The first quarter has not been easy for investors. In fact, the stock market had one of its worst starts to a year in history, rivaled by the GFC and the Great Depression. Of course, Bitcoin as a high beta asset it hasn’t been immune to the stock slump, falling more than 13% (at the time of writing) since three months ago. In the last quarter outlook, I focused on the headwinds that Bitcoin would likely face given the developing negative macroeconomic conditions. This has been developed to a great extent, but unfortunately it is not finished.
As we look ahead to what is in store for the crypto markets in Q2, I continue to believe that “major macros” in the sense of tighter financial conditions and slowing economic growth are serious headwinds. The deleveraging and liquidity-draining impact of the Fed’s policy change will likely limit any serious rise in crypto prices, but set against that, there are some fundamental and regulatory points that will excite long-term investors. Mainly, a pro-crypto executive order from the desk of President Biden and continued signs of growth throughout the Bitcoin network.
Here is an updated view of the current macro configuration and its possible implications on cryptography.
Bitcoin relative price performance (3 months)
On the surface, bitcoin has underperformed against commodity assets and gold to tech stocks and even bonds (which have been a disaster). This should come as no surprise, as Bitcoin continues to be positively correlated with equity risk and equities have generally underperformed.
21-DAY BTC/SPY ROLLING CORRELATION
Now, it is possible that this relationship breaks down and Bitcoin trades independently of stocks, it is simply difficult to argue that the sour macroeconomic backdrop and monetary policy affecting stocks do not weigh on Bitcoin as well. This is evident when looking at one of the best indicators of economic health, the US Treasury yield curve.
Macro still matters
In our previous perspective, I examined the relationship between the economic engine and the price of bitcoin, highlighting the price of bitcoin as largely a function of economic growth and monetary policy expectations. So bitcoin simply does better during periods of monetary stimulus and economic expansion. (A radically different environment than today). If we can get the direction of growth and politics right, there is a higher chance that we can get the bitcoin price trend right as well.
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 steeper curve indicates an improvement in growth expectations as longer-term interest rates rise relative to short-term rates. this is healthy
When the curve is flattening, the opposite is considered, with the expectation that economic growth is likely to slow down in the future. In other words… Not everything is fine, something is broken.
BTC/USD. vs Differential UST 10Y-2Y (last 3 years)
BTC/USD. vs Differential UST 10Y-2Y (Last 6 Years)
When we look at the curve from a bitcoin yield perspective, the pair has recently decoupled, but we can see that the bitcoin price follows the direction of the yield curve quite well. Currently, the yield curve is flattening lower, which should raise concerns about Bitcoin’s ability to move significantly higher if this continues.
Bullish Fundamental Developments
Stepping away from the short-term macro context for a moment, we should note a number of bullish signs that 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 order related to crypto regulation is a significant step in providing the industry with much-needed clarity and should be seen as a positive development for crypto. This will inevitably result in a framework for crypto-focused businesses to operate within. It will also encourage the participation of companies that have previously walked away from the space due to lack of regulation. Looking out, this is a seemingly bullish development for long-term investors.
Positive signs of chain activity
We are also seeing increased activity on the network through continued growth in active wallet addresses. Wallet address growth increased 2.3% quarter-over-quarter to 944 million, and there was a significant increase in average transfer volume to over 4 million BTC per day, compared to roughly two million during the same period from last year.
In closing, my view is that BTC is likely to struggle in the short term, due to Q2 market conditions (recent lows are well within the range of short-term probabilities). Long-term bulls should take comfort in the positive developments regarding the bitcoin network, especially the regulatory clarity offered by the recent US Executive Order.