After a rise of 120%, will there be a new momentum? Three charts explain the logic behind the Bitcoin bull market.

Is a New Momentum on the Horizon? Analyzing the Logic Behind the 120% Rise in Bitcoin through Three Charts

Author: Omkar Godbole, CoinDesk

Translation: Felix, LianGuaiNews

Since the beginning of this year, the price of Bitcoin has risen by 120%, and most analysts predict that it will continue to rise in the short term. They point out that the U.S. Securities and Exchange Commission (SEC) is expected to soon approve one or more Bitcoin spot ETFs, while the Bitcoin halving event scheduled for April next year approaches.

The changing market environment also supports the bullish view on Bitcoin. The following three charts demonstrate how the macroeconomic factors that caused the price crash last year have undergone positive transformations.

• How do lawyers view the $4.3 billion settlement case of Binance?
• MT Capital Research Report New Narrative of Asset Issuance, A Comprehensive Scan of the Inscription Track
• Ronin million-character research report Before Axie Infinity, after Pixels, why does this game sidechain always produce popular works?

Is the global tightening cycle turning? Could it bring more funding to the crypto market?

The global tightening cycle that impacted financial assets, including cryptocurrencies, reached its peak last year (BIS, TS Lombard)

TS Lombard, a macroeconomic forecasting and advisory firm, presents a chart that compares the preference for tightening or easing monetary policies of central banks around the world since 1947. Positive values indicate a preference for tightening monetary policy, while negative values indicate a preference for easing monetary policy.

Under easing policies, central banks increase market liquidity by lowering interest rates and implementing other measures, releasing more funds into the financial system, such as the 18 months following the outbreak of the COVID-19 virus in March 2020. Tightening monetary policy, on the other hand, involves absorbing market liquidity through interest rate hikes and other tools to suppress inflation.

Recently, this trend has declined, indicating that the global tightening cycle in financial markets, including cryptocurrencies, has peaked. Now, the market is leaning towards looser liquidity.

As global inflation rates slow down, central banks have more room to ease their monetary policy, which could result in more funds flowing into the crypto market. It is well known that Bitcoin is highly sensitive to changes in global liquidity conditions, and its price tends to rise when market liquidity increases.

The U.S. financial situation has eased somewhat

According to the chart below, the U.S. Financial Conditions Index (FCI) of Wall Street giant Goldman Sachs, which has been in use since January, has fallen from its year-high of 100.74 a few weeks ago to just below 100, offsetting the impact of all the tightening policies implemented in September and October.

The variables included in the FCI are short-term interest rates, long-term interest rates, trade-weighted exchange rates, credit spreads, and the stock price-to-earnings ratio compared to the 10-year average. For every 1% decrease (increase) in the index, there is a corresponding positive (negative) change of 1% in GDP over the subsequent three to four quarters.

The decline of this index contradicts the long-term interest rate increase stance of the Federal Reserve, suggesting that the future of the U.S. economy will show resilience, which is a positive signal for risk assets, including cryptocurrency. Most of Bitcoin’s gains this year have occurred during U.S. trading hours.

The FCI has dropped to slightly below 100, reversing the entire tightening policy since September and October (Goldman Sachs).

According to analysts at the Federal Reserve, financial conditions are a combination of asset prices and interest rates, which will vary depending on the economic health and monetary policy, and may also affect the economy itself.

10-year Treasury yield in a downward trend, positive signal for risk assets

The decline in the yield of the 10-year Treasury bonds (known as risk-free rate) in the United States is another positive signal for the rise of Bitcoin. Since the US Treasury Department announced a slowdown in bond purchases earlier this month, the yield on the 10-year Treasury bonds has dropped by 50 basis points to 4.43%. Typically, such declines often prompt investors to turn to other assets such as stocks and cryptocurrencies in search of higher returns.

At the same time, the appearance of a bearish head and shoulders pattern on the daily chart of the 10-year Treasury bonds suggests that the yield may further decline.

In a report to clients this week, the research team at EFG Bank stated, “The 10-year Treasury yield touched a higher low (as expected) and broke through the head and shoulders pattern. The yield target of this pattern is around 3.93%, but the current level (uptrend) and 4.33% (breakout point) are also potential support levels.”

U.S. 10-year Treasury yield daily chart (TradingView/CoinDesk)

Potential Risks

However, the reversal of the financial condition tightening implied by the Goldman Sachs FCI index may bring a stronger tone to the Fed’s rhetoric, forcing the market to reconsider the possibility of further interest rate hikes in the coming months. This could slow down the rebound of Bitcoin.

In addition, bulls should also pay attention to Japan’s exit from ultra-loose monetary policy, geopolitical issues, concerns about U.S. commercial real estate, and potential inflationary pressures, which are the sources of volatility in risk asset prices.

Related reading: Nansen Founder: 11 Catalysts for Bull Market and 6 Bullish Trends

We will continue to update Blocking; if you have any questions or suggestions, please contact us!