Several possibilities for the current crypto market trend

In yesterday’s article, I shared with you the two major contradictions that I think will affect the future market trends. One is the policy of the Federal Reserve, and the other is the development of the crypto ecosystem itself.

So how will these two contradictions affect the future trend of the market? Today I will try to deduce the effects caused by each contradiction.

Let’s first look at the policy developments of the Federal Reserve.

The fundamental purpose of the Fed's policy shift since this year is to pull inflation back to 2%, and the measures taken are to raise interest rates and shrink the balance sheet. Raising interest rates and shrinking the balance sheet obviously have a direct impact on all aspects of the US economy. In layman's terms, it means that everyone will have to live a tight life.

However, doing this in an environment accustomed to flooding is quite risky. This process may cause drastic market fluctuations and even lead to catastrophic events (such as stock market crashes, economic recessions, etc.).

But the Fed still plans to do so for two reasons: first, if such high inflation is not resolved, it will cause social unrest; second, the Fed believes that the US economy is healthy and has sufficient growth momentum to offset this negative effect.

So, given the current situation, can the inflation problem recover naturally if these measures are not taken? If we look at the world situation, we can see that it is not optimistic.

It is often predicted that inflation has peaked. If this is true, I think it is either temporary or a sign of economic recession. In the current situation, it is impossible for the economy to develop steadily while inflation can naturally fall without taking any measures.

Under such circumstances, the Federal Reserve must be cautious and try to control the process as accurately as possible. On the one hand, it must allow inflation to gradually return to the set target, and on the other hand, it must control risks to a minimum, stabilize the economy and try not to trigger another crisis.

After this analysis, there is no need for any profound reasoning to judge the market's next reaction after the Fed's move. We can roughly guess several possible scenarios that may occur in this process:

The first scenario: Everything goes smoothly, there are no major storms, the economy continues to develop steadily, and inflation gradually declines. This reflects the effect on the stock market, that is, despite the tight capital situation, confidence is gradually restored, the stock market remains stable, or continues to fall slightly, but the decline is probably not too deep. Even in an optimistic situation, the stock market will gradually improve, but due to the pessimistic environment, this improvement is also quite limited.

The second type: This process is full of ups and downs. Either the action is too drastic and causes panic in the market. At this time, the Fed will come out to calm the mood and wait for market confidence to gradually recover before continuing to act. Or the force is not enough, inflation rises, and the Fed will increase the pressure again. This affects the stock market, that is, the stock market fluctuates greatly, but confidence is exhausted in the process of such fluctuations, and the stock market eventually gradually declines.

The third type: the process is halfway through and it can no longer proceed. The Fed is in a dilemma. If it continues to raise interest rates or shrink the balance sheet, it will immediately trigger risks. If it stops raising interest rates or shrinking the balance sheet, inflation will rise. Fortunately, although inflation has not returned to 2%, it is far below 8%, and is in a middle position that is annoying but barely acceptable (such as 4% or 5%). So in this embarrassing situation, the Fed weighs the pros and cons and finds an excuse to stop raising interest rates and shrinking the balance sheet, and everything ends here. So, led by the United States, the world officially enters an era of inflation, and everyone coexists with inflation. In this case, the stock market will enter a state of long-term wandering, stagnation but not death, and it can't go too high or too low.

The fourth option: The Federal Reserve makes a careless move, leading to catastrophic consequences and the collapse of the U.S. stock market.

In the case of the linkage between the crypto market and the U.S. stock market, if we do not consider the impact of the crypto market's own development, the above four conditions will have the following four trends when applied to the crypto market:

The first scenario: The crypto market gradually stabilizes and may continue to fall, but the decline may not be too large. Of course, in an optimistic scenario, it may rise slightly, but the increase will not be very high. Judging from the price of Bitcoin, it will probably stabilize at around $30,000 or above.

The second scenario: The crypto market will gradually decline along with the U.S. stock market, but the depth of the decline remains to be seen. Judging from the price of Bitcoin, it will probably eventually fall below $20,000.

The third type: The crypto market is in a tense situation, with difficulty going up and down. If we look at the price of Bitcoin, I estimate that this position is between $15,000 and $25,000.

The fourth scenario: The crypto market collapses and Bitcoin falls below $10,000.

The four situations deduced above do not take into account the development of the crypto market itself and only consider the possible situations that may arise in conjunction with the U.S. stock market.

So which of the above four situations are likely to occur? I think the second or third one is more likely, but the fourth one cannot be ruled out, and the first one will only happen if a miracle happens.

Then, let’s see how the crypto market will develop without considering the linkage with the U.S. stock market and only considering the development of the crypto market itself.

Yesterday I wrote in my article: "The so-called problems of the crypto ecosystem itself mainly have two aspects: one is the negative problems of the crypto ecosystem itself, and the other is the new vitality contained in the crypto ecosystem."

Let’s first look at the second point: the new vitality contained in the crypto ecosystem.

I am absolutely optimistic about this without a doubt. This is also the goal and direction I have been pursuing in the bear market, and it is also the key to triggering the next bull market.

But I believe in what the ancients often said: Great accumulation leads to great success.

In the article "Written before Bored Ape Sold the Land" on April 30, I believed that there is nothing new in the entire crypto ecosystem at present, and all the stories and benefits have been told. What follows will be a long construction period. Whether it is a potential project or a future big bull project, it will take a period of dormancy and patient construction.

I estimate that this dormant period will last at least one to two years, which means it is very close to the next Bitcoin halving in 2024, or a little more than three years, which would be 2025.

If there is no resurgence of the ecosystem, it is impossible for new external funds to enter this ecosystem. So at least before 2024, I don’t think there will be large-scale external funds entering the market.

Some people say that some countries are continuously buying Bitcoin, but I don’t think this is a big positive. Only when new application scenarios and new ecosystems emerge in the crypto ecosystem, will the external funds brought in be truly positive, and the scale of external funds brought in will be greater than the scale of funds used to buy Bitcoin.

Next, let’s look at the first one: the negative problems of the crypto ecosystem itself.

This is the biggest mystery at the moment.

Previously, I estimated that Ethereum DeFi would explode in the bear market and trigger a sell-off, but I didn’t expect it to be UST, and I didn’t expect UST to be so big.

So what are the next surprises? I saw some data a while ago that showed that if the price of Ethereum drops to a point between $1,000 and $2,000, liquidation will be triggered. If there is another surprise, it will continue to pull down the entire market.

Is this really the case? We can only wait for history to tell.

But regardless of whether there are any surprises or not, the catastrophic consequences caused by the UST incident will make this concern a sword of Damocles hanging over the entire ecosystem in this bear market.

Therefore, judging from the development status of the crypto ecosystem itself, it will not only be difficult to attract new external funds in the next two years, but it would be quite good if it could avoid continued collapse and drag down the market.

We further combine these two factors and get the following conclusions:

1 This bear market may last at least one year, but two or even three years is possible.

2 In the absence of a crash in the crypto ecosystem, Bitcoin hovers between $15,000 and $25,000, and Ethereum hovers between $1,000 and $1,500, or even lower, with Bitcoin hovering below $20,000 and Ethereum hovering below $1,200. Once the crypto ecosystem crashes again, the situation will be even worse, with Bitcoin falling below $10,000 and Ethereum falling below $800.

Of course, there is a more extreme situation that I think is also possible: that is, after the US stock market crashes due to the Fed's careless move, the Fed completely changes its face and continues to flood the market with money. If this happens, the market may reverse into a bear market.