Bitcoin Drops 15% as Risk Aversion Intensifies, Fed Tightens Policy

The recent downturn in risk assets signals the beginning of a more significant market decline. Bitcoin, once a beacon of hope for crypto enthusiasts, is now feeling the heat as global risk aversion intensifies. The market's perception of risk is the most critical factor for Bitcoin, and the current risk-off phase is expected to persist, leading to further declines in Bitcoin prices.

Central banks, which have traditionally supported asset prices through intervention, are now constrained by inflation. Jerome Powell, the current Federal Reserve Chair, is unlikely to follow in the footsteps of his predecessor, Ben Bernanke, by providing easy money to prop up asset prices. Instead, Powell is expected to implement unpopular monetary policies to combat inflation, further exacerbating the economic downturn and driving Bitcoin prices lower.

The inverted yield curve, a traditional indicator of economic recession, adds to the market's woes. The current economic situation, marked by high government borrowing and a lack of central bank support, is reminiscent of the early 1980s, when Paul Volcker implemented strict monetary policies to combat inflation. The coming months are expected to be volatile, with risk asset prices likely to fall further.

Government borrowing is at an all-time high, with Germany and the US leading the charge. The US, in particular, has trillions in debt to roll over in 2025, and the proposed Mar-a-Lago accord, which involves issuing 100-year, non-tradeable zero-coupon bonds, is seen as a potential solution to the liquidity crisis. However, the global economic reality remains bleak, with sustained risk asset strength unlikely in the near future.

The financial economy, which has been propping up the real economy, is also showing signs of weakness. The largest economies, including the US, EU, and China, are all struggling, and central banks are reluctant to provide easy money to boost economic performance. This lack of support is likely to result in further declines in financial asset prices in the coming months.

Despite the current market volatility, the fundamentals for cryptocurrencies remain strong. However, global macroeconomic factors are weighing heavily on risk assets, making sustained appreciation unlikely in the near term. Fiat currency is broken, and those who can accumulate risk assets in the coming months with a long-term horizon are likely to benefit as the global financial system continues to unravel.