Chung's Weekly Digest (8/31)
by BSC News
August 31, 2022
The U.S. Federal Reserve’s desire to bring inflation down to 2% is bringing jitters back to the crypto market, while the world economy hangs by a thread.
The price of Bitcoin ($BTC) hovers gingerly at around $20,000 as the bears are taking a firmer grip on the crypto market while participants exit on fears of a further decline.
The bear flag that formed did not result in a massive dip but the warning signs are far from over. If the crypto market falls below the $1 trillion market cap, more downside is expected. The sentiment in the crypto market is weak as the U.S. Federal Reserve (Fed) is still struggling with inflation and there is also a lack of fresh liquidity to spur the market.
Jerome Powell’s remark last Friday is a cause for concern as the Fed attempts to forcefully balance demand and supply through interest rate hikes. Powell in his speech said:
“Restoring price stability will likely require maintaining a restrictive policy stance for some time. The historical record cautions strongly against prematurely loosening policy.”
The Fed is sounding the siren that it will not pivot from its current hawkish stance anytime soon.
There are a few narratives that investors should look out for. First, compared to previous bear markets, the crypto economy is now more mature and better suited for institutional investments. It is still in an early stage for institutional investment, making every capitulation event an opportunity to “buy the dip.” Second, various jurisdictions are introducing crypto regulatory frameworks that grant legitimacy to crypto assets and allow a freer flow of liquidity from traditional platforms into the crypto ecosystem.
On the other hand, the global economy is hanging by a thread. Rising inflationary pressure on a fragile post-pandemic global economy can result in a recession if not effectively handled. Risk assets will be the first to take a hit. China, the second-largest global economy, is also facing a drastic economic slowdown. Consumer confidence fell as fears of China's rigid “Zero Covid” approach with local lockdowns threatens to stagnate its domestic economy.
Amidst these uncertainties, investors may not be prepared to be exposed to risk assets.
Crypto’s rally in the last few weeks fizzled on two main grounds. First, $BTC failed to break past the crucial $25K mark. Secondly, Jerome Powell’s speech last Friday doubled down on the Fed’s effort to bring down inflation.
Bitcoin must not fall under $19K. If that support fails to hold, the likelihood that the lows recorded in June will be breached is high.
A discount or premium on the GBTC is a good indicator of the overall market sentiment toward Bitcoin. Retail investors remain averse to risk assets. The crypto market will be illiquid and recovery, if any, will be slow and gradual.
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