The Key Takeaways
- Numerous technical indicators have been flashing buy signals in recent weeks, which points to a possible bottom in the crypto market.
- The macroeconomic situation at the moment is not improving.
- The Fed may be forced to reverse its monetary tightening due to Europe’s current energy crisis. This would reduce risk-on assets and relieve some of the pressure on it.
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The Federal Reserve could be forced to rethink its current tightening policy due to the European energy crisis. With inflation showing no signs of slowing, there could be more pain before the crypto market experiences a meaningful recovery.
Is the market at its lowest point? From the smallest retail investors to the biggest hedge fund managers, this is the big question on everyone’s minds right now. It’s difficult to determine what is going on in the overall economy, especially in the fast-paced cryptocurrency market. Today I want to help you understand why the market has not bottomed.
First, the good news (so long as you’re not still sitting on the sidelines). Numerous technical indicators that have been flashing buy signals in recent weeks have strengthened the case for the crypto market reaching its lowest point. Net Unrealized Profit/Loss(NUPL), Pi Cycle Bottom, and Puell MultipleAll have reached the historic bottom at once-in-a cycle levels. While technical indicators like this can sometimes have a dubious track record, when several line up like they have now, it’s certainly worth paying attention in my book.
It is worth looking at the macroeconomic side of crypto market reactions to news. A big change came after June’s Consumer Price Index data registered a new 40-month high of 9.1%. Many market participants expected that crypto would continue to fall after the bearish news. The opposite happened. Crypto has risen since the CPI release, catching anyone trying to short-sell. Similarly, Wednesday’s 75 basis point rate hike and yesterday’s negative GDP growth have, paradoxically, pushed crypto higher, indicating that the market may now have “priced in”The current economic trend is downward.
Still, even if market participants have stopped caring about the broader macroeconomic situation, it doesn’t mean there isn’t more pain coming. Inflation is still high and the Fed is determined to bring it down to an acceptable level. Jerome Powell, Fed Chair said that the Fed had raised inflation after Wednesday’s hike. “become appropriate to slow the pace of increases,”He also left the doors open to him “an even larger”You can increase if necessary. The ongoing hikes, coupled with a selloff of the Fed’s treasury notes and mortgage-backed securities, will tighten the flow of money and almost certainly put a damper on risk-on assets like crypto.
The other big macro problem is the cost of energy—specifically in Europe. The already alarmingly high inflation rates worldwide have been exacerbated by war in Ukraine and the subsequent boycott of Russian oil. Winter is coming, and there’s a real possibility that many European countries will not have the energy to heat their citizens’ homes, certainly not at a price the average Joe is willing to pay. Europe will be forced to rely on the U.S. energy supply if the embargo continues on Russian oil and natural gas.
Here lies the problem. As you may have noticed, in recent months the euro has weakened substantially versus a dollar, aided by the Fed’s rate raises and monetary tightening. The U.S. is in a sticky spot because it appears likely that European countries will need to buy American energy to keep their economies and residents warm.
The U.S. has two options. Either it takes measures to strengthen the euro against the dollar by injecting liquidity in the European economy, or it lets European countries default on rising energy costs. Keep in mind that many European countries, as well as the European Central Bank, hold these assets. substantial amountsU.S. government debt, meaning that if they default, it could also hurt the U.S. economic system.
To avoid a European catastrophe, the Fed may need to end its monetary tightening. Currently, there’s a window from now until the winter where the U.S. can continue raising rates. Europe will soon reach breaking point and the Fed will have to relieve some pressure by halting, or reversing, its current monetary policies, weakening the dollar.
The ultimate question is: can the market move lower before the Fed forces it to pivot? In my opinion, it will be difficult for crypto to make new lows anytime soon considering the huge amount of deleveraging that caused Bitcoin’s crash below $18,000. If the macro situation becomes worse, I believe we could revisit those levels. If you’re interested in diving deeper into the global economic situation, check out Arthur Hayes’ recent essays covering the topic; you won’t be disappointed.
Disclosure: The author was a BTC, ETH, and other cryptocurrencies at the time this article was written.