The Word We Fear Has Finally Come!
(Any views expressed below are the personal views of the author and should not form the basis for making investment decisions, nor be construed as a recommendation or advice to engage in investment transactions.)
This week, the 2yr / 10yr treasury yield curve inverted, presenting the signal that a recession is possible at some point in the months ahead. However, the time of a recession is hard to predict.
Summary
General: Digital asset funds for bitcoin saw outflows of $132m, while Ethereum funds saw inflows totaling $6m
Technical: BTC lost the $45,300 support level and pulled back into the $40,000 whole number support
Markets: We see some selling and crypto fund outflows as the federal reserve signaled aggressive monetary tightening could be coming
Recommendation: Hold your current positions and keep the BTC $40,000 level on watch. If we go below the $37,000 level and hold, it will be a significantly bearish signal
Important News
- Apr 6: In February 2022, industrial producer prices (PPI) increased by 31.1% annually in the EU
- Apr 7: The Fed’s release of its meeting minutes indicated officials plan to shrink the balance sheet by $95 billion a month in the us
- Apr 8: Strike partnered with Shopify, Blackhawk, and NCR to let users pay with bitcoin. Merchants can get all the money with no fees, instant settlement, and cash finality that requires no third parties.
- Apr 11: White House releases a new report blaming Russia for “extremely high inflation. “
This week, the Bitcoin market traded lower after breaking out of a 3-month long trading range. While we were expecting a retracement into previous support levels, this pullback exceeded our expectations. On Monday, the White House press secretary told reporters the inflation report could show highly elevated prices, thanks to disruptions in energy and food markets caused by Russia’s invasion of Ukraine. Due to the concerns about inflation and its effects on economic growth, investors are reducing their exposure to risk assets, including technology stocks and crypto-assets. The 10-year Treasury yield rose to a new three-year high on Monday at 2.78%. During times of high rates, assets such as tech stocks tend to be sold as the comparable return vs. the risk-free rate is lowered. Data also shows that bitcoin held by funds was steadily decreasing starting last week. Approximately 10,000 bitcoins have flowed out of the fund.
Our View
Reality is settling in as the Fed signals that it could start shrinking its balance sheet by as much as $95 billion per month. Bitcoin and the overall market are in a susceptible position. There is a high correlation between bitcoin and risk assets, so the heightened inflationary fears caused a drop in risk assets, and bitcoin followed. The more correlated bitcoin is with risk assets, the more the Fed’s policies will matter. We need to continue following inflation trends and the Fed’s possible moves.
Recommendations
In the past week, bitcoin broke down from its $45,000 support as we expected. Currently, we are on the $40,000 whole number support. It will be a bearish signal if we break and hold under this level. We recommend keeping your position and watching how price reacts around this area. There is a possibility of a capitulation move towards $37,000. But, we would stop out of any short-term positions if we hold under that level.
Bitcoin’s daily volatility in the past 30 days is 2.23% compared to 2.89% last week. Its approximate 30-day average daily range decreased to $19,15 compared to $2,000 last week.
Technical Analysis
Bitcoin broke down from its 3-month resistance of $45,300 at the start of the week, hitting a low of $39,300, a 15% drop. This pullback was deeper than the one that we had expected as bitcoin made a test of the $40,000 support level. The question now is whether the bulls can show strength at this crucial level, or will we break down and revisit the $37,000 support. If we lose the $40,000 level, we might be again trading inside the trading range we have just broken out from. However, if we can hold this $40,000 level and buyers can push prices over $42,000, we may see some bullish momentum back into play. We could see further sell-side activity if we fall under $37,000 support.
Recession on the Horizon
Even though the labor market is still solid, other forces such as consumption make up 70% of US GDP.
Inflation has hit Americans hard and could stop the economy from further recovery. The consumer price index (CPI) surged 7.9% annually, the highest since January 1982. Prices have surged in automobiles, housing, food, and energy categories.
Rising inflation is becoming a more severe issue, and consumers are concerned about whether the current growth rate can be sustained. If prices continue to surge, people may begin to trim their spending, lower business revenue, and cause higher unemployment. Thus the Fed will continue to raise interest rates and tighten its balance sheet more aggressively, which will curb inflation while further slowing down the economy.
We don’t want to waste time arguing whether the economy will finally go into recession because the market moves in line with expectations rather than the actual economic situation. We believe traders should follow the trend regarding future expectations and get out of the game when everyone hops on the bandwagon. Therefore, our research simply focuses on observing this whole process and determining the critical points of hype in advance.
Fundamental Analysis
Retail investors (0-1 BTC holders) are currently buying at the second-highest rate in Bitcoin’s history. Most spikes have coincided with macro tops, but they have been bought strategically on several occasions. This time, the spike in price seems to be an outlier.
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