Bitcoin’s Next Move: 5 Things to Watch
Bitcoin
climbed nearly 25% in July, but investors are unlikely to see a repeat of those gains in August. Digital assets continue to trade sideways, and Bitcoin – the largest crypto – can’t seem to break out of the $20,000 to $24,000 range.
With Bitcoin still trading at less than a third of its all-time high near $69,000 reached in November 2021, bullish cryptocurrency holders will likely continue to hope for something that will drive token prices higher. There are at least five trends that investors should keep an eye on, according to Sheena Shah and Kinji Steimetz, analysts at Morgan Stanley.
One trend, the crypto equivalent of quantitative tightening, is the declining availability of stablecoins such as Tethers
USDT
and Circle’s
USDC
,
the analysts wrote in a note on Friday. Stablecoins are at the heart of the crypto world, forming the basis for trading and lending activities, and their availability is a key indicator of both liquidity in crypto and demand for leverage, or money lent for trading.
Changes in the market value of stablecoins — a measure of the amount in circulation since each coin is supposed to be worth a dollar — can be a leading indicator of Bitcoin prices, according to Shah and Steimetz. In June, Tether’s market cap fell 20% in about a month, while Bitcoin fell 45% over the same period to below $30,000.
“This week marked the first time since April that the market cap of the stablecoin has stopped falling on a monthly basis,” the Morgan Stanley analysts said. “This may be a sign that the extreme institutional downsizing seems to have stopped for now.”
A widespread halt in crypto deleveraging could signal that the worst of the recent market turmoil is over, paving the way for institutions and other influential traders to turn bullish on Bitcoin again.
That is why changes in the demand for leverage in crypto, similarly indicated by the market cap of stablecoins, is the other trend to watch. If the demand for leverage in crypto increases, causing people to move dollars to stablecoins, the market values of stablecoins will likely rise. It could mark a bullish reversal because leverage exacerbates price swings and increases the possibility that gains from solid rallies will be magnified.
However, “there doesn’t seem to be much demand for re-leveraging in the crypto world at the moment: decentralized finance (DeFi) platform lending is still down 70% this year,” Shah and Steimetz wrote. “In our opinion, it will be difficult for this crypto cycle to bottom out without fiat influence growing or crypto influence increasing.”
The third trend to watch is the stablecoins’ market values relative to each other, specifically fluctuations in the ratio between the amount of issued USDT and USDC, the most influential stablecoins pegged to the US dollar and the third and fourth largest digital tokens.
Typically, the market values of USDT and USDC move in opposite directions – meaning traders seem to generally rotate out of one and into the other – and Morgan Stanley sees a correlation between periods when USDC’s total value grows and subsequent gains in Bitcoin prices .
“The general trends in USDC market cap growth seem to lead to growth in Bitcoin’s price about two months later,” the Morgan Stanley team said, noting that “obviously, we cannot use this as a trading signal, as the historical relationship is volatile, has outliers (Bitcoin rally in June) and not a long history.”
Still, it’s a compelling flag. Tether’s market cap fell by $9 billion in a week in early May, to $74 billion from $83 billion, while USDC’s market cap jumped to $52 billion from $48 billion in the same period. Two months later – July – Bitcoin saw its best month of the entire year.
Now this trend appears to be reversing course, with USDC circulation now down nearly $4 billion from its peak in July while issuance of USDT has grown. If the pattern holds, it could be negative for Bitcoin.
Ultimately, however, it is the macroeconomic picture that matters, according to Morgan Stanley. While Bitcoin and its peers should in theory be uncorrelated to mainstream finance, they have been found to be heavily linked to other risk-sensitive plays, such as technology stocks. Much of the gains for tech stocks, and crypto, in recent years can be laid at the feet of loose central bank policy that has injected liquidity into global markets.
“Since 2013, Bitcoin’s market capitalization growth has generally followed the growth of the global fiat M2 money supply. When central banks eased and added liquidity, it ended liquidity in risk assets, including crypto,” the analysts said. “We expect [Bitcoin’s] the correlation with stock markets remains high.”
Expectations of future growth in the money supply, which is a function of the size of the Federal Reserve’s balance sheet and interest rates, are likely to be the most dominant force on Bitcoin prices, according to Morgan Stanley.
“Nearer term crypto markets will therefore place most trading focus on inflation expectations and market pricing for interest rate hikes,” Shah and Steimetz said.
The central bank has been aggressively tightening monetary policy and raising interest rates as it battles the highest inflation in four decades—a path it is not expected to depart from until at least 2023. That’s why inflation and the Fed’s monetary policy plans are the fourth and fifth factors investors should watch on for Bitcoin’s next move.
The coming days may bring more clarity to the market.
The Fed’s preferred measure of inflation arrives on Friday in the form of July’s core index of personal consumption expenditures. Also on Friday, Fed Chair Jerome Powell will speak at the Jackson Hole economic conference, which is likely to be key in clarifying investors’ expectations around Fed policy.
These events will no doubt be one of the main short-term catalysts for crypto in the coming week, to say nothing of inflation and rate expectations in the coming months. Just like in stocks, crypto investors can’t fight the Fed.
Write to Jack Denton at [email protected]
