Opinion: Is the crypto market bottoming out?

The current European energy crisis may force the Federal Reserve to reverse its monetary policy tightening regime. Still, with inflation showing no signs of abating, there could be more pain ahead of the crypto market staging a meaningful recovery.

Crypto capitulation

Is the market bottoming out? From the smallest retail investors to the biggest hedge fund managers, this is the big question on everyone’s mind right now. The commotion of macro signals and technical indicators makes it difficult to figure out what is really happening in the wider economy, and even more so in the faster crypto market. Today I will try to cut through the noise and provide examples of why the market may or may not have bottomed.

First the good news (as long as you’re not still sitting on the sidelines). Several major technical indicators have been flashing buy signals in recent weeks, strengthening the case that the crypto market may have bottomed out. Net Unrealized Profit/Loss (NUPL), Pi Cycle Bottom, and Puell Multiple have all hit once-in-a-cycle levels that have historically marked bottoms. While technical indicators like this can sometimes have a questionable track record, when several are lining up like they are now, it’s definitely worth taking note of in my book.

Moving away from the technical side of things, the way the crypto market reacts to macroeconomic news is also worth considering. A big change came after June’s CPI data hit a new 40-month high of 9.1%. Many market participants expected crypto to start another leg down after the bearish news. However, the opposite happened. Since the release of the CPI, crypto has surged higher, catching anyone attempting a late short sale. Likewise, Wednesday’s 75 basis point interest rate hike and yesterday’s negative GDP growth have paradoxically pushed crypto higher, indicating that the market may now have “priced in” the current downward economic trend.

Still, even if market participants have stopped caring about the broader macroeconomic situation, that doesn’t mean there won’t be more pain to come. The plain fact is that inflation remains hot, and the Fed is committed to bringing it back to an acceptable level. Although Fed Chairman Jerome Powell said after Wednesday’s hike that it had “become appropriate to slow the pace of hikes,” he also left the door open to “an even bigger” hike if necessary. The ongoing hikes, combined with a sell-off in Fed Treasuries and mortgage-backed securities, will tighten money flow and almost certainly put a damper on risk assets like crypto.

The other major macro problem is energy costs – especially in Europe. The war in Ukraine and the subsequent boycott of Russian energy have exacerbated the already alarming global inflation rates. Winter is coming and there is a real possibility that many European countries will not have the energy to heat the homes of their citizens, certainly not at a price the average Joe is willing to pay. If the embargo against Russian oil and gas continues, Europe will have to rely on the US for energy in the coming months.

Here lies the rub. As you may have noticed, the euro has weakened significantly against the dollar in recent months, helped by the Fed’s rate hikes and monetary policy tightening. At the same time, it seems likely that European nations will have to buy American energy to keep their economies running and their citizens warm, and this puts the US in a difficult situation.

Broadly speaking, the US has two options: take action to strengthen the euro against the dollar by injecting liquidity into the European economy or allow European countries to default on rising energy costs. Remember that many European countries and the European Central Bank hold significant amounts of US debt, meaning that if they default, it will eventually hurt the US economy as well.

Therefore, the Fed may have to end its monetary policy tightening to avoid disaster in Europe. At the moment, there is a window from now until the winter in which the US can continue to raise interest rates. However, Europe will soon reach a breaking point and the Fed will be forced to relieve some pressure by halting or reversing its current monetary policy, thereby weakening the dollar.

The ultimate question is this: can the market go down before the Fed is forced to swing? In my opinion, it will be difficult for crypto to make new lows anytime soon, considering the massive amount of deleveraging that caused Bitcoin’s crash below $18,000. Still, I believe we can certainly resume these levels if the macro situation worsens. If you’re interested in delving deeper into the global economic situation, check out Arthur Hayes’ recent essays covering the topic; You will not be disappointed.

Disclosure: At the time of writing this piece, the author owned ETH, BTC and several other cryptocurrencies.