Erik Weijers, 7 months ago

Large red candles: what's next?

These are not easy times for crypto owners. Or rather: for owners of just about anything not called dollar. What has caused this carnage in the markets? What scenarios do we have to reckon with?

It's not just the crypto markets that have collapsed. Stock prices are also falling hard lately. Even the price of gold is wobbly. The reason? The intention of the US Central Bank (the Fed) to raise interest rates and deleverage its balance sheet. This has caused market wide panic. The realization has dawned that the Fed feels compelled to address inflation, even if it is going to hurt the markets a lot. The Fed is stopping (facilitating) too much money creation. Because it was precisely this fast printing money press, combined with disrupted production and supply chains of commodities, which led to an explosion in consumer prices.

Since a central bank can't 'print' commodities to balance things out, its only recourse is to turn off the money supply. In the absence of money, demand will slowly dry up. Then the prices of everything will fall. And what went up the hardest - crypto - also goes down the hardest as people run for the exit called dollar.

How far can the price drop?

How far can crypto prices fall? If we limit ourselves to Bitcoin, we know that there is a first line of defense at about $28,000. That is the approximate level to which the price fell in July 2021. During yesterday's and today's crash, this price point was defended. Should that line fail, there is a good chance of a further decline.

What then? Three times before in Bitcoin's history we have experienced prices fall to around the 200-week moving average. That is currently at about $21,700. The price has wicked below but has never stayed below this level for more than about a week. For what it's worth!

Another widely used, fundamental pricing model is based on the number of users of Bitcoin: Timothy Peterson's fair value model. Since the end of 2020, the price of Bitcoin has been above the model price. Currently, we are again close to the price the model predicts based on the number of users: about $30,000. That is not to say that the price cannot fall below that. But it indicates that the current price may not even be that unreasonable.

Dependent on the Fed

Models are just that: models. A lot depends, as mentioned, on the Fed's monetary policy. There is going to come a time - perhaps not even that far in the future - when the money machine needs to be turned on again. Devaluation is simply what governments need to enable them to service their debts. Printing money has been the norm throughout history and causes everything to rise in price over the years. It's only the temporary periods of monetary tightening that hurt so much.

Good luck hodl'ing, adding to your stack or selling - depending on your own judgment and/or strategy.

Note that some people are already buying the dip:

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