Markets
Sky Remains Blue Behind Bitcoin Sales in Germany and Mt. Gox Refunds
It may seem like these are turbulent times in the cryptocurrency market. Germany’s Bitcoin (BTC) sell-offs and fears of mass liquidations by defunct exchanges Mt. Gox CreditorsHowever, looking beyond these oversupplies, a promising outlook emerges, supported by supportive macroeconomic factors and sustained risk-taking in traditional markets.
BTC, the largest cryptocurrency by market value, has fallen more than 17% to $57,200 in four weeks, leading to a rout in meme coins, digital assets allegedly tied to artificial intelligence (AI), and other risky corners of the cryptocurrency market, Data from CoinDesk show.
However, the overall picture remains bullish, meaning that once the excess supplies from Germany and Mt. Gox creditors are exhausted, the market could stage an impressive recovery.
Typically, during periods of global economic expansion, investors show a greater propensity to put money into risky, growth-sensitive assets, such as bitcoin and stocks.
The G-7, an informal group of advanced economies, is currently experiencing an expansionary phase of the economic cycle in an environment of high interest rates, second composite leading indicator of the Organisation for Economic Co-operation and Development (OECD).
According to TS Lombard, the indicator, which measures the short-term economic outlook for a group of major nations, has surpassed 100 and continues to rise, indicating above-average growth and acceleration.
The U.S. Bureau of Labor Statistics’ June Consumer Price Index (CPI) report, due Thursday, is expected to show the cost of living rose 3.1% over the year, slowing from a 3.3% annual increase in May, according to a Wall Street Journal survey of economists.
The expected slowdown would imply continued progress toward the Fed’s 2% target, strengthening the central bank’s case for starting to reduce its benchmark borrowing costs this year.
Further rate cuts could further catalyze demand for risk assets, including bitcoin. Since the beginning of this year, CPIs have been weaker than expected they galvanized the inflows in spot bitcoin ETFs, increasing the cryptocurrency’s market value.
“We expect the headline CPI to have risen 0.1% m/m, partly due to another decline in energy prices. This would translate into a y/y rate decline of one-tenth to 3.2% and the NSA to 314.770. Meanwhile, we expect the core CPI to have risen 0.2% m/m,” BofA economists said in a July 5 note to clients.
“If the CPI report comes in line with our expectations, we would maintain our expectation that the Fed will begin its rate-cutting cycle in December,” the economists added, saying a core CPI of 0.2% m/m would increase the likelihood of an early rate cut.
The path of least resistance for bitcoin is tilted to the upside as Wall Street remains awash in tech optimism, as evidenced by fresh all-time highs in the ratio of its tech-heavy Nasdaq index (NDX) to the broader S&P 500 (SPX).
Since the beginning of 2017, bitcoin has moved in step with the NDX-SPX ratio, which sees sharp increases during periods of relative outperformance by technology stocks.
Furthermore, social media concerns about a possible collapse in U.S. stocks, which would add to the downward pressure on other risky assets, may be unfounded, as the stock market does not appear to be in a bubble.
“Whenever US margin debt rises, we hear of a bubble forming in US equity markets. However, unlike previous bubble episodes (including 2020-21), margin debt is growing less than equity market capitalisation. Rather than being a driver of equity performance, it is likely to be a consequence of it. This is not surprising given the current high level of interest rates, which are not conducive to leverage increases,” TS Lombard said in a July note to clients.
“Another indication that the U.S. stock market is not in a bubble zone is investor positioning, which is close to neutral in both the S&P 500 and Nasdaq futures,” Lombard added.
Gold has also maintained some stability recently, a sign that the macroeconomic picture is favorable to assets with alternative investment appeal such as Bitcoin.
Finally, past data shows months after the reward halving they are optimistic and characterized by double-digit price corrections. The Bitcoin blockchain underwent its fourth halving in April this year.