What impact will macro factors have on Bitcoin prices amid expectations of large-scale balance sheet reduction?

The Federal Reserve recently released the minutes of its meeting on January 25-26. The minutes show that Fed officials made plans to start raising interest rates and reduce trillions of dollars of bonds on the central bank's balance sheet at the meeting. Some officials expressed concerns about financial stability at the meeting, saying that loose monetary policy could pose a significant risk, indicating that interest rate hikes could come soon and that the withdrawal of bond portfolios could be "aggressive."

In addition, the committee laid out procedures for how to begin reducing its balance sheet, and since the meeting, new inflation data showed that U.S. prices have risen at the fastest rate in 40 years. While no specific details on reducing the size of the balance sheet were decided at this meeting, participants agreed to continue the discussion at an upcoming meeting.

Recently, a research team led by Bruce Kasman, chief economist of JPMorgan Chase, said in a research report that the Federal Reserve is expected to raise interest rates by 25 basis points each time in the next nine meetings, and the policy interest rate will be close to a neutral position by early next year. The biggest threat now is that central banks may change their policies and find it necessary to slow growth, which may have an impact on the global financial environment.

Specifically in the crypto market, David Kelly, chief global strategist at JPMorgan Asset Management, said that cryptocurrencies may fall further as the Federal Reserve raises interest rates and ends the "crazy" era of speculation.

The senior strategist said the Fed's pandemic-era stimulus has forced bond yields to ultra-low levels, prompting investors to turn to highly speculative investments such as cryptocurrencies and unprofitable technology stocks. With the Fed preparing to raise interest rates several times in 2022 to curb inflation, investors have withdrawn from riskier investments. Kelly believes that the recent market turmoil is not over yet, and digital assets are particularly dangerous because they are useless. These are illusions that are easily affected by rising interest rates.

In addition, Barry Bannister, managing director and chief equity strategist at wealth management firm Stifel, believes that Bitcoin could fall to $10,000 by 2023. In a report to Insider, Bannister pointed out that global money supply, real 10-year yields, and equity risk premiums are three macro factors that could have a negative impact on BTC prices throughout the year and in 2023. The strategist said that these factors work together with the Federal Reserve's monetary tightening and interest rate hikes, and fundamentals indicate that Bitcoin will continue to fall.

In January, Federal Reserve Chairman Powell said the Fed would prevent high inflation from persisting. The economic situation will be different after the pandemic, and the Fed must adapt to these changes. In addition, all three of US President Biden's nominees for the Federal Reserve said they would place a high priority on curbing high inflation in the United States. On the eve of the Senate Banking Committee's nomination confirmation hearing, the three nominees Jefferson, Cook and Raskin acknowledged the cost of high inflation to American families in speeches released on Wednesday. Raskin said low inflation is an important task for the Federal Reserve and a top priority to continue to maintain the economic recovery. Cook said the most important task is to deal with inflation. Jefferson warned that high price pressures could increase expectations of future inflation, and the Federal Reserve has a responsibility to get inflation back to target levels.

Inflation and interest rates have a significant impact on the overall economy because they seriously affect employment, consumer spending, business investment, currency strength, and trade balances. M2, as a measure of money supply, is a key factor in predicting issues such as inflation. Broad money supply (M2) refers to cash circulating outside the banking system plus corporate deposits, household savings deposits, and other deposits. It includes all forms of money that may become real purchasing power, and usually reflects changes in total social demand and future inflationary pressures. In recent years, many countries have used M2 as a target for regulating money supply. Previously, the economic impact of the COVID-19 pandemic and subsequent economic stimulus measures have greatly increased the money supply.

Barry Bannister said that if the global money supply dynamics see a strong dollar slowing down the global M2 money supply, the price of Bitcoin could fall. Another macro factor is that rising 10-year real yields could hinder Bitcoin. In addition, the third factor is "equity premium risk". As the US central bank "continues" to raise interest rates, higher interest rates will increase the "equity risk premium", which means that the outlook for BTC is bearish, and the S&P 500 and Bitcoin may collapse in 2023.

UBS analysts, led by James Malcolm, said that the Federal Reserve's interest rate hikes in 2022 will reduce the appeal of cryptocurrencies such as Bitcoin in the eyes of many investors. This is because rising interest rates will overturn the view that Bitcoin is a good alternative currency or means of storing value. There is reason to believe that the situation will get worse, leading to a "crypto winter", that is, assets decline and then fail to recover for a long time. The last "crypto winter" occurred in late 2017 to early 2018, when Bitcoin fell from nearly $20,000 to below $4,000 and remained below $4,000 for more than a year, causing many investors to lose interest in digital assets.

In addition, another issue that could cause a sharp drop in prices is the flaws in encryption technology. For example, the development of blockchain technology is difficult because its decentralized design requires all members of the network to audit and verify transactions. The third issue is regulation. Rampant speculation on encryption networks "will inevitably lead to closer supervision to protect consumers and financial stability."

In addition, the mathematician Nassim Nicholas Taleb, author of books such as "The Black Swan" and "Antifragile", criticized Bitcoin on Twitter, saying: BTC is not a hedge against inflation, nor is it a hedge against companies. Moreover, Bitcoin is not a hedge against geopolitical events, in fact, it is the opposite. Bitcoin is a "perfect fool's game" during low interest rates.

Brett Heath, CEO of precious metals company Metalla Royalty & Streaming, believes that cryptocurrencies "may cause the next financial crisis." He said in an interview: "Looking back over the past few decades, looking at all the financial crises that have occurred, they all have a lot in common. One of them is the mass adoption of a new financial product or technology that is not well understood." Brett Heath went on to say that cryptocurrencies have become "a license for the private sector to print money." Although the circulation of the US dollar has increased significantly since January 2020, the market value of cryptocurrencies has increased "more than tenfold." He also said that Bitcoin's limited supply of 21 million coins does not really guarantee its "safe haven" quality because there are other "10,000 cryptocurrencies and related tokens that currently exist." Brett Heath said that many cryptocurrencies also have countless advantages over Bitcoin. With their birth, the entire crypto market will add billions of dollars and additional risks. Although some cryptocurrencies will prevail, the vast majority of digital assets may still collapse.

In addition, according to the latest report from blockchain analysis company Glassnode, as network data shows a bearish trend, Bitcoin bulls "face many unfavorable factors." Researchers pointed out that the general weakness of the mainstream market and broader geopolitical issues are the reasons for the current risk aversion in the crypto asset market, such as concerns about the Fed's March rate hike and uncertainty about conflicts in places such as Canada. "The possibility of a more sustained bear market is also expected to increase." Glassnode data shows that the number of active Bitcoin addresses or entities is currently at the lower limit of the bear market channel. In the past month, about 219,000 addresses have been emptied, indicating a decline in market demand and interest.