Will stocks retrace and push Bitcoin down before Christmas?

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Bitcoin and the crypto market are suffering from tightening conditions in the nascent sector and could suffer more losses in 2023. The poor performance of the US stock market could contribute to this possibility.

Market participants were expecting a rally from Santa before the holidays. There is less trading volume in the market, which often leads to spikes in volatility. This year, volatility could be on the bear side.

The price of BTC is moving sideways on the daily chart. Source: BTCUSDT TradingviewA drop in liquidity in global markets affects Bitcoin

Macro director of investment firm Fidelity, Jurrien Timmer, warned of current market conditions. In early November, the market experienced a short-lived rally on expectations of better conditions.

Representatives of the US Federal Reserve (Fed) have hinted at a potential change in their monetary policy. However, the bankruptcy of FTX, BlockFi, Voyager and other big companies hit Bitcoin and the crypto market.

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

At that time, Timmer had raised the possibility of a sustained turnaround in early 2023 during early earnings seasons. However, this thesis could suffer from a tightening of liquidity conditions, Timmer said via his Twitter account:

With liquidity conditions likely to tighten again, it seems plausible that the stock market will reverse some of its recent gains. The liquidity trendline (orange line below) is clearly down.

Market liquidity trends are on the downside and could push stocks and Bitcoin lower. Source: Jurrien Timmer on Twitter

The chart above shows that the S&P 500 index tracks market liquidity. If these indicators drop, US stocks could retest their October low at around 3,400. Will Bitcoin record a new yearly low in this scenario?

No Santa’s Gathering for BTC

Either way, a drop in liquidity is bound to be an obstacle to any Bitcoin rally. The upside potential of cryptocurrencies will remain capped.

In this scenario, there is potential for more woe if US stocks cannot hold the line around their October lows. Timmer added:

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

Are US stocks on their way to their October low? Source: Jurrien Timmer on Twitter

Even though Bitcoin cannot reclaim previously lost territory, the cryptocurrency has endured the worst of the bear market. Big companies went bankrupt and miners capitulated.

According to a recent report from Coinbase, the cryptocurrency maintains a strong long-term bullish scenario in the current macro landscape. Additionally, with 50% of BTC holders at a loss, the market could swing and surprise those expecting an imminent price drop.

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