Bitcoin’s been struggling to gain any ground lately and recent price action has been anything but encouraging for bulls. Bitcoin is trading way below the 20 day moving average, and the 200 day moving average seems like a distant dream for now. Price has just broken down slightly through a support zone on the daily chart.
If we drop a timeframe to the four hour chart, we can see that the price looks to be breaking down out of a triangle pattern too:
But these patterns don’t always play out as per the textbook. And as US stock indices plunged on Wednesday, (with the US100 shedding almost 5% by the close), Bitcoin fell in sympathy, but perhaps not as severely as you might expect given that Bitcoin and the US100 have been highly correlated of late.
Could the correlation break?
Now, if you’re of the opinion that liquidity matters more than everything else, like Stan Druckenmiller:
“Earnings don't move the overall market; it's the Federal Reserve Board... focus on the central banks, and focus on the movement of liquidity. Most people in the market are looking for earnings and conventional measures. It's liquidity that moves markets.”
… then that particular measure isn’t looking too supportive for any risky asset. On the 1st June 2022, the Federal Reserve will begin the process of Quantitative Tightening. Initially, they’ll be letting $47.5 billion a month roll off the balance sheet divided as $30 billion of Treasuries and $17.5 billion of Mortgage-Backed Securities (MBS). From the 1st of September, this will double to $95 billion per month: $60 billion of Treasuries and $35 billion of Mortgage-Backed Securities (MBS).
All of which amounts to liquidity withdrawal. Add this to the growing number of central banks hiking interest rates (which can divert capital into higher debt-servicing costs rather than investment), and it’s clear less money will be sloshing around the system in coming months.
What else could matter?
In the wake of the Terra/Luna debacle, stablecoins are one step closer to regulation. This renewed scrutiny might be uncomfortable in the short-term, but clearer regulation could open up the crypto industry to more investors.
Bitcoin as a hedge against government largesse and currency debasement could gain traction if governments keep promising to splash the cash and protect their citizens from the impact of high energy prices.
Some analysts have warned that these types of policies could ensure inflation remains high. UK Chancellor Sunak was similarly cautious, (even as he promised tax cuts for businesses to spur investment) saying:
“At a time of severe supply restrictions, an unconstrained fiscal stimulus does risk making the problem worse.”
“Bitcoin as an inflation hedge” hasn’t performed during this period of high inflation. Perhaps an even simpler analysis is required.
BTCUSD is a pairs trade. A trader who is directionally long BTCUSD will profit if Bitcoin outperforms the US dollar and viceversa for shorts.
And the dollar has outperformed pretty much every currency this year. Any future dollar weakness could extend beyond the fiat currency realm, and provide a boost to Bitcoin.
Not investment advice. Past performance is not indicative of future results. Trading cryptocurrency may not be available depending on your country of residence.
