Key Takeaways
Bitcoin has broken $30,000 for the first time since June 2022
Volatility is also at its highest point since June
Liquidity is the lowest it has been all year, meaning less is needed to move Bitcoin up (and down)
45% of stablecoins have fled exchanges in last four months, with market depth has not recovered from Alameda bankruptcy in November
Interest rate forecasts have flipped, providing positive impetus as market bets tight monetary policy is coming to an end
Low liquidity and positive interest rate expectations have kicked Bitcoin up past $30K
Week ahead brings data on inflation, Fed minutes and earnings, and Bitcoin could move violently again depending on how it shakes out
Throw a mask on and stay beyond a 2-metre radius, because it feels like 2021 again.
At least, looking at the cryptocurrency market, that is. Bitcoin has turned back the years to rally to its highest price since last summer, despite the economy feeling like it’s falling down all around us. $30,000 has officially been breached.
Not only is the price at its highest point in ten months, but the volatility and profits have also ramped up to the highest points since before the house of cards all came down, while the supply on the market is dwindling.
But why? And will all this continue or will Bitcoin fall back down to Earth? Let’s dig into the data to see if there is an answer.
Price
First, what makes the headlines pop: the price.
Bitcoin breached $30,000 Monday evening for the first time since June 2022. To refresh the memory, that was the week of the Celsius crash, the crypto lender announcing on June 12th 2022 that it was suspending withdrawals, having been caught up in the LUNA contagion.
Billions of customer assets were locked, and the Bitcoin price spiralled downwards, dropping below $30,000, and then $20,000, in the days afterwards. Monday was the first time it has taken back the $30,000 mark.
The key to this resurgence? Interest rate forecasts, primarily (but not just interest rates…as we will get into in the next section).
The forecast of the future path of interest rates has completely flipped in the last month or so, providing impetus for this leg up in Bitcoin as the market bets that we are finally ready to pivot off the aggressive hiking of rates that has been ongoing since last April.
Last year’s transition to a new paradigm of tight monetary policy signalled an abrupt end to the decade-long bull market across financial markets, pulling risk assets down in price across the board.
Crypto didn’t help its case with several scandals along the way – LUNA, Celsius and FTX to name a few – but the macro conditions have certainly not been kind either, with the Nasdaq shedding a third of its value last year, its worst return since 2008.
But following the banking collapse, the market is betting that the Fed simply cannot continue with the interest rate forecasts going forward. The below chart shows interest rate expectations for the July meeting – the right side shows the forecast from six weeks ago, which has completely flipped compared to the forecast today (purple bars on the left).
Volatility
But it’s not just the price that is rising. Volatility is also at its highest point since it picked up following the collapse of Celsius last June. The below chart shows this, and then we will see why this is not a coincidence that it is coinciding with a relentless price rise.
The elevated volatility is a direct consequence of the liquidity being so low. I crafted together a deep dive on this two weeks ago, but liquidity in cryptocurrency markets is as low as it has been all year.
45% of the stablecoin balance on exchanges has fled in the last four months, with the resultant balance the lowest since October 2021.
This is matched by market depth dropping down too, yet to recover from the evaporation of Alameda into thin air last November.
And this gets to the crux of the issue: the thin liquidity exacerbates moves both to the downside and upside. This is a fancy way of saying it elevates volatility, which is exactly what we seeing recently for Bitcoin.
And this exacerbation of any price move, coupled with the positive spin coming out of the interest rate forecasts, means Bitcoin is getting a hell of a push up the charts – with liquidity so shallow that there is minimal resistance.
In short, liquidity is down, and volatility is up. And with the most important thing in markets right now, i.e. the interest rate forecast, flipping positive, we get a violent upward price move.
“The low liquidity has left the market vulnerable to massive moves”, says Max Coupland, director of CoinJournal. “Luckily for crypto investors, the flip in interest rate expectations has meant prices have accelerated upwards, but looking at the week ahead, this may change if the economic data comes in below forecasts. Bitcoin is always volatile, but it feels particularly primed for big moves at the moment”.
Profit
Finally, profit. It doesn’t take a genius to work out that with the Bitcoin price at its highest point in nine months, the profit position for investors is also looking a little rosier than it has in the past.
When assessing the price at which Bitcoins last moved at compared to the current price, it can be deduced that 76.2% of the Bitcoin supply is in profit. That marks the highest point in a year, back before the transition to a tight monetary policy and the LUNA scandal of last May.
What happens next?
But will this all persist? Or is it just a bear market rally?
Well, the uber-low liquidity is likely not going to shift in the short-term, at least. This means that volatility will remain elevated and moves to both the downside and upside will be elevated.
But with volatility high, which direction will it go? I won’t pretend I know the answer to that, but the week ahead has some key data coming out that will drive the price one way or another – and perhaps very significantly so.
First is the CPI data out Wednesday. Inflation has come down every month since June 2022 yet this is the first inflation reading to come out following the optimism that interest rate hikes are soon coming to an end. A hot reading could spook the market into thinking that the Fed may think about hiking further, however, especially after the banking troubles of the last month have subsided.
Also on Wednesday is the FOMC minutes, which will give a direct insight into the plans of the Fed. This, and the inflation reading, are absolutely vital economic indicators, and have been what has moved markets all year long. That won’t change.
Throw in Thursday’s producer price index (PPI) and earnings season kicking off on Friday, and the price moves ahead could be extreme. Bitcoin is very volatile right now and the economy is at a watershed moment, with plenty of data coming out in the week ahead.
Buckle your seat belts and get your popcorn ready.
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