Bitcoin Fell Below the 20,000 Threshold, and the Federal Reserve‘s Scale Reduction May Cause the Market to Continue to Decline

1. Presently, Bitcoin is facing a key choice, and its price has fallen back to the level at the end of 2020.

2. The current price of Bitcoin has approached the shutdown price of many mining machines of Ant, Avalon and other brands.

3. The Fed's interest rate hike is the main reason for the decline in Bitcoin prices. Due to the severe form of inflation in the United States, the actual interest rate of the Federal Reserve is much higher than expected.

4. In addition to raising interest rates, the scale reduction may continue to push the crypto market into a bear market. Since June 1 this year, the Federal Reserve has officially started to shrink its balance sheet and recover cash from the market by selling assets.

5. In the long run, we may not need to worry too much about the future of Bitcoin. Bitcoin has experienced at least two large retreats, and each decline has reached 80%. According to this calculation, the lowest price of Bitcoin in this cycle will reach approximately $13,800.

Since May, Bitcoin has entered a new downward cycle under the influence of the Fed's interest rate hike, LUNA collapse, stETH depeg and other events. On June 18, Bitcoin fell below the $20,000 threshold, testing the support level of the December 2017 high. The global market value of cryptocurrency also fell below $900 billion. Currently, Bitcoin is facing a key choice, and its price has fallen back to the level at the end of 2020. At the end of 2020, Bitcoin was approaching $20,000 for the first time. After the price breakthrough, it soared and quickly reached $60,000 within six months. In this cycle of decline, the price of Bitcoin also fell back to the level of $20,000 from more than $47,000 in six months.


If the current mining price level is $0.4 / kWh, the current price of Bitcoin has approached the shutdown price of many mining machines of Ant, Avalon and other brands, that is, the mining cost price. Affected by the overall downward trend of the crypto market, many institutions that added Bitcoin in the bull market cycle suffered heavy losses. Among all listed companies that hold Bitcoin, MicroStrategy and Tesla have the largest holdings, and are also the most injured in this cycle. MicroStrategy currently holds nearly 130,000 Bitcoins at an average purchase price of $30,700. Last Monday, the 13th, MicroStrategy's share price fell 25% in one day. Up to now, the book loss of MicroStrategy's investment in Bitcoin has been close to $1billion. At the beginning of 2021, Tesla purchased 43,200 Bitcoins at an average price of $35,000 and spent $1.5 billion. These Bitcoins created huge profits for Tesla in 2021. Today, the value of these Bitcoins is approximately $900 million, which means that Tesla may have incurred a loss of $600 million.

In addition, El Salvador, the first country to declare Bitcoin as the official legal tender, also suffered heavy losses. Since the announcement of Bitcoin as legal tender in September last year, El Salvador has purchased 2,301 Bitcoins, with an average price of $45,200 and a total cost of $106 million. Presently, the Bitcoin assets of El Salvador have evaporated by more than 50 million dollars. However, President Nayib Bukele of El Salvador and some government officials are still optimistic about the situation. On the 15th, he tweeted that more Bitcoin may be bought in the country.



Interest rate hike and scale reduction: the era of deflation is officially coming

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The Fed's interest rate hike is the main reason for the decline in Bitcoin prices. In March, the US federal funds rate is expected to reach the range of 1.75~2.0% by the end of the year. However, due to the severe form of inflation in the US, the actual interest rate of the Federal Reserve is much higher than expected. The US CPI data released last week hit a 40 year high. Subsequently, on the 16th, the Federal Reserve announced a 75 basis point increase in interest rates, the largest since 1997. With the 25 basis points increase in interest rates in March and 50 basis points in May, the Federal Reserve's interest rate has risen by 150 basis points in total. According to the dot matrix of interest rate increase released by the Federal Reserve, it is expected that by the end of 2022, the federal funds rate will reach 3.25~3.5%, and the trend of interest rate increase will continue until the end of 2023, when the federal funds rate will reach 3.25~3.5%. The interest rate will not be reduced to 3.25%~3.5% until 2024.

The price of Bitcoin is pushed up by a lot of hot money. In 2020, the COVID-19 swept the world. The central banks of various countries represented by the Federal Reserve released a large amount of water to save the market, creating a brilliant bull market in the crypto market. Now, the interest rate hike has increased the income of holding US dollars, and a large amount of liquidity has been removed from risky assets such as cryptocurrencies. Even other traditional risk averse assets such as gold have been affected, and the price has declined.


In addition to raising interest rates, the scale reduction may continue to push the crypto market into a bear market. Since June 1 this year, the Federal Reserve has officially started to shrink its balance sheet and recover cash from the market by selling assets. Presently, the monthly scale of the Federal Reserve has reached $47.5 billion, including $30 billion in Chinese bonds and $17.5 billion in institutional debt and mortgage-backed securities (MBS). By September this year, the Federal Reserve's scale reduction will be expanded to $95 billion. As the tide of liquidity recedes, the cryptocurrency market, including Bitcoin, may become more gloomy in the short term.


Conclusion: stay optimistic

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We may not need to worry too much about the future of Bitcoin. The rise or fall of Bitcoin is only a part of the crypto market. In the ten years since its birth, Bitcoin has experienced at least two sharp retreats, with each decline reaching 80% and 90%. However, after the decline, Bitcoin finally rebounded and reached a new historical high. Assuming that the final range of this round of decline is also 80%, the final price of Bitcoin will be approximately $13,800. Follow the trend and maintain confidence. With the arrival of a new round of Bitcoin halving and the gradual improvement of the overall economic situation, the severe winter of the crypto market will eventually end.



Author: Gate.io Researcher: Ashley H. Translator: Joy Z.
* This article represents only the views of the researcher and does not constitute any investment advice.
*Gate.io reserves all rights to this article. Reposting the article will be permitted provided Gate.io is referenced. In all other cases, legal action will be taken due to copyright infringement.



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