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The worst is not over for Bitcoin and risk assets - BI's Mike McGlone

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(Kitco News) - As the U.S. economy heads towards a recession, the first major recession since the launch of Bitcoin in 2009, Bloomberg Intelligence senior macro strategist Mike McGlone is warning cryptocurrency investors that the worst is yet to come, and it would be wise to limit exposure to risk assets as volatility is likely to surge.

“Cryptos face their first US recession, a potential stock bear market, vigilant central banks and high interest-rate competition, and they've bounced in 2023, indicating consensus thinks the worst is over,” McGlone wrote. “We disagree.”

McGlone pointed to the declining price of cryptos in the second quarter as a “sign of skepticism that the stock market can sustain its 1H bounce,” and said that the recent rise in equities prices is raising the prospect of further rate hikes by the Federal Reserve, which “could represent a potential lose-lose for risk assets.”

“The don't-fight-the Fed mantra remains a strong headwind for Bitcoin and crypto prices,” McGlone said. “The cat-and-mouse game between the rallying stock market and watchful central banks could be an obstacle for risk assets.”

To reinforce his point, McGlone highlighted the performance of the Bloomberg Galaxy Crypto Index (BGCI) as compared to the Nasdaq 100 Stock Index, which broke higher in Q2 while the BGCI fell.

BGCI vs. Nasdaq 100 vs. federal funds futures. Source: Bloomberg Intelligence

“Federal funds futures in one year (FF13) are a liquidity gauge, and adding rising rate-hike expectations to a climbing stock market may put a ceiling on crypto prices,” McGlone said.

One positive that the crypto market has in its favor has been the softening stance of China, which has adopted a more open policy as U.S. regulators have cracked down on the industry.

When it comes to how Bitcoin will fare in a U.S. recession as compared to gold, McGlone said that “The high probability of a US recession and tendency for gold to shine in such conditions may favor the metal in 2H vs. Bitcoin, with its nascent risk-asset status.”

“That the Federal Reserve may still tighten at its June 14 meeting with commodities and bank deposits collapsing may portend a receding tide for all risk assets, with cryptos at the top of the list,” he said.

The way McGlone sees it, the worst may not be over for Bitcoin, so caution is warranted moving forward.

“Bitcoin's high of about $30,000 in 2023 vs. the 100-week mean around $33,000 may show the pre-eminent, 24/7, globally traded risk indicator feeling gravity from the comfort zone around $7,000 before the unprecedented 2020-21 liquidity boost,” he said. “That the widely expected US recession has not yet started may pressure risk assets accordingly.”

Bitcoin $7k support vs. $30k resistance. Source: Bloomberg Intelligence

McGlone noted that Bitcoin is currently down 40% since the start of 2022 and the Fed’s tightening cycle and warned that “its reversion process may not be done, with implications for risk assets.”

Fed pause in June does not mean rate hikes are over, and gold price is taking a hit - analysts

The fact that markets are leaning towards more rate hikes in June “could signal a potential lose-lose for risk assets,” he warned, “notably after most bounced from oversold in 2022 on optimistic prospects for a soft landing.”

The worst-case scenario noted by McGlone would be a Bitcoin pullback all the way to $7,000, where it traded at the end of 2019, “before the biggest liquidity pump in history.”

“The crypto has bounced from too cold in 2022 at around $15,000 and may have turned too hot in April at about $30,000,” he said. “It's the enduring patterns of booms on the back of liquidity and busts when it's removed that tilts our directional bias for Bitcoin toward respecting the down-sloping 52-week mean.”

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