Bitcoin and the crypto market suffer from tightening conditions in the nascent sector and could see more losses coming into 2023. The poor performance in the U.S. stock market might contribute to this possibility. 

Market participants were expecting a Santa Rally ahead of the holidays. There is less trading volume in the market which often leads to spikes in volatility. This year, volatility might side with the bears. 

A Decline In Liquidity Across Global Markets Impacts Bitcoin

Director for Macro for investment firm Fidelity, Jurrien Timmer, has been warning about the current market conditions. In early November, the market enjoyed a short-lived rally following expectations of better conditions. 

U.S. Federal Reserve (Fed) representatives hinted at a potential shift in their monetary policy. However, the bankruptcy of FTX, BlockFi, Voyager, and other major companies hit Bitcoin and the crypto market. 

These events pushed the price of Bitcoin into a new yearly low while equities trended in the opposite direction. Both asset classes have shown a high correlation in 2022, especially between BTC, the S&P 500, and the Nasdaq 100. This stock index tracks the performance of big tech companies. 

At that time, Timmer spoke about the possibility of a sustainable relief rally in early 2023 during the first earnings seasons. Now, this thesis could suffer from a tightening in liquidity conditions, Timmer said via his Twitter account:

As liquidity conditions presumably tighten back up again, it seems plausible that the stock market will retrace some of its recent gains. The trendline for liquidity (orange line below) is clearly down.

The above chart shows that the S&P 500 index follows market liquidity. If these metrics trends lower, U.S. equities could re-test their October low at about 3,400. Will Bitcoin record a fresh yearly low in this scenario? 

No Santa Rally For BTC

In any case, a decline in liquidity is bound to operate as an obstacle for any Bitcoin rally. The cryptocurrency’s upside potential will remain capped. 

In this scenario, there is potential for more doom if U.S. equities can’t hold the line around their October lows. Timmer added:

Will October lows hold? Stocks are in retreat following a failed test of the 200-day moving average, as well as the downtrend line from the January highs. It seemed too obvious that the market would fail right at this line in the sand, but sometimes the obvious happens.

Even if Bitcoin can’t reclaim previously lost territory, the cryptocurrency has endured the worst of the bear market. Major companies have gone bankrupt, and miners have capitulated.

According to a recent report from Coinbase, the cryptocurrency maintains a strong long-term bullish case in the current macroeconomic landscape. In addition, with 50% of BTC holders at a loss, the market might flip and surprise those waiting for imminent downside price action.