Bitcoin, according to Coinmarketrate.com, broke the $41,000 mark, and this is a race for which fundamental analysis would be 100% wrong. Why? Let’s figure it out together.
Bitcoin has been behaving like a financial asset for some time now – and this dictates the validity of fundamental analysis, at least first-line analysis, which reads economic events to understand any market reaction.
- BTC Correlation with S&P 500 Markets
The correlation, which was very accurate before February 5, no longer exists.
Something has happened that hasn’t happened for a long time: Bitcoin has retreated from a fairly close correlation with the world of stocks, reacting in the opposite way to the receipts coming from the US economy.
The fact that we are to analyze today is complex, so we invite you to follow us step by step in our reasoning. Let’s continue in order.
- US employment data is growing
The most important data published on February, 5th, was the data on almost 500 000 additional job vacancies in the US. This is the desire to pass off as a sign of some strength in the labor market, which, on the one hand, is a good sign for the economy as a whole, on the other hand, a bearish signal for all stock markets. And to understand the correlation, we will have to add another element.
- The Fed has no more room for maneuver in case the employment continues to grow.
This was explained by Jerome Powell back in December. Raising rates will have the effect of cooling economic growth – and this goes without saying. Therefore, in the case of supposedly full employment, the Federal Reserve System will have more room for maneuver, since any increase in interest rates will have less detrimental consequences for the economy.
In short, high employment in the US is a free opportunity for the Fed to be more hawkish, i.e. more aggressive. And with such news, we, logically, had to face bearish pressure for the world of Bitcoin and other cryptocurrencies. But that didn’t happen. The BTC did not fall for manipulation.
Bitcoin works, but it’s not the only one
This particular circumstance also resembles something else. The market, with rare exceptions, continues to move against the background of Bitcoin. Ethereum has returned to the value of $3,000, Solana is above $112, and Binance Coin is significantly above $411.
This is a sign that there are still very important correlations in the market, and that capital tends to flow proportionally into all or most of the major protocols. It is relatively behind all the Algorand and Uniswap, but still has an important plus sign.
And so, shall we continue?
The US Federal Reserve System inspires optimism in Bitcoin analysts
The latest data on the US economy may, in the end, slow down the plans of the Fed (US Federal Reserve System) on interest rates for 2022. After the economic data turned out to be weaker than expected, some investors turned away from the dollar. At the beginning of this week, the Bitcoin price has steadily recovered.
Low prices have attracted people to invest in Bitcoin. After all, the historical high in November 2021 was more than twice as high. But where will this journey take us?
- The US Dollar Index against Bitcoin
The US Dollar Index (DXY) is a key indicator that compares the value of the US dollar with a basket of six currencies.
You can often see a countertrend. If you look at the past week, you can see the trend towards the decline of the US dollar and the recovery of Bitcoin. If you look at the period from the beginning of 2022, you can just as clearly see how the US dollar has been constantly growing, and the MTC has been falling at the same time.
Therefore, both tendencies are closely connected. Investor confidence plays a crucial role here. News related to the increase in US interest rates has been the biggest factor lately.
Is the concern about raising interest rates subsiding?
Well, some market analysts see the renewed weakness of the dollar as a sign of easing concerns about a rate hike.
Lin Alden, founder of the investment strategy Lin Alden, tweeted:
“The Fed reached a fever pitch last week in terms of drawing up increasingly aggressive tightening scenarios,” noting that the slowdown in the economy and weak data on the Purchasing managers’ Index (PMI) mean that the central bank is likely to take a more dovish approach to raising rates in the near future.
- Decline in production and employment in the United States
In addition, Lin Alden points to the growth of industrial production in the United States, which in January 2022 has been declining for the third month in a row, according to data published on Tuesday. The Institute of Supply Management’s factory activity index was 57.60, which is the worst value since November 2020, compared with 58.80 in the previous month.
Data from the ADP Research Institute also indicates cracks in the US economic recovery. At the same time, the figures show that the number of jobs is declining and close to the level that was at the beginning of the Covid pandemic.
These lower-than-expected data came a week after a press conference by Federal Reserve Bank (Fed) Chairman Jerome Powell. He suggested that interest rates will be raised three times in 2022 to contain rising inflation in the United States.
Interest rate policy and its consequences
Powell’s statements pushed down the entire financial market. Thus, the stock market was steadily falling. The prospect of higher interest rates speaks in favor of a less lenient approach of central banks to lending. This depresses the mood in the markets. At such moments, investors often remove risky investments from the market.
However, there is likely to be an increase in interest rates in the US. Inflation also plays a crucial role in this. Since European countries have not yet been able to reach an agreement, and highly indebted countries such as Spain, Italy and France, in particular, do not support this path, we can probably expect that this year Europe will pursue a policy of low interest rates “as usual”.
- Fed officials are cautiously optimistic
One of the main catalysts of the Fed’s plans to raise rates was the steady recovery of the labor market in the United States. However, if the ADP figures do not meet expectations, the central bank may abandon its plans to raise rates.
Some Fed officials have also indicated that the central bank may not raise rates as aggressively as expected.
For example, Esther George, president of the Kansas City Fed, said that “unexpected adjustments” are not in everyone’s interests. The head of the San Francisco Fed, Mary Daley, also warned against tightening too quickly:
“They will raise rates, but not as much as the forward curve suggests”.
Teddy Valli, founder of New York hedge fund Parvelle Global, wrote, adding:
“The worst-case scenario is a rise in digital asset prices”.
And so, as a result, the very narrative that led the Bitcoin price to new multi-month lows seems to be cracking.
It’s hard to predict upcoming events. With Bitcoin moving against the current, it becomes much more difficult to understand how it will move in the coming hours. In addition to the classic unpredictability of the weekend, there will be a question about how long the US and cryptocurrency markets will remain in inverse correlation.
Correlations between the price of BTC and, for example, the interest rate policy of central banks show how much Bitcoin has already entered politics and, consequently, society.
Now it’s hard to say what will happen next, although what has happened over the past few days has brought back enthusiasm to the market, which has not been observed for some time. Not forgetting that the Fed’s future operations will have diminishing returns, since the markets have already discounted, at least partially, the statements of the world’s leading central bank.
And regarding long-term forecasts, ARK Invest, for example, believes that Bitcoin can reach the $1 million mark in 2030. They also assume that by that time, the market capitalization of Ethereum (ETH) will exceed $20 trillion, and therefore its price will be $180,000. But, time will tell.