After a long, dreary slumber, Bitcoin bulls are tentatively awakening to the winds of change, testing the newly released bullish currents while remaining on the lookout for another bearish drought. While it is too soon to proclaim that Bitcoin has carved out an ultimate cyclical bottom, favorable cross-asset dynamics, robust basing effect, and a devastating capitulation from the cryptocurrency’s miners cumulatively lend credence to the hypothesis that at least a local nadir has now been formed through the blood and toil of bruised investors.
Cross-asset Dynamics Support Bitcoin Bulls
A wonderful way of understanding Bitcoin’s price moves is to view it in the context of cross-asset dynamics. After all, Bitcoin’s 30-day correlation with the S&P 500 index remains elevated, currently hovering at 66 percent. With an overwhelming proportion of Bitcoin’s bullish thesis depending on the cryptocurrency’s future adoption rate, it is hardly surprising that it continues to act like a risky asset. Consequently, the fate of the world’s premier cryptocurrency remains inextricably linked to the wider risk universe, particularly US stocks. With headline and core inflation in the US stuck at a multi-decadal peak, the Federal Reserve has no choice but to stick to its hawkish interest rate increase trajectory. As interest rates increase, the future cash flows – which form the fundamental thesis of growth-focused equities – are discounted much more heavily, leading to a de-rating of such equities. For much of 2022, this effect has continued to dominate, thereby driving the weakness in Bitcoin along with the rest of the risk universe. Now, however, with expectations of a recession gaining ground, investor sentiment has hit rock bottom. Consider Bank of America’s latest Fund Manager Survey (FMS). The percentage of fund managers expecting a stronger economy has crashed below the level of the Great Financial Crisis (GFC) of 2008! This is despite the fact that US equities are still higher than their 2020 levels.
— Lance Roberts (@LanceRoberts) July 19, 2022 Moreover, the cash levels – an indication of de-grossing – are now at the highest level since 2001.
FMS cash levels jumped to the highest level since 2001, as recession worries mount👉 https://t.co/IgkqJeJgH9 h/t @BofAML #markets #investing #investors #cash#sp500 $spx #spx $spy #stocks #stockmarket #equities pic.twitter.com/Q7SRZ4hL94 — ISABELNET (@ISABELNET_SA) July 19, 2022 This rock-bottom investor sentiment recently compelled Bank of America’s Michael Hartnett to turn tactically bullish on the risk universe, boosted by the upcoming buyback galore, which is expected to see $5.5 billion in corporate demand for US stocks every day through July starting this Friday. This, of course, bodes well for the short-term prospects of Bitcoin.
The World’s Premier Cryptocurrency Has Now Established a Strong Base
Bitcoin has managed to establish a relatively strong base from a technical as well as long-term “hodlers” perspective. In our recent post on this topic, we had identified the $16,500 - $18,000 price level as a key demand zone. Bitcoin’s recent price action proved that the zone remains a potent bulwark to further weakness. As is evident in the chart above, Bitcoin’s price rocketed away from the pertinent zone, establishing its primacy. Moreover, this price action was followed by a relatively strong consolidation around the $20,000 price level. Both of these factors suggest that a strong base has been formed and is likely to hold in the short term. Additionally, with long-term holders of Bitcoin – defined as investors holding the cryptocurrency for a period of at least 1 year – now reaching 40 percent, a strong basing effect can be witnessed from the perspective of investor profile.
Bitcoin is once again carving out a strong base of long-term investors with over 40% having held BTC at least 1 year. pic.twitter.com/u6LxkEFy4x — Charles Edwards (@caprioleio) July 20, 2022
Bitcoin Miners Are Finally Capitulating
Bear markets usually do not end until some sort of capitulation is witnessed. Well, that phenomenon is currently being witnessed by Bitcoin miners whose cost indicators are soaring in tandem with a decline in BTC’s hash rate.
In the 2018 cycle, miner capitulation persisted for >3 months, we are only 1 month in right now. pic.twitter.com/3r1IeWnIEo — venturef◎undΞr (@venturefounder) July 20, 2022 The inventory levels of Bitcoin miners are currently sitting at a 1-year low.
This is perhaps a postive thing for the price of BTC because many miners have de-risked. pic.twitter.com/ybCw39Ff87 — venturef◎undΞr (@venturefounder) July 20, 2022 Moreover, Bitcoin’s hash rate has entered a downtrend for the first time since July 2021.
— venturef◎undΞr (@venturefounder) July 20, 2022 As per the trend witnessed in 2018, this capitulation is likely to last until mid-September.
Bringing It All Together
We had noted in our previous post on this subject that Bitcoin’s rip-roaring gains are likely to materialize in H2 2023 ahead of the cryptocurrency’s next halving event. We continue to stick to that prognosis. While Bitcoin is likely to record healthy gains going forward, this nascent bullish regime will remain vulnerable to the advent of a recession and the corresponding reaction function of the Federal Reserve. This is doubly important as Bitcoin has established itself as a risk asset that remains well-correlated with US equities. Consider a scenario where a mild recession in the US is unable to tame core inflation or one where the Fed capitulates before truly taming the ongoing inflationary impulse, thereby setting the stage for a devastating redux. If you are a long-term holder of Bitcoin, congratulations! You just survived one of the most difficult financial periods in around two decades. If you are looking to re-enter the crypto sphere, consider nibbling at these levels while retaining substantial ammunition for a post-recession setup.
