Powell Boosts Crypto
After Bitcoin’s nosedive from $31,000 to $19,000, the digital gold has transitioned into a phase of low volatility.
This lull has helped out stabilize the asset class.
At one point, $12,000 was on the table but now, as recessionary fears have started to creep back into the market psyche, an expectation of loosening the liquidity regime appears to be in the cards.
Or so that is what the market is pricing in and when we look at the Fed Funds rate, it shows a forecast of interest rate cuts starting after March 2023.
Interest rate cuts are highly bullish for cryptocurrency because lower interest rates mean easier access to borrowing money to pour into alternative assets like crypto.
The tighter the money policy, the more conservative investors become preferring to invest in real estate and energy assets.
This year certainly hasn’t been the year of Bitcoin, yet we roll into the last half of the year hoping that 2023 will deliver rate cuts to crypto traders.
Positive signs have been filtering through following the Federal Reserve's announcement to raise interest rates by 75 basis points, bitcoin climbed over $24,000.
Ethereum has more than doubled bitcoin’s gains over the same period, jumping as much as 57%.
The future expectation of rate cuts has been boosted because of US Central Bank Governor Jerome Powell’s weak testimony.
Signaling the bringing forward of rate cuts because a recession could come is bullish Bitcoin.
However, the current problem we have is 9.1% inflation devouring the 2.5% Fed Funds rate.
The probable result is when the Fed finally does pivot to a more dovish stance, it will do so while admitting defeat to inflation.
In the most recent Cleveland Fed inflation expectations, July is estimated to be 8.8%.
To be sure, the total market capitalization for all crypto assets is still down roughly 60% from its peak reached in November 2021. But cryptocurrency prices have rebounded over the first half of July with fresh buying having sent the sector's total market cap back above $1 trillion.
The 200-day moving average (DMA), which traders use as a technical gauge for whether an asset's trend is broadly higher or lower, still sits far above current levels and is declining for both bitcoin and ether.
As far as crypto fundamentals go, Ethereum's merger is a potential positive for markets through the summer. Core developers of the Ethereum blockchain have slated its software upgrade from proof-of-work to proof-of-stake, the so-called "Merge," for as early as the week of September 19.
People like hearing hard dates and we are still waiting for one from Ethereum.
Ultimately, what is abundantly clear is that the lack of appetite to raise rates is good news for all risk assets as we move forward into 2023.
This means we won’t see a repeat of a disastrous sell-off that occurred the past year in crypto.
Since the middle of June, the bitcoin dip has been bought and I can easily see a scenario where crypto continues to inch up if inflation comes down to a 5-7% range which is entirely possible.
Crypto, the industry itself, has a lot of work to do, but the macro picture is what is powering the price right now.
