Former head of the BitMEX exchange and well-known cryptocurrency influencer Arthur Hayes published an article in which he presented a bitcoin price forecast for the coming year.
First of all, Hayes drew attention to the fact that US inflation, as measured by the consumer price index (CPI), peaked around 9% in mid-2022 and is now rapidly declining to the all-important level of 2%. It would seem that this fact should prompt Jerome Powell to abandon his current policy of quantitative tightening (QT), which inevitably causes an economic downturn. However, consumer prices are not the only indicator that the Fed focuses on, Powell takes into account wage growth to a greater extent compared to the main American spending on personal consumption.
(% year on year)
Wages in the US are on average growing at the same rate as inflation. This means that although goods are becoming more expensive, people’s ability to buy these goods is actually increasing at the same rate due to the increase in their wages. As a result, there is a risk that the increased purchasing power of people will contribute to further inflation of goods. Thus, Powell has every reason to raise the key rate.
Since peaking at $8.965 trillion on April 13, 2022, the Fed’s balance sheet has shrunk by $458 billion as of January 4, 2023. The current QT figure suggests the balance sheet will shrink another $100 billion each month, or another $1.2 trillion in fiscal 2023.
If the withdrawal of half a trillion dollars in 2022 resulted in the worst performance of bonds and stocks in several hundred years, imagine what would happen if twice that amount was removed in 2023.
Powell understands that as aggressive as his QT is, at this pace, it would take many years to fully reverse the amount of money printed since the start of the COVID pandemic. From mid-March 2020 to mid-April 2022, the Fed printed $4.653 trillion. With a $100 billion per month contraction, it would take roughly 4 years to fully return to pre-pandemic Fed balance sheet levels.
Hayes sees two possible scenarios for how QT will be phased out:
- Powell sees the falling CPI as confirmation that the Fed has done enough to stop raising rates soon, and possibly stop QT and start cutting rates if a recession hits in Q2 2023. However, Hayes believes that this scenario is unlikely because Powell hardly uses the CPI as a measure of inflation.
- A significant part of the US credit market is crashing, leading to a financial crisis across a wide range of financial assets. In response, similar to the actions taken in March 2020, the Fed calls an emergency press conference, halts QT, cuts the rate significantly, and resumes quantitative easing (QE) through bond buybacks.
Hayes believes that in the case of the development of the 1st scenario, prices for risky assets will gradually grow. This means that the 2022 low will no longer be updated by bitcoin, which means you can invest in it right now.
Under Scenario 2, risky assets will plummet and 2023 will be as bad as 2022.
Imagine 10-year US Treasury yields rapidly doubling from 3.5% to 7%, the S&P 500 falls below 3,000, the Nasdaq 100 falls below 8,000, and Bitcoin trades at or below $15,000.
Scenario 2 is the base scenario for Hayes.
The author of the forecast admits that he may be wrong – if so, then he has already missed the bottom of bitcoin, the growth of which will take place in two stages. In the first phase, seasoned speculators will get ahead of the actual shift in Fed policy, and Bitcoin could easily reach $30,000-$40,000 as the price is currently heavily bearish after the FTX. The next stage – growth to $69,000 and above – can only begin after both the rate increase and QT are stopped.
Hayes is confident that Powell will communicate monetary easing clearly in advance. At the end of 2021, the Fed announced that it would switch to fighting inflation by limiting the money supply and raising the rate. She kept her promise and started doing it in March 2022 and everyone who didn’t believe her lost. Obviously, the same thing will happen in the opposite direction – the Fed will tell us when it’s over, and if you don’t believe it, you’ll miss out on a huge rally.
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