(Kitco News) Inflation in a recessionary environment is an entirely different beast to deal with all assets, and Bitcoin is no exception, according to Coinbase Head of Institutional Research David Duong.
The cryptocurrency market has seen a strong sell-off this week, with Bitcoin down 32% in the last seven days and trading at $20,464. And Ethereum, the world’s second-largest cryptocurrency, is down nearly 40% on the week and last traded at $1,083.
The initial trigger behind the last massive cryptocurrency crash was the macro environment. First, a surprising high inflation figure for May caught markets off guard, and then a 75 basis point hike from the Federal Reserve on Wednesday, which marked the biggest rate hike since 1994.
For a glimpse of what’s to come at the Fed’s July meeting, click here.
The dramatic shift in cryptocurrencies also gained traction after risks of contagion from the cryptocurrency community itself after a lending company Celsius said it was halting all transactions on its platform. To learn more about this, click here.
Inflation is a tricky measure, and its impact on the crypto space will depend on what business cycle the financial space will be in at the end of the year, Duong told Kitco News on the sidelines of the Consensus 2022 conference held in Austin between June 9 and 12.
“Inflation works very differently in a bullish cycle than in a bearish cycle. Inflation rising in a positive growth environment is not a bad thing because the economy is growing at the same time. The problem we have now is that inflation is rising in a potential recessionary scenario. That’s what makes things really complicated”, he explained.
Nothing can perform well in a recession, and Bitcoin will not be an exception to equities, Duong added.
“I don’t know if Bitcoin can work under this bearish environment. Jamie Dimon of JPMorgan recently referred to the current economic cycle as a hurricane blowing. If there’s a hurricane and my car is broken, and my house has broken windows, I don’t say to myself, ‘It’s a correlation between that broken car and the broken house.’ I say, ‘There’s a hurricane.’ That’s what people are missing when it comes to this kind of situation,” he said.
The correlation between equities, risky assets and Bitcoin seems very high at the moment. “I don’t think anything comes out of this unscathed. And unfortunately, Bitcoin is no exception to that rule,” noted Duong.
In terms of finding the bottom and whether $20,000 could be that level for Bitcoin, Duong pointed out that it is challenging to distinguish how much of this downtrend is macro-specific drivers versus some internal, idiosyncratic stuff relevant only to crypto.
“Trying to separate that is the hardest problem when trying to figure out what the bottom is, because they’re moving together,” he explained. “For people who are telling me it’s $20,000, it’s hard to be right because it’s hard to know how much these factors contribute to the performance of an asset like this.”
Some of the internal factors that affect Bitcoin’s bull cycles are elements like the hash rate and the halving, which is a 50% reduction in the Bitcoin mining reward that is scheduled to slow the pace of supply expansion every four months. years old. “That matters for the supply and how it affects the price of it,” Duong said.
Positive headlines to watch that are specific to cryptocurrencies and Bitcoin include innovations and new technologies – layer 2s. Also, the regulatory space – will be this oversight where “we can hang our hats,” Duong said.
“Headlines are important. They are key to this space. This is a long-lived speculative asset at the end of the day. That means that probably in the long run, if secular technology is to be believed, it has a good chance of increasing in value.” “, described.
These developments will be essential in the second half of the year, especially with the sweeping Lummis-Gillibrand cryptocurrency law, Biden’s executive order and all related digital statements reports due out in September and October, Duong pointed out. “Once we get that, maybe we can start talking about the Bitcoin spot ETF.”
Furthermore, the activity of Bitcoin miners is critical to keep an eye on this downtrend because they are important Bitcoin HODLers, who face rising electricity costs.
“As they are settling in the US, they should expect higher energy costs. How are they dealing with this? Are they being forced to sell reserves? All these are important issues to look at because they are technical factors that affect things side of the stream,” elaborated Duong.
In addition, funding is critical, especially in relation to the supply available when people are being called on margin. “Are there liquidations of funds that contribute to this? And is there enough supply to fulfill those requirements?” he asked.
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