Crypto DISASTER: When Will It End?

Crypto DISASTER: When Will It End?

Crypto update

We are going to look at where inflation is, where the economy is, how the Fed is reacting to that, and then where we are in this current cycle in terms of asset prices. This is the Price to Earning Ratio history of the NYSE over the last hundred years. It gives us a really good outlook as to where we are in the current cycle and how that is going to affect the price of Bitcoin and all coins over the next few months and years.

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BTC chart

Firstly, I want to start with the price of Bitcoin. You can see that this week, over the last week, we had a really nice jump up from the kind of low of $28,500 up to $32,000. That was ironically on the back of some fairly bad news for the economy, but on Friday this week we got some fairly good jobs numbers. Ironically, that’s bad for the price of Bitcoin. Good jobs numbers and a strong, robust economy mean that the Fed has to be even more hawkish and tighten and raise rates and tighten the money supply even more to try and keep the economy from growing. That’s what they’re trying to do right now.

So the better the economy looks, ironically, the more the Fed has to do. That means Bitcoin will actually go down in price. Bitcoin can be thought of essentially as property during the good times. The price goes up during the bad times, and when the recession comes, the price will go down. It’s essentially an inverse derivative of the strength of the dollar interest rates and the economy. So when the economy is getting worse, ironically, that’s when the Fed will lower rates and try and boost things, weakening the dollar, hence Bitcoin goes up. So what we can see is that 30k dollars is still a very key level and we are expected to kind of trade around this, probably for the foreseeable future. All of these price movements are based on job data and economic figures. Weaker economic figures will see it rise, and then stronger economic kinds of output figures will see it go down, basically as a derivative of interest rates. So I do see a lot of short-term volatility.

We have normalised…

If you’re a short-term trader, you can trade this. Though the price to earnings history of the S&P 500 is long, you can see that during the last easing cycle we got up to historically very high figures. This was just before the crazy economic collapse in 2008.

But we were historically high and we’ve come way down now to what you would see as a historically neutral Price to Earnings Ratio. This essentially means that the market is currently fairly priced in relation to historical figures. So for the earnings that the market makes, the market is priced in a normal way.

As you can see on June 1, 2022, the price-to-earnings ratio is around 20. It is not massively high. It is higher in recent years, but compared to most of modern history, 20 is about normal. It could fall to a 15 or a 16. And obviously, when the Fed is easing a lot, you can see it really jumps up here to 40, which is obviously too much, so we have come down, we have tightened, but it can go down further. We’re placing earnings; we’re placing the ratio of what we’re willing to pay for earnings at 20. It may go down a few points from here. So, you may get 18 times earnings or 17 times earnings. It does, but that doesn’t really matter. What will hit really hard is if earnings come down, and they very well could. Right now the market is priced appropriately, but what could see the price fall further is earnings. So the P/E ratio may stay the same around 18 to 20, but if earnings come down, so will the price of stocks, bringing down the crypto market as well.

Job losses

To complicate this, though, is the real economy, which is definitely going through a recession right now. At least in Tech, and obviously with Bitcoin and altcoins being Tech and related to Tech, how much of this tightening in the Tech market is left to go and how much will that affect Bitcoin prices?

So what we can see here is Peloton getting rid of 3,000 staff, you know, freezes, Frieza’s hiring, Carvana’s two and a half thousand laid off workers, Netflix lying off workers. Basically all of the Fintech plays that got all pumped up, just too much money in the system here, freezes, hiring, even Meta. So you can see that the contraction of the economy is hitting Tech. I believe Tech is first into this recession slowdown and will also be first out of it.That’s just how these kinds of stocks work.

You can also see here that this is the monthly global liquidity cycle. You can see during the Fed’s easing that inflation was really high and now we’re coming down to normal figures. So everything is normalizing, but now the future outlook is whether we have to tighten even further or is inflation going to come down. So that’s really the key thing. 

You can see, investors here setting their sights on the upcoming inflation report as the bear market rally falters. Inflation staying high means that the Fed will be extra hawkish, so the economy is fairly robust in the states anyway. But if inflation stays high, the Fed will spark that into a recession.

Treasury rates

Just to prove this as well, we’ve seen U.S. 10-year treasury rates tick up, and this means the market is fairly afraid that essentially the same contraction that’s happened in Tech needs to happen in the real economy as well, and yields are telling us this. So the jobs report that came out on Friday was fairly good, meaning that they think the Fed has to tighten further and really hit the rest of the economy.

As well, you’ve seen rates come up. They actually came off a little bit, but over the last few days they have spiked again. This is the job number right here. When jobs are really strong, that means they think the Fed is going to have to raise rates again to really hit the economy. So you can see the rates are just ticking up here. The market is telling us we don’t like these strong jobs figures. We need the jobs figures to be softer, and if that happens, rates will come down because they think the Fed is going to ease again. That’s good for Bitcoin. So if you’re in Bitcoin, what you really want is a slowing of the economy, which isn’t really happening here. Next Friday will be the CPI figures, which are extremely important. If they come down again, then that’s very good for risk assets, including Bitcoin.

Market outlook

The market thinks that the Fed is going to raise 50 basis points this month, 50 basis points at the next meeting, and then switch it down to 25 basis points a couple of times. This depends on inflation and the health of the economy, but most of the market, as you can see here, is predicting a 50 basis point move at this meeting in June, so a 97% chance of that happening. That’s what the market thinks going through to July again. The vast majority of the market thinks it’s another 50 basis point hike.

And then in September, what you can see here is that the market is undecided. Actually, a lot more people are thinking that they’ll go down to a 25 basis point hike right here. This is possible if inflation stays very high, what you’ll see, this figure going down and 50 basis points going up.

That’s not good for Bitcoin. If inflation comes down and that print next Friday is low and it shows inflation slowing or deflation, then this 50 basis points will not happen and a lot of people are going to go to the 25 basis points. So it really is figure by figure at the moment. Jobs reports and CPI are the absolute things to rely on if CPI is coming down. It is risky for way more than Bitcoin. And so Bitcoin will pump. Some of the altcoins that have been hammered will also start to pump.

Scenarios

The scenario that the market is pricing in right now is essentially just a slowdown of the economy and not a recession, and so that plays out on the Bitcoin chart like this. Essentially, you’re kind of bumbling around at this level, and then going from there.

The second scenario is that there is a short-sharp recession that may happen towards the end of this year when oil prices start going up again as the northern hemisphere starts to try and heat their homes again, and so that could bumble around. Then you see a short-sharp recession and then an easing of monetary policy, which then obviously sparks another rise for Bitcoin. Those are the two scenarios that are in play.

Right now the market is pricing in the first one where we’re just going to go around this level for a while and then go from there. I do not see a scenario where we just suddenly start going up. I don’t see any scenario where that is possible. The economy isn’t growing. It’s trying to actually come down in terms of its growth and the Fed wants that as well, so there’s no scenario in which I see all coins or Bitcoin really pumping anywhere like this. These two scenarios are far more likely: a kind of consolidation around here or a consolidation than an actual recession, which is a short-sharp kind of shock and then an easing of monetary policy. 

[This article is a transcription of a video made by MoneyZG]

Original video: https://youtu.be/jLOkaHYIusk]