January 23, 2022

Fed mission accomplished

Last week, the Fed released the minutes of the last meeting of the Open Market Committee (FOMC). And the most the least that can be said about this is that the stock market did not like this protocol. But from the point of view of the FRS itself, its mission has been accomplished.

What were the goals of the Federal Reserve when the COVID crisis began? I think they can be summarized as follows:

  • support the economy, that is, stimulate the stock market;
  • to reduce the unemployment rate to "dock-like" values;
  • generate some inflation, ideally around 2%.

Okay, let's see ...

Over the past 18 months, there have beenso much liquidity was poured in that the S & P500 not only underwent a V-shaped recovery, but also continued to renew record highs almost every other day.

Despite massive economic disruptions,caused by the pandemic, the unemployment rate is also returning to normal at an astonishing rate. Before COVID, the US unemployment rate was 3.5%, at the peak of the crisis it reached almost 15%, and has returned to 3.9% today.

As you can see, the pace of recovery is extremely fast, much faster than after 2008. So in this respect, too, the mission is clearly accomplished.

Recovery in the US unemployment rate: 2020 versus 2008 The current unemployment rate is 3.9%, compared to the pre-crisis level of 3.5%. From the point of view of the FOMC, the task is completed.

And inflation ... the Fed has tried for years to keep inflation steady above 2%. Now they got what they wanted, beyond their wildest expectations.

It turns out that if you pour trillions of dollars in a short period into an economy with limited supply, you can easily achieve inflation of 7%. So simple! Who would have thought…

Inflation - How Long Can It Last?For those who think that this kind of inflation cannot last long, there is a historical precedent: take a look at the 70s. Then high inflation persisted from mid-1966 to mid-1983 ...

So it turns out the Fed got what it wanted. Let us now see how sustainable these achievements are.

Because if the unemployment rates look likerather convincingly, then the stock market indicators raise some doubts. Most of the gains in the major indices have been driven by a few mega-cap stocks. And now that the Fed is (comparatively) tightening monetary conditions, it's interesting to see:

  1. How well will FAANG hold up?
  2. How bad will the rest of the market hold up?

After all, you can be sure that the Fedwill not let the stock market just crash and burn. However, it has grown so much over the past year that the pain threshold at which the Fed decides to do something is probably still a long way off: maybe 15% or 20% or more. Right now, with a roughly 7% drawdown on the NASDAQ, there is plenty of room for things to go awry.

The point is that inflation is so high thatThe Fed can't just change course so quickly. They can't even change the rhetoric until it looks like inflation has gone down. Judging by the abandonment of the epithet "temporary" in relation to inflation and the sense of urgency in tightening policies that follows from the FOMC minutes, I would say that they have no idea when this might happen.

It seems like the time has come to see the stock market sentiment shift from overconfidence to fear, insecurity, and doubt.

And that's bad for Bitcoin. BTC has been quite strongly correlated with the stock market lately, so a 20% drop in the S & P500 could bring the bitcoin price down.

Bitcoin Correlations: Is There Anything New? After the March 2020 crash, it looks like Bitcoin is becoming more correlated with the stock market on average.

For a historical preserve of capital, it isalso not that good. Inflation has been high over the past year, and while bitcoin's performance may have been low by historical standards, the price of gold has actually declined this year.

Against the background of the lowest realreturn (and negative real returns are assumed to drive gold) net capital outflows from gold ETFs totaled $ 9 billion. And this is only the fourth such case since the first physical gold ETFs appeared 20 years ago.

Net capital inflows / outflows in ETFs for gold. Despite accelerating inflation across the board, net capital inflows into gold ETFs have been negative over the past year.

Thus, general market conditions can be summarized as follows:

  • turbulence for risky assets;
  • lack of appetite for capital preservation.

Not the best conditions for Bitcoin, that's for sure.But now may be the time to get ready for "shopping" if the market "bloodshed". The long-term outlook for Bitcoin remains unchanged from the current situation, so gradually buying coins at relatively cheap prices in the event of a liquidity event is a perfectly viable strategy.

Market conditions

It is clear that the global market environment is unfavorable for Bitcoin. But what about on-chain metrics? Is there any good news from this angle?

Sorry, but as far as I can see, no.

Over the past 30 days, the larger the addresses, the weaker the accumulation trend. Whales do not "accumulate satoshi" and even "small fish" noticeably slowed down the pace of purchases:

BTC price and heatmap of BTC accumulation forlast 30 days for addresses grouped by balance. All addresses are divided into groups according to the number of coins held. For each group, the change in the total balance for the last 30 days is calculated.

If we summarize these data with our "indicatorparticipation ”, then we return to the downtrend. To be fair, it should be noted that historically a participation rate of about 0.4 means that a 30-day return on average is about 0%, but the range of values ​​is quite wide: from -50% to + 90%, you can see here. Be that as it may, the dynamics are so-so.

On-chain indicators: accumulation trends

The graph that I do not like at all:

  • the whales are still distributing coins,
  • and small traders seem to get tired of buying the decline.

On-chain indicators: accumulation trends on the price chart

But what I dislike even more isnet inflow / outflow of capital at exchange addresses. For the first time in a long time, more BTC is being transferred to exchanges on average in 30 days than being withdrawn. And if, in conditions of low demand, we get some more additional selling pressure, then I really do not see how we can reverse this trend.

On-chain metrics: 30-day net inflow of BTC on exchange wallets. Bad news awaits us here: for the first time in a long time, there is a positive inflow of BTC to exchange wallets.

Hodlers today do not bathe in unrealized("Paper") profits. The market value to realized ratio (MVRV) is 1.7, which is not too far from the lows of the current cycle. But previous cycles also saw much lower MVRV values, so there is room for more pain.

On-chain indicators:the ratio of the market value of BTC to realized (MVRV). The MVRV ratio compares the present value of all coins to the value at which they were purchased by the current owners. Values ​​below 1 mean that the market is losing on average. The higher the value of the coefficient, the more coins are in profit. The chart shows the distribution of daily values ​​broken down by halving cycles. The current value of the coefficient is 1.7.

Well, Bitcoin's “internal” metrics tell us the same thing as the macro environment in global markets: we are on very shaky ground.

Comparison of cycles:

  • BTC has grown 5.1 times since halving. In the previous cycle, a top was formed at 29.5x and a bear market bottom at 4.9x.
  • ETH has grown 17x since halving. In the previous cycle, the top was formed at 120x and the bear market bottom was at 7.2x.

The big difference between this cycle and the previous one is that this time there was no sharply "knocked down" top after a parabolic rally.

Bitcoin and Ethereum: Growth Trajectories After Bitcoin Halvings

The recommendations are the same as last week:

  • refrain from leveraged trading;
  • take the opportunity to buy coins on the cheap if blood spills on the stock market;
  • Well, if you play for a long time, then there is nothing new for you at all: just keep accumulating satoshi.

BitNews disclaim responsibility for anyinvestment recommendations that may be contained in this article. All the opinions expressed express exclusively the personal opinions of the author and the respondents. Any actions related to investments and trading on crypto markets involve the risk of losing the invested funds. Based on the data provided, you make investment decisions in a balanced, responsible manner and at your own risk.

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