Elon Musk and Cathie Wood sound the “deflation” alarm: Is Bitcoin at risk of falling below $14,000?

Bitcoin (BTC) has rallied 20% to nearly $22,500 since Sept. 7. But the risks of a bull trap they abound in the long run, as Elon Musk and Cathie Wood sound the alarm about a potential deflation crisis.

Cathie Wood: “Budding Deflation”

Tesla’s CEO tweeted over the weekend that a major interest rate hike from the Federal Reserve could increase the possibility of deflation. In other words, Musk suggests that the demand for goods and services will fall in the United States in the face of rising unemployment.

Bitcoin (BTC) has rallied 20% to nearly $22,500 since Sept. 7. But the risks of a bull trap they abound in the long run, as Elon Musk and Cathie Wood sound the alarm about a potential deflation crisis.

The rate hikes have typically been bad for Bitcoin this year. In context, the period in which the Fed has raised its benchmark rates from near zero in March 2022 to 2.25%-2.50% in August 2022 has coincided with the BTC price falling by more than 50%. .

Up to this point, the labor sector has been very resilient. However, the latest report from the Bureau of Labor Statistics sample that the unemployment rate has risen to 3.7% from 3.5% in August. Even Alphabet (Google) warned that it could resort to layoffs shortly to stay 20% more efficient.

But Fed Chairman Jerome Powell has affirmed that the central bank could raise rates further to bring inflation down to its preferred 2% target.

In July, the US consumer price index (CPI) was 8.5% year-on-year. August inflation data is due out on September 13, and a Reuters poll of economists foresees to fall to 8.1%, citing the recent drop in energy prices.

This figure is still far from the Federal Reserve’s 2% inflation target, which, according to David Whiteflower, a former member of the Bank of England’s rate-setting committee, will cause a hard landing. Therefore, an aggressive Fed could cause an increase in unemployment and a economic recessionsimilar to what Musk predicts about deflation.

Along the same lines, Ark Invest CEO Cathie Wood, who sees Bitcoin reaching $1 million by 2030, cited the latest data from Manheim, noting that used car prices fell 4% in August and about 50% by 2022. The metric again indicates declining consumer demand.

Bitcoin could feel the pain of a deflation-triggered recession, as Ecoinometrics analyst N suggests that companies holding cash don’t dive into a volatile asset until the economy has bottomed out.

This is how he explains it:

“From 2020 to 2021, there are a huge number of new entrants into the digital asset space, which almost doubled the total hodlings in treasures. And with the market slowing down, everything stopped.”

Bitcoin treasury holdings since 2020. Source: Ecoinometrics

Retail investors could follow a similar strategy, points out Q.Ai, a Forbes-endorsed investment service.

In other words, higher interest rates would increase people’s monthly income stream toward paying down debt (mortgages, credit cards, etc.), decreasing their cash allocation for riskier assets like Bitcoin.

Bitcoin at $14,000?

Macroeconomic fundamentals can also trigger bearish technicals for Bitcoin, especially on the daily chart.

B.itcoin appears to have been forming a bearish cup and reverse handle reversal pattern, confirmed by an inverted U-shaped price trend (cup) followed by a short uptrend (handle), all above a common support level called “necklines”.

As a rule of technical analysis, the profit target of a reverse cup and handle pattern is measured after subtracting the price of the neckline level by the maximum height of the cup, as shown below.

1663014917 235 Elon Musk and Cathie Wood sound the deflation alarm Is
Daily price chart of the BTC/USD pair with a reverse cup and handle setup. Source: TradingView

So, from a technical perspective, BTC price risks fresh multi-year lows below $14,000 in 2022, down around 37.5% from current price.

Also, Filbfilb, creator of the DecenTrader trading suite, which accurately predicted the bottom of Bitcoin in 2018, told Cointelegraph that BTC may drop as low as $11,000 later this year, based on historical volume around this level.

“As it stands, the price of Bitcoin is strongly correlated to ‘legacy’ markets, in particular the NASDAQ, which we know is under enormous pressure due to Fed monetary policy,” he explained. “So this time ‘it’s a little bit different’ because of the high correlation and external economic forces.”

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Elon Musk and Cathie Wood sound the “deflation” alarm: Is Bitcoin at risk of falling below $14,000?