Key  Takeaways

• Bitcoin is up nearly 50% thus far this year, but there have been no positive catalysts from within the industry
• Rally is nothing but macro-driven, writes our Analyst, with Nasdaq up 16% and Bitcoin continuing to trade like a levered bet on the index 
• There are many headwinds still present, the latest being the potential regulatory clampdown, such as the BUSD shutdown this week
• Bitcoin – and crypto – remain vulnerable to these factors, and despite the recent rally is still 65% off highs with many questions still unanswered

 

What do the below things have in common?

• Crypto lender Genesis files for bankruptcy
• Parent company DCG announces it is to sell off crypto assets at a discount
• Layoffs surge, including Coinbase, crypto.com, blockchain.com
• SEC sues the issuer of Binance’s stablecoin, BUSD, with the coin to gradually wind down
• Regulatory clampdown fears rise off back of BUSD case, most predominantly for world’s second largest stablecoin, USDC

 

They are all negative news events, that’s what. And yet, despite these headwinds, the crypto market is on an absolute tear thus far this year. Bitcoin is now staring down the barrel at $25,000 for the first time since August 2022.

Were all the bearish catalysts priced in? Maybe. One could certainly argue that prices incorporated the DCG and Genesis issues in the immediate aftermath of the FTX collapse in November. The BUSD story was certainly a surprise, however. Then again, should that really impact markets? Maybe not. 

The big crypto-specific story is the looming threat of regulation and the fears surrounding projects like USDC, the stablecoin that carries a $41 billion market cap. The concern around securities laws was first triggered last week when crypto exchange Kraken was issued with a $30 million fine in relation to staking products it offered.  

To frame it a different way, has cryptoland seen viable reasons to jump up to this extent? Bitcoin is now up 48% on the year. Where has the good news been?

Crypto is rising for one reason only 

The answer may not be the romantic one, but it’s macro. Inflation readings have softened, with the market moving towards an expectation of a Fed pivot off tight monetary policy sooner than was previously anticipated. 

The market, whether you agree or not, is now positioning itself as if inflation has been slayed – or, at least it is in the process of being slayed, with the peak in the past and numbers falling. In terms of prices, this means that optimism creeps in because the market expects a pivot off tight monetary policy sooner than was previously anticipated. 

For crypto, that is the most important thing bar none. The asset class is positioned as far out on the risk spectrum as can be, and despite claims from advocates to the contrary, it very much trades like an extreme-risk asset.

It is no coincidence that Bitcoin plummeted precisely when the Federal Reserve transitioned to a hawkish interest rate policy back in April of last year. And with inflation then softening towards the end of the last year, it has bounced back up. 

There are not many charts more indicative than the below one, a simple comparison of rates and the Bitcoin price. Again, not an overly romantic view, but it paints a pretty clear picture.   

Another way to chart this, albeit not an overly fashionable graph again, is by plotting Bitcoin against the tech-heavy Nasdaq index. It’s the modern-day Ross and Rachel from Friends story – the duo just can’t seem to separate for longer than a few days. 

I was tempted to decry what I think is an overreaction in the crypto market. But in truth, this is simply a continuation of what we have been seeing over the last few years. In good times, Bitcoin rises a magnitude higher than the Nasdaq, and in bad times, it does the same in the opposite direction.

Bitcoin is simply trading like a levered bet on the Nasdaq, which itself has been glued to inflation numbers and Federal Reserve minutes. 

I think what we have seen thus far this year is the strongest argument yet that Bitcoin is simply trading like a levered bet on the long end of the risk spectrum. There has been nothing but bearish catalysts from within sector, and yet it’s rocketing upward. 

The Nasdaq, on the other hand, is also printing boisterous gains – up a cool 16% at time of writing, meaning Bitcoin has pretty much tripled its gains. From the BTC all-time high in November 2021, the Nasdaq shed about 37% to its low. Bitcoin lost 77%. 

And so, while the Bitcoin price rise may seem jarring in nominal terms – it’s up nearly 50% this year! – it’s not that much over what we would have expected, had you known the Nasdaq would jump 16%. 

Not to mention, Bitcoin is still down 64% from its all-time high, and the space remains barren compared to the fruitful abundance of the bull market. 

None of this analysis is particularly revolutionary. We know for a long time now that Bitcoin is an extreme risk-on asset and its price movements are leveraged bets on the macro situation – with some crypto-specific scandals (looking at you, Do Kwon and Sam Bankman-Fried) thrown in. Do Kwon and Sam Bankman-Fried) thrown in. 

But when staring at the jaw-dropping percentage gains for Bitcoin, it’s important to keep this perspective. The space remains very vulnerable to some seriously bearish The space remains very vulnerable to some serious issues surrounding bankruptcies (and ongoing contagion out of FTX) and a potential hit to its reputation on the mainstream stage, not to mention the collapsed volumes and interest – which have not shown much bounceback even amid the recent rally. 

Bitcoin is 65% off its high, even after this run. It’s great that the economy appears a little more optimistic than a few months back, and that is obviously a good thing for Bitcoin. But be careful here people, there remain a lot of predators lurking in the long grass.