Bitcoin drops below $42,000, price prospects of $100,000 blur with quickening rate hikes Image Credit: Shutterstock

Bitcoin continued a weeks-long drop on Friday, falling below $42,000 to levels not seen since September.

The largest cryptocurrency declined as much as 4.9 per cent to $41,008, marking a tumble of about 40 per cent from its record near $69,000 reached November 10. Second-largest Ether dropped as much as 8.3 per cent to its lowest level since September 30.

The retreat comes after minutes from the Federal Reserve's December meeting, published Wednesday, flagged the chance of earlier- and faster-than-expected rate hikes as well as potential balance-sheet rundown.

"The Fed's intention to reduce the balance sheet in Q1 2022 is the primary cause of this sell-off," Fundstrat strategists said in a note Thursday. "Unfortunately, no immediate support looks likely ahead of September 2021 lows at $39,573, with breaks of that leading down to last summer's May-July bottom."

Bitcoin gained about 60 per cent last year, outperforming other asset classes amid a narrative that included institutional adoption, inflation protection and investment diversification. It's struggled in recent weeks, though, amid a volatile period for financial markets. Spiking inflation is leading central banks to tighten monetary policy, threatening to reduce the liquidity tailwind that lifted a wide range of assets.

Bitcoin gained about 60 per cent last year, outperforming other asset classes.

Bitcoin's gets pressured this week

Bitcoin's getting a drubbing this week as the US Federal Reserve readies a removal of stimulus, but traders looking to drive the price up are feeling as emboldened as ever.

The largest cryptocurrency by market value has shed about $80 billion since the start of the year amid a slump that's brought it to its lowest levels since its early-December flash-crash. But out have come predictions it can still reach the vaunted $100,000 level at some point this year.

It would have to more than double from current levels around $42,900 to arrive at that milestone. Analysts say it's not that it can't - it's posted plenty of triple-digit annual returns over the past decade - but that the road ahead might be more difficult for cryptocurrencies with a more hawkish Fed.

"Cryptocurrencies benefited from the Fed's massive liquidity injections since 2020," said Matt Maley, chief market strategist for Miller Tabak + Co. "It pushed these assets too far, too fast."

In conjunction with riskier assets like US equities, Bitcoin and other digital assets tumbled Wednesday after minutes from a recent Fed meeting showed officials were willing to withdraw stimulus sooner than many had previously expected.

Bitcoin's getting a drubbing this week as the US Federal Reserve readies a removal of stimulus.

Bitcoin still targeting $100,000 in 2022?

The release pointed to earlier and faster rate hikes by the central bank, which would increase the cost of capital throughout the economy. That has the potential to keep investors away from cryptocurrencies, many of which posted huge gains over the last two years amid amped-up stimulus.

But not everyone agrees that this environment is lousy for crypto. Bitcoin is a risk asset that's evolving into a digital-reserve asset in a world going that way - and that has positive implications for its price, according to Bloomberg Intelligence's Mike McGlone.

The coin is "heading toward $100,000," he wrote in a note. "Cryptos are tops among the risky and speculative. If risk assets decline, it helps the Fed's inflation fight. Becoming a global reserve asset, Bitcoin may be a primary beneficiary in that scenario."

Still, that hasn't stopped other industry participants such as Messari Inc. co-founder Ryan Selkis from poking fun at the basis of some of the sky-high predictions.

And earlier this week, Goldman Sachs analyst Zach Pandl wrote that Bitcoin could hit $100,000 if it continues to take market share from gold.

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Bitcoin still targeting $100,000 in 2022?

Bitcoin's road to price recovery gets rockier

Bitcoin has, as of late, sung the tune of the stock market, with the 100-day correlation coefficient of the coin and the S&P 500 now standing at 0.44. That's the highest such reading since the fourth quarter of 2020. A coefficient of 1 means the assets are moving in lockstep, while minus-1 would show they're moving in opposite directions.

"Now that this stimulus is going to become less plentiful more quickly than the markets had been thinking, it makes sense that these assets are falling in tandem," said Maley.

Lindsey Bell, chief markets and money strategist at Ally, says investors were already jittery entering the year thanks to uncertainty over the Fed's policy path.

"People are re-assessing the risk they want to take," she said by phone. It doesn't help that the dollar has also strengthened, which serves as a reminder to crypto investors that it is "still the currency of the world and it still remains very strong and it's not going anywhere, and so you don't need to hide your money under your mattress or in cryptocurrencies."

Greg Bassuk, chief executive of AXS Investments, an asset-manager that focuses on alternative investments, says Bitcoin should comprise a portion of an investor's portfolio.

"We are very bullish on Bitcoin and digital assets cutting through all the noise, day to day," he said in an interview. "Digital assets will be treated longer-term like commodities, equities and bonds, and real estate, and other more traditional asset classes in the years to come."