Bitcoin is currently rallying after a brutal 2022 that saw 65% slashed from its price. But how long can the upturn last? Is it even a real rally? And why do bitcoin’s ups and downs over the past 12 months appear to be so closely tied to the fortunes of traditional stocks?
Here, Protos takes a look at bitcoin’s price history and some current activity to try and understand what’s going on in both markets.
The last bitcoin bear market was in 2018 when the coin’s price fell by 70% during the course of the year. However, things soon picked up and in 2019 it rallied by 200%, closing the year 90% higher than the previous 12 months.
2018 was also a bad year for the S&P500 as it closed 6.24% down but it also rallied during the following year, picking up by almost 30%.
So, are we back on our way to the moon?
Stocks and crypto are currently on an upward curve ahead of the CPI and Initial Jobless Claims figures, due to be released on January 12.
Previous CPI readings have come out lower than expected, indicating that inflation eased significantly in the last quarter of last year. Jobs reports are showing a strong labor market and an unemployment rate of only 3.5%.
Meanwhile, treasury markets look to be predicting a recession which, along with a falling inflation rate, may be interpreted by investors as a signal that the Federal Reserve could finally pivot and announce its plan to decrease its interest rate.
A low-interest rate environment with eased financial conditions may well help both bitcoin and traditional stocks to rise. However, copper, which is also a popular recession indicator, is showing signs of strength as it hovers about the $4 mark. The Federal Reserve’s target is to bring inflation to 2%, a figure that it believes is appropriate for employment levels.
Bitcoin could outpace the S&P500 if big players don’t sell
However, if bitcoin rises along with stocks, this could also imply that the currency’s market risks are much lower than they were previously. These risks include potential fallout from the troubles of Digital Currency Group, the bitcoin miners’ crisis, and the Microstrategy overleveraged mega-bet.
Indeed, unless Grayscale, MicroStrategy, or any other big player is forced to sell their holdings, bitcoin may well outpace gains by the stock market once again.
The bearish case is that inflation may rise again sooner rather than later with higher demand and eased financial conditions as the Fed begins to cut interest rates. This could eventually force the Fed to raise interest rates again.
Last December, Powell discarded such a scenario by arguing that the Fed has taken a max pain for a max gain strategy and is erring on the side of caution by deciding to keep interest rates relatively high. This will continue as long as sustained and consistent data shows that inflation is subsiding.
The Fed’s next meeting is next February, at which it will give an update on its direction. A hawkish Fed may once again put a stop to the rally as it did last December, once again dashing hopes that it would pivot before 2024.
If the Fed takes the decision to remain cautious and stay on its path to increase interest rates to 5%, markets may backtrack on this rally and restart last year’s carnage all over again.