Looming ‘death cross’ may put Bitcoin bull run in danger ahead of Fed meeting

Analysts anticipate Bitcoin to continue its recovery rally above $40,000 on bets of increasing anti-inflation, but a looming death cross could spoil the upside outlook.

Bitcoin (BTC) wobbled around $40,000 as investors waited for the United States Federal Reserve to release its new set of economic projections on Wednesday.

The market's focus shifted to two important questions: Will United States central bank officials signal their intentions to raise interest rates in 2023 instead of 2024? And how much do they think inflation will rise in the remainder of 2021 and in the next year?

Taper tantrum

In March, the last Fed projection saw 11 Federal Open Market Committee (FOMC) officials agreeing to keep interest rates near zero at least until 2023. That suggested a tightening in the Fed's monetary policy in 2024. It would also imply that the Fed might trim its $120 billion asset purchasing program earlier than anticipated.

The prospects of "taper tantrums" in the medium term have also increased due to the latest consumer price index (CPI) readings, the Fed's preferred gauge to measure inflation. The April CPI data showed that inflation rose to 4.2%. Meanwhile, in May, it rose to 5% for the first time since 1992.

Nevertheless, the Fed defended the dramatic inflationary spikes by saying that they are "transitory" in nature. The central bank has committed to waiting until it sees inflation rates holding themselves up near higher levels before announcing rate cuts. The projections on Wednesday will indicate how long officials will wait for the next tapering. 

Faster growth and inflation prospects make a rate hike move more likely in 2023. Source: Bloomberg

David Tawil, president of ProChain Capital — a New York-based multistrategy crypto-asset fund, believes the Fed's sentiment toward keeping its expansionary policies intact would change following Wednesday's FOMC meeting.

"As always, the Fed's post-meeting statement is going to [be] parsed carefully by analysts," he told Cointelegraph.

"However, it is likely that even according to the most conservative reading, that the Fed will tip its hat to low unemployment and growth, and indicate a move toward tapering bond-buying and raising rates."

Bitcoin outlook bullish

The rate hike projections give Bitcoin at least two years to continue its anti-inflation bull run.

The benchmark cryptocurrency emerged as a star performer after the March 2020 global market crash, led by fears that the Fed's quantitative easing policies, coupled with the U.S. government's trillions of dollars worth of stimulus aid, would sap investors' appetite for government bonds and the U.S. dollar.

The BTC/USD exchange rate jumped from its mid-March 2020 low of $3,858 to as high as $64,898 in April 2021, up 1,582%. Meanwhile, the yield on the benchmark 10-year U.S. Treasury note surged from 0.36% in March 2020 to 1.774% in March 2021. Yields move inversely to bond prices.

The U.S. dollar index, which measures the greenback's strength against a basket of top foreign currencies, crashed 9.48% in the same period. The bond market and the U.S. dollar have recovered lately on strong economic projections in the U.S. post reopening.

Meanwhile, Bitcoin has dipped by more than 25%, partly because of Elon Musk's anti-Bitcoin tweets and because of regulatory fear, uncertainty and doubt, or "FUD."

Bitcoin (orange), U.S. dollar index (blue) and 10-year Treasury yield performance in 2020 and 2021. Source: TradingView

Nick Spanos, founder of Bitcoin Center NYC, noted that rising inflation coupled with Fed's efforts to keep interest rates near the current 0.25% gives Bitcoin ample opportunities to resume its bull run.

This is also because other traditional safe-havens, such as government bonds, offer historically lower yields. At the same time, Bitcoin promises a higher rate of growth.

Spanos said:

"Following the publication of the Fed Dot Plot today, I see a temporal reaction in the crypto market with an upsurge in the price of Bitcoin. Based on this fundamental, retesting the $45,000 level looks more likely, in the coming days."

Tawil also presented a bullish outlook for Bitcoin, noting that investors would keep looking at the cryptocurrency as their "flight to safety" against higher inflation.

"If the legislative critics and the celebrity personalities can keep their mouths shut regarding Bitcoin (which they probably can't), Bitcoin could make a run for $75K by year-end," he said.

Death cross looms

However, technical setups on Bitcoin charts don't agree with bullish analysts.

For instance, the BTC/USD exchange rate recently encountered higher selling pressure in the $40,000–$42,000 range. As a result, traders apprehensively treat the area as their cue to secure short-term profits, thereby risking declines toward the next points of support around $35,000, $32,000 and $30,000.

Meanwhile, Bitcoin's 50-day simple moving average (50-day SMA) — the blue wave on the chart below — is hinting at closing below its 200-day simple moving average (200-day SMA) — the saffron wave. The crossover is called a "death cross," an indicator notorious for predicting advanced price declines across financial markets.

Bitcoin hints at bearish continuation on death cross fears. Source: TradingView

"Whenever a Death Cross occurs, Bitcoin experiences deeper downside," noted Rekt Capital, a pseudonymous market analyst. "In 2014, a Death Cross preceded an extra -71% drop. In 2017, an extra -65% drop. In 2019, an extra -55% drop."

Related: Here’s how Bitcoin’s impending death cross could be a contrarian buy signal

The trader added that a death cross remains a scenario, not a prediction, hinting that the price of Bitcoin might recover higher despite the bearish indicator's potential appearance in the coming days.

Publication date: 
06/16/2021 - 13:42
Author: 
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