Bitcoin to Slide Lower as Global Risk Appetite Fades

Talking Points:

• Bitcoin prices to remain under pressure as inflationary pressures force central banks to aggressively hike interest rates.

• Fading risk appetite and rising real rates of return will probably keep the hugely-popular cryptocurrency on the backfoot over the medium term.

The price of the largest cryptocurrency by market capitalization, Bitcoin, has fallen significantly since climbing to a record high in November of last year, as global central banks tighten their respective monetary policy settings in the face of intense inflationary pressure. Bitcoin’s surge to fresh record highs was primarily driven by the liquidity-rich environment seen in the aftermath of the coronavirus-pandemic that started in February 2020, which forced policymakers to cut rates aggressively and implement various unconventional monetary policy tools. However, these extreme measures, in combination with substantial supply-chain shocks and escalating geopolitical tensions, has resulted in a monumental increase in consumer prices in the developed world. Indeed, in the United States the inflation rate surged to a four-decade high of 9.1%, while in the European Union consumer prices accelerated at the fastest pace ever recorded. In the United Kingdom the situation is even more dire, with CPI surging into double figures and forecast to peak at just shy of 15% by mid-2023. This surge in prices has resulted in real interest rates surging higher, which has placed a significant amount of downward pressure on the price of the duration-sensitive cryptocurrency market. Generally, Bitcoin exhibits a strong inverse relationship with real interest rates, as seen in the chart below.

Bitcoin Inverse Relationship with US 10-Year Real Interest Rates

Given recent comments from several developed country central bank heads at the Jackson Hole economic symposium over the weekend, further downside looks likely for the cryptocurrency market over the coming months. Fed Chair Jerome Powell warned investors that “restoring price stability will likely require maintaining a restrictive policy stance for some time [and that] the historical record cautions strongly against prematurely loosening policy”. While his counterparts at the European Central Bank are starting to warm to the idea of hiking by an outsized 75-basis points if the rate of inflation continues to climb to record highs. Compounding the downside pressure on Bitcoin is the notable lack of risk appetite seen across global markets as of late, as investors reposition their portfolios to accommodate higher rates and protect against geopolitical risk. After all, the ongoing conflict between Russia and Ukraine could always escalate while tensions between China and the US over Taiwan remain rather heated.

Bitcoin Price Daily Chart – Ascending Channel Break Signals Further Downside

From a technical perspective, the outlook for Bitcoin looks overtly bearish as prices slice below Ascending Channel support and the psychological $20,000 mark.

With the RSI tracking below its 14-day moving average, and price trading comfortably below all six moving averages, the path of least resistance seems skewed to the downside.

A push to fresh monthly lows would probably intensify selling pressure and bring the yearly low into sellers’ crosshairs.

However, if the monthly low suppresses selling pressure, a short-term recovery rally to retest the trend-defining 55-EMA (22207) could be on the cards.

Disclaimer: The material provided here has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Whilst it is not subject to any prohibition on dealing ahead of the dissemination of investment research we will not seek to take any advantage before providing it to our client. No representation or warranty is given as to the accuracy or completeness of this information and therefore it shouldn’t be relied upon as such. Any research provided does not have regard to specific financial situations, needs or investment objectives. Vantage accepts no responsibility for any use that may be made of these comments and for any consequences that result. Consequently, any person acting on it does so entirely at their own risk. We advise any readers of this material to seek professional advice where necessary. Without the approval of Vantage, reproduction or redistribution of this information isn’t permitted.