Insight
September 13, 2024
Next week, the FOMC is widely anticipated to reduce interest rates for the first time since 2020. Although there's ongoing speculation about the magnitude of the cut - 25 bps or 50 bps - the broader impact of this decision on financial markets, including bitcoin, is also under scrutiny.
An analysis of recent monetary policy trends highlights that the anticipation of interest rate changes often holds more significance than the actual rates themselves. Remarkably, major shifts in these expectations have aligned with critical junctures in bitcoin’s price movements in recent history. As illustrated in the following graph, turning points in forward interest rate projections have closely mirrored the pivotal moments in bitcoin’s price cycles.
However, this hasn't always been the case. In its early stages, bitcoin's market movements appeared independent of interest rate fluctuations or expectations. We believe this shift is due to bitcoin's growing adoption and ownership among traditional market investors, many of whom closely monitor macroeconomic indicators such as interest rates.
Over the past few months, bitcoin investors have been grappling with frustration as declining forward rate expectations have not translated into rising bitcoin prices. This could indicate an imprecise relationship between these variables, or perhaps bitcoin’s current price trend is signaling that the anticipated rate-cutting cycle may be shorter and less significant than previously thought.
As April's reward halving, Bitcoin's fourth, fades into the distance, we take a closer look at key metrics post-halving. Historically, Bitcoin's halvings have been important milestones along its price cycles. In this section, we analyze how current metrics stack up against past cycles and offer insights into what the future may hold.
Despite bitcoin's sideways trend over the past few months, its current price remains higher than it was following the 2020 halving (halving 3) and is only slightly below its position after the 2016 halving (halving 2). We are entering the period of the cycle where bitcoin has typically had some of its best returns, if the past 2 cycles are any guide.
After a halving event, it's common for network difficulty and hash rate to decline as less profitable hash rate goes offline. This cycle was no different. Although both metrics are starting to rebound, they remain significantly lower compared to the corresponding stages in past cycles.
There's been significant concern regarding Bitcoin's hash price, the revenue miners receive for their hash rate. In this current cycle, the hash price has fallen over 70% since just before the halving (excluding the Runes launch bump). In contrast, the hash price dropped only 55% at comparable stages in the two previous cycles (one should expect a 50% reduction due to just the halving of the block subsidy). Price is going to be an important determinant for this metric going forward as miners continue to add hash rate.
On Wednesday morning, the August CPI figures were released, offering investors a look into inflation trends. Although the figures slightly exceeded economists' predictions, the real conversation to us isn't about the numbers themselves, but instead, how inflation is reshaping societal expectations and future outlooks. A recent article in the Wall Street Journal pointed out that the American dream - owning a home, raising a family, and enjoying a secure retirement - is becoming increasingly out of reach for many.
We've shared the following graph before, but it’s worth revisiting in light of the WSJ article. Most people recognize that inflation means rising costs for goods and services, reducing the value of each dollar, and eroding purchasing power. Instead of expressing this in percentages or dollar amounts, this graph illustrates the cost of the median home in terms of hours worked. Essentially, how many hours did the average worker need to buy the median home? Since 1968, that figure has soared by 75% for new homes and 82% for existing homes through 2022. Translated into workdays, that equates to nearly an additional 3 years of labor for a new home and over 2.6 years for an existing one. Given the findings of the WSJ survey, it appears more Americans are resigning themselves to the notion that homeownership is becoming an increasingly unattainable dream.
What does this have to do with bitcoin? Economist and monetarist Milton Friedman frequently remarked that inflation is "always and everywhere a monetary phenomenon." It should come as no surprise that this bout of inflation, the first in 40+ years in the US, comes on the heels of massive money printing in response to the COVID-19 health care and economic crisis. Bitcoin, with its programmed, fixed, and unchangeable supply, addresses the rampant money printing by politicians and central bankers. Unlike fiat currencies, which often become the public dumping ground for governmental shortcomings, Bitcoin offers an alternative way forward.
Bitcoin rallied 4.2% on the week after the price reversed course following a tough week. Perpetual swap funding rates pushed increasingly negative on major exchanges, like Binance, beginning last weekend and this week’s price reversal likely caught many traders off guard. Other risk asset classes, such as equities, also rallied back as traders braced for the first interest rate cut since 2020. However, a stronger-than-expected CPI report on Wednesday reminded investors that while inflation continues to recede, it may be doing so at a rate slower than hoped by investors.
Oil prices continue to fall as recessionary fears continue to run through the market. Gold continues to have a banner year, up another 1.5% on the week, bringing its year-to-date return to 23.4%. Bonds also rallied as investors brace for the expected interest rate cuts on Wednesday. Markets are still undecided as to whether the Fed will cut just 25 bps or 50 bps, with the latter currently at a 47.5% probability.
Regulation, Taxation, & Enforcement:
North Korea Aggressively Targeting Crypto Industry with Well-Disguised Social Engineering Attacks - FBI
Cryptocurrency Fraud Report 2023 - FBI
eToro Reaches Settlement with SEC and Will Cease Trading Activity in Nearly All Crypto Assets - SEC
U.S. Pushes Nigeria to Release Tigran Gambaryan of Binance - NYT
Investing:
Options Markets Laser-Focused on Fed Before Election Takes Over - Bloomberg
Coinbase Wrapped BTC (cbBTC) is Now Live - Coinbase
Companies & Industry:
Tether: The Cryptocurrency Fueling the Financial Underworld - WSJ
Metaplanet Buys More Bitcoin - Metaplanet
MicroStrategy Acquires 18,300 BTC and achieves BTC Yield of 4.4% QTD and 17.0% YTD; Now Holds 244,800 BTC - MicroStrategy
Tron, Tether and TRM Labs Start Financial Crime Fighting Force - CoinDesk
21Shares Selects Anchorage Digital Bank and BitGo as Custodians for US Spot ETP Product Lineup - 21Shares
Industry Leader Jesse Spiro Joins Tether as Head of Government Affairs - Tether
Sept 18 - FOMC interest rate decision
Sept 27 - CME expiry
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