Bitcoin (BTC) could eventually drop to $30,000 if US inflation data released on Wednesday comes a little higher than expected, warned Alex Krueger, founder of Aike Capital, a New York-based wealth management firm.
The market expects the widely tracked Consumer Price Index (CPI) to rise 7.1% y/y through December and 0.4% m/m. The increase underscores why US Federal Reserve officials are pushing to normalize monetary policy faster than previously expected.
General inflation in the United States of America. Source: Bureau of Labor Statistics, Bloomberg.
According to the data released on January 7, further support for their preparation is the normalization of the labor market, including increased income and reduced demand for unemployment.
“Crypto assets are on the extreme risk curve,” Krueger wrote on Sunday, adding that since they have benefited from the Federal Reserve’s “extremely weak monetary policy,” suffice it to say they will suffer an “unexpected tightening” of policy. Transfer funds to safer asset classes.
“Bitcoin is now one of the macro assets that is being traded as a proxy for liquidity issues. With liquidity declining, macro players are now selling bitcoin in fray, and all cryptocurrencies are following them.”
The first rate hike in March 2022?
Since March 2020, the Fed has bought $80 billion in government bonds and $40 billion in mortgage-backed securities each month. Meanwhile, the US Federal Reserve kept its base rates close to zero, making lending to individuals and businesses cheaper.
BTC/USD against the Federal Reserve balance. Source: TradingView
But the civil damage from loose monetary policy is rising inflation, which peaked at 6.8% in November 2021, the highest in nearly four decades.
So now the Fed, which once stated that consumer price increases were “temporary,” has shifted its stance from expecting no rate hikes in 2022 to a discussion of three hikes along with balance sheet normalization.
“This is more dramatic than we expected and the turning point of the Federal Reserve into a tougher position was a surprise,” Leo Grochowski, chief investment officer at BNY Mellon Wealth Management, told CNBC.
“Most market participants expected higher interest rates, less flexible monetary policy, but if you look at the Federal Reserve funds, which showed a 90% probability of an increase in March, it was only 63% on New Year’s Eve.”
Little Bear Market?
Mike McGlone, chief commodity strategist at Bloomberg Intelligence, cited $40,000 as an important level of support in the bitcoin market. In addition, expect the cryptocurrency to eventually come out of its bearish phase as the world goes digital and treats Bitcoin as safe.
BTC/USD daily price chart with $40K history as support. Source: TradingView
The announcement came as Bitcoin’s drop from an all-time high of $69,000 on November 8 exceeded 40%. Eric Irwin, CEO of Blockforce Capital, says deflation has been largely taken down by new investors, leaving the market with long-term owners.
This could be the start of a “mini-bear market,” the Bloomberg chief said, adding that such reforms are “completely normal” for crypto investors.
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Krueger also notes that Bitcoin has already plummeted from all-time highs to the point where it is now technically oversold. Thus, if the value of the CPI suddenly deteriorates, the markets can expect the price of Bitcoin to rise and rise for a while.
“There will be US inflation data tomorrow, Wednesday,” Krueger said, adding:
“I think prices should be cut by about 41 and 44K until then, tilted upwards, given how strong the rejection is from the low.”