Bitcoin’s Resilience Amidst Economic Turbulence
A dive into Bitcoin’s relation with recent Capital Markets behaviors
The ongoing dedication of the Federal Reserve to reduce inflation has placed significant stress on the traditional financial market. Long-term bonds are experiencing a historical decline in demand, and at the same time, the yields on 10-year bonds have reached their highest level since 2007. However, Bitcoin has demonstrated relative resilience, maintaining a stable price throughout this period of market turbulence. Within this article, we examine the consequences of this pattern, delving into how the market’s assessment of Bitcoin has changed and how it could benefit from the rising financial uncertainty witnessed in 2023.
Bitcoin has started to outperform global markets performance. Remarkably, several of the factors that caused Bitcoin’s decline in 2022 are no longer exerting the same downward pressure, suggesting that the market is reevaluating its approach to valuing Bitcoin.
The prices of long-term bonds and Bitcoin are no longer correlated as they had been over the past year and a half. In 2022, the Federal Reserve implemented a significant rate hike, which resulted in a notable decline in the worth of long-term bonds since they offered considerably lower yields. High interest rates had an impact on Bitcoin and risky assets, as they made short-term bonds a more attractive option and simultaneously increased the discount rate applied to asset revenues. Subsequently, in 2023, as the rate hike pace decelerated and talks of a potential Federal Reserve policy shift emerged, both Bitcoin and long-term bonds experienced a price rally.
In the last month, there has been a shift in this trend, with Bitcoin showing strong gains while long-term treasuries have seen a significant decline, resulting in a correlation of -0.65 between the two.
Looking at Bitcoin’s 30-day volatility levels over the past three years, a consistent downward trend becomes evident. Conversely, when analyzing the volatility of long-term bonds, it’s apparent that there was a period of relatively stable and low volatility until the beginning of the rate hikes in 2022. Subsequently, a short period of calm came until the summer of 2023, when long-term bonds volatility surged once more, initially surpassing Bitcoin’s volatility by the end of July and then crossing it again in early October, reaching an almost 24% 30-day volatility level.
In 2023, there has been a noticeable increase in demand for Bitcoin as the vulnerabilities of the traditional financial system have become more evident. In March, when Silicon Valley Bank faced a collapse and the Federal Reserve intervened with the BTFP program, Bitcoin’s price surged by more than 20%. With long-term treasuries reaching their lowest value since 2007, Bitcoin is maintaining its stability, reversing its once-strong correlation with bond prices. While it might be premature to declare the start of a bull market, it’s evident that the overall sentiment in the broader market has shifted concerning Bitcoin.
There are several potential reasons behind Bitcoin’s ability to maintain its strong price position. One of the most widely discussed theories is that Bitcoin’s steady price performance is, in part, a result of its passionate supporters remaining firm believers. “Hodlers,” individuals who hold onto BTC for over a year, have been accumulating Bitcoin during the recent bear market, just as they have in previous downturns. The cumulative balance held by hodlers continues to hover around historic highs, standing at 13.45 million Bitcoin, which accounts for approximately 69% of the circulating supply. Historically, these long-term investors have played a crucial role in supporting prices during bear markets and capitalizing on gains as new all-time highs are achieved in bull markets.
Moreover, the potential approval of a Bitcoin ETF remains a promising catalyst on the horizon, causing holders to exercise caution and refrain from selling prematurely. There was even a momentary surge in price this week when CoinTelegraph mistakenly reported its approval, underscoring the heightened anticipation surrounding this development.
Just like with any potential crisis, it’s challenging to predict when or if they will occur. The recent bond market decline is revealing vulnerabilities in the traditional banking system, although the full extent of these weaknesses remains uncertain. Simultaneously, it seems that the market has reevaluated the correlation between bond prices and Bitcoin, recognizing greater value in the cryptocurrency asset even as bond yields rise. In the end, this development appears to be reinforcing Bitcoin’s value proposition in an uncertain economic climate.
