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Cryptocurrency Price Check: 'Don't Fight the Fed'

The 'overall weakness across the financial markets should be considered when trading crypto into the foreseeable future,' one analyst says.
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Cryptocurrency prices were mixed Monday and analysts cited the Federal Reserve's hawkish stance and overall market weakness as key factors in the weekend's rout.

Bitcoin, the world’s biggest cryptocurrency by market capitalization, inched higher to $48,756 at last check, after falling roughly 20%, since mid-day Friday. Ether was off less than 1% to $4,057.

"The overall weakness across the financial markets should be considered when trading crypto into the foreseeable future," said Jake Wujastyk, chief market analyst at TrendSpider. "The hawkishness from Jerome Powell is also something that may hurt cryptocurrency as the Fed attempts to tame inflation by being more aggressive with their tapering program."

Over the last several weeks, negative divergence has been forming on the Bitcoin weekly chart and the Williams Percent Range oscillator, Wujastyk said, adding that this inefficiency in price was "a warning sign of momentum fading."

"The price is now correcting down and may get to the volume weighted average price from the June lows around $47,500," he said. "With Bitcoin being a proxy for the rest of the crypto market, this has affected almost all facets of the cryptocurrency world."

Winston Ma, CFA Managing Partner of CloudTree Ventures, Author of The Digital War – How China’s Tech Power Shapes the Future of AI, Blockchain and Cyberspace," had some simple advice regarding cryptocurrency.

“Don’t fight the Fed," he said. "During the past 18 months, the zero-interest rate of the Federal Reserve, in part, has helped the tremendous run of the Bitcoin and all other crypto tokens."

Now, Ma said, "the Fed is starting the taper and rate hike talk, which may lead to a correction in risk assets, of which the crypto asset market is a part."

Ma noted that the weekend selloff also comes ahead of Wednesday's scheduled testimony by executives from eight major cryptocurrency firms, including Coinbase Global  (COIN)  and FTX Trading CEO, before the U.S. House Financial Services Committee.

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"The hearing marks the first time major players in the crypto markets will testify before U.S. lawmakers, as policymakers grapple with the implications of cryptocurrencies and how to best regulate them," Ma said. "In the near future, we may see more volatility in the crypto market driven by the development of Fed monetary policy tightening and US government regulations."

Nicholas Cawley, analyst at DailyFX said "we are facing a very unusual confluence of unique market standing and seasonal expectations that could render the beginning of a systemic trend owing to holiday conditions and extreme fear within the crypto market." 

"A toxic combination of low liquidity, excessive leverage, and overconfidence led to this weekend’s crash with most cryptos printing multi-week lows as prices went into freefall," he said.

Separately, David Lesperance, managing partner of immigration and tax adviser Lesperance & Associates, said "the cracks are already showing in plans that are made in haste in the crypto mining world."

Lesperance cited the case of crypto mining company Xive, which shut down a 2,500-rig mine in South Kazakhstan due to lack of sufficient electricity supply from the national grid.

"Miners should remember the key elements to a successful operation are a) stable energy sources (preferably green); b) in a location with the rule of law to protect their business from sovereign risk or unsavory 'partners'; and c) an ability for the owners to visit and oversee operations," he said.

Kazakhstan does not adequately meet the first two requirements, so many minors are now looking at locations like Iceland and the U.S., Lesperance added.

"Unfortunately, both those jurisdictions have significant immigration barriers for the actual owners," he said. "This later issue needs to be dealt with with indirect immigration strategies such as securing status in jurisdictions which enjoy preferred treaty access to the countries where the mining operations are located."