Bitcoin prices continued their struggle in Q3 as market uncertainty and low volatility played key roles. Bitcoin and Crypto markets as a whole remained on a downward path for the vast majority of the quarter with the occasional spike providing bulls with some optimism. Global Markets have however been suffering from a similar fate in terms follow through, as we have seen constant shifts in both sentiment, economic conditions and forecasts. Looking back at the Q3 forecast and a lot of the same factors remain in play as we have not seen clarity in many of the aspects that were discussed. Let’s dig a little deeper into some of the key factors that could affect the world’s largest cryptocurrency in Q4.

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Regulatory Challenges and Ripple (XRP) Lawsuit

Heading into 2023 and a lot of crypto enthusiasts and companies in the space had hoped for clarity around regulations, particularly in the US. While we have had progress on the matter it continues to advance at a snail’s pace and appears that pre-conceived biases continue to hinder the implementation of efficient regulations.

The SEC and the US as a whole have come under some criticism and scrutiny around the announcements as some believe it may be a witch hunt. Other notable market participants and Bitcoin enthusiasts such as Cathy Wood have voiced their concerns that the US may get left behind in the race around crypto regulation, a sentiment echoed by Coinbase CEO Brian Armstrong. This has continued throughout the third quarter and has led to some firms offering fewer services in the US. The effect can also be felt in the dwindling number of active trading accounts for Crypto assets as fear continues to engulf market participants. The lower activity from day traders has also added to the current low liquidity and low volume environment markets and particularly crypto markets have been experiencing.

The ongoing battle between Ripple and the SEC does not appear to be going away anytime soon. Crypto markets received a slight boost in July following a landmark ruling by District Judge Analisa Torres who determined the token was not necessarily a security.

*The chart below shows the initial spike in the ripple price following the court ruling with the gains having been wiped out since.

XRP (Ripple) Weekly Chart

Source: TradingView, Prepared by Zain Vawda

The SEC of course filed a motion challenging the ruling stating “programmatic offers and sales of XRP over crypto asset trading platforms could not lead investors to reasonably expect profits from the efforts of others”. The SEC has also requested permission from Judge Torres to file an interlocutory appeal which is yet to be decided. The US is facing the prospect of being left behind in the Crypto race as companies have threatened to leave the US as the SEC continues its crackdown on the industry.

BlackRock and Other ETF Applications to be Decided in October

As we had briefly touched on earlier, regulation was seen by some as a real saving grace for the Crypto industry following some massive scandals in 2022. However, confidence in US Regulators in particular has started to wane as many market participants view their take on the Crypto industry as a biased one. Instead of being a leader in the space the US risks getting left behind as several other Major Cities and Countries globally begin to amend and adjust regulation. The reason the US Regulators have faced a barrage of criticism stems from their ongoing negative rhetoric around crypto as well as countless rejections of Bitcoin ETF applications.

During the last quarter we discussed the Bitcoin ETF application by Blackrock which has since been followed up by WisdomTree, Invesco Galaxy, Wise Origins, VanEck, Bitwise and Valkyrie Digital Assets. I suppose looking at the success of BlackRock’s past ETF success with the SEC, many crypto followers were hoping that the world’s largest Asset Manager will be successful. The SEC has however filed paperwork stating that all decisions on all spot Bitcoin ETF application will be made in October. The immediate reaction to the SEC filing saw Bitcoin falls around 4.1% in a 24-hour period. Given this there is a growing expectation of what successful applications may look like for the price of Bitcoin in Q4.

US Courts themselves have made some interesting observations of late as the SEC came under increasing scrutiny around their attitude to Digital Assets and Bitcoin in particular. A DC Court of Appeal ruled that some of the SEC arguments in rejecting Bitcoin ETF applications seemed “arbitrary and capricious” after Grayscale argued that the SEC did not have a firm basis to reject its bid to convert the Grayscale Bitcoin Trust into an ETF.

Crypto enthusiasts are keeping a watchful eye on these developments as a potential approval for BlackRock and the other applicants could see an influx in both institutional and retail funds into Bitcoin and could help provide a legitimate avenue for exposure to Bitcoin. Given the low liquidity environment we have seen of late this could be a game changer for Bitcoin and the Crypto market in the US as well.

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Federal Reserve and Low Liquidity Environment

Bitcoin has historically outperformed during periods of extreme volatility and liquidity, something which has been lacking for the majority of the year. Now looking at volatility this year and the VIX which recently closed below 13 to end at the lowest level since January 2020. The VIX has also closed below the 200-day MA for 123 straight trading days, the most since 2009.

Now interesting I have been looking at the correlation between the CBOE Volatility Index and Bitcoin prices and its almost as if there is a lag between the spikes in volatility and the Bitcoin price rising. This may prove useful if history is to repeat itself at some point in Q4.

CBOE Volatility Index Vs Bitcoin

Source: TradingView, Prepared by Zain Vawda

One factor that could affect both volatility and liquidity in Q4 could be the US Federal Reserve who at this week’s meeting spoke about higher rates for longer. The updated Fed projections also showed 50 bps of cuts in 2024, a real hawkish message without needing to raise rates. The US economy has remained robust as consumers continue to spend freely as employment has also surprised but there may be speedbumps ahead. Many analysts believe that the reason the US economy has remained robust is down to a buildup of savings generated since the pandemic as well as the furlough on student loan debt repayments. Now the student loan debt repayments are set to resume in October and as household savings deteriorate the US economy could face a tough time in Q4 and this could have a negative impact on Global Markets with Crypto likely to be no exception.

Hodlers Continue Building Their Positions Ahead of Halving Event

Another area which may be worth monitoring is the long-term holders of Bitcoin who continue to accumulate the world’s largest Crypto at an impressive rate. No doubt hodlers are looking at the ETF decisions and a potential rally toward the end of year as the halving event approaches. This is in stark contrast to short-term holders with the majority now underwater on their positions. The usual FOMO buyers have become less and less as volatility and liquidity continue to be drained from markets and this does not bode well for Bitcoin prices.

*The chart below provides a glimpse of that as over the last 24 months or so the influx of FOMO buyers hasn’t had the desired effect on Bitcoin prices.

Bitcoin: Accumulation Trend Score

Source: Glassnode

In short there are many challenges which could come into play during the 4th Quarter and affect Bitcoin prices. Much like markets as a whole, Bitcoin is delicately poised and a lot of hope I believe may rest in the possible approval of the ETF applications which could provide a boost in the form of institutional investment and potentially prop up prices ahead of the halving event next year.

Q4 is underway now so do not lose valuable time and download the updated Q4 Bitcoin Forecast now!!

— Written by Zain Vawda for DailyFX.com

Contact and follow Zain on Twitter: @zvawda