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| By Sam Blumenfeld |
Crypto has traded resiliently over the past five trading days as it looks to establish a price floor.
Bitcoin (BTC, Tech/Adoption Grade “A-”) and other cryptocurrencies are trading slightly higher as the market looks to claw back after a two-week period of sharp sell-offs and establish a price floor.
Going forward, both crypto and traditional financial markets are expected to continue reacting to expectations surrounding the Federal Reserve’s interest rate policy.
Last week, cold water was poured on investors’ hopes for a pivot and worries of the U.S. entering a recession were reignited in response to Fed Chair Jerome Powell’s comments. He promised to do whatever it takes to restore inflation back to its 2% historical norm.
But as I’ve said before, the Fed’s actions matter a whole lot more than its rhetoric. We’ll have to wait and see if the Fed will stay true to its word.
For now, the crypto market is trying to rebound after the initial sell-offs because traders are still skeptical about the Fed’s prospective willingness to tank the economy.
After seeing year-over-year inflation drop from 9.1% to 8.5% last month, many investors are convinced the Fed will hesitate in the face of higher unemployment and potential negative growth.
But if the market doesn’t buy what the Fed is selling, it could lead to even more drastic tightening to reduce demand.
BTC managed to find support at $19,500 — just below its 2017 bull-market peak — but it could easily face additional weakness as it contends with significant macroeconomic uncertainty and the current bearish stage of the market cycle.
Today, Bitcoin is up about 1% in trading after retaking the critical $20,000 level. The asset still trades below its 21-day moving average of $21,600, but it’s moving in the right direction for now.
Here’s Bitcoin’s price in U.S. dollars via Coinbase Global (COIN):
On the other hand, Ethereum (ETH, Tech/Adoption Grade “A”) is performing better than the market leader, jumping 4% to a high of $1,650 earlier in today’s trading session. Despite the recent market weakness, ETH is even for the month compared to Bitcoin’s 10% loss.
Ethereum’s outperformance is no surprise considering the building hype for the Merge. The official launch for Ethereum 2.0 will take place on Sept. 6, while the final stage is expected to take place around Sept. 15-16. The transition should have many positive scaling effects, potentially increasing transaction speeds and simultaneously reducing network fees.
The Merge is a critical event for the second-largest cryptocurrency. Ethereum 2.0 and the shift to proof-of-stake consensus is much more environmentally friendly, and it could allow institutions with environmental, social and governance mandates to finally utilize the technology and gain exposure.
Still, it doesn’t change the fact that short-term macroeconomic headwinds are likely to keep crypto prices suppressed until they play out. It’s possible that a frenzy could become a “buy the rumor, sell the news” type of event after the dust settles.
ETH was nearly able to touch its 21-day moving average today, and it’s possible that it will manage to break through in the short term because of the historical importance of the Merge.
However, if it does, it’s unlikely to catalyze an uptrend without market-wide help from improving sentiment toward a Fed pivot.
Here’s Ethereum’s price in U.S. dollars via Coinbase:
Notable News, Notes and Tweets
- Pomp highlights how the U.S. debt-to-GDP ratio has ballooned to unsustainable levels compared to previous decades.
- Despite worsening sentiment during bear markets, a survey found that trust in crypto holds strong.
- On-chain metrics show that despite volatile and negative price action during the bear market, 62% of wallets have not sold any Bitcoin in the past year.
What’s Next
Crypto market price action should continue to be dominated by the Fed’s statements and actions toward fighting inflation. As interest rates rise and the U.S. central bank trims its balance sheet by $95 billion per month, the tightening will likely continue until economic data shows significant impacts on unemployment and GDP growth.
Until then, Consumer Price Index reports should reveal how the Fed’s tightening is impacting inflation and demand. August’s data will be released by the Bureau of Labor Statistics on Sept. 13, and it’ll be an important gauge of the success of Powell’s hawkish comments.
Regardless, long-term crypto investors are showing conviction, and on-chain metrics show that these speedbumps aren’t causing panic among the majority of investors.
Once macroeconomic headwinds ease, institutional accumulation and broader adoption should provide liftoff during the next bull run.
We’ll provide more information as it comes in, so stay tuned!
Best,
Sam
