Bitcoin is currently on the rise following a harsh 2022 that saw its price drop by 65%. But how long will the recovery last? Is this even a rally? And why do the ups and downs of bitcoin over the last year appear to be so closely linked to the fortunes of traditional stocks?
Protos examines bitcoin’s pricing history as well as some recent activity to try to understand what’s going on in both markets.
The most recent bitcoin bear market occurred in 2018 when the coin’s price fell by 70% over the year. However, things quickly improved, as it surged 200% in 2019, finishing the year 90% higher than the previous year.
The S&P500 had a poor year in 2018, finishing 6.24% worse, but it surged the next year, gaining about 30%.
So, are we on our way back to the moon?
Previous CPI data were lower than predicted, showing that inflation moderated sharply in the fourth quarter of last year. According to job reports, the labor market is healthy, with an unemployment rate of only 3.5%.
Meanwhile, treasury markets appear to be forecasting a recession, which, along with declining inflation rates, may be viewed by investors as a signal that the Federal Reserve will eventually pivot and disclose its plan to lower interest rates.
A low-interest-rate environment with easing financial conditions may aid the rise of both bitcoin and traditional stocks. Copper, another famous recession indicator, is showing signs of strength as it lingers around the $4 mark. The Federal Reserve’s goal is to achieve 2% inflation.
If main players do not sell, Bitcoin might outperform the S&P500.
However, if bitcoin climbs with stocks, it may signal that the currency’s market dangers are significantly lower than previously thought. These dangers include the potential consequences of Digital Currency Group’s problems, the bitcoin mining crisis, and the Microstrategy overleveraged mega-bet.
Indeed, until Grayscale, MicroStrategy, or another major participant is forced to relinquish their holdings, bitcoin may once again outperform stock market returns.
The negative case is that, when the Fed continues to decrease interest rates, inflation may rise sooner rather than later due to increased demand and easier financial conditions. This could compel the Fed to hike interest rates again in the future.
Powell dismissed such a possibility in December, stating that the Fed has adopted a maximum pain for maximum gain strategy and is erring on the side of prudence by keeping interest rates relatively high. This will continue as long as consistent evidence reveals that inflation is decreasing.
The Fed’s next meeting is in February, when it will provide an update on its strategy. A hawkish Fed may once again halt the rally, as it did in December, destroy hopes that it may pivot before 2024.
If the Fed decides to remain cautious and continue on its path to raise interest rates to 5%, markets may reverse this surge and relive last year’s disaster.
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