How Do Dollar Tides and Halving Affect Bitcoin?

Source: Jishi Communication

Abstract

In the early days, the cryptocurrency market was accustomed to Bitcoin bulls and bears strictly following the halving cycle every four years, but as Bitcoin continued to merge with the US dollar market, the impact of US dollar liquidity has become an issue that cannot be ignored. In the long term, we look at US dollar liquidity, and in the short term, we cannot ignore the impact of AI on the capital side. The market has been under multiple changes recently: 1) US interest rate cuts will come and go; 2) The impact of Trump's increased probability of being elected on the sentiment side; 3) The six-month consolidation period after the halving; 4) The liquidity released by the correction of the US stock technology sector. This article uses BTC as a global all-weather trading risk asset to discuss its fluctuations before and after the interest rate cut inflection point and before and after the halving.

For the first three halvings, it seems that the halving cycle and the bull and bear cycle are perfectly matched mechanically.Perhaps because of this experience, the halving has become the time point that the industry pays the most attention to. However, the fourth halving has broken this rule to some extent. Although the fourth halving is relatively close at present (July 10, 2024), the price of Bitcoin has hit a new high before this halving due to ETFs and other factors. This is the most obvious difference from the time points of the previous three halvings.

In terms of macro factors, US dollar liquidity has gradually become the main long-term factor affecting Bitcoin prices.Since the birth of Bitcoin in 2009, the relationship between the early Bitcoin bull-bear conversion and the actual yield of US bonds is not significant, and even seems unrelated.Since 2015,the (negative correlation) law between the two has taken shape.Since 2018,the negative correlation between the two has begun to strengthen.Since the beginning of 2020,it can be roughly seen that the relationship between the two has gradually emerged, that is, in a low-interest rate and loose environment, Bitcoin's market performance is better. This is also consistent with the significant positive correlation between Bitcoin and Nasdaq since 2020. In addition, the following features can be seen:In the early stage of the turning point of interest rate decline, Bitcoin is often in a stage of shock adjustment, andBitcoin's main rising market often appears in the stage when interest rates are at a lower threshold. The turning point of interest rates upward can easily bring about a turning point from bull to bear in the price of the currency.

Bitcoin spot ETF has created a local "disturbance" for the market from the perspective of funds.In October 2023, the market began to hype the expectation of the approval of Bitcoin spot ETF and the continued inflow of funds after its approval in January 2024. Bitcoin started a wave of rising main rising market. This happened in the context of the US dollar interest rate hike, when the actual yield of US bonds rose, and the two showed a positive correlation. Therefore, we can believe that the huge amount of funds brought by ETFs has "broken" the simple rules of the past, which is equivalent to creating a "disturbance" locally. In the near term, when the ETF is stable at a scale of 50 billion US dollars and the actual yield of US Treasury bonds is in a high-level oscillating operation stage, the currency price has entered the adjustment stage.

Referring to the previous experience, we speculate that the turning point of the next interest rate cut may still be in a oscillating stage, and the next major rise in Bitcoin should occur in the middle and late stages of the interest rate cut cycle - that is, the interest rate is running at a relatively stable low stage.

In the short term, market trading CPI expectations are also an interesting phenomenon. We observe the relationship between the US CPI data and the performance of Bitcoin prices every month since 2018. If the expected CPI value minus the published data value (which we call the inflation cooling value) is positive, it means that there are signs of inflation cooling, which is a positive signal for interest rate cuts (enhancing market liquidity). Therefore, examining the relationship between the price fluctuations of Bitcoin on the same day (or even at that time) and the inflation cooling value can reflect market trading expectations. From the data in the figure below, we can see that when the published CPI data shows that the inflation cooling value is positive, Bitcoin often rises and closes on the same day (time), especially after 2020. This phenomenon can be called trading CPI expectations. This short-term trading strategy has certain effectiveness. Even in 2022, the year of interest rate hikes, Bitcoin has gone bearish from highs, but in several cases of positive inflation cooling values, Bitcoin often rises on the same day.

Risk Warning: Blockchain technology research and development is not as expected; regulatory policy uncertainty; Web3.0 business model implementation is not as expected.

1. Core Views

In the early cryptocurrency market, the bull and bear markets of Bitcoin strictly followed the halving cycle every four years, but as Bitcoin continued to merge with the US dollar market, the impact of US dollar liquidity became an issue that could not be ignored.

 In December 2017, Bitcoin landed in the US futures market, Tesla purchased Bitcoin in 2021, and the US SEC approved the Bitcoin spot ETF in January 2024. Against this background, after Bitcoin entered the US capital market, it was increasingly affected by US dollar liquidity. From the early market to today, the main factors affecting Bitcoin prices have been constantly changing.

We use the actual yield of US Treasury bonds as an observation indicator of market liquidity, and combine the impact of US CPI data on market expectations to analyze the relationship between Bitcoin and these two variables.

2. How does halving "mechanically" shape the bull-bear cycle of Bitcoin?

2.1 Is each "halving" the starting point of a bull market?

We know that the output law of Bitcoin is that the output is halved every 4 years. It has experienced 4 halvings since 2009, and the fourth halving was completed on April 20, 2024 - this is a mechanical action written into the Bitcoin code. From 2009 to 2021, Bitcoin has experienced three rounds of bull-bear conversions, each of which was hyped by a round of industry innovation applications (the emergence of Bitcoin competitors, the initial exploration of industry applications driven by Ethereum smart contracts, and the innovations brought by innovative applications such as DeFi/Metaverse); but an interesting coincidence is that the 4-year halving cycle (not considering the fourth halving just experienced) is also the starting point for Bitcoin to turn from the bottom of the bear market to the upward trend - that is, the first three halving times just correspond to the starting points of the three bull-bear cycles. In fact, the industry often regards the "halving time point" as the "experience benefit" of the bull market launch.

It should be noted that, judging from the time points of the first three halvings, the price is at an obvious bottom position relative to the previous wave of tops, and the subsequent new round of top retracement seems to be regarded as the starting point of this round of market.

As for the first three halvings, it seems that the halving cycle and the bull-bear cycle mechanically fit perfectly. Perhaps because of this experience, halving has become the time point that the industry pays the most attention to. However, the fourth halving has broken this rule to some extent. Although it is relatively close to the fourth halving time (July 10, 2024), the price of Bitcoin has hit a new high before this halving, which is the most obvious difference from the time points of the first three halvings.

2.2 The US dollar market "competes" for Bitcoin pricing power

In December 2017, Bitcoin landed in the US futures market, Tesla purchased Bitcoin in 2021, and the US SEC approved the Bitcoin spot ETF in January 2024. Against this background, after Bitcoin entered the US capital market, it was more reflected in the attributes of technological innovation and high risk, so it showed an increasingly high positive correlation with the Nasdaq.

Back to the micro level, comparing the trend charts of Bitcoin and Nasdaq, from 2018 to 2021, both showed fluctuations, and in mid-to-late November 2021, both reached a historical high. In the subsequent adjustments, both reached an adjustment low between October and November 2022, and the subsequent trends have reached historical highs. The two show an increasingly high positive correlation.

An interesting point of view and assumption: There are currently 7 of the most important weighted stocks in the Nasdaq (Microsoft, Apple, Alphabet, Nvidia, Amazon, META and Tesla, etc.), and Bitcoin is more like the 8th important weight of the Nasdaq. This view has no strict logical basis, but Bitcoin's technological innovation and high-risk attributes have many similarities with these seven companies, not to mention that the correlation of price trends in fact confirms this point. In addition, with the listing of Bitcoin ETF, Bitcoin, an alternative asset, is directly connected to the US stock market, which has also strengthened the US stock market's pricing ability to a certain extent.

Especially the Bitcoin spot ETF, since the spot ETF was approved by the SEC on January 11, 2024, its scale has rapidly expanded to US$50 billion in 6 months (July 10, 2024), which is an astonishing growth rate. The continuous large amount of funds rushing to buy spot in the market may be an important reason why Bitcoin hit a record high before the fourth halving.

As the influence of US market funds on Bitcoin becomes greater and greater, how will the mechanical law of the 4-year bear market cycle of halving be impacted?

This is a complex issue. Over the past period of time, the blockchain industry has paid more and more attention to the US macro data and the Fed's interest rate decision-from another perspective, the US dollar tide has begun to "spread" the expectations of the cryptocurrency market. Therefore, we will observe the price performance of Bitcoin from factors such as the US dollar tide, US macro data and the Fed's interest rate decision, and try to explore the laws and logic therein.

3. How Bitcoin is affected: US dollar liquidity, macro data

3.1. Low interest rates are prone to bull markets, and ETFs have created a "disturbance"

In terms of macro factors, US dollar liquidity has gradually become the main long-term factor affecting Bitcoin prices.In terms of macro factors, we use the actual yield of US Treasury bonds as an observation indicator of market liquidity.Since the birth of Bitcoin in 2009, the relationship between the early Bitcoin bull-bear conversion and the actual yield of US Treasury bonds is not significant, and even seems unrelated.Since 2015, the (negative) correlation between the two has taken shape,Since 2018,the (negative) correlation between the two has begun to strengthen,Since the beginning of 2020,it can be roughly seen that the relationship between the two has gradually emerged, that is, in a low-interest rate and loose environment, Bitcoin's market performance is better. This is also consistent with the significant positive correlation between Bitcoin and the Nasdaq since 2020.

Another feature that can be seen is that at the turning point of interest rate decline, Bitcoin is often in a volatile adjustment stage, and the main rise of Bitcoin often occurs in the stage where interest rates are at a low level (recently due to the approval of Bitcoin ETFs for listing, there has been some disturbance, which we will analyze later). The turning point of interest rates upward can easily bring about a turning point from bull to bear.

From the details, at the main rising node of the first bull market in 2013, the actual yield of US bonds also rose. At this time, the cryptocurrency market was still in a "chaotic" and immature stage, and it was difficult to clearly explain the capital composition. The relationship between Bitcoin prices and the macro economy was even more difficult to analyze clearly - this stage can be called the "grassroots stage" of the cryptocurrency market. The main rising market from 2016 to 2018 was caused by the industry entering the second halving and the birth of the Ethereum project. Its smart contract capability brought a new means of rapid financing for the industry, namely ICO (Initial Coin Offering), followed by a continuous inflow of external funds. We believe that from this stage on, some of the inflows may come from the traditional capital market, so the macro environment and liquidity began to have an impact on the price of Bitcoin. As can be seen from the figure below, the main rising market in 2017 was accompanied by the periodic low and volatile interest rates. The subsequent interest rate rises and the market peaks and turns to bearish (in the purple box). That is, when the interest rate stabilizes at a certain low level, it is conducive to the bull market. This may be understood as the ample liquidity at the low interest rate stage, and the liquidity spills over to the cryptocurrency market, pushing the price of Bitcoin to the main rising stage.

From the trend since 2018, the trend of the real yield of US Treasury bonds and the trend of Bitcoin have shown a certain negative correlation. Especially at the end of 2021, Bitcoin fell from its high point and the market went bearish. At this time, the US dollar started the interest rate hike cycle. The real yield of US Treasury bonds began to turn upward, which also brought the turning point of the currency price peaking and going bearish.

But as shown in the purple circle in the figure below, in October 2023, the market began to hype the expectation of the approval of the Bitcoin spot ETF and the continued inflow of funds after the approval in January 2024. Bitcoin started a wave of rising market. This happened under the background of the US dollar interest rate hike, and the real yield of US Treasury bonds rose. The two showed a positive correlation. Therefore, we can believe that the huge amount of funds brought by ETFs "broke" the previous simple rules, which is equivalent to creating a "disturbance" locally. In the near term, with ETFs stabilizing at a scale of $50 billion and the actual yield of U.S. Treasury bonds in a high-level oscillating operation stage, the price of the currency has entered a stage of adjustment.

It can be seen from this that, in the macro sense, we can use the analysis method of comparing market interest rates and Bitcoin price trends. Bitcoin is affected by the macro environment in a long period of time, and its own capital logic is also an important short-term factor.The expectation of Bitcoin spot ETFs that began to be hotly speculated in the market in October 2023 and the continuous inflow of funds after the ETF was approved for listing in January 2024 have caused Bitcoin to start a rapid and sharp rise during this period. After Bitcoin hit a record high on March 14 this year, it began to enter a stage of oscillating adjustment. During the interest rate hike cycle, when the expectation of interest rate cuts was not very clear, the constraints of macro liquidity became the main external market force.

Based on the previous experience, we speculate that at the turning point of the next interest rate cut, the price of Bitcoin may still be in a volatile stage, and the next major rise in Bitcoin should occur in the middle and late stages of the interest rate cut cycle—that is, the interest rate is running at a relatively stable low stage.

Next, we try to observe the impact of short-term market expectations (with CPI data as the entry point) on Bitcoin prices from the perspective of market trading expectations.

3.2 Market Trading Expectations: CPI Data Release and Bitcoin Price Performance

Since Bitcoin landed on the Chicago Mercantile Exchange (CME) futures market in December 2017, Bitcoin has gradually merged with the US dollar market. The relationship between Bitcoin price performance and the US dollar market is intricate. Observing the historical trend of Bitcoin, Bitcoin's short-term price performance is often very sensitive to US macro data and policies, especially the time point of CPI data release and the Federal Reserve's interest rate decision, Bitcoin often has a more obvious performance. For example, on May 15, 2024, the United States released the April CPI data (released at 8:30 local time, time zone UTC-4) showing that inflation has cooled down. Almost at the same moment, the price of Bitcoin rose rapidly, with a daily increase of more than 7%. It can be simply understood that the cooling of inflation is a marginal positive signal in the cycle of US interest rate hikes, indicating that the probability of liquidity turning to easing has increased, so the market is trading this expectation.

We observe the relationship between the US CPI data and the performance of Bitcoin prices every month since 2018. If the expected CPI value minus the published data value (which we call the inflation cooling value) is positive, it means that inflation has signs of cooling down, which is a positive signal for interest rate cuts (enhancing market liquidity). Therefore, examining the relationship between the price fluctuations of Bitcoin on the same day (or even at that time) and the inflation cooling value can reflect market trading expectations. From the data in the figure below, we can see that when the published CPI data reflects a positive inflation cooling value, Bitcoin often rises and closes on the same day (time), especially after 2020.

This phenomenon can be called trading CPI expectations. This short-term trading strategy has a certain effectiveness. Even in 2022, the year of interest rate hikes, Bitcoin has gone from a high position to a bearish trend. However, in several cases where the inflation cooling value is positive, Bitcoin often rises on the same day.

As an alternative asset traded around the clock globally, the scale of spot and derivative transactions of BTC is expanding day by day, making it an excellent window for observing global macro fluctuations. In the latter stage, the actual progress of interest rate cuts, Trump's attitude towards BTC, and global geopolitical changes will all become factors affecting BTC price fluctuations.

Risk Warning

Blockchain technology research and development is not as expected: The blockchain-related technologies and projects underlying Bitcoin are in the early stages of development, and there is a risk that technology research and development will not meet expectations.

Uncertainty of regulatory policies: The actual operation of blockchain and Web3.0 projects involves a number of financial, network and other regulatory policies. At present, the regulatory policies of various countries are still in the research and exploration stage, and there is no mature regulatory model, so the industry faces the risk of regulatory policy uncertainty.

Web3.0 business model implementation is not as expected: Web3.0-related infrastructure and projects are in the early stages of development, and there is a risk that the business model implementation will not meet expectations.

This article is excerpted from the report "Blockchain: How does the dollar tide and halving affect Bitcoin?" released on July 23, 2024. For details, please see the relevant report.