Make no mistake, 2022 was a very tough year for Cryptocurrency. In fact, it was a tough year for the global markets as a whole. As the impact of the financial support given during covid started to take it’s toll, stocks, crypto and commodities were hit.
No sooner had the winter weather began to disappear when a war broke out in Ukraine. If, by March you were in any doubt that the economy was in for a tough year, then the start of the war would have confirmed it. After all, two of the biggest contributors to a recession are pandemics and wars. We had both. Finally, just to round the year off, we had the scandal of the FTX collapse.
New Year New Hope?
With 2022 behind us, are things about to take a turn for the better?
It is very easy to jump into the New Year with optimism. The reality is that optimism is no magic formula for improving the global economic outlook.
In this post we will look at the current situation and a few of the things we can expect in the coming year.
Is it written in the Charts?
With Bitcoin down 65% during 2022, it will be of no surprise to you that the yearly candle is coloured red. This is just the third time that has happened since 2010.
What is interesting is we can observe a clear pattern here. Every time Bitcoin has seen a red candle, the following candle has been green. In fact, the following three have always been green!
Ok, this is not your bottom signal or alert to go all in on Bitcoin and Crypto. Before we get too excited, we must realise that this is a relatively short-term. Also, the Bitcoin charts were not around in the 2008 global financial crisis, or the dot-com crash in 2000. Arguably, the current situation is more in line with these two previous market conditions.
Turn up the Volume!
Something that I always keep an eye on when trading is the Bitcoin Historical Volume Index chart. Below you can see this chart on the weekly timeframe:
This clearly shows us that the volumes being traded currently are at the lowest point since 2018! This would explain why the current price range on Bitcoin is so tight, with long periods of sideways movement. But look at all the lows created on this chart; we always see a big reversal. This does not give any indication on the direction of the move, it just suggests that bigger volatility in pending. Perhaps the capitulation to end the bear market before the next big move up?
So How Long Do Bear Markets Usually Last?
Excluding the very short bear market, from April to October 2021, this is the fourth long term bear market that Crypto has faced.
I have marked on the Bitcoin monthly chart the duration of each long term bear market. This is not the time from the top to the bottom. This is from the top to the time that the high was broken again.
1 – From the top in June 2011, it took 20 months to match the top again. However, the bottom was just 5 months from the top.
2- From the top in November 2013, it took 37 months to make a new all time high. The bottom of the bear market was found within 21 months of the high.
3- The next top before a bear market was found in December 2017. The bear market lasted 36 months, but the bottom was in within 12 months.
4- The current bear market is 14 months in length. If the bottom is in, then history tells us there will be a period of chop/ sideways movement before griding back up.
What is The Stock Market Telling us?
There has always been a strong correlation between Crypto and the stock market. When there is strength in the stock market, crypto follows. And visa versa. Perhaps this bear market is more to do with the economic outlook than the 3 previous.
For all of the reasons mentioned at the beginning of this post, nobody would be shocked to learn that the S&P500 down in 2022 too. Not quite 65% like Bitcoin, but 20%. This is the largest fall since the global financial crisis.
This graphic shows us the annual returns of the S&P500 since 1930. A glimmer of hope is that in almost 100 years, there has only been 4 times when there has been 2 or more years of consecutive decline. So whilst we can be optimistic of a positive return this year, this is certainly not guaranteed. Whatever the outcome is, you can be confident that Crypto will behave in a similar way.
The much-anticipated Fed Pivot is likely to be key!
Fed Pivot?! Tell me more…
History tells us that bull markets begin after a Fed pivot. A Fed pivot is when the US Federal reserve change their policy from a tight one to a loose one, or visa versa. Currently the Fed have a tight policy. The interest rates are rising at each meeting, and the money printers are turned off.
With the money printers turned off, there is less “easy money” and therefore risk assets such as stock and crypto suffer.
The fact is a tight policy hurts the economy. At some point, the Fed will have no option but to switch to a loose policy- reducing interest rates and turning the money printers back on. This will cause asset inflation which is bullish for stocks and crypto. When the Fed turned the money printers on during the pandemic, just look at how massively inflated stocks and crypto were- great for investors!
Wen Fed Pivot?..
We can say that there are 3 stages to the Fed pivot.
Stage 1- Interest rates are still being raised, but at a slower pace than they had been.
Stage 2- The pause. This is when the Fed stop raising interest rates but keep them at the same level.
Stage 3- This is when the Fed start to reduce interest rates, and the money printers are turned on.
During December 2022, stage 1 happened. Interest rates were raised at the FOMC meeting, but at 50 bps rather than 75 bps.
One step closer!!
Now, we can have an educated guess as to when stage 2 will happen. The Feds interest rate is currently between 4.25% – 4.5%. They have said they want to get the interest rate to 5% – 5.25% this year.
The next meetings are 1st February, the 22nd March and 3rd May 2023. This means that at the March meeting they should have reached their target interest rate. Potentially this could happen in February.
One of these dates likely becomes the start of stage 2. Interest rates will no longer be raised, but they will not be reduced either.
Jerome Powell, Fed Chair, has insisted that rates will not be cut at any time during 2023, meaning the Fed pivot will not be complete until 2024 at the earliest.
This may be their intention but, they could be forced to do this early if the economy is suffering too much. Therefore, I think there is a good chance that we see stage 3 happen in Q3 or Q4 2023.
It is unlikely that we see any major change in sentiment early 2023, or even in the first half of the year. But this is not necessarily a bad thing. In Crypto, we can make money long or short in any market conditions. It also gives us a great opportunity to accumulate strong coins, at incredibly low prices, which we can flip for massive profit in the next bull run. Maybe we need to wait until 2024, potentially even after the next Bitcoin halving mid-2024, but one this is for sure- generational wealth is available to those with patience!
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