BM Pro Daily - Bitcoin Falls As Rates Rise

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Rising Yields Impact Bitcoin Price

Our analysis throughout much of 2022 in regards to the bitcoin price action has held steady. Capital markets are in the midst of a deleveraging period due to elevated inflation readings hitting multi-decade highs, in an environment of historically low bond yields. 

While on the surface, high yields may seem to be bullish for stocks and bitcoin, the reality is that the credit market is the dominant driver. Higher inflation and increasingly hawkish central bank monetary policy has led to a historic rout in the bond market.

When fixed-income instruments sell off, it leads to higher financing costs. Rising yields lead to higher discount rates, which lower the valuations of assets like real estate and equities, which further compounds the market selloff.

We have covered this dynamic extensively as of late. 

Dylan LeClair 🟠 @DylanLeClair_

- Rising yields - Spiking volatility - Nasdaq puking - $BTC following in tandem 2022 summarized.

The reason why we have been so focused on the macroeconomic environment in our bitcoin-specific analyses as of late is because the dominant driver in the bitcoin market currently is the liquidity tide, and less bitcoin’s native market conditions.

Said simply: 

Dylan LeClair 🟠 @DylanLeClair_

The $BTC price action right now is about the denominator not the numerator. A lot of people seem to be confused by this.

This is why bitcoin is trading very close in tandem with equity markets, in particular the Nasdaq 100 Index, as the assets have a 0.85 correlation over the past four weeks of trading. 

Dylan LeClair 🟠 @DylanLeClair_

I know people in bitcoin rarely seem to care, but credit markets have been getting murdered recently and the charts are completely rolling over. Not a sign of a healthy economy. Liquidity troubles quickly turn into solvency problems. $LQD $JNK

Junk bonds made new lows during today’s trading, as yields continue to rise in the face of increasing inflationary pressures. 

Dylan LeClair 🟠 @DylanLeClair_

"You're a bitcoin analyst why are you tweeting about bonds?" If you want to understand why bitcoin is trading like it is, watch equity markets. If you want to understand why equity markets are trading like they are, watch the bond market.

Due to these market dynamics, bitcoin has been trading nearly in a 1:1 fashion with the inverse of the VIX (S&P 500 volatility index) throughout 2022. This is a historical look at BTC and VIX over previous years: 

Our thesis is simple. Bitcoin is a global monetary asset with a known fixed supply. The U.S. dollar is a debt-based fiat currency with a malleable supply, and during periods of credit contraction those dollars increase in value against risk assets despite the long-term assurance of increased supply and devaluation. 

For these reasons, and due to the reality that the global economy cannot function with this much debt with elevated yields for long, we believe bitcoin is the best asset to own. The credit system is in the midst of an unwind, but when — not if — the Federal Reserve intervenes, it is a fantastic bet that bitcoin will outperform everything else. 

In the meantime, the supply continues to be constrained as HODLers of last resort continue to reduce supply available on the market.