Bitcoin Unaffected by Macro, is Driven by Idiosyncratic Variables But Still Facing A Major Headwind
Crypto assets are in the red this week.
Bitcoin price keeps down around $31,500, and in tandem, Ether has fallen under $1,900. Altcoins are getting hammered except for selective ones like Axie Infinity, with the total market cap now at $1.35 trillion, down 48.5% from the mid-May peak. ETH -6.12% Ethereum / USD ETHUSD $ 3,959.57
-$242.33-6.12% Volume 26.69 b Change -$242.33 Open $3,959.57 Circulating 118.1 m Market Cap 467.63 b 4 h Robinhood’s Crypto Revenue Drops 78% in Q3 Due to Floundering DOGE, But New Coins like SHIB Not Coming until Regulatory Clarity 7 h Cryptocurrency Market Dips, Bitcoin’s Correlation with Commodities Climbs 1 d The Korea Teachers’ Credit Union with Over $40 Billion in Assets Is Investing in A Bitcoin ETF AXS -8.17% Axie Infinity / USD AXSUSD $ 121.56
-$9.93-8.17% Volume 642.01 m Change -$9.93 Open $121.56 Circulating 60.91 m Market Cap 7.4 b 2 w Institutions Are Back to Pouring Money into Bitcoin as a “Perfect Storm” Brews for the King 2 w Bullish Week: Overwhelming Bitcoin Buying Sends OI to May Level While Net Dollar Longs Are Surging 3 w Shift to Risk-on: Bitcoin Is Up 12% Already in Uptober Amidst Stock Market Weakness
Meanwhile, the stock market is keeping around its all-time highs hit just this week. The US dollar shows strength around 92.55, with gold recording some gains at $1,825.
The latest price action in the stock market is after Federal Reserve Chairman Jerome Powell’s comments on inflation to remain high for some time and assuring that tapering is not coming just yet.
While Bitcoin sometimes responds to macro events like the last FOMC meeting and the latest CPI data, which showed the highest inflation in 13-years, it does so on rare occasions.
The leading cryptocurrency remains an uncorrelated asset, for the most part. For Bitcoin, the dominant factor contributing to risk measures, basically the percentage of volatility due to factor exposure, is “residual.”
This means the cryptocurrency is mainly driven by bitcoin-specific (i.e., idiosyncratic) variables. And for Bitcoin, these idiosyncratic drivers have been money flows lately.
“Equities, rates, inflation, gold, the dollar, these all matter as everything is interconnected, yet most of the time are of secondary importance when it comes to BTC,” said trader and economist Alex Kruger. “Don't need to have an explanation for every time the price goes up or down.”
This week, the data showed that the price of food, energy, travel and primarily used cars increased dramatically, the most since 2008, which makes sense given that the costs of these things also fell sharply when the lockdowns were implemented last year.
A significant increase in the prices of everyday items makes crypto assets more attractive as in the past year, compared to other investments, crypto has provided much higher returns and more money to spend.
We have noticed that Unexpected inflation has typically led Bitcoin prices by 12 months.
— James Butterfill (@jbutterfill) July 15, 2021
“When it comes down to inflation, most of it is, in fact, transitory,” Kruger noted.
“Inflation is a rate of change. Prices are supposed to increase in aggregate. Price increases are indeed not transitory. High inflation likely is” because central banks' reserves creation is slowing down, supply-side bottlenecks are temporary, the population is aging, household savings will mean revert leading to fewer dollars to spend, and employers will hire less than before due to limited wage pressures, he added.
Household savings will continue trending lower until it mean reverts to pre-covid levels. This trend is a major headwind for crypto. pic.twitter.com/L2ealJJe8j
— Alex Krüger (@krugermacro) July 14, 2021
In a fireside chat, American economist Ben Bernanke said that the central bank wants to see some modest inflation. The Fed's target inflation rate is 2%.
According to him, the Fed will be successful in getting it in low 2% for a time before getting it down to 2.0% while noting that in the 1990s, inflation averaged 3% over that whole decade.
Persistent 3% inflation, however, would produce anxiety this time as it would question credibility, given the 2% target, according to him.
Bernanke, who served two terms as the Federal Reserve Chairman from 2006 to 2014, believes the tapering of the current $120 billion per month bonds buying will be a year-long process, $10 billion per meeting was how it was down in 2013. An increase in its rate won’t happen until the end of tapering, which pushes into 2023.