- Bitcoin is up nearly 50% so far this year, but there have been no positive catalysts from within the industry
- Our analyst says the rally is nothing but his overall move, with the Nasdaq up 16% and bitcoin continuing to trade like a bullish bet on the index.
- There are still many headwinds, the latest being potential regulatory tightening, such as BUSD closing this week
- Bitcoin – and cryptocurrencies – are still vulnerable to these factors, and despite the recent rally it’s still 65% off highs with many questions still unanswered.
What do the following things have in common?
- Crypto Lender Genesis files for bankruptcy
- Parent company DCG has announced that it will sell crypto assets at a discount
- Increased layoffs, including Coinbase, crypto.com, and blockchain.com
- The SEC is suing the issuer of Binance’s stablecoin, BUSD, as the coin gradually disappears
- Regulatory repression concerns stem from the BUSD issue, mostly to the world’s second largest stablecoin, USDC
They are all negative news events, that’s all. However, despite these headwinds, the cryptocurrency market has been in an absolute rip so far this year. Bitcoin is now staring into the barrel at $25,000 for the first time since August 2022.
Have all bearish stimuli been priced in? maybe. One could certainly argue that prices included DCG and Genesis issues in the wake of the FTX crash in November. The BUSD story was definitely a surprise. Then again, should that really affect the markets? Maybe not.
The big story for cryptocurrencies is the imminent threat of regulation and concerns surrounding projects like USDC, the stablecoin with a market cap of $41 billion. Concern over securities laws was first triggered last week when cryptocurrency exchange Kraken was fined $30 million in connection with the products it offers.
To frame it differently, did cryptoland see viable reasons to jump that far? Bitcoin is now up 48% over the year. Where was the good news?
Cryptocurrency is on the rise for one reason only
The answer may not be romantic, but it is macro. Inflation readings softened, with the market moving towards expecting the Fed to turn away from hawkish monetary policy sooner than previously expected.
The market, whether you agree or not, is now positioning itself as if inflation has died down — or, at least in the process of crashing, with the peak past and numbers falling. Regarding prices, this means that optimism is creeping in as the market is anticipating a pivot to hawkish monetary policy sooner than previously expected.
For cryptocurrency, this is the most important thing, bar none. The asset class is positioned as far from the risk spectrum as possible and, despite claims by advocates to the contrary, trades very much like a highly risky asset.
It is no coincidence that bitcoin fell precisely when the Federal Reserve moved to a hawkish interest rate policy in April last year. And as inflation eased at the end of last year, it picked up again.
There aren’t many more indicative charts than the one below, which is a simple comparison of prices and the price of bitcoin. Again, not an overly romantic landscape, but it does paint a very clear picture.
Another way to draw this chart, though not an overly familiar chart again, is by plotting bitcoin against the tech-heavy Nasdaq. It’s the story of modern Ross and Rachel from Friends — the duo didn’t seem to be apart for more than a few days.
I was tempted to announce what I believe is an overreaction in the cryptocurrency market. But really, this is just a continuation of what we’ve seen over the past few years. In good times, Bitcoin rises an amount higher than the Nasdaq, and in bad times, it does the same in reverse.
Bitcoin trades as simply as leveraged betting on the Nasdaq, which has itself affixed with inflation numbers and Fed minutes.
I think what we’ve seen so far this year is the strongest argument yet that bitcoin simply trades like a leveraged bet on the long-term risk spectrum. There have been nothing but downward triggers from within the sector, yet it is skyrocketing.
On the other hand, the Nasdaq is also making noisy gains – up 16% at the time of writing, which means that Bitcoin has tripled its gains. From BTC’s all-time high in November 2021, the Nasdaq has fallen about 37% to its lowest level. Bitcoin lost 77%.
And so, while bitcoin’s price rally may seem paradoxical in nominal terms – it’s up nearly 50% this year! – it’s not that More than we would have expected, had you known that the Nasdaq would rise by 16%.
Not to mention that Bitcoin is still down 64% from its all-time high, and space is still barren compared to the fruitful exuberance of a bull market.
None of this analysis is particularly revolutionary. We’ve known for a long time that bitcoin is a very risky asset and its price movements are leveraged bets on the macro situation – with some cryptocurrency scandals (looking at you, Do Kwon and Sam Bankman-Fried). Do Kwon and Sam Bankman-Fried were cast).
But when staring at bitcoin’s staggering percentage gains, it’s important to keep that perspective. The space is still very vulnerable to some serious downsides. The space is still very vulnerable to some serious issues surrounding the bankruptcy (and persistent infection from FTX) and the potential impact on its reputation on the main stage, not to mention collapsing volumes and interest — which didn’t show much of a rebound until amid the recent rally.
Bitcoin is 65% off its high, even after this run. It’s great that the economy is showing a little Much more bullish than it was a few months ago, and that is clearly a good thing for Bitcoin. But be careful here folks, there are still plenty of predators lurking in the tall grass.