Bitcoin could repeat post-COVID style rise: Bitwise

• Bitcoin's recent crash is reminiscent of the market downturn on March 12 following the global emergency surrounding the COVID-19 pandemic.
• Bitcoin rose over 1,000% after the COVID crash; could repeat a similar move if the Fed begins cutting rates.
• Investors should pay close attention to Bitcoin ETF flows, health of crypto companies and signs of potential market bottom.

In a memo to investors on Monday, Bitwise Chief Investment Officer (CIO) Matt Hougan noted that the recent crypto market crash has provided an "opportunity" for Bitcoin (BTC) to replicate a similar move to its rise post-COVID lockdown.

Why Bitcoin's recent downturn provides "opportunity"

Bitcoin suffered its heaviest loss since the FTX crash within the past few days after declining about 20% between Friday and Monday morning. The move took the crypto market loss since the beginning of August to over half a trillion dollars.

A series of bearish events — lower than expected Non-farm Payroll (NFP) data, geopolitical tension in the Middle East, the Japanese hiking interest rate, and Kamala Harris's increased odds on Polymarkets — coupled with a low liquidity weekend exacerbated the impact on the market.

Total Crypto Market chart

The crash wasn't limited to crypto as the entire capital market nosedived, with the Japanese stock market suffering the most.

Hougan highlighted that the last time the capital market faced such a selloff was on March 12, following a global emergency on the COVID-19 impact. Bitcoin took a 37% hit, declining from $7,911 to $4,971. However, an external crisis doesn't change Bitcoin's fundamentals. The quantitative easing programs and rate cutting by banks saw Bitcoin rise quickly by more than 1,000% to $57,322 within a year, noted Hougan.

"At the same time, Covid supercharged the reasons for bitcoin's long-term rise. It showed that central banks would bail out the economy at the first sign of trouble. It demonstrated the limitations of centralized institutions. And it reminded us that the future is more online and digital," said Hougan.

Similarly, market participants, including Tesla and SpaceX CEO Elon Musk and Wharton's Jeremy Siegel, have begun anticipating a rate cut by the Federal Reserve in its September meeting. Polymarket shows that the odds of a 50 basis points rate cut have surpassed 55%. Hougan highlighted a few metrics to watch ahead of a potential market pullback:

• Watch if the crypto market has found its bottom as over 1 billion in liquidations could signify a potential bottom is on the horizon. According to Ki Young Ju, CryptoQuant's founder and CEO, Bitcoin is still above the average cost basis of mining companies. A decline below this level confirmed a bearish market in previous market downturns.
  
  BTC Cost-basis Comparison
• Pay attention to the overall health of crypto companies as the 2022 market crash reveals that sharp market declines "could take down firms with overleveraged balance sheets."
• Observe flows across crypto ETFs to see if ETF investors join the crowd by selling off their holdings or serve as a backstop for the market bleed. Bloomberg analyst James Seyffart noted that Bitcoin ETFs could see overall net inflows when issuers' flow data comes in later.

Meanwhile, Capula Management, the fourth largest fund in the EU, has reported investing $500 million in Bitcoin ETFs.