Learning from history: How long will this bear market last, and how low can Bitcoin go?

I would like to start by saying that no one can accurately predict how long a bear or bull market will last, or how low or high prices will go, but we can try to use past events to predict the future.

1. How long will the bear market last?

Some would say we have just entered a bear market, no, we may be entering a market recession mode now, usually a bear market is measured from the previous ATH or first lower low, so I would say the "bear market" has lasted about 200 days.

1.1 How long will it take for the macroeconomic situation to improve, a proper bull run, and a new ATH?

I think it may take more time to happen as it is highly correlated with the macro scenario and big investors should be in risk-on mode, which is usually triggered by central bank monetary policies and incentives.

First, let's understand what causes a central bank to change its policy. The Federal Reserve, as the nation's monetary policy institution, influences the availability and cost of money and credit to "promote a healthy economy" (as they see it). Congress has set two monetary policy goals for the Fed: first, maximum employment; second, price stability, i.e., low inflation and stable prices. This "double standard requirement" implies a moderate long-term interest rate target.

This mild long-term rate is what they consider to be the neutral rate — a level that neither stimulates nor constrains economic growth. Fed policymakers estimate that the neutral rate is roughly between 2% and 3%. But it’s not an exact science, and changes in macro conditions can cause the Fed to take actions to increase employment levels or reduce inflation, which could cause supply and demand imbalances.

Now let's look at some previous examples of these correlations, when COVID hit, as the great lockdowns were implemented, unemployment began to rise, and as we have seen before, one of the main goals of the Fed is to keep employment high.

As unemployment rates rose month by month, coupled with the risk of a recession caused by the lockdown, the market began to fall. Between February 18 and March 20, the S&P 500 fell nearly 35%, the Nasdaq 100 fell nearly 30%, and BTC fell nearly 60%.

In an attempt to reduce unemployment and save the US economy the Federal Reserve launched a plan to cut interest rates to 0% and launched a $700 billion quantitative easing program, after all markets peaked with these incentives, Bitcoin went from $3,500 to $65,000 in a little over a year.

After BTC peaked at around $65,000, the market began to notice that inflation was growing, and investors expected the Fed meeting (April 27-28, 2021) to keep policy unchanged, but some policymakers suggested starting to slow down quantitative easing, which was enough for big investors to activate risk-off mode.

During the "bear market" consolidation from June to July 2021, the Federal Reserve announced that it might keep interest rates unchanged until at least the end of 2022. After the published meeting minutes showed plans to reduce the pace of monthly bond purchases by the end of the year, investors once again shifted their mentality to risk-on mode for one last risk-taking attempt.

Now, let's analyze the chart for the fall.

On November 3, 2021 (Figure 1 above), after the Fed's post-meeting press conference, Fed Chairman Jerome Powell said that the FOMC "will begin to slow the pace of asset purchases", a process called tapering (remember, the market went up again because the Fed postponed this decision in advance). At that time, the Fed purchased $80 billion in U.S. Treasuries and $40 billion in institutional securities per month. Powell said that starting in December 2021, monthly asset purchases will initially be reduced by $10 billion in U.S. Treasuries and $5 billion in institutional securities. There were other news that pushed the market down, such as Evergrande and China's ban on centralized exchanges, but these facts only triggered large investors to reduce position risks more quickly.

Goldman Sachs strategists said that on November 25 (Figure 2 above), rumors began to circulate that "the Fed may double its monthly bond purchases to $30 billion from January by mid-March and end the bond purchase program during the pandemic." Market interpretation: Risk aversion is difficult.

Note that the first half of 2022 was sideways until March, when we began to rally, but BTC fell again after the release of the Fed minutes (March 15-16 meeting)(3) The official announcement stated that "up to $60 billion of U.S. Treasuries and $35 billion of mortgage-backed securities will be allowed to roll over three months in phases, likely starting in May. This total would be double the previous effort, which began in 2017-19 and is part of a historic shift away from ultra-loose monetary policy." In addition, at the March 15-16 meeting, the Fed approved its first rate hike in more than three years. It raised the short-term benchmark borrowing rate by 25 basis points from near zero. However, the minutes noted that a 50 basis point rate hike was possible at the upcoming meeting, and investors interpreted it as: time to go risk-off.

As mentioned before, one of the Fed’s main goals is to keep employment high and inflation low, and if you revisit the unemployment chart you’ll see that it’s still very low, otherwise inflation has not peaked yet, and with the latest CPI data showing 8.6% y/y (4) – higher than previous readings of 8.3% and 8.5% in April and March – the depth is a bad sign for investors, many of whom would rather avoid risk, as high inflation gives the Fed plenty of room to raise interest rates, which will take liquidity out of volatile markets, and if the rate hikes are big enough, could push markets into a deep recession.

If you plot the history of BTC or any other volatile asset, you’ll notice that this pattern of central banks creating/withdrawing economic incentives will allow for wild bull or bear runs in those markets. Another timely example is the end of the BTC bull run chart below.

The last time the Fed started quantitative tightening was in December 2017, coincidentally or not, December 2017 was the time of the BTC all-time high that formed this bull cycle (1 in the above picture). Coincidentally or not, in December 2018, BTC bottomed out when the Fed lowered its rate hike forecasts and warned that they might stop quantitative tightening (2 in the above picture). The Fed abandoned rate hikes in January 2019 and March 2019 (3 ​​in the above picture), which is when the Fed announced that they would immediately stop quantitative tightening, after which BTC began to rebound.

Conclusion: It is really hard to predict when the market will behave normally, but you don't need to know for sure, you can follow the path of monetary stimulus/contraction. Monetary stimulus can cause volatile assets to top in a short time, and monetary contraction can cause assets to bottom at the same speed compared to the situation without stimulus. When monetary contraction ends, you can expect the market to recover, and even expect a rise, but without stimulus, breaking the previous ATH will take longer.

Also: I know more data on how long bullish/bearish moves can last in scenarios of market stimulus/contraction, the focus here is on how these scenarios shift investor thinking towards risk-on/risk-off.

1.2 Correlation between inflation peaks and stock performance

An analysis by the Leuthold Group looked at market performance since 1945 and found that when inflation is high, stocks tend to perform well after inflation peaks. Additionally, Game of Trades shared a chart that shows the S&P 500 bottomed before inflation peaked in nearly 20 different high inflation episodes dating back to the 1950s.

According to Paulsen's analysis of data when inflation is at lower levels (between 2% and 4%), changes in the inflation rate won't have much impact on stocks, but once the annual inflation rate jumps above 4%, "even if inflation stays high for a while, if it stops accelerating, that's generally a very good thing for the stock market."

The measure Paulsen uses to gauge the performance of the S&P 500 when interest rates are 8% or higher shows that stocks do well over the next year when inflation starts to slow. But they do poorly when inflation continues to climb.

Why? As we've seen before, when inflation is high, the Fed tends to adopt a contractionary monetary policy because short-term interest rates rise because higher rates make it harder for businesses and consumers to borrow and spend, which helps slow demand and fight rising prices. But it also drives down the prices of financial assets, like stocks and cryptocurrencies — and that spooks investors. We've already seen investor fear as the Fed has raised rates.

When inflation is really low, investors tend to worry about a weak economy and what that means for company earnings and stock prices. Paulsen said the stock market can do better as inflation accelerates, but soon higher inflation will start to have a negative impact on stocks.

That’s partly why inflation spikes are so important to investors, he added. When inflation rises, investors get more pessimistic and want to keep their money on the sidelines. Stock prices fall on those concerns, and when inflation slows, you have a buying opportunity. The influx of cash boosts stock prices back up.

That thesis is borne out by a recent Bank of America Corp. fund manager survey, which showed investors hoarding cash as global growth prospects fall to historic lows and fears of stagflation (recession + inflation) mount. The report showed investors holding cash at the highest level since September 2001, with Bank of America describing the results as “extremely bearish.”

The question that remains is whether inflation has already peaked or will it peak soon? The answer to this question is also difficult to predict because the answer will be based on monthly economic data. Inflation may be lower in one month and the next peak will appear again. So it is important to pay attention to CPI data, PPI data, and if you live in the United States, pay attention to prices because as a chart shared by Game of Trades shows, inflation tends to fall faster than it rises.

How low can BTC go in a bear market? — 200-week moving average is strong support

The 200-week moving average (200wMA) has been a strong support for BTC in previous bear markets and has only been briefly crossed twice before, in 2015 and during the 2020 COVID crash, and now everyone is questioning whether it can hold or break support again.

The S&P500 chart follows the same pattern, always supported by the 200wMA, only crossing downwards in the last decade during the COVID crash, but there was a moment when the S&P500 traded below the trendline for about 861 days during the 2008 recession, the BTC chart has never faced a recession, and now with the increasing risk of a US recession, coupled with the strong correlation between BTC and traditional markets, and some uncertainty in the macro situation, one scenario to consider is that if the S&P500 faces a recession and the chart "trades below the 200wMA", perhaps BTC will follow the same pattern.

How far can the S&P 500 go? This is also a question that cannot be answered accurately/perfectly (unless you can travel through time) because no one can predict how far the US government will allow the stock market to plummet without intervention. The 200wMA of the S&P 500 chart is now around 3,500 points, which represents a 6.5% drop from current levels. Another key level I would consider is 3,000 points, which would require a drop of nearly 20% from current levels (BTC would fall to $18,000 in the same case). Personally, the last and most confusing target is the 2,200 point range - the bottom of the COVID crash - which would represent a 40% drop (BTC would fall to $13,500 in the same case).

In my personal opinion, I do not think the U.S. would allow the stock market to fall to a low of 2,200 without intervention, and next we will discuss some scenarios that could trigger U.S. government intervention.

You could argue that BTC should be compared to tech stocks, so the NASDAQ100 would be more accurate.

Even in the COVID crash, the Nasdaq chart showed support for the 200wMA. But it broke below it twice, the first time being the dot-com bubble (investment in dot-com companies in the late 1990s drove a rapid rise in US tech valuations, and we may be living in a crypto bubble - few projects with real use cases, some crashes and lost investor money, and extremely high valuations driven by investors randomly throwing money at every project).

The second one is the recession of 2008. The same comparison with the S&P500 and BTC would lead to the following prices: a 4% drop to the MA would represent a price of $21,600 for BTC, a 13% drop until the 9,800 point area would represent a price of $19,575 for BTC, a 40% drop would put the Nasdaq at the same level as the Covid crash, i.e. 6,700 points, and the same structure would represent a price of $13,500 for BTC.

Just imagine, if this happens, BTC could even go lower than every price mentioned above, as BTC always falls more compared to traditional financial markets.

3 Conclusion

Historically, wealth favors investors who buy in moments of contemplation, in moments of uncertainty, when price is close to the 200wMA. I’m not saying BTC won’t go down or below $13,500 (the maximum “pain” level I drew), but if you use the DCA method and stay close to or below the 200wMA, you may have one of the potential best positions.

NOTE: Please always DYOR (do your own research), this is not financial advice.