Note: The current Bitcoin price trend is more than a short-term spike

While many technical analysts see the recent surge in Bitcoin price as the result of leveraged selling pressure or simply a bull trap, a veteran financial markets analyst believes that the current trend is likely to be sustainable, considering various aspects of Bitcoin analysis.

To the report CoinDesk, Glenn C. Williams, a digital currency market analyst with a background in traditional financial markets, has reviewed the price of Bitcoin from various aspects, especially macroeconomics, price action, and the relationship of the asset itself, in a note.

Bitcoin may have failed as a hedge against inflation

It’s not hard to find people who see Bitcoin as an anti-inflationary asset. An asset whose price increases with inflation. This view was a common view among Bitcoin fans for years, and some still believe it. However, a review of last year’s data shows that Bitcoin failed as a hedge against inflation; Because this digital currency has lost more than two-thirds of its value in the midst of the most difficult period of inflation in the last 4 decades.

However, I think Bitcoin was a hedge against bad central bank policies. This is an idea that Renzo Anfossi, chief trader at Arca Funds, planted in my mind recently during a conversation, and I believe it can explain a lot.

Federal Reserve officials spent many months in 2021 (1400) explaining that high inflation would be temporary. Federal Reserve Chairman Jerome Powell did not change his mind until November of that year, when he finally abandoned the idea of ​​inflation as a passing phenomenon. By then, just as policy makers seemed to be in denial about inflation, the price of Bitcoin reached its all-time high.

During this period, the Federal Reserve injected money into the financial system to support it against the Covid-19 pandemic. M2, which is a measure of money supply, jumped from about $15.5 trillion in March 2020 to a peak of $22 trillion last year. The Federal Reserve also reduced the interest rate target to zero in its policy. Pouring so much cash into the system and engaging in unrestricted monetary policy created a sense of mistrust in risk acceptance in the markets. Meanwhile, the rise in the price of Bitcoin was a clear indicator that something reckless was going on.

Bitcoin finally crashed. Not surprisingly, this largely coincided with the Federal Reserve starting to raise interest rates a year ago, even as the institution became more responsible. Now, it seems that the central bank will end the rate hike process soon. Currently, the Federal Reserve’s target inflation rate is 4.5%. Of course, policymakers have stated that a 5% rate will also end contractionary policies. The amount of M2 also decreased and reached 21 trillion dollars. The economic yield curve, compared to 2-year and 10-year treasury bonds, has reached negative 0.69 percentage points from minus 0.84 percentage points in early December, which is a sign of moving towards a more normal economy.

The price of Bitcoin rose earlier this year, and after falling below $17,000 on January 8th, it surpassed $23,000. Is this a sign of more incapacity of the central bank? Not in the US, where inflation seems to be getting under control as the days of easy money seem far in the past. But is this a sign of more inefficiency of the central bank? Not in the US, as inflation appears to be under control as the period of high liquidity passes.

I think we’re entering an era where bitcoin is traded based on different perspectives. In the United States, Bitcoin is viewed as a tool for speculation and something valuable because of the underlying technology.

In other parts of the world, the inefficiencies of the economic system can still remain a driving force for Bitcoin investors. The 2022 ChinaAlysis Digital Currency Geographical Report shows us the rate of Bitcoin adoption around the world. Unsurprisingly, some of the countries with the highest rates of Bitcoin adoption are facing numerous economic issues, mostly related to monetary policy. In this report, Venezuela and Argentina stand out in particular with interest rates above 60% and inflation close to or above 100%.

Whether it’s a US-style speculative approach or the inaction of central banks elsewhere in the world, both could be bullish for Bitcoin. Recently, not only Bitcoin, but the entire digital currency market has been significantly bullish. Since the beginning of 2023, Bitcoin has grown by about 38% and Ethereum by more than 31%.

How Bitcoin will ultimately behave as an asset remains to be seen. This asset is still very young and its audience has mixed opinions. The purpose of this report was to highlight these views so that decisions can be made based on them.

Diversification of digital currencies in 2023

During 2022, the digital currency market and stocks, especially stocks of technology companies, experienced more growth than in 2020-2021. This similarity can be explained with the investors of joint investment views who want to move towards the adoption of future technologies despite the risk of uncertain and unpredictable cash flows in the future.

However, the significant increase in interest rates in 2022 had a significant impact on investment portfolios consisting of high-growth companies. Investors’ time horizons decreased from more than five years to short term. Today, investors prioritize current cash flows and profits over potential growth prospects. Common terms such as bull market, fear of missing out, laser eyes, market growth, financial independence, and early retirement have fallen out of fashion, replaced by clichés such as holding, dollar cost averaging, and the collective hope for transitory inflation.

With this sudden change in the mentality of digital currency investors, who are not used to inflation or a stable bear market, the transactions of these assets also gave way to other risky assets. Note the periodic correlation chart (correlation between two time series) of Bitcoin with major ETFs below.

Fortunately, despite the Bitcoin-Nasdaq (QQQ) correlation falling to a 2021 low, cryptocurrencies and other assets continued to trend in 2023. Bitcoin’s correlation with gold (GID) and the bond market (TLT) is almost zero, meaning that there is no longer any correlation between them. As a result, market diversification has returned once again.

A useful example to understand how correlation changes under market stress is to imagine that you are standing outside your house when it is on fire. In this state of shock and disbelief (of your house burning down), you lose your long-term perspective or sensitivity to any subtle differences. The only thing that matters is who stays indoors and who is safe outside. Few people plan ahead for these situations, and for those who do, as Mike Tyson once said, “Everyone has a plan until they get punched in the face.”

Only when the flames die down can we begin to make calm and rational decisions, which will only happen now as the price of digital currencies rises. However, I didn’t see this move as anything more than a short squeeze in a bear market, but if you look at the Commodity Futures Trading Commission’s futures position data, it’s a different story. Over the past three weeks, we have seen an upward trend in market contracts in the real money group, asset managers. While contracts in the fast money group market, which is usually vulnerable to borrowing pressures, do not appear to have overgrown. As a result, it can be said that the current Bitcoin price growth is likely to be sustainable.