18 Feb 2025

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“The bottom has not yet been reached” – ZX Squared Capital fund

“The bottom has not yet been reached” – ZX Squared Capital fund

Another 30% market downturn? It’s not out of the question!

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CNBC has gathered the views of industry experts, including executives and analysts from several cryptocurrency exchanges and investment funds. They are virtually all unanimous in their opinion that we are at the bottom forming stage.

At the same time, unlike small speculators, big players interpret the possible reversal trajectory very differently, believing that the real culmination will not be a stop at psychological support of $20,000/$1,000 (for BTC/ETH), but the final capitulation of the “weak hands”, which will require a more significant decline.

CK Zheng, the co-founder of the hedge fund ZX Squared Capital, which is focused on cryptocurrencies, believes that the global economy can avoid a recession if inflation is somehow controlled. “Thanks, Cap!” as the saying goes. But that, of course, it’s not all.

The passes about inflation are directed to the world’s main regulator, the Federal Reserve. The cryptocurrency market is still highly correlated with stocks and indices, so the policy of increasing interest rates, which makes money more expensive, creates liquidity crises for crypto as well. The equation is simple: no money = no “fuel” = no growth.

The root of the problems

The systemic reason that aggravated the bear market is said to be the excessive indebtedness of the sector: the drop in cryptocurrency values has prevented risky protocols like Celsius from continuing to provide the high returns promised to clients, resulting in cascading bankruptcy processes.

Another glaring “showcase” of excess leverage was the Three Arrows Capital fund. It suffered because of its categorical bullish position, which was opened, unfortunately, due to other people’s money borrowed at high-interest rates. The 3AC owed its primary lender, Voyager Digital, $670 million (!!!).

“The deleveraging process we don’t know if it is complete or not. I think it is still in the process of washing out the weak players,” says CK Zheng, adding that the real bottom will be found when there are no more surprises with constant company collapses.

Miners could be the next victims. Several mining startups have raised funding, and, in some cases, the equipment ordered has either not been delivered or has yet to be connected to the network. The capitulation of this cohort may be the last signal of the bottom forming.

The recent decline in bitcoin mining costs is unlikely to change anything: miners, being able to sell coins at a profit, will then create additional pressure on the price, pushing themselves into an even greater zugzwang.

Trading patterns

Experts have outlined several patterns that will help determine the market’s bottom.

The first pattern is the “capitulation candle”. It is a “spike”, consisting of a fast decline, which destroys the last remaining weak hands, and the subsequent recovery to the initial levels.

With such a spike, the market captures liquidity at lower price levels. A similar scenario was observed in March 2020 when bitcoin fell more than 30% in one day and then confidently won back all its losses.

The second pattern is the “accumulation phase”, when bitcoin forms a “shelf” at the reached lows and stays within the same range for several months.

In both cases, according to CK Zheng, bitcoin could fall to $13,000-$14,000, representing about a 30% additional drop from current prices.

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