Key Highlights
- Central banks tightening liquidity may lead to a long-term correction in Bitcoin and other digital assets. Global banks have been removing liquidity from the market due to inflation concerns and quantitative tightening (QT) measures.
- The correlation between cryptocurrency performance and liquidity levels of central banks has been highlighted by Bloomberg Intelligence and other market experts, indicating that declining liquidity and risks in the banking sector could reduce the appetite for risky assets like Bitcoin.
- Despite recent market volatility, institutions like MicroStrategy continue to show confidence in Bitcoin by acquiring additional holdings, indicating that dip-buying demand may remain high. However, underlying storylines such as demand for safe-haven assets and performance in a low-interest rate environment may continue to impact Bitcoin’s performance going forward.
Bitcoin and other digital assets may still likely experience a long-term correction because of central banks’ tightening of liquidity.
In its most recent study, Bloomberg Intelligence took a cautious approach to the current crypto market rise in 2023.
Despite increasing by 70% in the first quarter, nobody is certain that Bitcoin will continue to rise or even hold its current level of around $30K
Examining the macroeconomic environment, Bloomberg Intelligence is the most recent source to point out the strong correlation between cryptocurrency performance and the liquidity levels of the world’s central banks.
Global Banks have been removing liquidity from the market as inflation increases, which has led to a decline in risk assets including digital assets. Quantitative tightening (QT) by the US Federal Reserve, which started in late 2021, occurred at the same time as Bitcoin’s current record high.
Despite the recent banking crisis, market experts remarked that the squeeze on liquidity is still there due to the declining M2 money supply and bank deposits.
According to an analysis posted on Twitter by senior macro strategist at Bloomberg Intelligence Mike McGlone, “Bank deposits indicate headwinds for cryptos.” Risk assets normally rise and fall on the strength of liquidity and the declining US money supply.
The chief executive of JPMorgan Chase also warned that there is a greater chance of a recession in the US because of a succession of bank failures that have sparked worries about the country’s general soundness of the banking sector, which will likely reduce the appetite for risky assets like Bitcoin and crypto assets.
Consequently, Jamie Dimon, who oversees the largest lender in the US, said that while the financial system of the world’s largest economy is still strong and stable, the possibility of a protracted economic downturn cannot be ruled out in the wake of unfavorable developments in the crucial industry.
Yes, Mr. Dimon said, “There are more chances of a recession, but I don’t see it as inevitable – it’s simply another weight on the scale.”
The largest economy in the world is also facing “storm clouds,” according to Mr. Dimon, who lists quantitative tightening (QT), persistently high inflation, and the ongoing conflict between Russia and Ukraine as the key drivers of disruption.
However, American business intelligence company MicroStrategy, recently revealed its newest acquisition of an additional 1,045 Bitcoin for about $29.3 million at an average price of $28,016 per BTC, which is tapping on its present fair value thus showing institutions still see value in the evolving asset. Michael Saylor, MicroStrategy’s executive chairman, tweeted this information on April 5.
Dip-buying Demand Will likely Remain High
As a result, the likelihood of a brief pullback seems to have increased. Bulls of Bitcoin, however, shouldn’t worry too much.
This is due to the fact that the underlying storylines that sparked the stunning rebound from the lows of under $20,000 in mid-March are likely to continue to act as headwinds going forward.
Readers may remember that earlier this month, three US banks failed, raising worries about a wider global banking crisis and prompting traders to aggressively reduce their bets on further tightening from the US Federal Reserve.
Crypto investors are now expecting that a cutting cycle will start in the second half of the year after the Fed provided a dovish pivot in its rate guidance at its meeting this week (while still raising interest rates by another 25 bps).
A double tailwind for Bitcoin comes from the demand for safe-haven assets (as an alternative to fiat money) and assets that perform well in a low-interest rate environment. Typically, Bitcoin has this (which it typically has). These tailwinds should remain strong because bank contagion risks are still high, and the US economic forecast has become significantly less optimistic.