(Kitco News) Inflation in a recessionary environment is an entirely different beast for all assets, and bitcoin is no exception, according to David Duong, head of institutional research at Coinbase.
The cryptocurrency market has seen a strong sell-off this week, with Bitcoin down 32% in the past seven days and trading at $20,464. And Ethereum, the world’s second largest cryptocurrency, is down nearly 40% for the week and last traded at $1,083.
The initial impetus for the most recent major drop in cryptocurrency was the macro environment. First, the surprise inflation number from May surprised markets, then the Federal Reserve raised 75 basis points on Wednesday, the largest rate increase since 1994.
For a preview of what to expect at the Federal Reserve’s July meeting, click here.
The massive turmoil in the cryptocurrency also gained momentum after the risk of contagion within the crypto community itself after lending company Celsius said it had halted all transactions on its platform. To learn more about this, click here.
Inflation is a complex metric, and its impact on the crypto space will depend on the economic cycle the financial space finds itself in at the end of the year, Duong told Kitco News on the sidelines of the Consensus 2022 conference in Austin from June 9-9. 12.
“Inflation works very differently in an upward cycle than in a downward cycle. High inflation in a positive growth environment is not a bad thing because the economy is growing at the same time. The problem we are facing right now is that inflation is rising in a potentially stagnant environment. That is what makes it really complicated.” .
There is nothing that can do well in a recession, Duong added, and bitcoin will be no exception to stocks.
“I don’t know if Bitcoin can operate in such a low environment. Jamie Dimon of JPMorgan recently described the current economic cycle as a hurricane. If there is a hurricane and my car crashes, and the windows in my house are smashed, I don’t think, “It’s a connection between this broken car and the broken house.” I say, “There’s a hurricane.” That’s what people miss when it comes to these kinds of situations.
The correlation between stocks, risk assets, and Bitcoin appears to be very high at the moment. “I don’t think anything comes out unscathed from this. Unfortunately, bitcoin is no exception to this rule.”
In terms of finding the bottom and whether $20,000 could be that level for Bitcoin, Duong noted that it’s hard to distinguish the amount of this downward trend that drives the macro versus some of the intrinsic, crypto-only idiosyncrasies.
“Trying to separate these is the hardest problem when trying to figure out what the bottom is because they move in tandem,” he explained. “For people who tell me it’s $20,000, it’s hard to be right because it’s hard to know how much these factors contribute to the performance of an asset like that.”
Some of the internal factors influencing bitcoin’s rise cycles are things like the hash rate and halving, a 50% drop in the reward for bitcoin mining that is programmed to reduce the rate of supply expansion every four years. “This is significant for supply and its impact on price,” Duong said.
Duong said the positive headlines to watch for crypto and Bitcoin include innovations and new technologies – Layer 2. Also, regulatory space – if they are to be given that oversight “we can hang our hats.”
“Headlines are important. They are key to this space. It is ultimately a long-lived asset for speculation. This means that perhaps in the long run if we believe in ancient technology, it has a good chance of increasing its value,” he described.
Dong noted that these developments will be key in the second half of the year, particularly with the Lummis-Gillibrand crypto bill, Biden’s executive order, and all related digital claims reports out in September and October. “Once we find out, maybe we can start talking about where the Bitcoin ETF is.”
In addition, the activity of bitcoin miners is key to keeping a close eye on this downward trend, as they are major bitcoin miners facing rising electricity costs.
As they move to the United States, they have to incur higher energy costs. How do they deal with this? Are they obligated to sell reserves? These are all major topics to look at as they are technical factors that affect things on the flow side,” Duong explained.
Additionally, financing is key, particularly in terms of supply available when people are called on the sidelines. “Is there liquidation funds contributing to this? Is there enough to meet these needs? “I have requested.
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