Bitcoin's recent recovery to $26,100 is a positive sign, but there are concerns for short-term gains. Higher-than-expected US inflation and Bitcoin's 20-week moving average rollover suggest a potential market correction. The resistance at $26,400 is a challenge for BTC, and breaking through faces hurdles at $27,000 and $27,100. A drop below $25,150 could lead to a seven-month low at $22,000.
Our analysis of the situation
Introduction:
Despite Bitcoin's recent recovery to the key level of $26,100, indicating a pivotal moment for its future gains and staving off further decline, there are worrisome signals that could cause concern for Bitcoin bulls in the short term. The convergence of factors reveals a potential perfect storm for a market correction.
The Warning Signs:
One contributing factor is the higher-than-expected US August headline inflation, showing a rise from the previous month's 3.2% to 3.7%. While not a game-changer, it suggests that the likelihood of another rate hike has marginally increased, now standing at 53%. Multi-asset investor Jeroen Blokland highlights this development.
Additionally, Bloomberg's senior macro strategist, Mike McGlone, suggests that Bitcoin may be leading a downward trend. McGlone points out that Bitcoin, as an exceptionally liquid asset, has experienced considerable appreciation without being tied to specific projects or liabilities. However, given its emergence during a period of historically low-interest rates, its vulnerability to a market reversion becomes noteworthy.
The Implications:
A key indicator according to McGlone is the rollover of Bitcoin's 20-week moving average (MA), which can impact all risk assets. As one of the best-performing assets in history, Bitcoin's regression is a significant observation. McGlone's analysis reveals that federal funds futures for the next year hover above 5%, implying limited liquidity expectations from the Federal Reserve (Fed).
Similar patterns were observed in Bitcoin's mean reversion at the beginning of 2022 when futures began pricing for the current tightening cycle. With the rapid rise of the lower bound of the federal funds rate from zero to 5.2% and expected further increases, there is likely to be significant pressure on all risk assets, including Bitcoin.
The Historical Connection:
McGlone also highlights the historical relationship between Bitcoin and the broader market. After the liquidity injection resulting from the shift to zero interest rates in early 2020, Bitcoin's 20-week moving average reached its bottom before the S&P 500 experienced a similar trend in the third quarter of that year.
Considering the changing dynamics of interest rates and their potential impact on all risk assets, Mike McGlone's analysis raises concerns about Bitcoin's future performance. As the 20-week moving average shows signs of rolling over, investors and market participants will closely observe Bitcoin's price trajectory and its ability to withstand the pressure of rising interest rates.
The Battle With Resistance:
As of now, Bitcoin faces a challenge in breaking through the resistance wall at $26,400. In the past 24 hours, it has managed to gain a modest 0.3%, with the most significant gains occurring within the seven-day timeframe at 1.9%.
However, should Bitcoin succeed in surpassing its immediate resistance, it will encounter formidable hurdles in the form of the 200-day and 50-day moving averages (MA), at levels of $27,000 and $27,100, respectively. These levels pose significant obstacles to the cryptocurrency's prospects and potential future gains.
On the other hand, if Bitcoin experiences an extended decline and loses its current modest gains, Bitcoin bulls should closely monitor the critical threshold at the $25,150 level. Any breach of this level could potentially drive Bitcoin down to a seven-month low of $22,000, endangering the cryptocurrency's bull run and the gains achieved since the beginning of the year.
As the battle between Bitcoin's resistance and potential market correction unfolds, investors should approach with caution and closely monitor the evolving landscape. The coming weeks will reveal whether Bitcoin can weather the storm or face a challenging period ahead.
Disclaimer: Our articles are NOT financial advice, and we are not financial advisors. Your investments are your own responsibility. Please do your own research and seek advice from a licensed financial advisor beforehand if needed.
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