The first quarter was not easy for investors. In fact, the stock market had one of its worst start to a year in its history, challenged by the GFC and a Great Depression. Of course, Bitcoin as a high beta asset has not been immune to the stock decline, falling over 13% (at the time of writing) from three months ago. In the outlook for the last quarter, I focused on the headwinds bitcoin was likely to face given the evolving negative macro conditions. It has largely played out, but unfortunately is not over.
As we look to what lies ahead for crypto markets in Q2, I continue to believe that “macro importance” in the sense of tighter financial conditions and slowing economic growth are serious headwinds. The deleveraging and cash draining impact of the Fed’s policy shift will likely cap any serious crypto price increases, but in the face of this there are a few fundamental and regulatory points that have long-term investors excited. . Mainly, a pro-crypto executive order from President Biden’s office and continued signs of growth on the Bitcoin network.
Here is an updated view on the current macro configuration and its potential implications on cryptography.
Relative Bitcoin Price Performance (3 Months)
On the surface, bitcoin has underperformed against assets ranging from commodities and gold to tech stocks and even bonds (which have been a disaster). This should come as no surprise, as bitcoin remains positively correlated to equity risk and stocks have generally performed poorly.
21-DAY BTC/SPY SLIDING CORRELATION
Now it’s possible that relationship breaks down and bitcoin trades independently of stocks, it’s just hard to argue that the degraded macro backdrop and monetary policy impacting stocks isn’t weighing on the market either. bitcoins. This is evident when looking at one of the best indicators of economic health, the US Treasury yield curve.
The Macro Still Matters
In our previous outlook, I examined the relationship between the economic driver and the price of bitcoin, noting that the price of bitcoin is largely a function of economic growth and monetary policy expectations. Bitcoin simply does better during times of monetary stimulus and economic expansion. (A radically different environment than today.) If we can find the right direction for growth and policy, there is a greater likelihood that we can also get the right bitcoin price trend.
Back to the yield curve…
The US Treasury curve does a respectable job of reflecting the market’s view of future economic growth. It’s not perfect, but generally speaking a steepening curve signals improved growth expectations as longer-term interest rates rise relative to short-term rates. It’s clean.
When the curve flattens, it is seen as the opposite, with the expectation that economic growth is likely to slow in the future. In other words… Everything is wrong, something is broken.
BTC/USD. vs Spread UST 10Y-2Y (last 3 years)
BTC/USD. vs Spread UST 10Y-2Y (last 6 years)
When we look at the curve from a bitcoin performance perspective, the pair has decoupled recently, but we can see that bitcoin price is following the direction of the yield curve quite well. Currently, the yield curve is collapsing, which should warrant concern about bitcoin’s ability to rise significantly if this continues.
Bullish Fundamental Developments
Stepping away from the near-term macro picture momentarily, we should note a number of bullish signs we are seeing in the market, specifically encouraging developments on the regulatory front and the continued growth of the bitcoin network.
President Biden’s Executive Order
The President’s Crypto Regulation Order is a significant step in providing much-needed clarity to the industry and should be seen as a positive development for crypto. This will inevitably result in a framework within which crypto-focused businesses can operate. It will also encourage participation from companies that have previously walked away from the space due to a lack of regulation. On the horizon, this is a seemingly bullish development for long-term investors.
Positive signs of chain activity
We are also seeing increased activity on the network via continued growth in active wallet addresses. Wallet address growth was up 2.3% q/q to 944 million, and there was a significant increase in average transfer volume to over 4 million BTC per day, from around 2 million during the same period last year.
In conclusion, I am of the opinion that BTC is likely to face difficulties in the short term, due to the market conditions of the second quarter (the recent lows are within the range of short-term probabilities). Long-term bulls should take solace in the positive developments regarding the bitcoin network, particularly the regulatory clarity offered by the recent US executive order.