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.
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 key rate hike in the minutes 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. The updated forecasts assume three increases in the key rate over 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,” the specialist explained.
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For digital assets, “quantitative tightening” can be challenging as they are at the far end of the risk curve.
Just as they have benefited from extremely loose monetary policy, cryptocurrencies could come under pressure from their 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.
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“As the Fed moves from the increasing supply (the size of its balance sheet) to decrease it, the dollar begins to rise. And everything else loses its value to him,” he explained.
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 is going to 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. That 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.