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Bitcoin is building a massive support range
Bitcoin is stuck between strong support and resistance. Breaking out of this range, up or down, will be difficult, barring a surprise EIF approval. While we were in this range for six months, the fundamentals continued to improve. For example, Number of Bitcoin addresses With more than 1 Bitcoin continuing to grow, approx 30% of Bitcoin supply Hasn’t moved in over 5 years, and asset allocations are at a total > $17 trillion In assets under management, I applied for Bitcoin ETFs, and Bitcoin is still going Exit exchangesAnd the half is coming. The price will eventually break the resistance level and this range will become massive support.
On the daily chart below, we see the $25,000 level holding as resistance turns into support. This week the price is trying to break below the 200-day moving average.
Bitcoin’s daily Relative Strength Index (RSI), a very popular momentum indicator, is safely above the 50-level midline which is a required signal to start a new uptrend. The Moving Average Convergence Divergence (MACD) indicator also managed to stay above its signal line in a bullish stance. More importantly, both widely used indicators are in bullish agreement for the first time since June.
A note about technical analysis: From our point of view, technical analysis is a series of… Schilling points. These are prices or indicators that “people tend to choose by default in the absence of communication.” That is, they are things on the chart that traders and investors watch.
Dollar Rising: Good or Bad News for Bitcoin?
The dollar wrecking ball threatens to return. The Dollar Index (DXY) broke out of its downtrend in mid-August, backtested and is currently rising to the 38.2 Fib retracement level. This is a strong move that goes against the almost universal bearish dollar thesis, but has now reached a logical place for consolidation.
Not surprisingly, the dollar is rising as recessions in Europe and China reduce the market’s ability to service existing dollar debt or acquire new dollar debt. In this environment, we should also expect interest rates to fall as money moves to safer and more liquid assets.
US Treasury yields cannot challenge the dollar’s strong move for long. Milton Friedman’s interest rate fallacy tells us that interest rates fall when money is tight, not loose. A rising dollar is a strong indicator that money is tight, and therefore, we should expect lower interest rates.
Usually, a strong dollar is seen as negative for Bitcoin, but in the history of Bitcoin, the correlation coefficient with the Dollar Index (DXY) has been positive several times. In 2016, it reached 0.93. In fact, before the coronavirus, it could be argued, that Bitcoin and DXY were often positively correlated.
The correlation coefficient tends to be more negative than positive in recent years, however, in bull market breakouts it usually swings positive. For example, 2016 was dominated by a relatively positive correlation with the start of a bull market. Then, back in the first half of 2019, when Bitcoin entered an early pre-coronavirus bull market, it correlated positively with DXY.
The negative correlation did not begin to take hold until after March 2020, coinciding with the rise in the Consumer Price Index (CPI). This is especially interesting because the fixed supply of Bitcoin is a hedge against inflation. Coin mismatch has taken advantage of this mismatch, as Bitcoin performed poorly during the high CPI. The explanation, easy but uncomfortable for most Bitcoin users, is that the CPI acceleration came not from inflation (money printing) but primarily from supply chain disruptions and artificially stimulated demand from financial spending.
Preview of the Federal Open Market Committee meeting
The Federal Open Market Committee (FOMC) meets this week and is sure to pause. They don’t like to surprise the market, and the market is universally agreed not to raise interest rates. the Federal Funds Rate Monitor Investing.com is a good place to bookmark. It uses Federal Reserve funds futures to indicate what the market is thinking.
The Fed Fund futures curve is starting to move higher for next year, meaning the market is pricing in fewer cuts, but not moving significantly higher in the short term. This tells us that the market believes the Fed is likely finished, and that interest rate cuts will begin sometime next year.
The curve moves slowly upward, leading to subsequent and delayed cuts to the Fed funds target range.
According to the Fed’s rate monitor, a cut to 500-525 basis points becomes the most likely scenario by June 2024, and by the FOMC meeting in November 2024 (time of the US elections), the Fed funds target will be 450-475 basis points. basis points, so 3 reductions.
Surprisingly, the markets agree with the Fed’s dot charts. Neither sees a recession but does imply a coming slowdown. This is a serious sign and should be considered the base case at the moment. This is bullish for risk assets including Bitcoin during the halving season.
source: Federal Reserve
However, we know that the Fed never expects a recession, and tends to respond quickly when one occurs. Take Chairman Powell’s 2019 pivot for example. Rates were naturally falling which meant money was getting tighter. He responded with three sympathetic cuts, but when the coronavirus hit it dropped to zero. This same pattern appears to involve the futures market.
When the financial system malfunctions, the Fed will be forced to cut interest rates. These events tend to cluster at the end of the third and first quarters. For example, the banking crisis this year was around the end of the first quarter. We have some evidence that a US recession will be avoided until Q3 2024, leaving time for Bitcoin’s halving and potential immediate approval of ETFs.
*Note: Past performance does not guarantee future results. This article is not intended to provide financial advice.
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