Dear subscribers,
In our latest Uncharted we analyzed bitcoin’s market structure amidst a faltering economy and sentiment. We believe that the price action is highly susceptible to changes in the macro front and the reaction of traditional markets. Therefore, we decided to write a new piece expanding on the macro perspective in Uncharted #16.
Let’s dig in!
TL;DR
Bitcoin crossed over to the $30k range where it faces resistance around $32k.
Investors see bitcoin as a liquidity transfer mechanism due to its sensitivity to the Fed’s monetary policy.
Risk-on assets gained strength following a hinted pause in rate hikes later this year from the Fed.
The BTC/Gold ratio is at 2017 levels and investors may begin to rebalance their portfolios towards BTC.
US bonds and bitcoin trade at a discount which should encourage more capital inflows to the said asset classes.
Swissblock’s Bitcoin Risk Signal remained within the high-risk zone in the wake of ranging price action with intense volatility.
Rebalancing portfolios in the eye of the storm
Bitcoin cleared the $30k level early this week while US equities closed their first winning week since April. All in the context of a more lenient Fed that discarded, for the time being, a 75 bps hike and hinted at a potential pause in their hawkish stance in late Q3. Thus, we believe that bitcoin, and risk-on assets, face a ranging price action with upside potential if stronger investment sentiment leads to a new capital rotation cycle.
Figure 1: Bitcoin faces resistance at $32k
Bitcoin flourished under the Fed’s great expansion, yet has historically been sensitive to contractive monetary policy (Figure 2). In other words, bitcoin has not traded as an inflation hedge but rather as a liquidity transfer mechanism.
Figure 2: Bitcoin’s sensitivity to the Fed’s balance sheet
On the bright side, if the Fed suspends its hawkish policy later this year-end of Q2 - bitcoin can outperform as a liquidity transfer mechanism, sensitive to monetary policy. The figure below depicts an inverse relationship between gold and bitcoin during a transition from an expansive (blue lines) to a contractive monetary policy.
Figure 3: Target rate probabilities rise driving gold
When looking at the year-to-date performance of major asset classes, gold and US bonds are outperforming (Figure 4). We believe investors increased their allocation to gold earlier this year in response to armed conflict and high uncertainty in the markets. Hence gold showed a strong performance, while risky assets were sold off.
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