Dear subscribers,
Bitcoin dropped below $20k but remained within our support level noted in Uncharted #18. All eyes turned to the upcoming FOMC meeting as inflation fears and the Fed’s reaction will continue to drive bitcoin’s price action and structural shifts within crypto.
Let’s dig in!
TL;DR
Bitcoin remained within the $17-$20k trading channel and the Swissblock Bitcoin Risk Signal suggested an easing risk.
Personal consumption expenditure remained high agitating investors as they await the Fed’s reaction.
The economy’s structure is similar to that preceding the Great Inflation period (1965-1982), characterized by cost-push and demand-pull inflation.
The Fed confronts a tradeoff between fighting inflation and slowing down the aggregate demand, therewith potentially paving the way for a higher unemployment rate.
Inflationary pressures
In Uncharted #18, we defined bitcoin’s significant price levels, with an emphasis on the current trading channel constrained between $17-$20k. Since then, Swissblock’s Bitcoin Risk Signal dropped, and what seemed like a more decisive price action, weakened at the hands of agitated investors.
Figure 1: Bitcoin’s trading channel and support level: $17-$20k
All eyes turned to the Fed’s reaction to an alarming inflation rate, similar to that of the Great Inflation (1965-1982). During which inflation started at 1% and culminated in 1980 at around 14% (Figure 2).
Figure 2: Personal Consumption Expenditure reaching alarming levels
When comparing the Great Inflation period to the current macroeconomic conditions, we can observe two major similarities in the factors leading to higher prices: cost-push and demand-pull inflation. To start, two severe energy crises (1973 and 1979) coupled with food price shocks (Figure 3) paved the way for cost-push inflation.
Figure 3: Rising food and oil prices led to cost-push inflation
Cost-push inflation: inflation is pushed by supply disruptions, notably in food and energy markets.
Now, investors confront cost-push inflation as the pandemic and Russia’s invasion of Ukraine strained production chains. Notice how bitcoin’s 220-plus day downward trend initiated while oil and food prices surged (Figure 4). It seems that this cost-push inflation is already constraining investors’ ability and willingness to deploy capital.
Figure 4: Oil and wheat rallied as geopolitical tensions strained supply chains
From a demand-pull inflation perspective, during the Great Inflation government expenditure drove the economy’s output over its productive capacity in light of the Vietnam War and the Great Society legislation. Recently, as the pandemic drove the economy to a complete stop, government expenditure rose unprecedentedly (Figure 5). On both occasions, the economy overheated, which led to higher prices.
Keep reading with a 7-day free trial
Subscribe to Swissblock Insights to keep reading this post and get 7 days of free access to the full post archives.