This year, when the spot Bitcoin ETF was approved in the U.S. in January, the factor that influenced the price of Bitcoin was no longer the interest rate narrative. Since then, as ETF flows have decreased, the price of Bitcoin has re-aligned with market expectations of interest rates. The Federal Reserve faces a challenging dilemma: it needs to control persistent inflation while also supporting a weak U.S. economy. In the long run, this dilemma may be beneficial to Bitcoin.
Bitcoin has had a euphoric year, with spot Bitcoin ETF applications approved and inflows exceeding $13 billion in the first quarter. This surge has seen Bitcoin's price decouple from its recent historical relationship with interest rate expectations, pushing prices above $75,000. However, this optimism appears to have faded, with current data suggesting a decoupling between Bitcoin's price and US ETF inflows. Following recent outflows, the market now appears to have realigned with US interest rate expectations.
The chart above shows a strong correlation with rate cut expectations until mid-January, at which point the launch of the spot Bitcoin ETF led to a clear deviation.
We believe that much of the price action observed over the past week is primarily related to macroeconomic factors. A closer look at the past 40 trading days shows increased alignment with June rate expectations. A similar trend is emerging for 2023.
First, the GDP growth data released last week was significantly lower than expected. At the same time, the core personal consumption expenditures (PCE), a key measure of inflation, was much higher than expected, exacerbating people's concerns about stagflation. The situation was further exacerbated by data from the Institute for Supply Management (ISM), which showed that service sector growth had stagnated, while prices paid were much higher than expected, indicating that huge price pressures still exist.
This situation led to expectations that the Fed would maintain a hawkish stance at its meeting on Wednesday, which led to a sharp drop in the price of Bitcoin. However, the Fed seems to be caught in a dilemma: it can’t raise rates without dampening growth prospects, nor can it cut rates due to concerns about inflation. Despite these challenges, the Fed’s announcement in June to taper quantitative tightening (QT) came as a dovish surprise, not only because of its timing, but also because of the magnitude of the cut. While the market expected a reduction from $60 billion to $30 billion, the actual cut was $25 billion.
Lowering QT while keeping the front end rate elevated can be likened to applying the brakes to a car and accelerating it at the same time. If one is cynical, the US Treasury appears to be nearing its limit in terms of issuing debt at shorter maturities, and the only lever they have available now is QE. Fed Chairman Powell has noted that sudden weakness in the job market could lead to lower interest rates, so we now expect the Fed to cut rates later this year, a knee-jerk reaction to weak economic data that increases the odds of a later, but higher than expected, cut. We do think it is highly likely that job growth will slow, as indicated by recent trends between private payrolls and hiring intentions.
The recent price drop has led to a large outflow from US spot Bitcoin ETFs, which have an average investment of about $62,000. The price drop may have triggered sell orders, further exacerbating the recent downturn, and seems to be a knee-jerk reaction to unexpectedly positive short-term economic data. At this moment, a quote from John Steinbeck seems appropriate:
"In a dry year, people forget about the good years, and when the good years come, they lose all memory of the dry years. It's always been this way."
It appears that the broader market is primarily focused on economic data that is more reflective of past trends and its impact on short-term growth, rather than considering the long-term outlook, which points to weak growth and escalating government debt problems. Since Bitcoin's supply is fixed and highly immutable, this volatile situation is likely to support Bitcoin prices when the Fed eventually cuts interest rates (which may be larger and later than expected).
As a person who has been in the cryptocurrency industry for 8 years and in the financial industry for nearly 15 years, I have a lot of trading experience that may be helpful to you. I will also share some passwords with you from time to time.
Click on my profile picture, follow me, and look at my profile carefully to find me
