The crypto market is getting hammered as investors panic over the supposed upcoming actions of the Federal Reserve.
Gone are the days of quantitative easing (QE) and endless money printing ... or so says the Fed.
And the all-time low interest rates that the country has grown accustomed to? Those are expected jump as many as three times in 2022.
The macro backdrop of endless printing and unchecked government spending that propelled Bitcoin (BTC, Tech/Adoption Grade “A-”) and the broad crypto market to amazing new highs over the past two years appears to be unraveling before our eyes.
And it’s not just crypto that benefitted from the free money flood. The S&P 500 hits a new all-time high just about every month or so since the 2008 crash.
The latest round of QE accelerated in 2020, when the Fed sent those printing presses into overdrive to combat the economic blow from the COVID-19 shutdowns. Overall, the total supply of U.S. dollars in circulation increased by 40% in just 18 months.
The chart below, which tracks S&P futures, goes almost vertical at this point.
That type of money printing has consequences, though, and now it’s looking like the Fed is finally waking up and taking action to combat those consequences.
Investors are reacting to this shift with panic, leaving higher risk assets as fast as they can. The bond market had an atrocious week last week and is off to a poor start again today.
It should be noted that this isn’t the first time the Fed has attempted quantitative tightening. However, each failed as they resulted in steep, short-term corrections to the S&P 500, forcing the Fed to turn the money printer back on.
Once again, the Fed is embarking on this tapering course ... and like many times before, it’s likely to end with an abrupt change in policy as the taper proves too much for the economy to bear.
Still, in the short term, the Fed flipping hawkish to combat out-of-control inflation could be what shuts off the music on what has been a euphoric bull run in the equities and crypto markets.
The key difference between the two, however, is that crypto assets were created in response to such poor monetary policy.
In a world where governments do not control the money supply, these types of shenanigans cannot take place.
Bitcoin is still a new asset, however. And the broad market is even younger. We’re still far off from mass adoption of a Bitcoin standard and, for now at least, we are subject to the Federal Reserve and its reckless actions.
BTC is currently hanging on for dear life at the support area between $40,000–$42,000; there will likely be some buyers below $40,000, but the bears have proven a formidable force so far in 2022.
Here’s BTC in U.S. dollar terms via Bitstamp:
What’s Next
The endless money printing that this country has grown accustomed and addicted to is coming to an end. And just like with any addiction, we’re likely to see symptoms of withdrawal in both traditional finance and crypto.
It might take some time for the Fed to realize that, but at some point, they’ll understand that they can’t undo the actions of QE without causing massive pain to the economy as a whole.
The money printer will eventually resume, but for now, the market must deal with the actions of the Fed. Even though crypto isn’t under the Fed’s authority, it will still feel the aftershocks as investors flee speculative investments.
If BTC’s support holds, we expect the current sideways trading to continue for a bit longer.
Best,
Alex
