For most people, the rise and fall of Bitcoin prices seem to be random fluctuations and unpredictable, but there are some key drivers of Bitcoin prices. If we have a correct understanding of these factors, we can relatively accurately judge the turning points and subsequent trends of Bitcoin prices. It is no coincidence that Bitcoin prices were slightly weak in January this year, soared all the way into March, but entered a consolidation state in the past two months.

Bitcoin’s critical turning point has arrived

Retail trading volume (measured in South Korea) has been weak, which shows that retail investors do not understand what is happening in the Bitcoin market and are likely to be caught up in FOMO (fear of missing out). How can I be confident that Bitcoin will soon reach new all-time highs?

Year to date, approximately $54.6 billion in funds have flowed into the cryptocurrency market, including $25.6 billion in stablecoins, $15.5 billion in leveraged perpetual futures, and $13.5 billion in inflows into Bitcoin spot ETFs.

When these flows stop, when they resume, and whether they continue at all will be crucial in determining where the price of Bitcoin goes, up or down.

Bitcoin and various capital flows (stable coins, ETFs, futures leverage)

Since the Bitcoin halving on April 20, stablecoin inflows have slowed significantly. After the halving, USDT issuer Tether completed its own inflow of $2.7 billion, while USDC issuer Circle completed an outflow of $500 million. For comparison, from the beginning of the year to now, Tether has accumulated $20.1 billion in inflows.

When the Bitcoin spot ETF began trading on January 11, we saw $611 million in net ETF inflows, with a staggering $4.6 billion in first-day Bitcoin spot ETF volume. Despite billions of dollars in stablecoin issuers preparing for this, January’s buying volume was disappointing.

Part of the disappointment came from large outflows from Grayscale’s GBTC ETF, but the main reason was that inflation unexpectedly rose on January 11, with the CPI index reaching 3.4%, higher than the expected 3.2% and higher than the 3.1% recorded last month.

When the CPI index was released on February 13 at 3.1%, lower than the expected 3.4%, indicating a slowdown in inflation, the inflow of funds into the Bitcoin spot ETF gradually resumed. ETF inflows turned positive from negative at the end of January, but did not begin to accelerate slightly until the release of the CPI data on February 13. However, when inflation rose again to 3.2% on March 12, the inflow of funds into the Bitcoin ETF stopped immediately because the market ruled out the expectation of 2-3 rate cuts.

In other words, (sort of) Bitcoin changes direction depending on whether CPI is higher than the previous month (bearish for a high CPI, bullish for a low CPI).

The result was a gradual decline in the price of Bitcoin from around $73,000 to around $60,000, before the decline was finally slowed by dovish Fed Chairman Powell’s remarks on March 20, who assured the market that the Fed expected to cut interest rates three times in 2024.

A similar situation occurred on April 10 when CPI exceeded expectations of 3.4% to 3.5%, with Bitcoin falling again to $60,000 and dropping to around $56,500 on April 30 amid weak ETF flows in Hong Kong.

Repeating the same old trick, at the FOMC meeting on May 1, Federal Reserve Chairman Powell "took action again" to stop the downward trend of Bitcoin.

On May 15, the CPI report came in at 3.4% as expected (down from 3.5% last month), but in line with expectations. More importantly, Bitcoin spot ETF inflows resumed. Traders who understand how Bitcoin reacts to CPI should have the confidence to trade in the opposite direction of last month’s CPI reading.

From March 12, when the CPI rose to 3.2%, to May 15 (a total of about 46 days), when the CPI data was consistent with the market forecast of 3.4%, the amount of funds purchased by Bitcoin spot ETFs was only US$1 billion; and since May 15, we have seen inflows of about US$1.5 billion for 7 consecutive days.

Next critical date: June 12

With the next release of CPI data scheduled for June 12, we expect Bitcoin spot ETF inflows to remain strong over the next two weeks, which should help Bitcoin reach new all-time highs.

If the inflation index reaches 3.3% or lower, the price of Bitcoin should hit a new all-time high. This will continue to provide "some motivation" for Bitcoin spot ETF investors to allocate Bitcoin and support Bitcoin prices.

Inflation will gradually become less of a problem. It will not only become a moderately strong contributor, but it will probably become a strong contributor as we head into the end of the summer - inflation will gradually decline.

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