The impact of macroeconomic uncertainty on Bitcoin and Equities
As you may know, geopolitical and macroeconomic uncertainty plays a significant role in driving market trends. The day-to-day fundamentals and comments on crucial topics such as FED Interest Rates, Russia & Ukraine War, and Energy Crisis, among others, can have a substantial impact on the markets. With so much volatility, it’s difficult to confidently predict possible economic outcomes for 2023. Nevertheless, we’ll explore the main topic and analyze it in-depth to gain a better understanding of the current market state.
Furthermore, the 7-week correlation coefficient at 0.97 provides a strong relationship and cross-dependence of BTC on the $SPX. Therefore, BTC is likely to follow any directions taken by large-cap stocks.
While the short-term fluctuations can’t be eliminated, the long-term price history since June 2010 reveals a reliable chart pattern where every decisive breakout to the upside following a declining 200-day trend of the primary bear run initiated a new bull run.
Traders should consider the fact that there is little sample within the short price of the history of Bitcoin. However, ignoring a 100% reliability of such a chart pattern may not be the smartest choice.
When it comes to FED monetary policy in 2023, there are a number of possible scenarios to consider, including recession and no recession, higher inflation or deflation, and a tighter labor market or an increase in unemployment.
The potential outcomes of these scenarios could have either a bullish or bearish impact on risk-on assets like Bitcoin and equities. If a recession does occur in the coming months, the FED might pivot quickly, which could help risk-on assets recover rapidly and possibly initiate a new bull market. However, if the labor market remains tight and wages are inflationary, the FED might need to continue tightening, which could result in further declines for risk assets. It’s important to understand the possible outcomes of these different scenarios in order to make informed investment decisions.
While the correlation between equities and Bitcoin has been decreasing recently, this doesn’t necessarily mean that Bitcoin will hold up if equities continue to decline. The low-interest rate environment over the past few years has driven both markets upward, resulting in an increase in market capitalization and institutionalization of the crypto space. This has led to crypto becoming more correlated with equity behavior and performance.
It’s important to understand the correlation between crypto and equities in order to establish a bull or bear thesis for crypto. Whatever justifications are made for taking a long or short position on equities should also be reflected in crypto. While crypto investors often have little macro knowledge and tend to be disconnected from stocks, it’s necessary to connect both markets in the middle ground. In a neutral or bear market, being completely ignorant of the direction of each market asset class is not acceptable. The reality is that connecting both markets is necessary, and being dismissive of fundamentals is not a good strategy.
As seen in the chart below, there is an interesting pattern-based technical similarity with the end of the last two bear cycles for Bitcoin:
Even though the bear market trendline has been breached, the previous bear cycle’s duration was between 2-3 years. At the moment, since the top of the market in November 2021, the time elapsed has been around 430 days. Due to the challenging macro environment and the bear cycle not lasting as long as previous ones, the chances of a bull cycle starting for Bitcoin this year are very low.
If interest rates stay high over the next two years, it’s less likely that crypto will perform well. FED officials have indicated that they plan to maintain high rates and not repeat the interest rate tightening and loosening cycles that were used during the inflationary crisis of the 1970s. Instead, they will keep rates elevated for a period of time, but at lower levels than those seen in the 70s due to higher levels of debt.
To sum up, understanding how macroeconomic uncertainty can affect Bitcoin and equities is crucial for making informed investment decisions. By analyzing possible scenarios and their impact on risk-on assets, we can better prepare for market trends. While Bitcoin and equities may not always be correlated, it’s important to understand the relationship between them and connect both markets in the middle ground.
Thanks for taking the time to read through our document. We think it’s important to stay informed about the current market state, which is why we’ve analyzed this topic in-depth.
🐦 At The Birb Nest, we have a dedicated team of Trading Analysts who are available 24/7 to help you navigate these extreme market conditions. We’ve already shared several market theses inside our Discord with Legacy and Crypto market explanations for both Intraday and Swing trading.
Don’t hesitate to reach out if you need any guidance!