Eoners
The price of Bitcoin (BTC-USD) rallied above $64,000 in 2021, due to institutional adoption and investment in the cryptocurrency. The ongoing economic uncertainty and monetary policy measures taken in response to the COVID-19 pandemic have increased interest in Bitcoin as a hedge against inflation, which has contributed to the Bitcoin craze. Other factors that have contributed to the price increase include increased awareness and acceptance of cryptocurrencies in different regions. The sudden price increase in 2021 marked a long-term resistance and pullback in an effort to stabilize the price structure. This article examines the impact of inflation on Bitcoin price and the market’s next move in light of the technical analysis. Bitcoin is trading at a strong level of support, and the price will confirm a bottom if it breaks above $28,000. There is a high probability that the price will continue to the downside once the resistance is confirmed. Bitcoin’s current upswing is a result of the high level of support and the bottom is still not confirmed.
Is Inflation Good for Bitcoin?
Inflation does not affect the value of Bitcoin directly because Bitcoin is not issued by the government. However, some investors see Bitcoin as a hedge against inflation because it is decentralized, finite, and has a transparent supply schedule. In that case, if the US dollar loses value due to high inflation, Bitcoin’s value increases.
The chart below depicts the Consumer Price Index (CPI), which measures inflation in the USA. The inflation rate has broken the 40-year record, but the price of bitcoin has fallen by more than 50%, indicating that there is no direct relationship between Bitcoin and inflation. However, there is an indirect relationship between inflation and Bitcoin. Investors are investing in Bitcoin as a hedge against inflation, which is increasing the demand for Bitcoin. In contrast, the Federal Reserve is increasing interest rates to combat inflation, causing economic uncertainty in the USA. This economic uncertainty is damaging the US dollar. The falling US dollar is favorable for Bitcoin.
Relation between Inflation and Bitcoin (fred.stlouisfed.org/)
Technical Picture of Bitcoin
The monthly Bitcoin chart presents key support and resistance levels in the Bitcoin market. The development of a double top coupled with a break of the $28,000 neckline indicates bearish price action in the market. Once the neckline was broken, the price moved to the major support at $17,000. Since Bitcoin is a highly volatile instrument, the support and resistance levels have roughly $1,000 deviations on both sides. Two monthly closes above or below the support or resistance line are required for the level of support or resistance to be broken. There have been no consecutive monthly closes below $17,000, indicating that support still exists. Bitcoin is currently rising from the support level, and if it continues to do so, it will encounter significant resistance at $28,000. In order for the Bitcoin market to be considered bullish, the price must close the month above $28,000.
Bitcoin Monthly (stockcharts.com)
Since the emergence of Bitcoin in 2021 was extremely volatile, with the price increasing by more than 1500% in a matter of months, linear charts are difficult to interpret. The logarithmic weekly outlook for Bitcoin is shown in the chart below. The weekly chart illustrates that whenever Bitcoin prices increase, bullish price action commences. The patterns of 2015 and 2020 were bullish inverted head and shoulders, which caused the price to begin its huge upsurge to new heights. However, the price action in 2022 was marked by head-and-shoulder patterns, which are bearish. These bearish price movements suggest that Bitcoin must drop to at least $12,000 to $13,000 or $3,500 before the next significant rally. Bitcoin must also surpass $28,000 on a monthly basis for the next bullish rally to commence.
Gold Weekly (stockcharts.com)
Bitcoin’s price has been subjected to a significant amount of volatility. The types of price movements imply that once Bitcoin has completed the bottom at the defined support levels, the subsequent advance could be massive. Due to the recent price patterns depicted on the Bitcoin monthly chart, it is not feasible to measure the exact target for Bitcoin’s next advance.
Market Risks
The greatest market risk for the Bitcoin market is the prospect of regional regulation. In 2021, China constructed illegal policies against cryptocurrencies. Similarly, the Indian government imposed a 30% tax on crypto transactions, reducing demand for Bitcoin. There are still a number of countries where the use of cryptocurrencies is prohibited, and the concept of cryptocurrencies has not yet caught on in the region. Even in countries where Bitcoin has been utilized, the future use of cryptocurrencies cannot be guaranteed. Therefore, many investors are reluctant to implement cryptocurrencies as investments. This reluctance to utilize Bitcoin as an investment imposes market risk and influences the demand for Bitcoin.
The second risk is the emergence of a large number of cryptocurrencies on the market. There are over 12,000 cryptocurrencies, and this number is growing at a faster rate. The increase in the number of cryptocurrencies on the market decreases the demand for Bitcoin, as investors shift attention to newly created cryptocurrencies.
Another risk posed by Bitcoin is extreme volatility. The price of Bitcoin increased by 1.542% in April 2021 as shown in the chart below. This type of decade movement indicates extreme volatility, and the price increase is typically followed by long-term fluctuations and a long and complex sideways market. Typically, long-term consolidation serves as the development of the bottom for a subsequent price increase. Currently, bitcoin has fallen to a lower level of support, and it is anticipated that Bitcoin will remain sideways for some time in order to form the bottom. Technically, the bottom in Bitcoin will only be confirmed if $28,000 is broken.
Bitcoin Monthly Gain (stockcharts.com)
Final Words
Based on the preceding discussion, it is concluded that Bitcoin is not directly affected by inflation, but there is some indirect relationship that may impact Bitcoin demand. As a result, higher inflation may have a positive impact on Bitcoin. Inflation is expected to remain high in the US in 2023, implying that the Fed will raise interest rates. The higher interest rates will slow down the US economy and will have a negative impact on the US dollar, resulting in increased demand for Bitcoin. However, the technical picture indicates some strong support at $17,000. The strong resistance level at $28,000 is regarded as the pivot for Bitcoin’s next rally. However, the bottom in Bitcoin has not yet been confirmed, and more pressure may develop. If there is a further downside, $13,000 and $3,500 are strong levels where the bottom can form. Due to the high volatility and uncertainty in the cryptocurrency market, investors should consider Bitcoin as a high-risk investment. However, $13,000 and $3,500 remain the levels at which investors must consider investing in Bitcoin with high risk. Currently, Bitcoin price has the potential to encounter resistance at $28,000 and continue further downside.
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