(Kitco News) Bitcoin’s yearly lows are not in yet, as the cryptocurrency needs to drop even further before kicking off another bull run, DailyFX strategist Michael Boutros told Kitco News this week..
The world’s largest cryptocurrency took many by surprise when it dropped 52% from its November all-time highs. But the rout might not be over just yet, with the selloff hurting the retail sector the most, Boutros said.
“We’re not out of the woods yet. It was a really big [loss] of confidence. It is more the retail side that’s really getting slaughtered here. Over the next couple of months, this is going to be a market that you’re going to want to actively manage. It’s not going to be the buy and hold play like it was from July to November,” the strategist noted.
Sideways price action is to be expected in the next few months as Bitcoin continues to track risk pretty aggressively. “We could go for a test of the 2021 low daily close at around $32,000. If we get one more drop, that’s where you want to start to look for a more meaningful low,” Boutros said.
Weighing on Bitcoin are hawkish Federal Reserve rate hike expectations, with some market participants pricing in up to seven rate hikes this year.
“That can automatically put a damper on Bitcoin because it’s a riskier asset, and there’s still a lot of volatility in it. And higher rates are going to sway some flows into more safety assets. The issue is that you’re seeing the market correction happen as well. And the spread of the distribution of where people think rates will be is very wide. You’ve got banks calling for seven interest rate hikes, while the Fed is somewhere in the range of three or four,” Boutros pointed out.
Also, there is uncertainty around whether the Fed will hike rates by 25 basis points or 50 basis points at the March meeting.
“With that spread so wide, it’s really hard for asset managers to allocate a lot to such a volatile asset, specifically one that’s washed out 52% in just three months,” Boutros added. “If you’re a believer in DeFi and you think decentralized finance is going to be the new hallmark, then this is going to be a bid still.”
The key level to watch in Bitcoin is $46,200, according to the DailyFX strategist. A breach higher would mean the cryptocurrency is ready for the next bull rally.
“If we get above $46,200, it will signal the resumption of the broader uptrend towards the highs,” he said. “Once we get through $46,000, we can look at $65,000 again, if not higher.” But first, we have to end the correction. It depends on when the low is achieved. But I do think we see a prolonged sideways move here for a while until you attract more attention.”
On the downside, Boutros is looking at the low close for January and $35,091. “If that breaks, you’re looking for $32,000. Anything sub $29,000 could trigger a rout that could really get aggressive — $19,000-$17,000. It’s going to be disastrous.”
At the time of writing, Bitcoin was trading at $44,436.29, flat on the day.
The big risk for Bitcoin this year is the Fed going all out on rate hikes to try and control the problematic inflation.
“If we do get up to five or six hikes, we might see Bitcoin’s upside limited here. But all things held constant, and if risk returns, that’s going to be a tailwind. And more adaptation — whether it’s institutional interest or retail interest,” he said.
Right now, the Fed is prioritizing its price stability mandate over its employment mandate in order to bring inflation down.
“The outlook for the interest rate expectation is going to be 100% based on what the inflationary outlook does in the months ahead. I don’t think inflation we’ve seen in energy so far has even filtered down to the cost of goods yet. You’re still going to get a relapse where the inflation outlook is going to stay rather strong moving forward,” Boutros explained.
And if, prior to the March FOMC meeting, inflation does not calm down, the U.S. central bank won’t be able to soften that hawkish tone. “The Fed might need to get more hawkish because inflation is notoriously hard to curb. They’re behind the curve, and this is a major policy blender from the Fed,” Boutros warned.
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