- The “death cross” in bitcoin is a negative indication that occurs when the 50-day moving average (MA) falls below the 200-day MA.
- The ominously-named chart pattern is expected to be verified this week amid growing concerns about the US Federal Reserve (Fed) withdrawing liquidity more quickly, which would be a bearish event for bitcoin and asset markets in general.
- Concerns about a hawkish Fed gripped the bitcoin market at the conclusion of last quarter, after the central bank changed its focus from maximum employment to inflation management.
The Federal Reserve System, the US central bank, has been looking into policy responses to the emergence of cryptocurrencies and digital currencies. For example, in his press conference following the FOMC meeting on September 22, 2021, Federal Reserve Chair Jerome Powell acknowledged that the Fed is considering creating a central bank digital currency (CBDC).
The Federal Reserve has undergone a significant transformation.
The Federal Reserve has shifted to a more hawkish stance. Their primary concern is inflation, not employment. To combat inflation, the Fed must raise interest rates.
Bitcoin reached a high of about $69,000 on November 10 and dropped nearly 40%. In the seven days leading up to January 9, the cryptocurrency lost more than 12%, its worst weekly loss since early December. The approaching death cross, combined with a bleak macro outlook, could fuel a pessimistic mood.
Because of the Fed’s quick turnaround, this has been highly bearish.
Raising interest rates or reducing quantitative easing (QE) should not be adequate to reverse the upward trend in asset prices.
But this is more than that.
However, the technical indicator’s track record as a bear market prediction is uneven. Many of bitcoin’s prior death crosses, like those witnessed in 2014 and 2018, were followed by “either a sell-off in the days that followed or a continued macro downtrend that confirmed a bear market.”” according to Kraken’s research.
The Federal Reserve’s timeline:
- No rate hikes are expected until 2022. (June FOMC)
- Foreseeing a half-hike in 2022. (median forecast) and declaring that QE reduction will begin shortly (September FOMC)
- Declaring a gradual end to quantitative easing. (November FOMC)
Because moving average crossovers are based on backwards-looking data and tend to lag prices, they are unreliable as independent indicators. By the time the crossover is confirmed, the market is frequently oversold and due for a bounce, as it was in June last year and late March 2020.
Cryptocurrencies are at the extremes of the risk spectrum.
As money transfers away from riskier asset classes, they suffer from unexpectedly restrictive monetary policy, as they gained from unusually slack monetary policy.
Consequently, bitcoin has evolved into a macro asset traded as a proxy for liquidity.
As liquidity erodes, macro players that have recently entered the fray sell bitcoin, and the rest of crypto follows suit.