Bitcoin Rally May Be a Mirage, Writes Our Analyst – A Deep Dive
Key Results Bitcoin is up nearly 50% so far this year, but with no positive catalysts from within the industry, our analyst writes, the rally is anything but macro-driven, with the Nasdaq up 16% and bitcoin a leveraged Continues to trade like a bet. There are still several headwinds on the index, the latest being a potential regulatory clampdown, such as the BUSD shutdown this week. Bitcoin – and crypto – are sensitive to these factors, and despite the recent rally still remain 65% away from high with many questions still unanswered
What do the following things have in common?
Crypto lender Genesis files for bankruptcy. Parent company DCG announced it is selling crypto assets at a discount, including Coinbase, Crypto. Fears of a regulatory clampdown have risen for USDC, the world’s second largest stablecoin, primarily in the case of BUSD
They’re all negative news events, that’s all. And yet, despite these headwinds, the crypto market has absolutely broken out so far this year. Bitcoin is now falling below $25,000 a barrel for the first time since August 2022.
Were all the bearish catalysts priced in? Perhaps. One could certainly argue that the DCG and Origin issues were factored into prices in the immediate aftermath of the FTX collapse in November. However, the BUSD story was definitely a surprise. Then again, will this really affect the markets? Probably not.
The big crypto-specific story is the looming threat of regulation and fears surrounding stablecoin projects like USDC, which carries a $41 billion market cap. Concerns about securities laws first started last week when crypto exchange Kraken was issued a $30 million fine in relation to products it offered.
To frame it differently, has Cryptoland seen viable reasons to jump to this extent? Bitcoin is now up 48% on the year. Where’s the good news?
Crypto is growing for only one reason
The answer may not be romantic, but it is gross. Inflation readings have softened, with markets turning to expectations the Fed pivots from tighter monetary policy sooner than previously thought.
Whether you agree or not, the market is now positioning itself as though inflation has been tamed – or, at least it is in the process of being tamed, with numbers peaking in the past and falling. In price terms, this means that optimism waned as the market expects a tighter monetary policy pivot sooner than previously thought.
For crypto, this is the most important thing, bar none. The asset class is as far out of the risk spectrum as it can be, and despite advocates’ claims to the contrary, it trades like a very high-risk asset.
It is no coincidence that bitcoin plummeted at exactly the same time as the Federal Reserve made a hawkish interest rate policy change last April. And with inflation softening late last year, it has bounced back.
There are no more indicative charts than the one below, a simple comparison of the rates and price of bitcoin. Again, not an overly romantic scene, but it paints a pretty clear picture.
Another way to chart this, though again not a highly fashionable graph, is plotting bitcoin against the tech-heavy Nasdaq index. It’s a modern-day Ross and Rachel from the Friends story – the pair can’t stand being apart for more than a few days.
I think there is an overreaction in the crypto market I was tempted to downvote. But the truth is that this is a continuation of what we are seeing in the last few years. In good times, bitcoin moves higher than the Nasdaq, and in bad times, it does the same in the opposite direction.
Bitcoin is simply trading like a leveraged bet on the Nasdaq, which itself is pegged to inflation numbers and the Federal Reserve to the minute.
I think what we’ve seen so far this year is the strongest argument yet that bitcoin is only trading like a lever on the long end of the risk spectrum. There is nothing but bearish catalysts within the sector, and yet it continues to trend upwards.
On the other hand, the Nasdaq is also printing huge gains – up 16% at the time of writing, meaning bitcoin has nearly tripled its gains. The Nasdaq is down about 37% from its all-time high in November 2021 for BTC. Bitcoin declined by 77%.
And so, while the rise in the price of bitcoin may be mildly troubling – it’s up almost 50% this year! — It’s not more than we expected, did you know the Nasdaq would jump 16%.
Not to mention, bitcoin is still down 64% from its all-time high, and the space remains barren compared to the fruitful abundance of a bull market.
Neither of these analyzes is particularly revolutionary. We’ve long known that bitcoin is a highly risky asset and its price movements are leveraged bets on macro conditions – with a few crypto-specific scams thrown in (looking at you, Du Kwon and Sam Bankman-Fried). Du Kwon and Sam Bankman-Fried).
But when looking at the tremendous percentage growth for bitcoin, it is important to maintain this perspective. The space remains very vulnerable to some serious downturn. The space remains very vulnerable to some serious issues surrounding the bankruptcy (and the ongoing transition from FTX) and the potential hit to its reputation at the mainstream level. Not to mention volume and interest – which haven’t shown much bounceback even amid the recent rally.
Bitcoin is still 65% off its high after this run. It’s great that the economy looks a bit more optimistic than it did a few months ago, and that’s obviously a good thing for bitcoin. But be careful here, there are lots of hunters lurking in the tall grass.
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