- The Bitcoin price fell under $20,000 for the first time since December 2020 then briefly took out $19,000.
- The cryptocurrency is now back to trading in the low $19,000s with weekly losses of nearly 30%.
- Fed hawkishness and rising downside risks to the US economy continue to weigh heavily on crypto.
Bitcoin – The Coin of the Day as It Takes Out $20,000 and $19,000 Levels
The biggest news in crypto this week looks set to be Bitcoin’s latest slide that has taken it back below the psychologically important $20,000 level for the first time since December 2020. Prior to Saturday, BTC/USD had been tentatively fending off a push below the key support level, even in wake of the US Federal Reserve’s largest rate hike in 28 years of 75 bps on Wednesday.
However, Saturday’s sudden bearish break that saw Bitcoin tumble from around $20,300 to the low-$19,000s in a matter of minutes, an unusually large move in such a short time frame for Bitcoin, makes the cryptocurrency fitting of the title of Coin of the Day. Amid thin weekend liquidity conditions, BTC/USD soon extended its to below the $19,000 level as well.
The cryptocurrency has since recovered back above te $19,000 level and at current levels near $19,100, Bitcoin is trading with losses on the day of just over 6.0%, taking its weekly losses to closer to 30%. The world’s largest cryptocurrency by market capitalization now trades more than 70% below its record highs printed last November just above $69,000.
The Fed’s hawkish shift this week continues to hang heavily over crypto market sentiment. The central bank has not only shifted towards faster rate hikes but is also signaling higher interest rates by the end of this year and throughout 2023, as it seeks to battle US inflationary pressures that continue to build (as per last Friday’s US CPI data).
Cryptocurrencies, including Bitcoin, are seen as highly speculative investments. These sorts of investments tend to perform poorly when central banks (the most important being the Fed) move to tighten financial conditions, which dampens risk-taking activity. Tighter financial conditions also push up government bond yields, raising the “opportunity cost” of not being invested in this safe asset class, and increase downside risks to economic growth, given lower borrowing across the economy.
What Next for Bitcoin?
Bitcoin can only muster a sustainable rebound if economic conditions in the US and global economy improve and the Fed can ease back from its current hawkishness. That means a sustained easing of US inflationary pressures that would allow the Fed to take its foot off of the monetary breaks.
The fact that global commodity (energy) prices remain elevated for mainly geopolitical reasons (Russia’s invasion of Ukraine, OPEC+ supply reduction) and look set to remain so for some time makes this much-needed decline in inflation more difficult. But most suspect that with many major economies like the UK, Eurozone and US seemingly in/headed towards recession, consumer weakness could take the sting out of global prices by the end of this year/in 2023.
But that means we may have to wait sometime for a more certain picture on inflation. As long as this uncertainty lingers, traders will continue to have to price in a tail risk that the Fed has to pivot in an ever more hawkish direction. In other words, if an inflationary spiral is starting, it might take rates in the 5-6% region to snap, way higher than the peak interest rates the Fed is currently signaling of under 4.0%.
Amid all this uncertainty that doesn’t look likely to ease anytime soon, Bitcoin’s near-term outlook remains ugly. The $20,000 level will now be looked at as one of short-term resistance. If BTC/USD was to break above, the May low at $25,400 would be the next key area of resistance. Against the current macro backdrop, a fall to test 2019 lows in the $13,800 area seems more likely than a rally back towards $30,000.