Bitcoin's relief rally stalls. Why a return to record highs by year-end now seems unlikely.
By Frances YueBitcoin is struggling after it fell below the key $100,000 level earlier this weekBitcoin is trading nearly 20% off of its record high reached on Oct. 6.Bitcoin's attempt at a relief rally stalled on Thursday, as U.S. stocks fell and some speculative corners of the market showed renewed weakness.The largest cryptocurrency by market capitalization (BTCUSD) fell 2% to around $101,693 on Thursday afternoon, according to FactSet data. It had recouped some losses on Wednesday after falling below the key $100,000 level on Tuesday for the first time since June, but the recovery quickly lost momentum.The crypto remained more than 19.5% below its record high of $126,273 reached on Oct. 6. Although no longer in record territory, it was still up 9% year to date.Alex Thorn, head of research at crypto investment firm Galaxy Digital, on Wednesday significantly revised down his year-end target for bitcoin to $120,000 from $185,000. "While bitcoin's structural investment case remains strong, cyclical dynamics have evolved," Thorn wrote in a Wednesday note.What's going on? Some investors might have been selling in a panic, worried that bitcoin may have already peaked - particularly if it follows past four-year cycles, a pattern that has persisted since the crypto was launched in 2009, according to Alexander Blume, founder and chief executive at crypto investment adviser Two Prime.Though bitcoin has a relatively short history, analysts have long divided its price movements into four recurring phases: breakout, hype, correction, and accumulation. Those who still subscribe to the four-year cycle argue that the cryptocurrency should have already seen, or will soon see, a sharp pullback at this time of the cycle following the "hype" phase and then hit the correction phase.Martin Leinweber, director of digital-asset research and strategy at MarketVector Indexes, has been in that camp, telling MarketWatch in August he expected bitcoin to peak around October or November of this year.Read: Bitcoin's bull run could defy history and last until 2027, Bernstein analysts say. Why that may be too optimistic.Data also support why some investors have been getting uneasy. In previous cycles, roughly 1,065 days, or about two years and eleven months, typically elapsed between bitcoin's cycle lows and peaks, according to Vetle Lunde, head of research at crypto analytics firm K33. In the current cycle, 1,080 days have already passed since bitcoin bottomed at $15,591 on Nov. 21, 2022, meaning the timeline for a potential peak has already been reached or slightly exceeded, if the pattern holds true.While Blume at Two Prime doesn't think the pattern still applies, given the change in market structure after exchange-traded funds investing directly in bitcoin were introduced in January last year, it may have dampened sentiment among some investors, he said.Read: History says bitcoin could peak soon, but here's the case for it to keep climbingMeanwhile, the crypto market has been scrambling to recover from its biggest single-day liquidation in history on Oct. 10, which wiped out at least $20 billion in leverage positions, according to Blume. As a result, there has been shallower liquidity, or fewer willing buyers and sellers than before the selloff in the crypto market, noted Blume. It means that even modest sell orders can push the price down sharply, Blume added.Market participation also has been shrinking since the event, as evidenced by futures data. The open interest of crypto futures peaked at $220 billion on Oct. 6 and tumbled 35% to $142 billion on Oct. 11, with most of the decline happening in the 24 hours around Oct. 10, according to Coinglass and Galaxy Research data, as shown in the chart below. The open interest stood at around $141 billion on Thursday, according to Coinglass data."This level of damage ripples out and resulted in significantly less liquidity across the entire crypto market, which has only partially rebounded," Galaxy's Thorn noted.-Frances YueThis content was created by MarketWatch, which is operated by Dow Jones & Co. MarketWatch is published independently from Dow Jones Newswires and The Wall Street Journal.