Economist predicts Bitcoin could fall below $40,000 amid high inflation

Bitcoin could break below $40 000 if inflation continues to run hotter than market expectations. Such a scenario, in a climate of Federal Reserve monetary-policy tightening, was outlined by economist Alex Krüger.

19/ If CPI surprises on the downside, expect prices to pop and trend for a while.

If CPI surprises on the upside, «lights out», $BTC is going into the 30s, tradfi will make sure of it. pic.twitter.com/v8hug6V1wQ

— Alex Krüger (@krugermacro) January 9, 2022

Sensitivity to macroeconomic news is driven by the Fed’s changing monetary-policy stance, Krüger argued. He reminded of the Fed’s rejection of the assessment that inflation would be temporary and of the readiness to begin shrinking the balance sheet after the start of rate-hikes, in the December meeting minutes.

On December 14-15 the Fed postponed the timing of the end of its asset-purchase program from June to March. The updated projections foresee three rate hikes over the next two years. The previous forecast in September allowed only one hike in 2022 and two in 2023.

Kruger warned that shrinking the Fed’s balance sheet could trigger a bear market. The reason lies in the decision to reduce liquidity as rates rise. The hawkish pivot occurred in less than six months, the analyst emphasised.

«Few considered the coming normalization of the Fed. Not only is it possible in the near term, but the Fed is discussing implementing it faster than in 2018. For that reason, last week cryptocurrencies fell 15–30% in two days», — explained the specialist.

8/ Balance sheet normalization was not in anybody’s radar for a long time.

Not only is this now a possibility in the near term, but also the Fed is talking about doing so faster than in 2018.

That’s why crypto assets dropped 15%-30% in two days last week.

— Alex Krüger (@krugermacro) January 9, 2022

For digital assets, “quantitative tightening” may pose a challenge, as they sit at the far end of the risk curve.

Just as they benefited from an exceptionally loose monetary policy, cryptocurrencies may come under pressure from its unexpectedly hawkish character as capital flows into safer asset classes, Kruger explained.

Kruger called Bitcoin a liquidity-indicator for the financial system. As liquidity tightens, macro‑oriented players sell “digital gold,” followed by other cryptocurrencies (the disappearance of such correlation remains, for now, a pipe dream).

Kruger drew parallels with shitcoins, describing the US dollar as the king among them, and the Fed as their master.

«As the Fed shifts from increasing the supply (the size of its balance sheet) to decreasing it, the dollar begins to rise. And everything else loses value relative to it», — he explained.

15/ The Fed is here your shitcoin master in chief.

And the US dollar is the king shitcoin.

As the Fed goes from increasing supply (the size of its balance sheet) to burning supply, the US dollar starts going up.

And everything else goes down vis-a-vis the dollar. pic.twitter.com/JpG34dh4HG

— Alex Krüger (@krugermacro) January 9, 2022

Bitcoin could rebound to the $41,000-$44,000 range before the inflation data is released on Wednesday. The data’s nature will determine the next move. The specialist urged taking cautious positions until the end of Q1. He did not rule out that it may take longer to buy, and favourable conditions may not arrive in May.

Everything will depend on the trajectory of consumer prices, which at some point will take a downward turn, Kruger believes. This will be aided by the tightening of monetary policy, resolution of supply-chain problems, and the long‑term dominance of deflationary forces.

«The question is whether inflation will fall fast enough, or the Fed will manage to ‘spoil’ everyone? If the Fed is ‘too hawkish’, then Houston, we have a problem», — concluded Kruger.

24/ And the final question is, can crypto ignore the Fed if it decides to go all out wielding a deflationary machete?

I doubt it

«Don’t fight the Fed» applies both ways, up and down.

If the Fed is *too hawkish* then Houston, we have a problem.

/END

— Alex Krüger (@krugermacro) January 9, 2022

In December, billionaire Louis Navellierpredicted a drop in Bitcoin to $10,000. He said that the chart for the first cryptocurrency showed a signal of a ‘double top’ formation that could materialise as the Fed’s monetary policy normalises.

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