Can Crypto Go Lower? Price Cycle Analysis Shows Summer Bottom
Report Date: April 11th, 2022
To determine whether crypto can crash lower, Token Metrics analysts are tracking multiple elements, including:
- US Government Bond yields. Long and short-term yields have recently moved parabolic. This is bearish, as increasing yields raises the cost of financing and can stall economic growth.
- Failed bullish rallies in both Bitcoin and Ethereum’s monthly charts.
- Tuesday’s (4/12) CPI print, which is expected to reach 8.4% (the highest ever recorded).
These bearish influences creates further downside potential for equities that spills over into cryptocurrencies. Of critical importance this week is inflation and long-term Treasury yields.
The Long Bomb
US Treasury yields are beginning to invert, as short term interest rates are increasing faster than long-term rates. Inflation panic is disseminating across markets, and as a result, fear selling should result in lower prices for cryptocurrencies.
As interest rates trend higher, this raises the cost of financing and damages the credibility of the US Dollar. Higher rates also hurt valuations for “long duration” stocks, which rely on fast earnings growth far into the future. They are more vulnerable to an increase in the bond yield, which is used to discount their future earnings.
Token Metrics Senior Market Analyst Bill Noble refers to the potentially drastic increase in long-term rates as the ‘Long Bomb.’ As we can see in the chart below, the last time long-term interest rates were this high was back in 2017 and 2018 (when crypto was in a deep bear market):
Additionally, the recent rise in rates threatens to break the long-term downtrend in yields, as shown in the chart above.
The US 10Y – 2Y Treasury yield curve officially inverted on April 1st as markets priced in accelerated Fed tightening. Historically, the difference in yield between US 10-Year and US 2-Year Treasury yield has served as an accurate predictor of economic recessions.
Looking back, an ‘inversion’ of this yield (when 10Y-2Y yield is <= 0) has predated the US stock market’s past 15 recessions. Notably, the last time the 10Y – 2Y yield inverted, markets crashed 203 days later and Bitcoin lost 40% of its value in a single day:
Put simply, since the US10Y – 2Y yield inverted last week, this essentially tells us that a heavy downturn in risk-assets is ‘pending.’
When Will Crypto Crash?
By using Gann price cycle analysis, Token Metrics analysts project a potential crypto bottom to occur in August 2022. As we can see in the chart below, Ethereum currently appears to be moving in a relief rally amidst a larger bear trend. If Ethereum mirrors its previous 4 year Gann cycle, then it should bottom sometime in August:
>> To learn more about the crypto market’s Gann price cycle, watch Bill Noble’s livestream here.
In terms of Bitcoin, it seems the asset wants to trend lower to eventually bottom at $28k. Given Bitcoin’s recent volatility and break below $40k, it appears that BTC is moving within the 3rd wave of second bearish Elliott cycle:
If the above waves play out, then investors who wait patiently will be presented with a generational buying opportunity. In the short term, Bitcoin’s major support points reside at $41.6k and $36.5k, with a minor support at $39.1k.
Summary
Everything mentioned above points to a bearish outlook for cryptocurrencies in the medium term (until the end of summar 2022). In the long-term, however, deflationary influences should lead to bullish demand for cryptocurrencies (as crypto is increasingly seen as a hedge against the legacy system).
Put simply, the storm in financial markets needs to pass, and when it eventually does this may create a perfect environment for cryptocurrency expansion.
>> To read more Token Metrics Insights, click here.
