Hayes: Crypto will “get smoked” in Fed pivot
Bitcoin’s current rally should likely not be taken as the start of a new bull run.
That is the opinion of Arthur Hayes, who in a fresh treatise on U.S. macroeconomic policy this week warned that current Federal Reserve behavior would flip from restrictive to liberal, but cause cryptoassets to “get smoked.”
With U.S. inflation easing, the Fed is the focus of practically every crypto analyst this year as they estimate the likelihood of a policy “pivot” away from quantitative tightening (QT) and interest rate hikes to flat and then decreasing rates, and potentially even quantitative easing (QE).
This essentially involves a move away from draining the economy of liquidity to injecting it back in, and while that practice led to new all-time highs for Bitcoin beginning in 2020, the same phenomenon would not be plain sailing next time around, Hayes believes.
“If a removal of half a trillion dollars in 2022 created the worst bond and stock performance in a few hundred years, imagine what will happen if double that amount is removed in 2023,” he wrote.
“The reaction of the markets when money is injected vs. withdrawn is not symmetrical — and as such, I expect that the law of unintended consequences will bite the Fed in the ass as it continues to withdraw liquidity.”
As such, rather than a smooth transition away from QT, Hayes is betting on extreme circumstances forcing the Fed to act.
“Some part of the US credit market breaks, which leads to a financial meltdown across a broad swath of financial assets,” he explained.
“In a response similar to the action it took in March 2020, the Fed calls an emergency press conference and stops QT, cuts rates significantly and recommences Quantitative Easing (QE) by purchasing bonds once more.”
This in turn means “risky asset prices crater.”
“Bonds, equities, and every crypto under the sun all get smoked as the glue that holds together the global USD-based financial system dissolves,” the blog post continues.
Current estimates, as shown by CME Group’s FedWatch Tool, overwhelmingly favor the Fed lowering the pace of rate hikes at its next decision on Feb. 1.
Planning a March 2020 rerun
Hayes is far from alone in being suspicious of Bitcoin being a firm “buy” at present after two weeks of near-vertical price growth.
Those taking a leap of faith and piling in now thus face serious risk before reward.
“This scenario is less ideal because it would mean that everyone who is buying risky assets now would be in store for massive drawdowns in performance. 2023 could be just as bad as 2022 until the Fed pivots,” Hayes wrote, nonetheless calling that scenario his “base case.”
If that means a retest of the 2022 lows, the area between $15,000 and $16,000 will be a key zone of interest going forward.
“I will know that the market has probably bottomed, because the crash that happens when the system temporarily breaks will either hold the previous $15,800 lows, or it won’t,” the blog post concludes.
“It doesn’t really matter what level is ultimately reached on the down draft because I know the Fed will subsequently move to print money and avert another financial collapse, which will in turn mark the local bottom of all risky assets. And then I get another setup similar to March 2020, which requires me to back up the truck and purchase crypto with two hands and a shovel.”
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