Europe region inflation reached a record 5.1% in January, exceeding the highest expectations of the last two decades, and pressure on the European Central Bank (ECB) to increase interest rates increased. Still, the ECB remains slower than the Fed and has no intention of going as fast as the Fed. The ECB kept the benchmark interest rate at 0.25% as expected at this meeting, but we can say that we received a 10% increase in the interest rate in June 2022 from Lagarde’s speech, and a total of 40% base point increase until the end of the year.
On the other side of the continent, we saw the Bank of England raise interest rates for the first time since 2004, raising its benchmark lending rate by 25 basis points to 0.5%.
The possibility that the growing monetary policy divergence between the Fed and the ECB will lead to a stronger dollar and weaker Bitcoin is currently on the table and priced in. While all macro decisions are important, the FED is the most important for us as it drives global policy. By removing the word “temporary” from the inflation discussions at the FOMC meetings, the FED laid the groundwork for at least 4 rate hikes this year. With a sharp turn from November, it announced that it would end its bond purchase program, which increased liquidity, in March.
The cryptocurrency market has also retreated by almost 45-50%, led by Bitcoin in November, with the curbing of liquidity taps.
The correlation between Bitcoin and Ethereum and S&P and Nasdaq has increased from 0% 2 years ago to 60% today. While this uncertainty continues, there are things that should not be forgotten.
When we look at the market reaction of the S&P 500 index during monetary tightening periods in the past, it is obvious that we will see many corrections this year.
Yes, Bitcoin debuted in 2008 as an alternative to central bank control. Now, BTC, ETH, and other altcoins have come under the spell of the central bank, with markets increasingly reliant on cheap and abundant central bank money and crypto becoming a more prominent feature in capital markets.
If we look at the upcoming period, it is not certain whether this high correlation between cryptocurrencies and traditional indices will continue. Because the 30-day BTC/S&P500 correlation is not at its highest level ever! The highest correlation was in July 2020. It is currently hovering slightly above 0.5. We also see that after each of the peaks in August 2016, November 2018 and March 2020, this positive correlation fell into negative territory.
In the short term, macro sentiment will continue to move crypto prices. But as a new post-pandemic economic regime emerges, as economies around the world maintain strong labor markets and try to contain rising prices, the role of central banks will continue to be called into question and nation states will continue to take a defensive stance against the vulnerabilities caused by the dollar.
Correlations will drop once again as Bitcoin and other cryptoassets assume a more “alternative” status.
So are we in a bear market?
According to the research of Strategas Securities, the technology sector is the best performing sector among the 4 periods in which the FED has increased interest rates in the last 30 years.
In The Edelman’s market confidence barometer for 2022, the most trusted sector is again technology!
In fact, against the Russian MB’s plans to ban cryptocurrencies, which resonated last week, Fitch Ratings warned Russia that the crypto ban blocks technologies that will increase productivity in Russia!
The crypto market as a whole is likely to continue to experience bullish and bearish cycles over time as all markets do, but cryptocurrency investors can breathe a sigh of relief remembering the widespread adoption and integration of blockchain technology.
While uncertainty continues in the short-term in the cryptocurrency market, there are things that should not be forgotten.
– The entire crypto market does not act as a whole. There is always a party somewhere in this market. It’s important to listen to the sound of the music and catch the party!
– The market is now quite diverse compared to the crypto winter 2018. (DeFi, NFT, Metaverse, Stablecoin Layer1 Layer2)
It should not be forgotten that what is called the market in 2018 is only Bitcoin and Ethereum.
With the withdrawal of liquidity in the market in the short term, it will be important to look at the ability of the market to stay on its own feet and act according to its own liquidity, and to look at the coins/tokens that can achieve this.
As today, some altcoins will perform well while others will perform poorly for the remainder of 2022.
I think it is now impossible for us to have a 2018-style “bear” period.
Therefore, my expectation for 2022 is neither a bear nor a bull market.
In my words; buffalo market
Note: The buffalo is a less attractive bull that stays tired, heavy and slower than the bull.
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