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January 07, 2022
The publication of the minutes of the last Fed meeting shocked the tech and crypto markets.
Written by Steven Anthonis - @stevenanthonis
Inflation is rising in the US and the Fed has already admitted that it is no longer a temporary phenomenon. The central bank therefore warned last month that it will tighten its policy, raising interest rates in 2022 and phasing out bond buying.
The publication of the minutes of the meeting this week made it clear that there are some Fed executives who want to intervene quickly. The plan is effective to stop buying bonds by March, after which interest rates can be raised. James Bullard, the chairman of the Federal Reserve Bank of St. Louis, just announced that a first rate hike could already follow in March.
The language the Fed is now speaking should help temper inflation expectations. When people expect higher inflation, they will also demand that their wages be raised, which effectively causes the higher inflation. By saying that the policy will tighten, the Fed can already have an impact on inflation developments, without actually raising interest rates at all.
The Fed's expansive monetary policy has made money sloshing around and looking for assets that still offer yields. A risk-free government bond no longer yielded any returns, so there was a real risk-on phase where shares of fast-growing tech companies were bought and many large investors even looked at cryptocurrencies like bitcoin.
If returns can soon be achieved again with safer investments such as government bonds, a risk-off phase is starting. A rotation, away from tech and crypto and back towards bonds.
Higher interest rates also make it more expensive for tech companies to borrow money. Many startups are not yet profitable and the higher cost of borrowing often pushes the point at which profitability is achieved further into the future. This also makes tech companies less attractive to invest in. Moreover, zombie companies that have survived thanks to the zero interest rate run into trouble quite quickly in a period of rising interest rates.
Bitcoin is often viewed as the digital gold, as a hedge against inflation or as a haven for lax central banks. The big money in Wall Street has also invested in bitcoin for that very reason. When the Fed now promises to raise interest rates, bitcoin loses some of its appeal. In addition, many cryptocurrencies are also viewed as risky tech companies. If returns can be made in the future with risk-free assets, investments in crypto will again be phased out by the major investors.
In the previous analysis, we were still around the support of the rising trend channel, where we were able to bounce back effectively. But this bounce did not continue. Bitcoin failed to overcome the $51,000 mark, then fell below the 8 and 21 EMAs again and then broke below the rising trendline.
The RSI could not rise above 55, the MACD remains below the zero line,... The technical picture currently looks weak. On the downside, the next targets are $38,000, $35,500 and $31,000. The trend is downwards, so in the event of a recovery, look out for a new lower top. The picture doesn't brighten until we get above $46,000 again. Above $51,000, we're looking up again.
If you wait for bitcoin to show strength again, you will of course never be able to buy at bottom prices. For those who think that bitcoin will be worth more in the future, the current price weakness can therefore be a buying opportunity. Read more about buying bitcoin here.