In his latest blog post, published Jan. 19, Arthur Hayes, the former CEO of the BitMEX exchange, predicted a “global financial meltdown” thanks to future economic woes in the United States.
Hayes: Crypto will be ‘smoked’ in Fed pivot
Bitcoin’s current rally should probably not be taken as the start of a new bull run.
That’s the opinion of Arthur Hayes, who this week in a new paper on US macroeconomic policy warned that the Federal Reserve’s current behavior would flip from hawkish to liberal, but would result in crypto assets “being smoked.”
With U.S. inflation slowing, the Fed has been in the focus of virtually all crypto analysts this year as they assess the likelihood of a policy pivot away from quantitative tightening (QT) and rate hikes towards flat and then falling rates and possibly even quantitative rates relaxation (QE).
Essentially, this involves a move away from withdrawing liquidity from the economy and toward reinjecting it, and while this practice led to new all-time highs for Bitcoin starting in 2020, the same phenomenon wouldn’t be easy next time, Hayes believes.
“If removing half a trillion dollars in 2022 produced the worst bond and stock performance in a few hundred years, imagine what will happen when twice that amount is removed in 2023,” he wrote.
“The way markets react when money is injected or withdrawn is not symmetric – and so I expect the law of unintended consequences will bite the Fed in the ass if it continues to withdraw liquidity.”
Therefore, Hayes is not betting on a smooth transition from QT, but on extreme circumstances that will force the Fed to act.
“Part of the US credit market is collapsing, leading to a financial meltdown across a broad spectrum of financial assets,” he said.
“In a similar response to March 2020, the Fed calls an emergency press conference and halts QT, cuts rates significantly and restarts quantitative easing (QE) by buying bonds again.”
This, in turn, translates to “asset price risk craters.”
“Bonds, stocks, and every crypto under the sun will all be smoked as the glue that holds the global USD-based financial system together dissolves,” the blog post continues.
Current estimates, as shown by CME Group’s FedWatch tool, overwhelmingly support the Fed slowing the pace of rate hikes when it next makes a decision on February 1st.
Fed target rate probability chart. Source: CME Group
Planning a repeat in March 2020
Hayes is far from the only one wary of Bitcoin being a firm “buy” for now after two weeks of near-vertical price growth.
Related: Bitcoin Sees New 4-Month High as US PPI, Retail Data Releases ‘Big Miss’
As Cointelegraph reported, various commentators are betting that new macro lows will still occur, with BTC/USD bottoming out from Q4 2022.
So those who take a leap of faith and accumulate now face serious risk before reward.
“This scenario is less than ideal because it would mean that anyone buying risky assets now would face a massive performance hit. 2023 could be just as bad as 2022 until the Fed turns around,” Hayes wrote, still calling this scenario his “base case.”
If this means a retest of the 2022 lows, the $15,000 to $16,000 area will be a key zone of interest going forward.
“I will know that the market has probably bottomed because the crash that happens when the system momentarily collapses will either hold the previous $15,800 lows or not,” the blog post concludes.
“It doesn’t matter what level is ultimately reached in the downdraft because I know the Fed will subsequently print money and avert another financial collapse which in turn will mark the local bottom for all risky assets. And then I get another setup similar to March 2020 where I have to reset the truck and buy crypto with two hands and a shovel.”
Bitcoin (BTC) is poised for a drop to $15,000 “or less” as part of a mass risk asset capitulation, says Arthur Hayes.
BTC/USD 1 Hour Candlestick Chart (Bitstamp). Source: TradingView
BTC/USD consolidated at $20,800 as Wall Street opened Jan. 19, data from Cointelegraph Markets Pro and TradingView showed.
The views, thoughts, and opinions expressed herein are solely those of the authors and do not necessarily reflect or represent the views and opinions of Cointelegraph.