Could softer liquidity conditions finally pump Bitcoin?
- The US unemployment rate jumped to 3.8% last month, from 3.5% previously
- Cooling economic data has strengthened the market’s resolve that interest rate hikes could soon cease
- Implications for a pivot in policy are key for the crypto markets
Bitcoin has had a torrid time ever since the economy transitioned to a tight monetary environment for the first time since the Genesis block was mined, all the way back in January 2009.
Throughout 2022, the tightening of liquidity conditions dragged Bitcoin down (also helped by some rather shocking events within the crypto ecosystem). From trading as high as $68,000 in Q4 of 2021, it tumbled as low as $15,500 before bouncing back somewhat thus far in 2023.
This makes sense, given Bitcoin resides so far out on the risk spectrum. The question of whether Bitcoin can one day operate as an uncorrelated asset, or some sort of digital gold, is an intriguing one. It is evident, however, that this has not yet happened.
Partially propelled upwards by the rampant money printing and easing of global liquidity since the financial crisis in 2008 (which just so happens to coincide with Bitcoin’s launch, a fact which did not go over the head of Satoshi Nakamoto when he/she mined the Genesis block), Bitcoin went parabolic during COVID when central banks really took things to the next level.
But the music had to stop. And when inflation began to spiral, those same central banks were forced to reverse course, embarking on one of the most rapid tightening cycles in recent memory. Up went interest rates, dispelling the complacent notion that the new era of zero-rates was here to stay. And they kept going up – today, T-bills are paying north of 5%.
The chart below demonstrates the steep incline of the key Fed funds rate:
With economic data remarkably consistent, the Fed was forced to stay the course, rates rising ever higher and higher. Despite some wobbles along the way (the regional bank crisis led by the collapse of Silicon Valley Bank is the clearest example), the economy continued to hum along just fine.
While this seems like good news (and it is!), it has led to a sort of good news is bad news paradox. To rein inflation in, the economy must slow down. But if the economy does not slow down, inflation remains high and hence rate projections also stay elevated. This is why we have often seen a scenario where markets fall on good news.
Is the economy slowing down?
However, this could all be about to change. Finally, it seems as if the economy could – finally – be losing some momentum. The most recent Labor Department report shows the unemployment rate jumped to 3.8% last month, from 3.5% previously.
On the one hand, this shows quite how unusual a situation we are in. Sentiment feels negative, rates have been hiked to oblivion, and yet unemployment is near half-century lows. At least it was, until this report.
The 30 bps jump is not dramatic, but it could be significant and a demonstration to the Fed that it may be able to (finally) take its foot off the gas. Average hourly earnings also rose 4.3%, down slightly from 4.4% in July. And while employers added 187,000 workers to their payrolls in August, which was a greater number than July, revisions in prior months have shown job growth to be not as strong as first reported.
All in all, this is far from a seismic fallout, but it does at least point towards some progression. Looking at markets, traders felt the same way. Projections around the future path of interest rates immediately became more dovish. The next chart backs out probabilities implied by Fed futures, comparing the projections for the next Fed meeting on 20th September with those same projections a week ago, before the jobs report.
The chances of a hike at the meeting dropped from 20% to 6%, with the market now expecting no hike with a 94% probability.
Combined with inflation already coming down significantly in the last twelve months, the macro conditions are undoubtedly far better than they were at this time last year when inflation was not far off double digits.
Again, the shift is far from dramatic, and the data overall remains strong. 3.8% unemployment is still a stellar number, while wage growth has slowed but is still hotter than what the Fed desires.
But finally, with rates north of 5%, it appears that the end of the tunnel may be approaching. For Bitcoin, which trades like a high-risk asset, this paints optimism. Of course, the flip side of this is that Bitcoin is already up 55% on the year. Investors must decide to what extent a pivot off tight conditions is already priced in.
In that respect, the latest report spells out a notable warning. Despite the “optimistic” news that the hiking of interest rates could draw to a close, Bitcoin barely moved as the numbers hit the market. Figuring out this dilemma will be key for Bitcoin traders, but at least the long-term picture feels clearer after eighteen months of brutal liquidity tightening.