In The past year you've must have heard the market talk about:
• The fed
• Interest rates
• Quantitative tightening
These things have LARGELY been responsible for the entire crypto bear cycle but the same factors also help predict the next bull cycle.
To understand the market situation in simple terms let's consider the example of the historic bull run we had in 2020.
On March 12, 2020, the World Health Organization declared the Coronavirus a pandemic. The whole world was under a lockdown. COVID sent panicked investors to rush for the safety of cash, sending all liquid markets down sharply.
It was then that the US Federal Reserve stepped in. As the Central Bank behind the world’s largest economy, the US Federal Reserve plays a unique role in financial markets. It controls the supply of the US dollar, which is the world’s reserve currency. Printing money and changing interest rates are the Fed’s main tools for supporting the economy in times of extreme turmoil.
By digitally printing money and buying financial assets like bonds from financial institutions, they can introduce new money into the economy. And by lowering interest rates, they can make it cheaper for other banks to borrow money from the Fed, which also introduces new money into the economy (credit).
Over the next two years, almost 6 trillion in new money was printed, increasing the broad supply of USD nearly 40%.The US wasn’t alone, as the European Central Bank, Bank of Japan, and Bank of England all lowered interest rates to near zero. All told, the world’s four major central banks printed $11.3 trillion, which is a 73% expansion since the beginning of 2020.
Now as expected, when new money is being printed at record levels, and interest rates are near zero, all of this money and credit needs a place to go.
In the aftermath of COVID, these forces caused massive inflows into stocks, crypto, and even NFTs, helping push asset prices to new heights. Hence a historic bull run we hadn't seen before took place.
When the system is awash with money, and assets are going up, everyone feels richer. People can spend more and companies can pay their employees more. When spending and incomes increase faster than the production of goods, you have “too much money chasing too few goods. As a result the price of goods rises. Classic supply and demand relation.
Because of this the consumer price index (CPI) measures the change in prices paid by consumers for goods like gas, utilities and food. From March to May 2021, it shot up from a healthy 2.6% to 5%.By March 2022 it hit 8%. The highest in 40 years. This is also defined as inflation.
Inflation makes everyone poorer, because people’s money no longer buys as much as it once did, so the Fed had to step in once again.
To combat rising inflation, the Fed in turn used the same tools they used to support financial assets in the first place.
Another good take on how different factors affect cryptocurrency, read here.
When that happens, the Fed flips the switch, raises rates and removes money from the market, setting the process in reverse. Basically pulling money OUT of the market instead of INTO the market like before (quantitative tightening).
With the cost of borrowing and paying existing debts more expensive, everyone slows down on the spending that caused inflation in the first place.
This causes less money chasing investments, which brings the price of assets down along with it.
On November 3rd, 2021, the Fed said that it would start to slow asset purchases.
The start of the crypto bear market. Coincidence? Obviously not.
Best ways to deal with a bear market here.
When October’s CPI of 6.2% was announced on November 10th, it became clear that inflation was not under control and that the Fed would have to intervene.
While the first interest rate hike wouldn’t come until March, the great information processing machine that is the market, seemed to react at first sign that they’d likely be coming. With money tighter, investors preferences shift to investments that produce cash flows today rather than far out in the future. Thus the tech sell-off.
Tech stocks are considered risk assets. Given the correlation, it’s fair to say that most individuals are still treating crypto similarly. When money gets tight, risk assets are often the first to get sold.
This market has however been pronounced dead in 2018, 2015, and 2013, only to come back stronger each time.
Like the internet before it, crypto innovation marches on regardless of market cycles. At present, 9 out of 10 Central Banks are exploring digital currencies and analysts at JP Morgan have dubbed crypto a “preferred alternative asset class.” Facebook rebranded to Meta, Twitter, Tik Tok and Instagram are integrating NFTs.
The moment the Fed stops raising interest rates OR turns on the money printer is the moment the crypto markets will likely enter the next (bull) cycle. While people largely look at the 4 year halving to predict the cycles of the market there needs to be money available.
In a broader look, since the start of the creation of the crypto markets the economy in general has always been in one giant bull run. This time it's slightly different and as such we need to include and monitor the macro conditions we are in.
However, most importantly Crypto is here to stay.
If you are into crypto and looking to hold up discussions, join communities and network better with traders and crypto enthusiasts from all over the globe, you should definitely check out Our Crypto Talk.