Bitcoin price falls below $29K, no surprise given volatility and liquidity metrics

Important takeaways

• Bitcoin has softened falling from $30,000 to near $28,000
• Our head of research looks at the data, and claims the move shouldn’t be a surprise
• Bitcoin’s fixed supply and lack of dividends or earnings means its price is entirely demand-driven
• Thin liquidity in the Bitcoin market exaggerates every move, with 45% of stablecoins leaving exchanges in the last 4 months
• The correlation with shares remains high, with high UK inflation causing pause for thought
• The market has also fallen back a bit on forecasts of interest rate cuts, and Bitcoin has followed suit

I’ve lost count of the number of times I’ve been asked “Why Bitcoin going up?”, or “what is driving this Bitcoin selloff?”.

For many assets, it is clear what drives price action over a given trading period. Earnings forecast missed by 10%? Hello, red light. Warren Buffett announced a massive buyout of your stock? Buckle in; we are heading north.

For Bitcoin, it’s a little tougher. There are no dividends or dividend forecasts; Bitcoin gives no return. Nor is it earnings. In addition, the supply does not fluctuate, instead following a predetermined schedule set by Satoshi Nakamoto in October 2008, managing it block by block in ten minute intervals.

With supply set in stone and out of the picture, and the absence of any periodic returns/forecasts derived from dividends or earnings, this means Bitcoin price is all about demand. And it is very difficult to predict. Bitcoin is going to Bitcoin, is often about the best justification that can be given.

But there are factors we can consider. One is liquidity, which I touched on in a recent one deep dive when Bitcoin rose above $30,000 for the first time in ten months. Order book liquidity is as thin as it has been in a year, while overall capital has fled the crypto space at large. Take a look at the balance of stablecoins on exchanges:

That’s 45% of the stablecoin balance that took the exit door in the last four months, the balance as low as it has been since October 2021.

With Bitcoin already uber-volatile (VIX metrics blow all “normal” assets out of the water), this further increases the propensity for violent movements. Simply put, thinner liquidity means that it takes less action to move the price.

Why is the Bitcoin price falling at the moment?

So it is often difficult to determine why Bitcoin moves, as this thin liquidity and capricious demand combine to make it very sensitive.

But sometimes we can make educated guesses about what’s moving Bitcoin on any given day. This is one of those moments.

Macro conditions have long been key to Bitcoin. Again, a little diagram to show this:

Despite some temporary optimism that Bitcoin was decoupled as investors fled a collapsing (fiat) backing system for the safe haven that is Bitcoin, the orange coin is moving very much in line with high-risk assets, such as tech stocks listed on the Nasdaq .

I wrote a deep dive at the time of the banking crisis on why Bitcoin’s fall in correlation with stocks was only a temporary blip. Looking at the data, it appears to have come back up.

Lots of talk about what’s driving this massive Bitcoin rally.

Talked to @CNBC last night about whether it stems from interest rate forecasts or whether investors are betting on Bitcoin as an alternative to the bank uro👇 pic.twitter.com/o45zOOPiiw

— Dan Ashmore (@DanniiAshmore) March 21, 2023

And looking at broader financial markets in recent days, optimism about the economic climate has receded. British inflation was released yesterday, holding steady in double digits, fueling expectations that the Bank of England will increase further.

In the US, the Atlanta Federal Reserve president said he expected another 25bps hike, adding another slight doubt to the market that hikes may not be done quite yet.

Not to mention a rally can’t go on forever. Bitcoin has been on a tear this year, up 74% year to date. It’s an asset that has always fluctuated, so it’s not a surprise that it’s finally showing some weakness. And a drop from $30,000 to $28,000 is just a drop in the ocean compared to what it’s capable of.

A true Bitcoin red candle cannot be ruled out here, given the volatility and thin liquidity, just as it could suddenly rise further north. As financial markets adjust to new data all the time, like the key inflation readings and FOMC minutes, Bitcoin will continue to move as a bet on tech stocks.

As for which direction it will move in, it’s anyone’s guess. I don’t have a crystal ball, and I won’t make any predictions just for the sake of it, because I simply don’t know. Not many do right now, with the world in an economically precarious state. Inflation remains high, but interest rates appear to be nearing the end of the tightening cycle.

Soft landing, hard landing, something in between? The future will tell. But no matter what happens, the volatility of the world’s largest cryptocurrency is very real, and sudden price reversals and big swings won’t stop anytime soon. Bitcoin is going to Bitcoin.