Inflation vs. Geopolitical Tension: Which Will Win the Crypto Market?
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| By Alex Benfield |
We have explained that one of the biggest drivers of crypto adoption is concern over runaway inflation ... and the Federal Reserve’s response to that inflation.
After the Fed’s recent announcements, the crypto market has priced in some very hawkish behavior — the market seems to be expecting four or more rate hikes as well as some quantitative tightening (i.e., a decrease in the rate of money printing).
But lately, the biggest deterrent to greater adoption has been the tense situation on the Ukraine-Russian border.
So, it would seem these two macroeconomic factors are working against each other, playing tug-of-war with crypto market sentiment.
But looks are deceiving.
The tension over the Ukrainian border regions should be bullish for crypto. In times of political strife, a currency not regulated by any centralized authority is a lifeline — a means of accessing your wealth even if your country’s fiat currency is sanctioned or banks are closed.
It seems the influx of institutional investors that jumped into the crypto market in 2021 are stuck in their old habits. See, when tensions like we’re seeing now rise, investors get rid of any risk assets out of fear.
These investors still see cryptos as extensions of the technology sector — risk assets to be dumped at the first sign of uncertainty. And this proves their fundamental misunderstanding of crypto.
Once they catch on and see the value of holding Bitcoin (BTC, Tech/Adoption Grade “A-”) through a crisis like this, it’ll become another factor adding to adoption growth.
And that’s not all.
The U.S. has already announced additional sanctions against Russia ... which will in turn raise inflation even further as gas prices creep higher.
They may, even, creep high enough that the Fed is forced to reconsider just how hawkish it can be. The last thing the Fed would want is to push rates past the market’s breaking point and send the U.S. into a recession.
So, not only does the Ukraine-Russia conflict perfectly demonstrate the value and importance of crypto: It also contributes indirectly to rising inflation — one of the biggest drivers of crypto adoption.
Meaning the question investors should ask isn’t, “Which force will control of market sentiment?” but rather “How long will it take for both forces to positively impact crypto adoption?”
The answer is impossible to know. But we do know it’s a long-term outlook.
In the short term, there are far too many moving pieces in this scenario to confidently predict how Bitcoin and the broad market will react in the next few weeks or even months.
What we do know is while we wait, we can expect recent volatility to continue.
From the Jan. 24 low to BTC’s local high on Feb. 10, Bitcoin’s price increased by 37%. And since that high just two weeks ago, it slid again by 20% to today’s level.
Look for the $35,000 and $30,000 levels to offer major support for Bitcoin; they should hold in our sideways market scenario.
On the upside, watch out for $42,000 and $46,000 to act as strong resistance levels. A break above $52,000 would have us reevaluating our sideways market outlook, as well.
Here’s BTC in U.S. dollar terms via Coinbase Global (COIN):
Ethereum (ETH, Tech/Adoption Grade “A”) has been slightly more volatile than Bitcoin lately, as would be expected. Both ETH and the rest of the altcoin market are going to follow Bitcoin in whatever direction it moves right now.
Any hopes that Ethereum might decouple from Bitcoin have been pushed aside for the moment as investors have turned to BTC as the crystal ball for market direction.
ETH will need to hold above the $2,400 level to fight off a further downside drop, and it will look to regain the important $3,000 level in the short term. The area between $3,000 and $3,400 will be a major test for ETH if it begins to rally upwards.
Expect ETH’s price to continue to fluctuate wildly until it’s able to climb above that area.
Here’s ETH in U.S. dollar terms via Coinbase:
Notable News, Notes and Tweets
What’s Next
The past few months haven’t been very fun for investors as macroeconomic woes have caused great unease and uncertainty in the crypto markets.
Unfortunately, that is unlikely to change in the short term.
Until we can work out some of the uncertainty with these situations, it’ll be very hard for the crypto market to continue its growth. This is the time for all investors to remember to see the forest for the trees, as our long-term outlook remains in place.
These challenges all highlight the power of cryptocurrencies and showcase why, in the long run, Bitcoin is the answer.
As always, we’ll provide you with the information needed to make informed decisions concerning the crypto market, so stay tuned for more.
Best,
Alex
