The Bitcoin price has gone nowhere in the past few days. After soaring to an all-time high of $65,000 in April, the price has struggled to move above $60,000. Indeed, the price has faced substantial resistance at $59,625.
Bitcoin prices and ESG investments
There are several reasons why the BTC price appears to have hit a major barrier. First, the recent decision by Elon Musk to disable the currency in transactions has pushed more people to dump the currency. For one, Tesla is the biggest company that accepted these transactions.
He cited the energy consumption used by Bitcoin miners. However, some critics pointed to the fact that Elon Musk knew about this energy consumption before he allowed the company to accept the currency.
Therefore, this led to some speculation that Tesla made a U-turn about Bitcoin because of its tumbling share price. Furthermore, the stock is already down by more than 30% from its year-to-date high. Elon Musk’s personal net worth has also dropped from more than $200 billion early this year to more than $164 billion.
This performance is partly because some large investors who hold Tesla for its ESG status started to exit their trades because of the large carbon emissions associated with crypto mining. As such, there are concerns that some companies interested in Bitcoin will avoid it because of the use of fossil fuels.
BTC and inflation
Another reason why BTC prices have gone nowhere in the past few weeks is inflation. In the past few months, the prices of most items has surged. For example, the price of lumber has more than quadrupled in the past 12 months while other commodities like copper and iron ore have jumped to an all-time high. The impact of all this is that the prices of most items has risen.
Last week, data from the United States revealed that the headline consumer price index (CPI) rose by 4.2% in April. This was the highest level it has been at in more than 13 years. At the same time, the core CPI rose by 2.3%, higher than the Fed target of 2.0%. Further data showed that the producer price index rose by 6.2%, the highest level since 2011. And, some analysts believe that inflation will rise to 20%.
What is the relationship between inflation and Bitcoin prices? The idea is simple. In the past 12 months, Bitcoin and other asset prices has jumped because of the policies by the Federal Reserve. The bank has slashed interest rates to zero and launched a big quantitative easing program that has pushed its assets to more than $7.8 trillion. If it continues with the current program, the assets could rise to more than $10 trillion in the next few years.
Therefore, with US inflation rising and with the labor market tightening, there is a possibility that the Fed will start tightening. Indeed, Janet Yellen, the former Fed chair and current Treasury Secretary has said that it will be appropriate for the Fed to tighten.
Fed is afraid of tightening
The Fed also knows that it will tighten at some point but they have not said so. In the most recent decision, they said that the current performance is transitory.
Still, anyone who has followed the Fed for long knows why it is afraid of sounding hawkish. The reason is what happened in December 2018, when Jerome Powell made his first decision and sounded hawkish. This pushed US stocks down by more than 20%, as shown below. To calm the market, the Fed insisted that it won’t tighten, which helped the stocks recover.
S&P 500 collapsed after Fed’s hawkish talk
Will Bitcoin prices collapse if Fed starts tightening?
The question among many market participants is whether Bitcoin prices will collapse if the Fed starts tightening. Furthermore, if the Fed easing pushed prices higher, why won’t tightening push them lower?
In my view, the upcoming Fed tightening will have an immediate negative impact on Bitcoin prices as investors rush to other assets like value stocks and bonds. However, in the longer term, I think that the impacts won’t be as dire as many analysts expect.
First, this tightening will start with tapering of asset purchases and not hiking interest rates. The current Fed futures funds show that the Fed may not hike in the next few years.
Second, even when the Fed starts hiking, the process will be gradual. This means that the bank will not immediately move rates from zero to 5% at once. Therefore, while BTC prices may decline if the Fed starts tightening, I think that such a decline will be a healthy one for long-term investors.
BTC prices prediction
Turning to the weekly chart, we see that the BTC price has been in a tight range recently. This chart shows that the price has formed what appears to be a bullish flag pattern after it made a bullish breakout at $19,900. The price is still being supported by the 50-period and 100-period exponential moving averages (EMA).
Therefore, we can’t rule out a situation where the price soon makes a major bullish breakout above its all-time high of $65,000.
1 comment
Excellent analysis Crispus.
Relations between the USA and China are at a low point. Tesla has a Giga factory in Shanghai. I suspect the move by Tesla is partly aimed at endearing the company to the Chinese government, which banned BTC mining in China as of April. Note also that Musk is backing the new Chinese crypto, which is based on “Proof of Space” as opposed to BTC “Proof of Work” and as such uses very little electricity to mine it.