Why This Isn’t the Start of Crypto Winter
Has crypto winter arrived?
Back in 2017, high-flying crypto prices experienced big declines…falling by as much as 90% in short order. In the cryptosphere, this became known as “crypto winter.” Now, everyone is wondering whether this pattern is repeating itself.
It’s certainly a blizzard of losses out there right now.
Across the cryptosphere, cryptocurrencies are getting hammered, led by bitcoin and Ethereum.
At time of writing, bitcoin, the granddaddy of crypto, is around the $30,000 level. A month ago, it was trading at about $43,000.
Similar goings-on over at Ethereum, which has tumbled to around $2,000. In the last month, ETH, as it’s called, has lost more than $1,000 in value.
Long time readers will remember that I expect BTC to surpass $100,000, and ETH to eventually hit $20,000 (with a major price boom set to coincide with the Ethereum 2.0 rollout later this year).
What’s going on?
Does this crash change those long-term expectations? And how low could bitcoin go?
Second question first…
No, nothing changes. My expectations remain unchanged.
As I said when I launched Global Intelligence back in 2021 “trying to guess what happens to the price of bitcoin before the year’s out…that’s ‘Friday night’ stuff” (referring to the Southern expression: “Poor people plan for Friday night, rich people plan for three generations”).
Crypto is the future of finance…and pretty much everything else. Much as the dot-com bust of 2000 didn’t stop the internet from forever changing the U.S. economy (or the rise of Amazon or Apple), this moment doesn’t alter that path. At worst, it delays it.
No asset moves up in a straight line. Every last one of them ebbs and flows. With crypto, that ebbing and flowing is often more violent, to be sure. But crypto prices will violently stairstep higher.
Why are they crashing now? And how low could bitcoin go?
What’s going on is the Federal Reserve spooked the American economy, the financial markets, and investors.
For more than a year, I’ve been writing to you with news that inflation was going to be a bear. That it was going to awaken, “hangry,” and it was going to do some damage.
The Federal Reserve did not see it that way. To the Fed, inflation was just a temporary reflection of post-pandemic supply problems. Inflation, as the Fed told us throughout 2021, was “transitory.”
Of course, this is the same Fed that told us the 2007 housing crisis was contained and would not lead to any systemic damage.
Right…
Same faulty playbook, different decade.
And just as the Fed was dead wrong in 2007, the Fed was dead wrong in 2021 (which fits in nicely with the Fed’s long history of being dead wrong basically since it was founded).
Now, the Federal Reserve is playing catch-up…racing to address inflation that is not so transitory after all. It’s doing so, as you likely know, by jacking up interest rates and curtailing the money it has been spending for decades buying U.S. debt.
Those actions, in turn, are causing fear and panic in the financial markets.
Higher rates mean higher borrowing costs. But we are a debt-loving nation. Government, corporate, and consumer debt are at record levels. Raising interest rates means fewer and fewer dollars will go into the economy as Uncle Sam, Corporate America, and the consumer necessarily shift money from buying to debt-repayment.
Curtailing spending on U.S. debt, meanwhile, means the Fed has turned off the money spigot that was pouring billions of dollars into the economy monthly. A great deal of that money was, in turn, flowing into the financial markets.
Here’s my take on all of that: The end is near.
Not for crypto or stocks.
For the Fed’s rate hikes.
Because of the size of America’s debt, the Fed has a very limited range of motion. At some point, higher interest rates risk pushing America in a debt-repayment crisis. It risks destroying corporate profits. And it risks slamming the U.S. consumer.
That point is closer than you might imagine, particularly for the consumer, which defines a massive part of the American economy. Kill the consumer and you kill the economy.
Right now, inflation is sending rent, food, and energy costs moonward. Tack on higher interest payments on credit cards and the consumer is quickly going to be tapped out and unable to spend.
I see a recession on the horizon, most likely by late summer, early fall. Inflation is already causing problems for consumers and companies. The Fed’s rate hikes and curtailment of its bond-buying program serve only to exacerbate the problem.
As terrible as the Fed has been at making economic projections, there’s no way it raises rates into a recession. That would be economic suicide. My bet: We have two more rate hikes—June and July—that push interest rates to 2%…maybe 2.25%.
And then …
A rate cut in September or October, when the Fed realizes it cannot engineer a “soft landing” for an economy that has stumbled into a recession. So, the Fed goes back to cutting rates and stimulating the economy with more bond buying.
In short, the U.S. becomes Japan—meaning it requires endless government stimulus to keep an extremely indebted economy on life support. Basically: A zombie economy.
That’s what Japan’s has become after nearly four decades of ultra-low rates and never-ending government stimulus the country uses to avert a financial disaster that should have happened after the 1980s economic bubble burst.
So, all that said, here’s where we’re going:
We have some months of volatility remaining. But at some point, the investment world is going to come to the realization that the Fed is hamstrung…that U.S. debt limits what the Fed can do…that we are limping toward a recession…and that the Fed will end up cutting interest rates again.
When that happens, we’re back to the world we’ve known since at least 2007. Stimulus and low interest rates.
It won’t be great for America long-term—the dollar will continuously lose value amid high inflation…which means we will have a major financial/monetary crisis to navigate later this decade.
But for the next few years at least, the tide will shift and all boats will begin rising again.
In that world, bitcoin and Ethereum return to their upward trajectory.
In fact, they will see a monster-sized rally that ultimately pushes the top two cryptocurrencies past previous records.
Once the Fed gives up on raising rates, inflation will run wild, and the purchasing power of the dollar will fall. In this environment, people will increasingly turn to alternative assets to protect their wealth…assets like gold and bitcoin.
How low might bitcoin go until we see this upcycle?
Based on my technical analysis of the charts, I see two possible answers:
- If I go back to bitcoin’s lows in 2018 ($3,100-ish), then the charts suggest that bitcoin will find support in the $25,000 to $27,000 range, and begin rising from there.
- If I use the lows from last summer (about $37,700), then the retracement sees bitcoin in the $10,000 to $11,000 range. That’s a steep drop from here, no doubt. But the good news: The rebound would see bitcoin crack $99,000.
Bitcoin is going to hit six figures. It may take some months longer than I initially anticipated due to the Fed’s miscalculations, but that’s where it’s going.
Ultimately, what I’m saying is this: Be patient. Hold firm. The ride is going to remain nauseating for a time.
Yet everyone who has previously sold bitcoin into a downturn has regretted it. Literally every time. This time will be no different.
The Fed screwed up. It’s going to continue to screw up until it realizes it screwed up (this fall) and at that point, it will be forced to reverse course.
And all will be right as rain once again (for a while anyway).
