According to Bloomberg senior analyst Mike McGlone, Bitcoin (BTC) and other risk assets may face further downward pressure as the Fed continues to tighten monetary policy despite signs of economic weakness.
Mcglone: "Bitcoin Risks 'Reversal'"
In a tweet, McGlone said that the Fed's decision to raise interest rates twice in the first half of 2023, despite bank failures and falling commodity and producer prices, could point to the potential for deflation for risky assets.
McGlone noted that Bitcoin was trading around $7,000 at the end of 2019 before the largest liquidity injection in history, which could highlight the risks of reversal for BTC, which was around $27,000 on May 19.
Reversal risk is a type of risk that arises from the possibility of an asset's price returning to its long-term average value.
McGlone said that Bitcoin jumped from the very cold around $15,000 in 2022 and may have reached the very heat of around $30,000 in April.
"Too cold" and "too hot" are terms that describe the deviation of an asset's price from its long-term average value. If the price of an asset is too cold, it means that its value is under or oversold and it may experience a rebound. If the price of an asset is too hot, it means that it is overvalued or overbought and a correction is in progress.
McGlone also commented on the Fed's determination to stick to its tightening path despite a bank crisis in March. He said falling copper and cryptocurrencies appear to be heeding the warning, contrasting with the stock market, which has been particularly strong.
The analyst warned that Bitcoin has fallen nearly 40% since the start of 2022 and the Fed's tightening cycle, and that the reversal may not be complete, which could have implications for risk assets.
*Not investment advice.