Bitcoin (BTC) has rebounded by 20% to almost $22,500 since Sep. 7. But bull trap risks are abound in the long run as Elon Musk and Cathie Wood sound an alarm over a potential deflation crisis.
Cathie Wood: “Deflation in the pipeline”
The Tesla CEO tweeted over the weekend that a major Federal Reserve interest rate hike could increase the possibility of deflation. In other words, Musk suggests that the demand for goods and services will fall in the United States against rising unemployment.
Bitcoin could feel the pain of a deflation-led recession, with Ecoinometrics’ analyst N suggesting that companies with cash holding would not dip their toes in a volatile asset until the economy has bottomed.
“From 2020 to 2021, there is a large number of new entrants in the space of digital assets, which pretty much doubled the total hodlings in treasuries. And as the market slowed down, everything stopped.”
Bitcoin treasury holdings since 2020. Source: Ecoinometrics
Retail investors could follow a similar strategy, notes Q.Ai, a Forbes-backed investment service.
In other words, higher borrowing rates would increase the flow of people’s monthly incomes toward debt repayment (mortgages, credit cards, etc.), decreasing their cash allocation for riskier assets like Bitcoin.
Bitcoin to $14K?
Macro fundamentals may also trigger Bitcoin’s bearish technicals to play out, particularly on the daily chart.
Bitcoin appears to have been forming an inverse-cup-and-handle bearish reversal pattern, confirmed by a flipped U-shaped price trend (cup) followed by a short uptrend (handle), all atop a common support level called the “neckline.”
As a rule of technical analysis, an inverse cup-and-handle pattern’s profit target is measured after subtracting the neckline level price by the maximum cup’s height, as shown below.
BTC/USD daily price chart featuring inverse-cup-and-handle setup. Source: TradingView
Therefore, from a technical perspective, BTC’s price risks new multi-year lows below $14,000 in 2022, down about 37.5% from today’s price.
Moreover, Filbfilb, creator of trading suite DecenTrader who accurately predicted Bitcoin’s bottom in 2018, told Cointelegraph that BTC can drop as low as $11,000 later this year, based on the historical volume around this level.
“As it stands, the price of Bitcoin is heavily correlated to the ‘legacy’ markets, in particular the NASDAQ, which we know is under huge pressure due to the Federal Reserve’s monetary policy,” he explained. “So this time ‘it’s a bit different’ due to the high correlation and external economic forces.”
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