The crypto market “could get weird” with increased volatility over Memorial Day weekend—and investors would be wise to rein in risky investments, according to financial research firm Fundstrat.
Head of digital asset strategy Sean Farrell said in a note published Thursday that a combination of factors are creating the perfect storm for prices to drop over the weekend. Low liquidity in the crypto market, increasing leverage, and negative macroeconomic factors, including the Federal Reserve’s efforts to tighten monetary policy, could lead to large price swings.
The chill of crypto winter has pushed the top cryptocurrencies to record lows for the year. Bitcoin, the most popular cryptocurrency, was trading at $28,800 on Friday, down more than 38% year to date, and Ether was trading at $1,700, down about 52% since the start of 2021. Both Bitcoin and Ethereum are far off from their record highs in November (Bitcoin is down 58%, Ether 65%).
This weekend could add more pain to the already hurting crypto traders, according to Farrell. On Memorial Day weekends in 2020 and 2021, crypto trading volume declined 43% and 35% respectively, as many institutional traders took the weekend off. This low liquidity could give rise to price volatility again this year.
“The takeaway here is that liquidity is likely to be extremely low this weekend and during most holidays thereafter, which could result in outsized price swings,” Farrell wrote in the report.
Another factor contributing to possible whipsaw weekend prices is the increasing number of futures contracts for Bitcoin. Because these contracts enable investors to bet on the future price of Bitcoin, either up or down, a drastic move in either direction could cause major liquidations, Farrell wrote.
Low liquidity and high leverage, combined with the Fed’s plans to deliver more half-point interest rate hikes in the coming months, could lead to selloffs in crypto.
“Macro is driving everything in crypto right now,” Farrell wrote in the report. “The U.S. remains burdened by rising prices, rate hikes, and QT, which has led to compressions in valuations across all risk assets.”
To protect against the volatility, Farrell said traders could sell any risky lesser-known “altcoins” and purchase near-term put protection, which would temporarily protect against falling prices on any long crypto positions they hold.
Yet despite the increased volatility over the weekend, Farrell said Fundstrat expects crypto prices to increase in the second half of 2022.
