SEC enforcement

BTC and the crypto market will continue to battle with strong headwinds, but analysts explain why Q3 and Q4 of 2023 could turn out well for Bitcoin.

Bitcoin (BTC) price and the wider crypto market corrected at the start of this week, giving back a small portion of the gains accrued in January, but it’s safe to say that the more experienced traders expected some sort of technical correction. 

What was unexpected was the SEC’s Feb. 9 enforcement against Kraken exchange and the regulator’s announcement that staking-as-service programs are unregulated securities. The crypto market sold-off on the news and given Kraken’s decision to close up 100% of its staking services, traders are concerned that Coinbase will eventually be forced to do the same.

The real question is, does this week’s price action reflect a change in the trend of bullish momentum seen throughout January, or is the “staking services are unregistered securities” news a simple blip that traders will disregard in the coming weeks?

According to analysts at analytics firm Delphi Digital, crypto is set up for a “roller coaster ride in 2023.” Analysts Kevin Kelly and Jason Pagoulatos explained the start of the year price action as being fueled by “recent increases in global liquidity” which are favorable to risk assets, but both agree that macroeconomic headwinds will continue to negatively impact markets until at least the third quarter of 2023.

Beyond the negative news of this week and its impact on crypto prices, there are a handful of metrics that provide some insight into how the rest of the year could be for the crypto market.

DXY comes back to life

The US Dollar index has rebounded from its recent lows, a point highlighted by Cointelegraph newsletter author Big Smokey.

In a recent post, Big Smokey said:

“December’s below expectation CPI print and the upcoming February FOMC and interest rate hike clearly provided the necessary investor sentiment boost to push prices through what had been a sticky zone for months.

But, as shown below, BTC’s inverse correlation with the U.S. dollar index (DXY) says it all. Recently, DXY has been losing ground, pulling back from a September 2022 high at 114 to the current 101. As is custom, as DXY pulled back, BTC price amped up.”

Taking a look at DXY this week, one will note that DXY rebounded off its Jan. 30 low at 101 and reached a 5 week high near 104. Like clockwork, BTC topped out at $24,200 and began to rollover as DXY surged.

According to JLabs analyst JJ the Janitor:

“How DXY fares after retesting the 50-, 100-, and 200-day MAs in the weeks to come will provide us much insight into the market’s next move…If it breaks through and holds above its 200-day MA (currently at ~106.45), asset markets will indeed become bearish again, and we could expect November’s lows to be threatened. However, should this DXY back-test fail, either now (at the 50-day) or later, we can take it as confirmation that we have entered into a new macro environment. One where the strong dollar that terrorized us in 2022 is now a neutered beast.”

The Fed pivot takes way longer than investors expect

For months retail and institutional traders have prophesied an eventual pivot from the U.S. Federal Reserve on its interest rate hike and quantitative tightening policies. Some seem to interpret the shrinking size of the recent, and future rate hikes as confirmation of their prophecy, but in the last FOMC presser, Powell hinted at the need for future rate hikes and while speaking to David Rubenstein during a open interview at the Economic Club of Washington, Powell said:

“We think we are going to need to do further rate increases,” primarily because according to Powell, “The labor market is extraordinarily strong.”

According to Delphi Digital analysis, market participants are “playing chicken with the Fed trying to call their bluff” and the analysts suggest that data shows the bond market is signaling that the Fed’s policy too firm.

Generally, equities and crypto markets have rallied when FOMC decisions on rate hikes align with that of market participants for anyone who was breathing and following crypto markets in 2022 will remember that everyone and their mother was waiting for Powell to pivot before going ultra long on large cap cryptocurrencies.

From the vantage point of technical analysis, a retest of underlying support in the $20,000 zone is not a wild expectation, especially after a 40%+ monthly rally from BTC in January.

Based off historical data and fractal analysis, Delphi Digital analysts suggest that there is room for further upside from BTC as “there isn’t a lot of overhead supply for BTC in the $24K - $28K range” and earlier reporting from Cointelegraph highlighted the importance of Bitcoin’s recent golden cross.

While this is all encouraging in the short-term, the reality of certain CPI components remaining sticky and Powell seeing a need for further interest rate hikes due to the strength of the labor market should be a reminder that crypto is not yet in bull market territory. Interest rate hikes increase operational and capital costs for businesses and these increases always trickle down to the consumer. Another consistent and alarming development is the continuance of layoffs in big tech companies.

Banks and major U.S. brokerages continue to spin down their earnings estimates and big tech has a way of being the canary in the coal mine for equities markets, earnings and the rate of layoffs taking place. The high correlation between equities markets and Bitcoin, along with concerning macroeconomic hurdles suggest that there is an expiration date on crypto’s recent mini bull market and investors would do well to keep this front of mind.

If the long-awaited “Fed pivot” continues to remain elusive, certain realities will come to the forefront and they are bound to have a stronger impact on pricing in the crypto and equities markets.

Related: SEC enforcement against Kraken opens doors for Lido, Frax and Rocket Pool

Looking deeper into 2023

Despite the more bearish nature of the challenges listed above, Delphi Digital analysts issued a more positive outlook for the bottom half of 2023. According to their analysis:

“The need for liquidity expansion will become more pressing as the year progresses. Cracks in the labor market will also become more apparent, which will give the Fed cover for a shift towards more accommodative policy. The reversal in Global Liquidity we cited at the end of last year will start to accelerate in response to a weaker growth outlook and concerns over growing fragilities in sovereign debt markets, acting as support for risk assets in 2H 2023. The impact of changes in global liquidity on financial markets tends to lag anywhere from 6-18 months, setting up a more optimistic outlook for 2024-2025.”

The views, thoughts and opinions expressed here are the authors’ alone and do not necessarily reflect or represent the views and opinions of Cointelegraph.