There are a number of key points for Bitcoin to strengthen again, closely tied
to the Fed's policy, if the US central bank fails to control inflation and the
economy heads into recession.
When this article was written, Monday (11/4/2022) night, the market value of
crypto assets was knocked out to US $ 1.8 trillion. The price of Bitcoin (BTC)
itself has failed to climb higher than US$43 thousand per BTC. Last Monday
night, the price of BTC even fell to US $ 40.8 thousand per BTC. The other top
20 cryptocurrencies, along with three coins, were blown away due to the mass
selling.
To map the cause, it is actually quite simple, namely the strengthening of the
US dollar. The origin is the policy of the US Central Bank, aka The Fed, which
is predicted to be much more aggressive in selling its assets and raising the
benchmark interest rate even more.
Let's break them down one by one, based on a common fundamental structure.
First, the relationship between the value of the US dollar and Bitcoin.
The value of Bitcoin remains based on the value of the US dollar, considering
that this currency is still the dream of many countries and is still used in
international trade, even though for two decades many countries have begun to
remove the currency from their foreign exchange reserves, such as Russia and
China and several countries in Africa. . The dollar's weakness since 1982 is a
fact that's hard to argue with.
The dynamics of the US dollar can be easily measured from the US dollar index
(DXY). That is, if the dollar index weakens significantly, it will strengthen
the crypto market, including Bitcoin. And vice versa, if the DXY index shows
strengthening, the crypto market is depressed. This relationship occurs more
often than not, historically.
This simple formula can also be applied to the stock market and other types of
markets, including gold.
This kind of relationship has occurred, at least between December 2016 and
December 2017. On December 16, 2016 the dollar index reached the range of
103.829, after advancing from the range of 71.211 on March 17, 2008. This was
a remarkable achievement for the dollar, after going through the global
economic crisis at that time.
The value of 103.829 is a very strong resistance that is difficult to break
(including when it strengthened in mid-March 2020), until it finally fell at
88.727 on February 14, 2018.
What happened to Bitcoin at that time was a price boom, rising from around
US$708.50 per BTC towards the end of 2016, then peaking at 20,000 per BTC on
December 17, 2017. On that date the dollar index hovered around 94, ahead of
the US dollar finding support. level, which was 88,601 on February 16 2018,
then strengthened.
And the fact is that since the beginning of 2018 the crypto and Bitcoin market
prices have indeed fallen because the green back is taking over. On December
15, 2018 alone the price of Bitcoin met the range of US $ 3,288.
Fed Policy Determines Bitcoin Price
Well, so far you can find patterns in the relationship between Bitcoin and the
US dollar, in the context of the narrative Bitcoin is “a new gold in a digital
form”: rare, opposite to the US dollar as a result of the Fed's policies.
Second, the supply and dynamics of the dollar's value. The weakening of the
dollar stems from the large supply of that currency in the economy. The free
market economy took the reins, that many dollars had to be diverted to more
profitable assets.
Note that 2008 was a time when the US central bank poured a lot of dollars
into the market to save the economy. That is the reason for the birth of
Bitcoin from the hands of Satoshi Nakamoto.
Be the uncontrollable supply of dollars, leading to massive inflation, plus
the arrival of the pandemic in March 2020, the dollar fell and Bitcoin began
to be glimpsed again. The pandemic also forced the US to pour more dollars
into the economy by adding assets to its balance sheet.
Until December 2021 the Fed actually could no longer hold back from
controlling the situation. The reason is that inflation in the US has reached
more than 7 percent year-on-year. That's the highest since 1982 in the same
period. Critical! Experts also cornered the Fed, that the giant monetary
institution was too late to deal with it, lulled by quantitative easing
policies and the benchmark interest rate was almost zero percent.
So, what is the Fed's action? As usual, that is withdrawing the US dollar from
the economy by selling assets off its balance sheet and increasing the
benchmark interest rate. Now, because the supply of dollars is much more
scarce than before, the value of the dollar is boosted up.
In November 2021, for example, the dollar index entered the 93.985 region,
surpassing the March 2020 resistance, which is 93. And on April 8, 2022, it
continued to rise to around 100, trying to aim for a strengthening March 20,
2020, which is 103.
Recall, that in January 2021, even though the dollar index entered the 90
support region and tried to advance upwards, Bitcoin was involved. In this
case, there is no strong signal from the Fed to anticipate the state of the
economy and the dollar is still flooding the market.
So what about the hopes of the crypto market in an unprecedented situation
like this? That if the dollar continues to strengthen and the crypto market
crashes, at what point will it reverse direction?
The initial note to answer this question is whether the Fed's policy in
relation to the Bitcoin price will succeed in controlling inflation or vice
versa? The reason is, if it is too slow or aggressive to raise interest rates,
for example, what happens is a crazy recession.
Remember, the impact of the pandemic is not over yet, made worse by Russia's
military action against Ukraine. This has a negative impact on rising energy
prices in western countries. Severe inflation! The Fed is actually in a
dilemma and continues to be cornered.
So far, a number of observers expect the Fed to be more aggressive in raising
its benchmark interest rate than at the beginning, which began in March 2022.
A Reuters poll, April 4-8, 2022, revealed that more than 100 economists expect
two half-point rate hikes this year. This is the first move since 1994 to 1.25
percent-1.50 percent. This could happen in June 2022.
From the same poll, 85 of 102 economists expect a 50 basis point increase in
May 2022, and a still solid majority of 56 say the Fed will follow through
with 50 basis points also in June. In short, this policy is very monumental
from a historical perspective in different contexts and conditions.
From that fact, economists believe that if such a big interest rate hike
really takes place in order to tackle uncontrolled inflation, there will
likely be a recession, because the market component is forced to save on
investment spending, aka no expansion.
This potential was also confirmed by Bank of America a few days ago. For them,
if a recession occurs, then the forex market, bonds including Bitcoin become
the gaze of a large number of parties. Stocks are expected to fall heavily.
That is, capital flows out of the stock market and into the crypto market,
because the Fed failed.
The economist Mohamed El-Erian at Allianz said the same thing a few days ago.
According to him, the policy of raising interest rates aggressively is likely
to be a bigger policy error than misjudging inflation. The Fed risks pushing
the economy into recession.
This is the most important point for Bitcoin to rise. This common thread is
threaded by crypto market advocates, at least by Mike Novogratz Founder of
Galaxy Digital. Just so you know, this company has collaborated with a number
of top investment companies in creating a number of crypto-value investment
products.
Novogratz put it this way, as quoted by Kitco: “While the market is bracing
for aggressive Fed policy in the first half of the year, the US central bank
may have to pause once the US economy slows down. This is the time for Bitcoin
to strengthen.” He echoed those words at the Bitcoin 2022 grand conference in
Miami.
It is easy to interpret, that Novogratz really expects a 50 basis point rate
hike to happen this year, because he believes it will have a negative impact
on the economy, namely a recession. This kind of interpretation is quite
reflected in the thin strengthening of the Bitcoin price over the last 3
weeks.
This situation may make the Fed swerve, reluctant to continue its policy of
raising interest rates and continuing with quantitative easing again, aka
adding the US dollar to the market.
This is in line with El-Erian's suggestion, that the Fed should not be fixated
on the financial market which makes it act very aggressively. He advised the
Fed to restore the real sector. Well, theoretically this is the direction of
that quantitative easing and will steer the market into the crypto market.
This further confirms the relationship between the Fed's policy and the price
of Bitcoin.
However, if the scenario is aggressive policy throughout this year, then the
positive impact as expected by the Fed, at least can only be felt in 2023.
This is the historical pattern. If this happens, the dollar will strengthen
further, weakening the stock and crypto markets. Even if the opposite happens,
then the scenario that Novogratz has in mind is what happens: Bitcoin heads
north.
So, we are still waiting in early May and June 2022 when the results of the
meeting of the Fed's top brass are announced whether it is so aggressive that
it has a negative impact on the price of Bitcoin. Between those days, we can
only wait and watch.
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