New inflation spike? - 5 things for BTC on this week

Key points: 

• Traders are conservative on the outlook for BTC/USD as there is no sign of a fundamental shift in market behavior.
• The Federal Reserve will release the minutes of the Federal Open Market Committee (FOMC) meeting on January 4, providing clear guidance on future policy.
• According to the CME Group's FedWatch tool, the short- to the medium-term trend of lower inflation remains, leaving room for risk assets.
• Bitcoin’s upcoming difficulty adjustment on Jan. 3 will erase gains made two weeks ago, suggesting that miners are still under pressure from BTC’s price action.
• With Bitcoin showing no volatility for weeks, sell-offs among holders have understandably been minimal.
• Crypto Fear and Greed Index continue to surf above “Extreme Fear.”

Bitcoin starts the first week of 2023 in a lackluster place as volatility stays away — and traders.

BTC price action remains stuck in a tight range after being unchanged during the Christmas and New Year holidays.

With nearly 65% ​​of annual losses locked in in 2022, Bitcoin has arguably had a classic bear market year, but few are currently actively predicting a recovery.

For ordinary investors looking for the macro triggers provided by the Fed and the impact of economic policy on dollar strength, the picture is complicated.

Bitcoin Traders Fear New Lows in Price Plunge

Bitcoin holders may be hoping for volatility, but so far, Bitcoin's price action has remained in a coma, data from TradingView show.

Nothing - low Christmas volumes, quarterly and yearly candle closes, even macro data before then - seems to be able to change the status quo.

According to the Bitcoin Historical Volatility Index (BVOL), Bitcoin volatility even hit a new all-time low on the eve of this year.

Bitcoin historical volatility index (BVOL) 1W chart. Source - TradingView

Therefore, looking ahead, traders are conservative on the outlook for BTC/USD as there is no sign of a fundamental shift in market behavior.

“All it takes is a bit of resistance to turning everyone bullish again. The same bull trap is happening all through 2022 and people haven’t learned anything,” Crypto’s Il Capo said on the day:

“12k is very likely.”

BTC/USD annotated chart. Source - Il Capo of Crypto [Twitter]

His comments came amid modest gains for bitcoin, which surpassed $16,700 for the first time in days.

BTC/USD 1H chart. Source - TradingView

They were confirmed by a popular trader and analyst Pentoshi, who also flagged $12,000 as a key support area for Bitcoin to revisit volume on higher time frames.

BTC/USD annotated chart. Source: Pentoshi [Twitter]

Meanwhile, analyst Toni Ghinea doubled the BTC/USD floor again to $11,000-$14,000.

"We expect all of these values ​​to be reached within 2-3 months," confirms a Jan. 1 Twitter comment.

Michael Burry warns of the return of inflation

With a week before the U.S. December consumer price index (CPI) release, the first few days of January have been relatively quiet in terms of macro BTC price catalysts.

However, that doesn’t mean there isn’t anything to watch, as PMI and non-farm payrolls are expected next week.

According to the CME Group's FedWatch tool, the short- to the medium-term trend of lower inflation remains, leaving room for risk assets.

While the pace of rate hikes has begun to slow, the Fed has yet to signal that it will reverse rate hikes. Once these signals arrived, risk appetite increased significantly.

Fed target rate probabilities chart. Source - CME Group

The Federal Reserve will release the minutes of the Federal Open Market Committee (FOMC) meeting on January 4, providing clear guidance on future policy.

Yet even this more accommodative scenario is not the end of the inflation story for big short investor Michael Burry.

“Peaking inflation. But not the final peak of this cycle,” he warned in a Jan. 2 tweet:

“We are likely to see CPI lower, possibly negative in 2H 2023, and the US in recession by any definition. Fed will cut and government will stimulate. And we will have another inflation spike. It's not hard.”

The consequences of Fed policy are clearly visible in stock market performance in 2022, with the S&P 500 ending the year, for example, 1,000 points below many of the most popular estimates.

As the market awaits the first day of trading on Wall Street in 2023, the U.S. dollar index is already grappling with what could be the first silver lining of the year for crypto assets.

The U.S. dollar index (DXY) is now at risk of falling unchallenged on support for more than six months before re-entering the 100-point level.

"Markets: DXY poised for another crash, 10-year Treasury yield hits resistance, WTI rebounds at resistance, gold at resistance, stocks flat," said Callum Thomas, founder and research director at macro research firm Top Down Charts summed it up, in some of the Twitter comments of the day.

U.S. dollar index 1W chart. Source - TradingView

Difficulties due to low hash rate data

In the subconscious world of Bitcoin fundamentals, it’s business as usual to start the new year.

Bitcoin’s upcoming difficulty adjustment on Jan. 3 will erase gains made two weeks ago, suggesting that miners are still under pressure from BTC’s price action.

After a 3.27 percent rise on Dec. 19, the difficulty is expected to drop about 3.5 percent this week, failing to hit a new all-time high, according to BTC.com.

Bitcoin network fundamentals overview. Source - BTC.com

The difficulty data itself provides an interesting insight into the health of Bitcoin "behind the scenes" — competition for block subsidies remains fierce despite concerns about miners' financial stability.

However, data from late December provided a bleak snapshot of average network participants, with hash rate — an estimate of the total computing power dedicated to mining — hitting its lowest level this year.

“This is the most brutal Bitcoin miner capitulation since 2016, and probably the most brutal ever,” commented Charles Edwards, founder of Capriole Investments at the time:

“Hash Ribbons capitulation has captured the lowest Bitcoin hash rate reading of 2022 as miners bankrupt and default under the great pressure of squeezed margins globally.”

Bitcoin hash ribbons annotated chart. Source - Charles Edwards [Twitter]

The accompanying chart shows Bitcoin’s hash belt indicator entering another “surrender” zone, where miners collectively shut down their hash rate. A similar event happened in July 2022, and it happened again a year ago.

Bitcoin’s public miners also continue to feel the pinch, with Core Scientific reportedly securing nearly $40 million in temporary bankruptcy loans from creditors including BlackRock.

BTC supply goes dormant

With Bitcoin showing no volatility for weeks, sell-offs among holders have understandably been minimal.

The latest on-chain data supports this theory, with BTC supply becoming more and more dormant as speculators stay away.

Physical deliveries to wallets over the past five to seven years have reached their highest level since January 2018, according to on-chain analytics firm Glassnode.

BTC supply last active 5-7 years ago chart. Source - Glassnode [Twitter]

This trend has existed for most of the past year, as those who bought BTC during the last halving cycle saw their purchases rebound in price.

As the supply ages, the amount of short-term moving coins increases, suggesting that there is no spontaneous speculative trading.

Glassnode confirmed that BTC supply, which was last active three to six months ago, is now at a five-year low. Supply that was active three to five years ago is now at annual lows.

BTC supply last active 3-6 months ago chart. Source - Glassnode [Twitter]

"Supply is tight again," analyst resource Stockmoney Lizards said in response to similarly dormant data late last month.

The accompanying chart shows the relationship between dormant supply and the macro highs and lows of BTC price action.

BTC/USD annotated chart. Source - Stockmoney Lizards - [Twitter]

The sentiment is not clear 

Similar signs that many market participants just don't know how to see the future of cryptocurrencies, sentiment is neither here nor there.

That’s the reading of the popular sentiment gauge Crypto Fear and Greed Index, which continues to surf above “Extreme Fear.”

A story and sentiment that has described much of the post-FTX debacle seem to be confused about how bad the state of crypto really is.

Of the index's five sentiment zones, only "fear" has been present in the past few weeks, with the last time it dipping deeper into "extreme fear" in late November.

Fear and Greed can provide important insights into market activity based on investor behavior. In 2022, it fell to a low of 6/100, a rare score in Bitcoin's history.

Daniel Cheung, a co-founder of investment firm Syncacy Capital, summed it up in a Twitter thread: “While 2022 has been a brutal year for crypto, I’ve never been as bullish on the industry as it is in terms of long-term fundamentals. So excited now" January 11.

Crypto Fear & Greed Index. Source - Alternative.me