesting developments coming out that could assist.

Inflation (De)Escalation

Everyone at this point has noticed that inflation is clearly high, as prices for consumables, commodities, and services continue to climb for everyone.

The United States Senate recently passed the Inflation Reduction Act of 2022, which is a legislative package to fight inflation.

There are key provisions in the act set to boost clean energy investments, expand tax credits, prioritize affordability of health insurance and prescription drugs, and close previous tax loopholes.

How this new legislation actually plays out to reduce inflation will remain to be seen, however, it could coincide with a new macro push for the economy back in positive mood territory and drag the market sentiment up with it.

Upbeat Means Up Only?

We as humans are quick to forget. The same applies to investing to a degree, especially to the average investor and consumer. Let's take a look at how they are doing.

The July consumer sentiment reading is in parallel with June's historic low. While it is only one month out, it does show for the time being that consumer sentiment is not drastically getting any worse at the moment and seems to be leveling off without further major declines.

Source: SCA.ISR.UMich.edu - University of Michigan Surveys of Consumers

Investor sentiment could be leveling also. The AAII Sentiment Survey offers insight into the opinions of individual investors on where the market is heading in the next six months and has been doing so since 1987.

What you will see from this chart below is that investor sentiment is once again moving from bear to bull each week, albeit slowly.

Source: AAII.com - AAII Investor Sentiment Survey Results

What Could Go Wrong?

There you have it. Proven factors and narratives that the bottom for markets is likely in - or is it?

Elements that could derail a recovery still linger as geopolitical situations like those in Ukraine and Taiwan remain in headline news. And midterm elections in the United States are starting to warm up as an expanded narrative.

Further, other factors like the Fed hiking basis points more than anticipated could send market shocks and of course, being very early still in comparison to the average length of bear markets (currently about 60 days into the average 197-day length of past bear markets) means that further downside is not quite off the table yet.

But as you can see above, there are some factors and macro conditions that give us several early signs that the bottom just might be forming. If you want a more detailed analysis of the current state of the market please check out the Bitcoin and Crypto Deep Dive.