Why Bitcoin Is Set to Plunge Toward $12,000 As the Fed Tightens Policy – Business Insider

  • Fed tightening is bad news for bitcoin, Stifel’s Barry Bannister said on Tuesday.
  • He warned that the crypto could fall to as low as $12,000. It currently sits around $47,600.
  • He said gold is better-positioned right now.

One big argument that proponents of bitcoin make in favor of the cryptocurrency is that, with its finite supply, it’s an alternative to inflation-susceptible fiat currencies like the US dollar or the euro. 

Regardless of how true or not that is, the asset has certainly hedged against the inflation brought about in part by the enormous amount of money printing that’s gone on since the beginning of the pandemic, according to Stifel‘s Chief US Equity Strategist Barry Bannister. That’s because bitcoin thrives in high- liquidity environments. Since March 2020, it’s up well over 800%.

So it’s perhaps ironic that inflation itself is likely to hurt bitcoin even more in the months ahead, with the largest crypto already down 28% since November 8 at $48,000.

With the Consumer Price Index, a leading measure of inflation, at its highest level in almost 40 years — 6.8% year-over-year in November — the Federal Reserve announced on Wednesday afternoon that it would begin tapering its asset purchases at twice the pace it had planned. The central bank will decrease its monthly purchases by $30 billion instead of $15 billion, from the $120 billion per month pace it had kept until November. It signaled that it expects to raise interest rates three times in 2022. 

These decisions will shrink the global money supply in dollar terms, hurting bitcoin, Bannister said.

“Bitcoin has functioned as a high-powered, liquidity-driven speculative asset. That chart shows that slowing year-over-year growth in global M2 money supply should drag Bitcoin lower near-term, which is my view,” Bannister said in an email on Wednesday.

He continued: “With the Fed being first to raise rates among the major central banks, the dollar has been strengthening. The U.S. is only about 21% of global money supply, so the value of the other 79% of world money declines in dollar terms because their currencies buy fewer dollars.”

Below is the chart Bannister references. 

M2 and bitcoin


The chart was presented on Tuesday during Stifel’s 2022 market outlook webinar. During the presentation, Bannister also shared other indicators he’s looking at that show bitcoin is in for a rough road ahead. 

One is the rising equity risk premium as stock valuations start to shrink. The equity risk premium is the return that stock market investors get above a 10-year Treasury bond yield, which is considered risk-free. With interest rates rising and stock valuations seeming to start to top out after ballooning since March 2020, the equity risk premium is currently rising (as stock valuations fall, the outlook for better future returns improves). 

This has historically been bad news for bitcoin’s price action. When the equity risk premium jumps, bitcoin’s price seems to fall. 



While this environment tends to be bad for bitcoin, it tends to be good for gold. Below is the same chart for gold. It shows the precious metal’s price rising when the equity risk premium rises.

“We observe that Crypto hedges excessive global money supply growth (ominously for Bitcoin, global money supply growth rates peaked in Mar- 2021) and bitcoin is a high octane speculative asset in a risk-on stock market with a rising P/E ratio,” Bannister said in Stifel’s 2022 outlook note. “In contrast, gold is a better hedge for risk-off stock markets (which feature a rising Equity Risk Premium, e.g., a falling P/E ratio) and gold does well during Treasury yield repression by central banks which lowers the real (after inflation) yield despite rising inflation.”



Bannister also measured bitcoin’s performance relative to gold and found that it stays within two standard deviations of its polynomial trend, or curved trend. Bitcoin’s data is log transformed, adjusting for its skewed price action relative to gold.

Based on its current position on the trend line, bitcoin’s downside is as low as about $12,000 and its upside is as high as almost $134,000.



Given that current environment is set up for gold’s success instead of bitcoin’s, Bannister warned of a potentially volatile period ahead for the cryptocurrency.

“Its fair value, if you consider the trend to be fair value, is really $27,000,” Bannister said during the webinar. “But as the old Wall Street saw goes, fair value is what you pass on the way on the over- to the under- and the under- to the overvalued. Fair value only lasts a day or two.”

He added: “In an inflationary bust, I think bitcoin would drop to $12,000. It would crash. It would be down here, the green line support, like it was in here 2020, it was here 2019, and it was in here throughout most of ’15, ’16, and ’17.”

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