Opinion: Is the Crypto Market Bottom In?

key takeaways

  • Several technical indicators have shown buying signals in recent weeks, pointing to a potential bottom for the crypto market.
  • However, the current macroeconomic situation still shows no signs of improvement.
  • Europe’s energy crisis could force the Fed to pivot on its monetary tightening, easing pressure on risk assets.

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The current European energy crisis could force the Federal Reserve to pivot on its monetary tightening regime. Still, with inflation showing no signs of slowing down, there may be more pain to come before the cryptocurrency market sees a significant recovery.

crypto capitulation

Is the market bottoming out? From the smallest retail investors to the largest hedge fund managers, this is the big question on everyone’s mind right now. The commotion of macro signals and technical indicators makes it difficult to know what exactly is going on in the broader economy, and even more so in the faster-paced crypto market. Today, I want to try to cut down on the noise and provide cases as to why the market may or may not have bottomed out.

First, the good news (as long as you don’t stay on the sidelines). Several major technical indicators have shown buying signals in recent weeks, strengthening the case that the crypto market may have reached its lowest point. Net Unrealized Gain/Loss (NUPL), the Bottom of the Pi cycleand the Multiple Puell they have reached unique levels in a cycle that have historically marked the bottom. While technical indicators like this can sometimes have a dodgy track record, when several line up like this, they are certainly worth paying attention to in my book.

Moving away from the technical side of things, it is also worth considering how the crypto market is reacting to macroeconomic news. A big change came after June’s consumer price index data posted a new 40-month high of 9.1%. Many market participants expected cryptocurrencies to start another leg down after the bearish news. However, the opposite happened. Since the release of the IPC, cryptocurrencies have risen, trapping anyone attempting a late short sale. Similarly, on Wednesday Rate hike of 75 basis points and yesterday’s negative GDP growth have paradoxically pushed crypto higher, indicating that the market may now have “priced in” on the current economic downtrend.

Still, even if market participants have stopped worrying about the broader macroeconomic situation, it doesn’t mean there isn’t more pain to come. The fact is that inflation is still very high and the Federal Reserve is committed to bringing it down to an acceptable level. Although Fed Chairman Jerome Powell said after Wednesday’s hike that “it had become appropriate to slow the rate of hikes,” he also left the door open for an “even higher” hike if needed. The ongoing hikes, along with the sell-off of Federal Reserve Treasury bonds and mortgage-backed securities, will reduce the flow of money and almost certainly curb risky assets like cryptocurrencies.

The other big macro problem is the cost of energy, specifically in Europe. The war in Ukraine and the ensuing Russian energy boycott have exacerbated already alarming global inflation rates. Winter is coming and there is a real possibility that many European countries will not have the energy to heat their citizens’ homes, certainly not at the price the average citizen is willing to pay. If the embargo on Russian oil and gas continues, Europe will have to rely on the US for energy in the coming months.

Here is the problem. As you may have noticed, in recent months the euro has substantially weakened against the dollar, helped by Fed rate hikes and monetary tightening. At the same time, it seems likely that European nations will need to buy US energy to keep their economies running and heat residents, and this puts the US in a tough spot.

Broadly speaking, the US has two options: take steps to strengthen the euro against the dollar by injecting liquidity into the European economy, or let European countries stop paying for rising energy costs. Please note that many European countries and the European Central Bank have substantial amounts of US debt, which means that if they default, it will ultimately hurt the US economy as well.

Therefore, the Fed may need to end its monetary tightening to avoid catastrophe in Europe. Currently, there is a window between now and winter in which the US can keep raising rates. However, Europe will soon reach a breaking point and the Fed will be forced to relieve some pressure by halting or reversing its current monetary policy, which would weaken the dollar.

The final question is this: can the market go down before the Fed is forced to turn? In my opinion, it will be difficult for cryptocurrencies to reach new lows anytime soon considering the massive amount of deleveraging that caused Bitcoin to drop below $18,000. Still, I think we could certainly revisit those levels if the situation macroeconomic worsens. If you’re interested in delving into the world economic situation, check out Arthur Hayes’ recent essays covering the topic; you won’t be disappointed.

Disclosure: At the time of writing, the author owned ETH, BTC, and several other cryptocurrencies.

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