The bull argument for crypto: is another run imminent as rate hike expectations slow?

on Aug 1, 2023
  • Falling inflation and yield expectations have many wondering whether crypto is primed for another leg up
  • A number of historical patterns & on-chain indicators are bullish, while the halvening is under a year away
  • Despite this, risk and uncertainty remain high; we dive into the charts to assess the bull case for crypto

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The sentiment within crypto has flipped remarkably in the last nine months. After a bear market that shook the entire asset class to its core, dragging the reputation of the industry into the mud as various scandals struck the space, optimism is finally returning. 

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Despite the pickup in both sentiment and prices across the space, we recently discussed the potential for a lagged effect of tight monetary policy to rain on the parade, laying out arguments around why the macro picture may not be quite as rosy for crypto as some investors believe. 

However, in this piece, we will assess a series of bullish indicators, analsying why some are speculating a turning point has been reached. These remain highly uncertain times and the risk is undoubtedly high, but for crypto investors, at least hope is far more abundant than it was nine months ago, when FTX collapsed and Bitcoin careened down to $15,500 shortly after. 

The bull argument

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The most obvious place to start is with yields. Following a transition to a new interest rate paradigm in March 2022, the Federal Reserve has been on a relentless streak of rate rises, which sent risk assets for a tailspin last year, including all things crypto. 

Following Wednesday’s 25 bps hike, the market is anticipating that the journey is coming to a close – with perhaps only one more hike to come (if even). With that, the heavy weight around Bitcoin’s ankles appears to finally be loosening. To illustrate the asset’s sensitivity to rates, which have been near zero for most of its existence prior to the last year, a regression of Bitcoin’s price against the yield on two-year Treasurys is indicative. Two-year yields tend to move with rate expectations, and have been charted on an inverted axis on the below graph. 

Beyond yields, Bitcoin has also historically moved in four-year cycles. We are now nine months away from the next halvening, slated to take place in April 2024. Although there have only been three halvenings to date, and hence it is hard to put a lot of weight into their effects (not to mention that at least one, if not two, took place when Bitcoin had minimal liquidity), many still point towards the supply cut as a positive catalyst for the price of Bitcoin. 

The efficient market hypothesis dictates that these events should be priced in, although the counter argument is that with the cost of production for Bitcoin suddenly set to double, the price needs to rise to maintain the equilibrium of the market price and production cost converging, as the new supply released to miners will suddenly be cut by 50%. 

In reality, we don’t quite know yet what the effects of the halvening are, given Bitcoin’s extreme youth, but the chart below shows why some abide by the thought that these events can only be bullish for the price. 

In a related angle, if we plot the 200-week simple moving average, we see that it has acted as a strong indicator for Bitcoin price appreciation. Breaks below the SMA have been followed by aggressive price rises each time. The price has just spent the longest it ever has below this trend line, recently breaking above it and painting an interesting picture. 

Having said that, to again caveat the obvious here: with so many technical indicators, there is bound to be one that looks seductive when charted on a graph, especially when there is so little price history to work with. 

Additionally – and this is key to bear in mind with the halvenings, too – global liquidity has also been moving in four year cycles since Bitcoin launched. This obviously has a huge impact on all risk assets, and could be the lurking variable behind the seemingly meaningful SMA and halvening charts discussed above. 

It is difficult to know, but given recent movement in the interest rate market and with inflation softening, there is every chance that the global liquidity cycle could again coincidentally line up with the next halvening.

If we change tact and assess the bear market drawdown, we also see interesting comparisons with the past. Bitcoin cascading down to $15,500 represents one of the worst bear markets in recent times, and with consistent upticks before a lot of chop often following prior bouncebacks, there are definitely similar patterns. 

In previous cases, that chop was then followed by blow-off tops, although of course the crypto market was far thinner back then than it is today, and the capital necessary for such moves is greater. 

Flipping our scope again to now assess on-chain data, there is nothing overly dramatic but there are some consistent trends which bear mentioning. The first is the dwindling supply of Bitcoin on exchanges, which has been steadily decreasing throughout the last few years. The hoarding narrative is one which is often referenced by believers, in conjunction with the hard supply cap, as reasons behind their resolve that Bitcoin is slated to rapidly expand. Obviously, that also depends on the demand side holding up its end of the bargain. 

In a related note, the portion of long-term holders continues to grow. Only 30% of the supply has moved in the last year, while 11% is currently on exchanges (that number no doubt encouraged downwards by Sam Bankman-Fried’s antics last year). Over half the supply has not moved in two years, while even the coins which have not moved in over ten years are now up to nearly 15% (Satoshi’s mammoth stack constitutes approximately a third of this figure, however, while it is difficult to know how many of the remainder are lost from the early days, or belong to deceased individuals). 

Looking beyond the world’s biggest crypto, there are also reasons to be optimistic that altcoins could have further to run. Historically, we have seen a typical pattern over the years: capital flows into Bitcoin, which sees its price and dominance over the market rise, before altcoins then surge and the dominance falls.

Looking at this Bitcoin dominance, which is the ratio of the Bitcoin market cap to the rest of the crypto market, it has climbed above 50%, trending steadily upwards over the last year. 

Obviously, the small sample space here is again a huge caveat. Bitcoin itself is a problem with regard to its youth and extrapolating past performance, but altcoins are far younger, many only emerging in the last five or six years. 

Additionally, Bitcoin’s proof of work mechanism, drive to become a store of value and a monetary asset, and the fact it may even be carving out its own niche in the eyes of regulators means it would well be decoupling from the rest of the crypto market. This would constitute a structural break and render the previous trend of Bitcoin dominance rising before altcoins accelerate as largely moot going forward.

All in all, there are plenty of indicators pointing to Bitcoin, and crypto, being ready to make a run. Then again, as we previously discussed, the current macro climate still presents as highly unusual. While inflation has come down and had a positive effect on rate expectations, the fed funds rate is north of 5%, having been near zero little more than a year ago. Monetary policy notoriously operates with a lag, so it would be wise not to celebrate qutie yet. 

Additionally, the 10Y-2Y yield curve is at its deepest level of inversion since 1981, a notorious recession indicator, highlighting further that risk does remain. 

Whatever way you look, there will always be reasons to be bullish and bearish. However, while the macro situation is hard to put one’s finger on, it is unquestionable that sentiment in crypto is far better today than it was nine months ago, when FTX was going down in flames and some wondered where this enigmatic industry was going next. 


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