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Will the “crypto winter” get harsher?

Bitcoin, Ethereum and other cryptocurrencies are suffering through a “crypto winter” that’s erased around $2 trillion of value from the market. It’s now well-known that the world’s most popular cryptocurrency has been oscillating around the hugely psychological $20,000 level for some months now. But this comes from the dizzying heights of near-$70,000 late last year. The recent tracking sideways begs the question as to whether this is bearish consolidation before a breakout in line with the longer-term downtrend or a base is being built as we head into winter proper.

Bitcoin

US CPI to govern Fed policy and direction of risky assets

Key to all of this is the liquidity situation in markets and what the US Federal Reserve is doing to tighten monetary policy, both in terms of raising interest rates and quantitative tightening. We know that the number one goal of policymakers is to bring inflation back its 2% target as quickly as possible. In which light, we get the latest CPI report on Thursday which won’t make for pretty reading. Although the headline print is expected to fall slightly, it is still expected to stay above 8%. Bloomberg consensus estimates are at 8.1% from 8.3% in August caused primarily by lower gasoline prices, but the month-on-month print is expected higher at 0.2% from 0.1% previously.  At the same time, crucially an acceleration in the core rate is predicted with expectations of a rise to 6.5% from 6.3%, mainly driven by housing costs and recreation prices.

This should all but endorse prospects of another 75-basis point rate hike in November and a peak rate of 4.60-4.70% is now in the price, even though surveys like the University of Michigan show an easing in long-term inflation expectations.

QT doesn’t help liquidity

Meanwhile, the Fed is also unwinding liquidity via quantitative tightening. This process sees the central bank shrink its portfolio of Treasuries and mortgage-backed securities every month by letting them roll off or mature without reinvesting the proceeds. This amount doubled last month to $95 billion. These policies are all hugely important as central bank liquidity and government stimulus fuelled the speculation-driven 2020 to 2022 crypto cycle. With these liquidity taps being tuned off, long-term institutional investing in cryptocurrencies has been cut back, as well-known legendary traders like Paul Tudor Jones recently said in an interview. The fabled trader, who is known for his macro trades and particularly his bets on interest rates and currencies, had been bullish on crypto two years ago but now only has a minor allocation to bitcoin.

Even “The Merge” which is the phrase given to ethereum’s shift to a greener, less intensive blockchain system has so far failed to propel the respective coin to previous highs of near $5,000. With crypto futures volumes stagnant for some time now, it seems like it is tough to see any major bounce in cryptocurrencies. And yet, news that regulation in the US is getting closer hasn’t put buyers off as bitcoin continues to track sideways. In the past regulatory clampdowns have triggered sharp price declines.  But another bull market may need the development of new ecosystem technologies like exchanges and wallets which were the catalyst for the previous most recent upcycle.

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