Bitcoin could break down $40,000 if inflation further exceeds market expectations. Economist Alex Kruger outlined a similar scenario amid the Fed tightening monetary policy.
19 / If CPI surprises on the downside, expect prices to pop and trend for a while.
If CPI surprises on the upside, “lights out”, $ BTC is going into the 30s, tradfi will make sure of it. pic.twitter.com/v8hug6V1wQ
– Alex Krüger (@krugermacro) January 9, 2022
Sensitivity to macroeconomic news is due to changes in the Fed’s monetary policy, Krueger is convinced. He recalled the rejection of the assessment of the “temporary” nature of inflation and the readiness to start reducing the balance after the start of the increase in the key rate in protocols for the December meeting.
On December 14-15, the Fed postponed the deadline for the final winding-up of the asset repurchase program from June to March. Updated forecasts suggest three key rate increases in the next two years. The previous one in September allowed only one increase in 2022 and two in 2023.
Krueger expressed concern that the reduction in the Fed’s balance sheet would provoke a bear market. The reason lies in the decision to reduce liquidity in the face of the rate hike. The hawkish reversal occurred in less than six months, the analyst said.
“Few have considered the coming normalization of the Fed. Not only is it possible in the short term, but the Fed is discussing its implementation at a faster pace than in 2018. For this reason, last week cryptocurrencies fell by 15-30% in two days “, – explained the specialist.
8 / Balance sheet normalization was not in anybody’s radar for a long time.
Not only is this now a possibility in the near term, but also the Fed is talking about doing so faster than in 2018.
That’s why crypto assets dropped 15% -30% in two days last week.
– Alex Krüger (@krugermacro) January 9, 2022
For digital assets “quantitative tightening“May pose a challenge as they are at the farthest end risk curve…
Just as they have benefited from extremely loose monetary policy, cryptocurrencies could come under pressure from its unexpectedly tight nature as capital flows into safe asset classes, Krueger explained.
The economist called Bitcoin an indicator of the state of liquidity in the financial system. As it decreases, macroeconomic-oriented players are selling “digital gold”, followed by other cryptocurrencies (the disappearance of such a correlation remains a “pipe dream” so far).
Krueger drew parallels with Shitcoins, calling the US dollar the king of them, and the Fed as their master.
“As the Fed moves from increasing supply (the size of its balance sheet) to decreasing it, the dollar begins to rise. And everything else loses its value to him “– he explained.
15 / The Fed is here your shitcoin master in chief.
And the US dollar is the king shitcoin.
As the Fed goes from increasing supply (the size of its balance sheet) to burning supply, the US dollar starts going up.
And everything else goes down vis-a-vis the dollar. pic.twitter.com/JpG34dh4HG
– Alex Krüger (@krugermacro) January 9, 2022
The expert allowed Bitcoin to rebound in the $ 41,000- $ 44,000 range before the inflation report was published on Wednesday. The nature of the data will determine the further course of events. The specialist urged to take a cautious position until the end of the first quarter. He did not rule out that it will take more time for purchases, and favorable conditions may not come in May.
Everything will depend on the dynamics of consumer prices, which at some stage will become bearish, Kruger is convinced. This will be facilitated by the impact of monetary tightening, the resolution of supply chain problems and the dominance of deflationary forces over the long term.
“The question is, will inflation fall fast enough, or will the Fed be in time for all „upset“? If the Fed „too hawkish“then Houston, we have a problem “, – summed up Kruger.
24 / And the final question is, can crypto ignore the Fed if it decides to go all out wielding a deflationary machete?
I doubt it
“Don’t fight the Fed” applies both ways, up and down.
If the Fed is * too hawkish * then Houston, we have a problem.
/ END
– Alex Krüger (@krugermacro) January 9, 2022
Recall that in December billionaire Louis Navelier allowed bitcoin to fall to $10,000. According to him, the signal for the formation of a “double top” is strengthening on the chart of the first cryptocurrency, the implementation of which may occur as the Fed normalizes monetary policy.
