- Bitcoin breaks $30,000 for the first time since June 2022
- Volatility is also at its highest point since June
- Liquidity is the lowest it’s been in years, which means less is needed to move bitcoin up (and down)
- Stablecoins have fled 45% of exchanges in the past four months, market depth has not recovered from the Alameda bankruptcy in November
- Interest rate forecasts have flipped, providing positive stimulus as markets end tight monetary policy
- Low Liquidity and Positive Interest Rate Expectations Drive Bitcoin Above $30K
- The coming week brings data on inflation, Fed minutes and earnings, and bitcoin could move violently again depending on how it shakes out
Put on a mask and stay 2 meters away, because it feels like it’s 2021 all over again.
At least, judging by the cryptocurrency market, that is. Bitcoin has turned back years to rally to its highest price since last summer, despite the economy feeling like it’s collapsing all around us. $30,000 has officially been breached.
Not only is the price at its highest point in ten months, but volatility and profit margins have also risen to all-time highs, as the house of cards before all bottomed out, while the market is dwindling in supply.
But why? And will this all continue or will bitcoin fall back to earth? Let’s look in the data to see if there is an answer.
First, what grabs the headlines: the price.
Bitcoin breached $30,000 on Monday evening for the first time since June 2022. To refresh the memory, that was the week of the Celsius crash, with Luna caught in the contagion on June 12, 2022, after the crypto lender announced it was suspending withdrawals.
Billions of customers’ assets were frozen, and the bitcoin price dropped below $30,000 and then below $20,000 in the following days. It has retested the $30,000 level for the first time on Monday.
The key to this resurgence? Interest rate forecasting, mainly (but not just interest rates… as we’ll learn in the next section).
Forecasts for the future path of interest rates have completely flipped over the past month, providing impetus for this leg up in bitcoin as the market bets that we are finally ready to stop the aggressive rate hikes that have been taking place over the past month. Is going on april.
Last year’s transition to a new paradigm of tight monetary policy signaled the abrupt end of a decades-long bull market in financial markets, pulling risk-on 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 situation certainly hasn’t been kind either, with the Nasdaq shedding a third of its value last year, its Worst return since 2008.
But after the banking collapse, the market is betting that the Fed may not continue with forward-looking interest rate forecasts. The chart below shows interest rate expectations for the July meeting – on the right shows the forecast six weeks ago, completely flipped compared to today’s forecast (purple bar on the left).
But it’s not just the price that’s going up. Volatility is also at its highest point since the fall of Celsius last June. The chart below shows this, and then we’ll see why it’s not a coincidence that this is coinciding with continued price increases.
The increased volatility is a direct result of the liquidity being so low. I did a deep dive on this together two weeks agoBut liquidity in the cryptocurrency markets is as low as it has been all year.
45% of stablecoins on exchanges have fled over the past four months, resulting in the lowest balances since October 2021.
It also coincided with a decline in market depth, yet to recover from Alameda’s evaporation into thin air last November.
And it gets to the crux of the issue: thin liquidity increases, both to the downside and to the upside. Which is a fancy way of saying that it increased volatility, which is what we’ve been seeing for bitcoin lately.
And this whipping up of any volatility in price, along with the positive swing emanating from the interest rate forecast, means that bitcoin is getting bullish on 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 the markets at the moment, i.e. the interest rate forecast, flipping positive, we get a violent upward momentum.
“Low Liquidity Makes Markets Vulnerable to Large-Scale Moves”, says Max Coupland, director of CoinJournal. “Luckily for crypto investors, fluctuating interest rate expectations have meant that prices have been bullish, but looking into the coming week, this could change if economic data comes out below forecasts. Bitcoin is always volatile. Happens, but it seems especially primed for big steps at this time.”
Lastly, profit. It doesn’t take any genius to figure out that while the price of bitcoin is at its highest point in nine months, the profit situation for investors is also looking a bit better than before.
When assessing the price at which bitcoin last moved in comparison to the current price, it can be concluded that 76.2% of the bitcoin supply is in profit. This marked the highest point in a year, before the transition to tighter monetary policy and before the LUNA scandal last May.
what happens next?
But will it all last? Or is it just a bear market rally?
Well, very little liquidity is unlikely to move, at least in the short term. This means that volatility will remain high and will move both down and up.
But with high volatility, which direction will it go? I won’t pretend that I know the answer, but there are some key data coming out in the week ahead that will move price one way or the other – and probably very significantly so.
First up is the CPI data released on Wednesday. Inflation has come down every month since June 2022, yet this is the first inflation reading after the optimism that interest rate hikes will end soon. A hot reading could lead the market to think the Fed might be thinking about hiking further, though, especially after last month’s easing of banking problems.
There is also the FOMC minutes on Wednesday, which will give a straight forward look at the Fed’s plans. This, and inflation readings, are absolutely important economic indicators, and that’s what the market has been through all year. He won’t change.
Thursday’s drop in the producer price index (PPI) and Friday’s start of earnings season could further price peaks. With bitcoin very volatile right now and the economy in a watershed moment, there is a lot of data coming out in the coming week.
Fasten your seat belts and prepare your popcorn.
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