Dear Glassnode Uncharted community,
In this edition of Uncharted: Bites, we start by analyzing bitcoin and other global assets in the context of the March 16th FOMC meeting, and rising inflation. We later deep dive into bitcoin’s market structure and its changes following a stronger conviction that led to stronger hands.
Let’s dig in!
TL;DR
Bitcoin’s trading channel narrowed even further to $38k to $42k, which points to pressure building up towards a breakout.
After the end of February decoupling event bitcoin’s correlation to equities has remained high nevertheless.
As the Fed strikes a more dovish tone and caps upcoming rate hikes, capital is flowing into US equities, likely triggering inflows to bitcoin and crypto as well.
Long-term holders keep accumulating bitcoin, with many investors moving supply out of exchanges at a loss.
Derivatives-driven exchanges and a high futures-to-spot volume ratio reinforce that futures are driving the market.
Bitcoin continues to drive the market outperforming altcoins.
Bitcoin is fragile in the short run as the likelihood of a recession increases.
Uncharted times indeed
The price behavior of the largest assets in terms of market capitalization reflects investors’ concerns of a rising CPI and tensions in Ukraine. Gold, commodities, and oil-related assets have outperformed, since the start of 2022, while tech and bitcoin underperform (bitcoin: -11.41% YTD).
Figure 1: Gold, commodities, and oil-related assets outperform YTD
Bitcoin’s correlation with safe-haven assets is negligible, while the correlation to the Nasdaq Composite has remained at levels seen in 2020, which led to the big run ending in May 2021. The strong correlation between riskier assets is a consequence of the uncertainty in the market and the looming fear of stagflation. However, even though the correlation approaches its recent average, bitcoin has shown in the last month’s critical times that its identity as an independent asset class may not be far.
Figure 2: Bitcoin, an independent asset in uncertain times
Turning our heads back to the macro picture, investor confidence is decreasing. A nearly flat yield curve coupled with 1980s level CPI change implies a potential recession. Notice how the 10Y-2Y spread is well within the warning zone and edges towards the critical recession zone.
Figure 3: High rate of inflation and flat yield curve signal potential recession
When looking at the 10-Year US Treasury yield minus CPI inflation in the chart below, it quickly becomes apparent that while, in absolute terms, inflation has not reached the 1980 peak, it is just as critical due to the backdrop of low-interest rates. In short, any anti-inflationary moves by the Fed will be received by a much more fickle market this time around.
Figure 4: US Treasury bonds’ real rate of return at all-time lows
The likelihood of more than six rate hikes is decreasing. Moreover, household and corporate debt are at all-time highs. Increasing interest rates will pressure debt holders to repay their loans and save less.
Figure 5: Household and corporate debt at all-time highs
Despite continuously rising debt and uncertainty, both US equities and fixed income are the go-to place for capital among global assets with a US monetary policy that is willing to go very long to avoid major crashes. This is a similar, albeit ever more delicate backdrop that has allowed crypto to flourish since the pandemic hit in 2020 and in the near term all but ensures equity-correlated flows of fresh capital into bitcoin as well.
Figure 6: Capital flows to US markets (equities and fixed income)
Bitcoin accumulation continues
When looking at bitcoin, the long-term holder supply rate of change increased towards the end of February (Figure 7, red area). We can see the first innings of how investors are seeing the long-term viability of the asset as a staple investment.
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