Crypto: 3 Reasons to Be Bearish in 2022

 | Jan 28, 2022 09:13

No one knows what the future holds, but we can use past trends and experience to predict it.

Here are three reasons why I am bearish on cryptocurrency (and equities markets in general) for 2022, and why you should be too:

1 — Federal Reserve Will Remove Money from the System/h2

The Federal Reserve, or Fed, is the central bank of the United States.

The global asset markets are tied to the US stock market. Bitcoin and crypto are to a large degree correlated the US stock market. Since the Fed monitors and adjusts the volume of cash flowing through the economy, it has a strong influence on all of these markets.

For example, an economy with low interest rates and lots of disposable cash rewards investors and borrowers. In the extreme, too much of this can create too much inflation.

Having the opposite, i.e. very high interest rates and less cash in the system, rewards savers, as people have a greater incentive not to spend their money. This tends to result in slower economic growth. Too much of this can result in an economic depression.

In March 2020, to prevent financial collapse and to revive the US economy, the Fed applied an unprecedented level of quantitative easing (money printing). Further, it purchased US stocks and bonds directly. This was the first time on record the US central bank specifically did this with stocks to support the economy.

Stimulus checks to individuals, increased borrowing by the US government and asset purchases by the Fed have all resulted in an increase in cash throughout all levels of the system, from the top down. Some effects of this have been:

  • A red-hot stock market
  • An explosive bitcoin and crypto market
  • Increasing real estate prices
  • Growing commodities prices
  • Rising prices for consumer goods

The Fed’s mandate is to balance inflation and growth.

The Fed has an inflation “target” of 2%. US Inflation hit 7% year-over-year in December 2021. The central bank’s policy makers did not expect inflation to get this high, and now, they are facing growing pressure to decrease inflation.

The Fed has two actions it can take to place downward pressure on inflation. The first is to remove money from the system.

2 — The Federal Reserve Will Increase Interest Rates/h2

The second action the Fed can take to decrease inflation is increasing the central bank’s benchmark interest rate. The Fed lowers their benchmark interest rate to stimulate the economy.

In March 2020, the Fed lowered their benchmark rate to 0%. Other banks determine their interest rates for lending and borrowing based on the Fed.

So far this year, Fed Chair Jerome Powell has repeatedly announced plans to provide several hikes in benchmark rates.

Like removing money from the system, increasing interest rates tends to create downward pressure on asset prices like stocks and crypto.

3–History Does Not Repeat, But it Rhymes/h2

In crypto and especially Bitcoin, historically, markets have moved around the approximately four-year Bitcoin halving cycles. The previous halving cycles occurred in 2012, 2016 and May 11, 2020.

The bull markets peaked in 2013, 2017 and based on appearances, 2021. This can be viewed on the Bitcoin historical price chart. According to many crypto influencers on Twitter (NYSE:TWTR), this was the very reason why they were so bullish in 2021. I agreed with them.

Like a few others on Twitter, I am bearish for the same reason. It might just be my timeline, but most continue to be bullish despite the above three factors.

Again, no one knows the future, and it is possible for the future trend to violate the pattern of the past. It’s just not very likely.

Wait — Was That a Bull Market?/h2