According to Ouyi market data, at around 8:00 am Beijing time on May 10, Bitcoin fell below the key position of $30,000 in a short time, with a minimum of $29,735, a drop of more than 10% within 24 hours. This is the first time Bitcoin has fallen below $30,000 since it peaked at $69,000 on November 10 last year. Half an hour later, the price of Bitcoin was back above $30,000. At 10:00 a.m., the price of Bitcoin was temporarily reported at $30,891.
Bitcoin price trend (European data)
What is the immediate cause of the Bitcoin price falling below $30,000 this time? There is a view that:
At 2 am today, 42,530.82 bitcoins were transferred out from the bitcoin address of Luna Foundation Guard (LFG), worth about $1.319 billion. This stimulated panic selling among a large number of users. In addition, the stable currency UST issued by Luna has recently broken away from the anchor of $1, and the price has continued to fall. As the number one U.S. dollar algorithmic stablecoin with a total market value of $18 billion, the flash crash of UST and the similar smashing operations of the issuer behind it have brought down the recent crypto market that has been in turmoil.
Of course, why has the cryptosphere been so vulnerable lately? This also points to the ultimate reason for this round of slump: the US interest rate hike.
On May 4, the U.S. Federal Reserve announced a 50 basis point rate hike, raising the target range for the federal funds rate to between 0.75% and 1%. At the same time, the Federal Reserve announced that it will shrink its balance sheet by nearly $9 trillion starting June 1 in order to match interest rate hikes and curb soaring inflation.
As soon as the news came out, U.S. stocks and the crypto market rose slightly in a short period of time, because panic had been largely digested in the early stage. During the meeting, Fed Chairman Powell ruled out the possibility of raising interest rates by 75 basis points, dispelling market concerns about an overly aggressive rate hike.
But immediately after that, the market winds turned sharply, and both U.S. stocks and crypto markets closed sharply lower. After all, this is the first time since 2000 that the rate hike has reached 50 basis points, which shows the urgency of the Fed to tighten monetary policy, which has brought a shock to the capital and market sentiment.
But correspondingly, U.S. bond yields have soared, and the U.S. dollar index has hit a new high in nearly 20 years, showing the positive effect of raising interest rates. It can be said that the interest rate hike is a critical moment for the Federal Reserve to reshape the US dollar credit at a critical moment when US inflation is intensifying and the US dollar credit is declining.
Specific to the market, the trend of panic selling has already been established, which is a tragic situation. The three major U.S. stock indexes all gave back their gains in the previous days, with the Dow Jones Industrial Average plunging nearly 1,400 points during the session.
1. Economic recessions are rarely accompanied by high inflation rates, and interest rate hikes therefore bring greater uncertainty
As early as in late April, the investment agency Goldman Sachs released a report saying that the probability of a recession in the United States in the next two years is expected to be 35%.
The report analyzed that the main challenge facing the United States is to close the gap between the number of jobs and the number of workers, and by tightening financial policy to reduce employment opportunities without significantly increasing the unemployment rate, so as to slow wage growth to the same level. 2% inflation target at a consistent pace.
But what’s troubling the Fed and Wall Street right now is that a recession in the U.S. economy as a whole is coexisting with stubbornly high inflation, which is extremely rare in history. From two intuitive data points, this contrast is even more acute:
The first is that the “Wall Street Journal” conducted a survey of 65 business, academic and financial people earlier this month. The respondents generally expected that the probability of the U.S. economy falling into recession in the next year was 28%, which was higher than the 18% at the beginning of the year and the one in the next year. 13% a year ago. In other words, the elites have further lowered their expectations for the U.S. economy, pessimism has grown, and mainstream views have reached a further consensus on the U.S. economic recession.
Data from The Wall Street Journal
Secondly, according to data released by the US Department of Labor on April 12, the US CPI in March rose by 8.5% year-on-year, the highest level since December 1981. This data is higher than the 8.4% expected by Dow Jones, and also means that the United States has experienced a level of price rises that have not been seen in the past 40 years.
U.S. consumer price index (CPI) and producer price index (PPI) both reach historic peaks
The direct comparison of the two shows the inflation dilemma in the recession cycle.
As we all know, high inflation is accompanied by rapid economic growth, and conversely, large-scale deflation corresponds to a significant economic recession. Therefore, the Fed’s rate hike this time may be more complicated than the previous rate hike cycle, because the new crown epidemic superimposed on the two black swan events of the Russian-Ukrainian war has brought huge uncertainty to the world economy. Of course, the initiator of all this is the huge release of the US dollar after the epidemic. Therefore, raising interest rates is inevitable, and the subsequent macroeconomic and financial market trends are even more confusing.
2. The hawkish doves are quite divided on the intensity of interest rate hikes, and there is still uncertainty about the Fed’s monetary policy in the later period
The sharp blade hanging high, the dilemma, shrinking the money and controlling the liquidity have become the “least bad” option. After all, everyone in the United States is concerned about whether a recession can be avoided.
The City Index analysis believes that the S&P 500 index posted its strongest gain since 2020 on the day the Fed announced its latest interest rate decision, which is somewhat unusual in itself. Arguably, the drop seen on May 5 was the expected repricing. “At the end of the day, the risks remain, inflation remains high, and the Fed will remain aggressive.
Of course, those who believe that raising interest rates can cure the US economic ailment do not seem to be worried about the pain caused by the slump. Earlier, Bullard, the hawkish representative and president of the Federal Reserve Bank of St. Louis, said: “Raise interest rates to around 3.5% by the end of the year.”
What’s more, Bullard chose to ignore the “recession theory” put forward by investment banks and economics represented by Goldman Sachs: “It’s too early to talk about recession, and the rate hike only happened once. Bullard expects the U.S. economy to grow at a healthy rate in 2022 and 2023 that exceeds the long-term trend, with the unemployment rate falling below 3%, with monetary policy remaining tight.
Whether it is a gradual, moderate and small rate hike, or a radical, dramatic and large rate hike, they all have a direct and rapid impact on the relatively fragile crypto market.
Just in the third week of April, Bitcoin fell below the $40,000 mark again after a lapse of nearly a month, and has continued to decline ever since.
Although during this period, heavy news such as Russia’s announcement that “energy such as natural gas will be settled in Bitcoin”, judging from the market reaction, it is only to delay the decline.
From Bitcoin hitting a new high of $69,000, to falling below the $50,000 and $40,000 mark in a row, it is closely related to the Fed’s monetary tightening policy.
As one of the world’s major value targets, Bitcoin is still highly dependent on the stability of the US dollar and global financial stability dominated by US finance. The policy direction of the Federal Reserve is the decisive force that affects the price of Bitcoin.
However, the Fed’s policy formulation is not entirely driven by financial markets, capital gains, retail investors’ profits and losses, and public sentiment. The rise and fall of US stocks is only one of its references, and the crypto circle is even more insignificant here. In view of the obvious decline of the US economy, subsequent interest rate hikes will inevitably advance in accordance with the timeline, not to mention that it has entered a historical tightening cycle. However, judging from the current attitude of the Federal Reserve, the option of raising interest rates seems to be left with room for expansion and manoeuvre. After all, Powell has said it before: We have a good chance of a soft landing.
3. From two hypothetical analysis, what is the impact of this round of interest rate hike cycle on the crypto market outlook?
Based on the above conclusions, combined with the specific trend, we may wish to make the following two assumptions about the future trend of the encryption circle. It is for informational purposes only and does not constitute investment advice of any kind.
Possibility 1: The Fed will continue to be hawkish after the May meeting, raising interest rates by more than 3% throughout the year in order to curb high inflation—
Specific impacts may include:
1) Funds continue to flow out substantially, which in turn affects asset prices in the financial circle;
2) The US CPI will be reduced to the level in the first half of 2021 or even lower, and the inflation problem will be alleviated;
3) The US dollar continues to appreciate, and the US dollar credit has been repaired to a certain extent;
4) There is a high probability that Bitcoin will be forced to digest the “consequences of dollar water injection” since 2021 or even longer, and mainstream views may deepen its bearish expectations;
5) Triggering interest rate hikes in various countries, that is, major countries, financial institutions, etc. will try to maintain the stable status of their currencies and use more radical means to stabilize the existing international financial system.
For example, after May 5, the European Central Bank, the Bank of England, and the central banks of developed countries such as Canada and New Zealand have successively confirmed their next interest rate hike plans.
6) In the long run, Bitcoin will gain more independent value positioning, and the encrypted market may once again usher in a new period of stable development due to this stimulation. Because the price of mainstream digital assets hits the bottom, it will attract a new batch of high-level institutions and retail investors to buy the bottom, and then after the US dollar starts the water release cycle, the rich returns brought by value investment will surface. Of course, during this period, the price of Bitcoin may be affected by major currencies such as the US dollar, the euro, and the ruble, causing some fluctuations.
Possibility 2: In order to avoid the risk of recession in the United States, the Fed’s policy is to raise interest rates by less than 2% throughout the year —
Specific impacts may include:
1) The shadow of financial risk may engulf the crypto market, but to a certain extent, it will be good for Bitcoin in the short term, because the actual bad news is less than the worst expectation;
2) The US dollar inflation rate has eased, but it is still not conducive to the boost of purchasing power for a long time. The crypto market may be in a state of coexistence of high structural risk and high value for a period of time in the future, and the situation of continuous wide fluctuations may become the norm;
3) Of course, the United States still chooses not to send the arrow on the string, which will naturally bring about a series of chain reactions until the collapse of US dollar credit. Although the result of this qualitative change will take a long time to brew, the United States has always been beggar-thy-neighbor. Almost ready for quantitative denaturation. The most immediate and important changes are:
Major sovereign credit currencies will not wait to transfer risks, and major economies’ trust and adoption of the U.S. dollar will gradually weaken, which will directly impact the international financial system dominated by the U.S. dollar after World War II. Russia’s unilateral announcement of decoupling from the US dollar was the prelude to this big change, but the war accelerated this process.
4) Under the domino effect, the uncertainty of the global financial market has increased sharply, and even the intensity is comparable to the most eagle-style interest rate hike, because the downward trend brought by the latter is completely predictable. In this case, the inactive Federal Reserve is tantamount to implying that a large number of safe-haven funds have entered the crypto circle in disguise. After all, Bitcoin still has the attributes of a risky asset. This trait has only been downplayed by the fact that the US dollar has released water and is related to the strength of US stocks. But when the conditions for its turn begin to fail, Bitcoin’s original hedging properties are likely to be strengthened again. At that time, the price of encrypted assets will rise and fall, and it will be more complicated and confusing, and it will be more difficult for investors to make profits in short-term operations. Therefore, it is more important to judge and estimate risks, and to adjust operation strategies in a timely manner, and even the ability to calm personal fluctuations in emotions.
From the performance of digital assets such as Bitcoin during the Russian-Ukrainian War, it can be seen that the encryption circle has been fully integrated with the global financial market, but the form is particularly special. More and more mainstream central banks have begun to formalize the status of blockchain technology and encrypted assets, while less developed countries in Asia, Africa and Latin America are also accelerating the process of realizing Bitcoin legalization. These phenomena have begun to appear frequently in the headlines of the international mainstream financial media.
Looking back at the economic cycle of the past ten years since the birth of Bitcoin, it is not difficult to find that every time it crosses a bottom, the total market value and tenacity of Bitcoin will reach new highs. Therefore, no matter the intensity, magnitude and method of the US interest rate hike this time, it is a wise move to cross the bull-bear cycle by being bullish on the crypto circle, choosing Bitcoin, investing prudently, and raising awareness deeply. .
Posted by:CoinYuppie，Reprinted with attribution to:https://coinyuppie.com/ouyi-research-institute-bitcoin-fell-below-30000-in-the-crypto-circle-and-faced-two-trends-since-the-rate-hike-in-may/
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