The Calm Before the Storm
More Liquidity Ahead?
"When interest rates decline, bitcoin often experiences significant gains as investors seek higher returns outside of bonds. Additionally, bitcoin, often regarded as "digital gold," becomes more appealing as a store of value and an inflation hedge in such environments. Moreover, bitcoin's historically low correlation with traditional assets like stocks and bonds enhances portfolio diversification. Including bitcoin in a portfolio can improve its risk-return profile by increasing the Sharpe ratio, offering growth potential while mitigating overall risk. These factors, combined with the availability of ETFs, could lead to substantial inflows from financial institutions during the next upward move. As a result, we have strong conviction that bitcoin will cross the USD 100,000 mark." - Thomas Zeltner
The digital asset market has continued its sideways trend this week, with investor sentiment remaining uncertain. Despite the rather dark outlook, there are some emerging positive signs, like the growing global liquidity. The GMI's total liquidity index (12-week lead) is about to pivot upwards next month, signaling a more positive last quarter (Q4).
The potentially positive fourth quarter would follow our long-term outlook, forecasted back on April 17th: "The post-halving market might calm down for the summer, and rise again for the last quarter (Q4)".
Source: GMI
Bitcoin's relationship and correlation with global liquidity have been intensively discussed during recent years, and analysts like Raoul Pal have used the context in their macro-level models.
Pal sees a tight correlation between bitcoin and global liquidity, estimating it rising to 87 percent. According to him, the correlation is driven by the fact that bitcoin's price is influenced by the same macroeconomic factors that affect liquidity, such as interest rate policy.
As Bitwise's chart below shows, the total market capitalization of stablecoins has been trending upwards, despite the volatile crypto market. From a market cap of around $5 billion in 2020, it peaked at approximately $180 billion in early April 2022, before experiencing a contraction to about $120 billion by the end of April 2022. The current market cap of stablecoins has recovered to $171.22B, while the transactions have climbed to $3 trillion, led by Tether (USDT).
Source: Bitwise
Tether has maintained its position as the market leader, with its market share and dominance growing over time. For instance, by January 2023, USDT's market share had grown to 49% of the stablecoin market. Despite competition, Tether's liquidity and market presence have kept it at the forefront, and elevated its market share to 75% in 2024.
The stablecoin market continues to act as a platform of innovation, systematically creating new products. This year, Ethena launched its synthetic dollar stablecoin, USDe. It's designed to maintain a $1 peg through a unique mechanism involving delta hedging with cryptoassets, primarily Ethereum, and shorting futures contracts.
Another new entrant to the stablecoin market is EUROe, a fully fiat-backed, EU-regulated currency, issued by Membrane Finance Oy, an electronic money institution based in Finland. It's designed to be always redeemable for one fiat euro, backed by at least 102% in euro-denominated assets. EUROe operates on multiple blockchains including Ethereum, Solana, and others, aiming to provide efficient, low-cost transactions globally. It's noted for its compliance with upcoming EU regulations like MiCA, positioning it as a significant player in the European crypto market for both payments and DeFi applications.
Entering Re-Accumulation
From a technical vantage point, bitcoin continues its sideways trend, staying in the roughly same channel for six months. The current technical structure could shift into a Wyckoff accumulation pattern, in which institutional "smart money" investors quietly buy at favorable prices, absorbing selling pressure from weaker market participants.
Next, let's analyze bitcoin's price action with Dow theory. In a simplified way, the Dow theory divides market movements into three phases: The accumulation phase, the absorption phase, and the distribution phase. Although the Dow theory was initially used to interpret the stock market, it can also be applied to digital assets.
Applying the Dow theory, bitcoin’s price development over the last couple of years can be divided into accumulation and distribution cycles. The year 2022 represented a clear distribution cycle, bringing bitcoin into a technical inflection point at the turn of 2022-2023.
The last year was clearly an accumulation phase (turquoise), which culminated to a distribution cycle in 2024 (red). Once a proper technical support is found, bitcoin moves into a re-accumulation phase (violet), potentially reaching towards six figures.
Sources: Timo Oinonen, CryptoQuant
Cumulative volume delta (CVD) mirrors the lack of short-term demand among most investor segments. However, the brown $1M - $10M whale-level segment seems to be in an accumulation mode, signaling latent demand.
Source: Material Indicators
Fed Expected to Cut Rates on Wednesday
We're approaching a massive central bank policy shift as Federal Reserve's FOMC takes place on Wednesday. CME currently estimates a 41 percent chance for a 25 basis point reduction, and a 59% chance for a larger 50 bip drop.
We're watching the largest global rate cutting cycle since the COVID crisis. In a summary, 6 out of 10 top central banks have started to slash their interest rates this year. The BoC cut 3 times, the SNB and the ECB 2 times, and the BoE once. This week, the Fed is about to join in.
Source: LSEG
Has Bitcoin Decoupled from the Stock Market?
During its early days, bitcoin was often considered as a non-correlated asset, having low correlation with the traditional finance and the stock market. The said phase lasted until 2020, when Michael Saylor started an epoch of bitcoin's institutional adoption. Now Saylor's company MicroStrategy (MSTR) is profiled as the de facto bitcoin institution, owning a total of 226,500 bitcoin units.
While bitcoin was previously preferred as a hedge asset, the recent mainstream adoption has skewed it towards risk-on asset category. Nowadays bitcoin is often sold during risk-off events, like conflicts, and bought during risk-on events, like rate cuts, vice versa.
[S&P 500]
Since 2020, bitcoin has been increasingly correlated with the leading stock market index S&P 500. The correlation also stems from bitcoin being a global liquidity proxy: historically the growing M2 liquidity has been bullish for high beta assets like cryptocurrencies, as the "cheap dollar" flows into risk-on assets, uplifting valuations.
Sources: Julio Moreno, CryptoQuant
This year, bitcoin was significantly correlated with S&P 500 during the spring, reaching above 0.9 coefficient. However, during the summer the correlation fell below -0.5. Now that bitcoin seems to be recovering vis-à-vis S&P, we might see the correlation to rise again.
[Nasdaq Composite]
Bitcoin's correlation with Nasdaq Composite index follows a similar trajectory as with S&P 500: The coefficient reached a level of 0.89 during the spring, but since weakened during the summer and early fall. Recently the correlation has recovered again, rising to the current level of 0.55.
Bitcoin has increasingly been treated as a risk-on asset, similar to tech stocks in the Nasdaq, especially during times of market euphoria or distress. However, its behavior during different market cycles suggests it's not purely a tech stock equivalent, as it sometimes decouples, particularly when investors seek safe-haven assets.
Sources: Julio Moreno, CryptoQuant
Given the dynamic nature of bitcoin's correlation with Nasdaq, investors and traders should consider bitcoin as having its own market dynamics while still being influenced by tech sector trends due to overlapping investor bases and thematic similarities.
[Gold]
Initially, bitcoin was often viewed as "digital gold," suggesting it might serve as a hedge against inflation like physical gold. However, this correlation has fluctuated, sometimes showing bitcoin moving in tandem with gold, other times diverging, especially during periods of high market volatility or when bitcoin's behavior aligns more closely with risk-on assets.
This year, the correlation between bitcoin has seen increasing volatility, as the two assets were performing closely during the spring. Towards the fall of 2024, gold has increased its performance, while bitcoin has mainly stayed sideways, bringing the correlation into a negative territory of -0.48.
Sources: Julio Moreno, CryptoQuant
Gold and bitcoin are often seen as comparable assets, both deriving their value from scarcity. Bitcoin’s scarcity is based on the limited amount of bitcoin units, theoretically peaking at 21 million. The amount of gold is not limited in a similar fashion, yet it’s a scarce asset as well.
[DXY]
Historically, bitcoin has often shown an inverse correlation with the US Dollar Index DXY, meaning when the US dollar strengthens against other currencies, bitcoin tends to decrease in value, and vice versa. This relationship is often attributed to bitcoin being viewed as a "digital gold" or a hedge against inflation, where a weaker dollar might lead investors to seek alternative stores of value like bitcoin.
Sources: Julio Moreno, CryptoQuant
Bitcoin and DXY can be influenced by expectations around monetary policy, inflation rates, and global economic stability. For example, anticipation of Federal Reserve actions like interest rate changes can affect both bitcoin and the dollar's value. If the market expects a dovish policy (lower rates, more liquidity), it might see bitcoin as a beneficiary due to increased liquidity, potentially weakening the dollar.
[Summary]
While bitcoin has not particularly shined compared to other asset classes this year, there might be a potential decoupling ahead. As bitcoin is increasingly considered as a risk-on asset, favorable changes in central bank policies might greatly increase its performance in the medium term. Praeterea, bitcoin should be seen as a unique asset class, a bearer asset that represents the scarcest supply ever, limited to 21 million units.
