NewsFlash Articles Data Fundraising BlockBeats Pro

Ouyi Research Institute: After Bitcoin fell below $30,000, the market faced two trends since the interest rate hike in May

Read this article in 22 Minutes

Every time a valley is crossed, the total market value and tenacity of Bitcoin will climb to a new high

Original title: "Ouyi Research Institute: Bitcoin fell below $30,000! The encryption circle is facing two trends since the interest rate hike in May"

Original author: Zhao Wei, senior researcher at Ouyi Research Institute

According to Ouyi market data shows that at around 8:00 a.m. Beijing time on May 10, Bitcoin briefly fell below the key position of $30,000, reaching as low as $29,735, a drop of more than 10% within 24 hours. This is the first time since Bitcoin peaked at $69,000 on November 10 last year, it has fallen below $30,000. Half an hour later, the bitcoin price was back above $30,000. At 10 o'clock, the price of Bitcoin was temporarily reported at 30,891 US dollars.

Bitcoin price trend (Ouyi data)

What is the direct cause of the bitcoin price falling below $30,000 this time? There is a view that:

At about 2:00 am today, the bitcoin address of Luna Foundation Guard (LFG) transferred 42530.82 bitcoins to the outside world. About 1.319 billion US dollars. This spurred panic selling among a large number of users. In addition, the stablecoin UST issued by Luna has recently broken away from the anchor of $1, and its price has continued to fall. As the number one USD algorithm Stablecoin with a total market capitalization of USD 18 billion, the flash crash of UST and the similar operation of the issuer behind it brought down the crypto market that was already turbulent recently.

Of course, why is the encryption circle so vulnerable recently? This also points to the ultimate reason for this round of slump: US interest rate hikes.

On May 4, the U.S. Federal Reserve Board announced a 50 basis point rate hike, raising the target range for the federal funds rate to between 0.75% and 1%. At the same time, the Federal Reserve announced that it will shrink its balance sheet of nearly $9 trillion starting June 1, in line with interest rate hikes to curb soaring inflation.

As soon as the news came out, the U.S. stock market and the encryption market rose slightly in a short period of time, because the panic had been largely digested in the early stage. During the meeting, Federal Reserve Chairman Powell ruled out the possibility of raising interest rates by 75 basis points, dispelling the market's doubts about raising interest rates too aggressively.

But immediately after that, the trend of the market turned sharply, and both the US stock market and the encryption market closed sharply lower. After all, this is the first time since 2000 that the interest rate hike has reached 50 basis points, showing the urgency of the Fed's tightening of monetary policy, which has brought a blow to funds and market sentiment.

But correspondingly, the yield of U.S. bonds soared, and the U.S. dollar index hit a new high in nearly 20 years, showing the positive effect of raising interest rates. It can be said that raising interest rates is a desperate move by the Federal Reserve to reshape the credit of the US dollar at a critical moment when US inflation is intensifying and the credit of the US dollar is declining.

As far as the market is concerned, the trend of panic selling has already been established, and it is a miserable situation. The three major U.S. stock indexes all gave up the gains of the previous few days, among which the Dow once plunged nearly 1,400 points in the intraday session.

1. Economic recession accompanied by high inflation rate is rarely staged, and interest rate hikes therefore bring greater uncertainty

< /p>

As early as late April, Goldman Sachs, an investment institution, released a report predicting that the probability of a U.S. economic recession in the next two years is 35%.

The report analyzes that the main challenge facing the United States is to narrow the gap between the number of jobs and the number of workers, and to tighten financial policies without substantially increasing unemployment. Employment reductions at the same rate would slow wage growth to a pace consistent with the 2% inflation target.

But what makes the Fed and Wall Street troublesome at present is that the recession of the overall US economy coexists with a high inflation rate, which is extremely rare in history. From two aspects of intuitive data, this contrast is even more acute:

First, the "Wall Street Journal" conducted a survey of 65 business, academic and financial professionals earlier this month. According to the survey, respondents generally predict that the probability of the US economy falling into recession in the next year is 28%, both higher than the 18% at the beginning of the year and 13% a year ago. In other words, the elite level has further lowered their expectations for the US economy, and pessimism has become increasingly strong. The mainstream view has reached a further consensus on the US economic recession.

The data comes from The Wall Street Journal

Secondly, according to data released by the US Department of Labor on April 12, the CPI in the US rose by 8.5% year-on-year in March, the highest level since December 1981. This figure was higher than the 8.4% expected by the Dow Jones, and it also means that the United States has experienced a level of price increase that has not been seen in the past 40 years.

U.S. consumer price index (CPI) and producer price index (PPI ) both reached historical peaks

The direct comparison between the two shows the inflation dilemma under the recession cycle.

As we all know, high inflation is accompanied by rapid economic growth, and vice versa, substantial deflation corresponds to an obvious economic recession. Therefore, the Fed’s interest rate hike this time may face a more complicated situation than previous interest rate hike cycles, because the two major black swan events of the new crown epidemic and the Russia-Ukraine war have brought huge uncertainties to the world economy. Of course, the instigator of all this is the skyrocketing release of the US dollar after the epidemic. Therefore, raising interest rates is inevitable, and the subsequent macroeconomic and financial market trends are even more confusing.

Second, the hawks and doves are quite different in raising interest rates, and the Fed’s monetary policy is still uncertain

The sharp edge hangs high, the dilemma, shrinking money, and tightly controlling liquidity have become the "least bad" option. After all, everyone in the United States is concerned about whether a recession can be avoided.

City Index analysis believes that the S & P 500 index has seen the strongest increase since 2020 on the day the Federal Reserve announced the latest interest rate decision, which in itself is somewhat unusual. Arguably, the drop seen on May 5 was the expected repricing. "At the end of the day, risks remain, inflation remains high, and the Fed is still going to act aggressively.

Of course, those who firmly believe that raising interest rates can cure the ills of the US economy, It seems that they are not worried about the pain caused by the plunge. Earlier, the representative of the hawks and the president of the St. Louis Federal Reserve Bullard even made a bold statement: "Raise the interest rate to about 3.5% before the end of the year."

Furthermore, for the "recession theory" put forward by investment banks and economists represented by Goldman Sachs, "Eagle King" Brad chose to ignore: "It's too early to talk about a recession. There's only been one rate hike." Bullard expects the U.S. economy to grow at a healthy rate above the long-run trend in 2022 and 2023, with unemployment falling. to below 3%.

Whether it is a gradual and moderate small interest rate increase, or a radical and violent large-scale interest rate increase, the relatively fragile encryption market , resulting in a direct and swift impact.

Just in the third week of April, Bitcoin fell below the $40,000 mark again after nearly a month, and has continued to fall until now.

Although during this period, there were heavy news such as Russia’s announcement that “energy such as natural gas will be settled with Bitcoin”, judging from the market reaction, it is only slow down the decline.

From Bitcoin hitting a new high of 69,000 US dollars, to falling below the 50,000 and 40,000 US dollars in a row, it is closely related to the Federal Reserve's monetary tightening policy.

As one of the world's major value targets, Bitcoin is still highly dependent on the stability of the US dollar and global financial stability dominated by US finance. The policy direction of the Federal Reserve is the decisive force affecting the price of Bitcoin.

However, the Fed's policy formulation is not entirely based on financial markets, capital gains, retail profits and losses, and public sentiment. The rise and fall of US stocks is only one of its references. The encryption circle is even more insignificant here. Given the obvious downturn in the U.S. economy, subsequent interest rate hikes will inevitably follow the timeline, not to mention the current tightening cycle in history. However, judging from the current attitude of the Federal Reserve, it seems that the option of raising interest rates still has room for expansion and maneuver. After all, Powell has already said it: We have a good chance of a soft landing.

Third, from two assumptions, how will the current round of interest rate hike cycle affect the market outlook of the crypto circle?

Based on the above conclusions, combined with the specific trend, we might as well make the following two hypothetical analysis on the market outlook of the encryption circle. It is for informational purposes only and does not constitute any form of investment advice.

Possibility 1: The Federal Reserve will continue to be hawkish after the May meeting, raising interest rates by more than 3% throughout the year in order to curb high inflation

< /p>

The specific impacts may include:

1) Funds continue to flow out significantly, which in turn affects asset prices in the financial circle;

;

2) The U.S. CPI has dropped to the level of the first half of 2021 or even lower, and the inflation problem has been alleviated;

3) The US dollar continues to appreciate, The credit of the US dollar has been repaired to a certain extent;

4) There is a high probability that Bitcoin will be forced to digest the "consequences of US dollar water injection" since 2021 or even longer. Its bearish expectations may deepen;

5) Trigger interest rate hikes in various countries, that is, major countries and financial institutions will try to maintain the stability of their currencies and use more Radical means to stabilize the existing international financial system.

For example, after May 5, the European Central Bank, the Bank of England, and the central banks of developed countries such as Canada and New Zealand have successively confirmed their next interest rate hike plans.

6) In the long run, Bitcoin will gain more independent value positioning, and the encryption market may usher in a new period of stable development once again stimulated by this. Because the price of mainstream digital assets has bottomed out, it will attract a new batch of high-level institutions and retail investors to buy bottoms, and then after the US dollar starts the release cycle, the rich returns brought by value investment will surface. Of course, during this period, the price of Bitcoin may be affected by major currencies such as the US dollar, the euro, and the ruble, causing some fluctuations.

Possibility 2: In order to avoid the risk of US economic recession, the Federal Reserve will raise interest rates by less than 2% for the whole year

The specific impacts may include:

1) The shadow of financial risk may engulf the encryption market, but to a certain extent, it is good for Bitcoin in the short term, because it is actually bad Less than the worst expectation;

2) The inflation rate of the US dollar has eased, but it is still not conducive to the boost of purchasing power for a long time. The encryption market may be in a high structural situation in the future In the state where risks and high value coexist, the situation of continuous wide fluctuations may become the norm;

3) Of course, the United States still chooses not to launch, so it will naturally It will bring about a series of chain reactions until the credit of the US dollar collapses. Although this qualitative change will take a long time to brew, the consistent beggar-thy-neighbor operation of the United States is almost ready for quantitative change. The most direct and important changes are:

Major sovereign credit currencies will not wait to transfer risks, and the trust and adoption of the US dollar by major economies Gradually weakened, and then directly impacted the international financial system dominated by the US dollar after World War II. Russia's unilateral announcement of decoupling from the U.S. dollar was the prelude to this major change, but the war accelerated the process.

4) Under the domino effect, the uncertainty in the global financial market has increased sharply, even as violent as the most hawkish interest rate hike, because the latter brings The coming downtrend is completely predictable. In this case, the inactive Federal Reserve is tantamount to implying that a large amount of safe-haven funds have entered the encryption circle in disguise. After all, Bitcoin still has the attributes of a risky asset. This characteristic has only been downplayed by the dollar's flood and its correlation with the strength of US stocks. But when the conditions for its turn begin to fail, Bitcoin's original hedging attributes are likely to be strengthened again. At that time, the price rise and fall of encrypted assets will become more confusing, and it will be more difficult for investors to make profits in short-term operations. Therefore, it is more important to judge and estimate risks, plus the ability to adjust operating strategies in a timely manner, and even to calm personal fluctuations.

From the performance of digital assets such as Bitcoin during the Russo-Ukrainian War, we can see that the encryption circle has been fully integrated with the global financial market, but the form is very special. More and more mainstream national central banks have begun to formalize the status of blockchain technology and encrypted assets, while underdeveloped countries in Asia, Africa and Latin America are also accelerating the process of realizing the legalization of Bitcoin. These phenomena have begun to appear frequently in the headlines of international mainstream financial media.

Reviewing the economic cycle of more than ten years since the birth of Bitcoin, it is not difficult to find that whenever a valley is crossed, the total market value and tenacity of Bitcoin speed, will reach new heights. Therefore, regardless of the strength, magnitude, and method of this U.S. interest rate increase, it is a wise move to go through the bull-bear cycle at this time to look more at the encryption circle, choose Bitcoin, make prudent investments, and deepen your understanding. .