- Markets and gold are experiencing record highs after interest rate cuts from the FED
- Interest rates are being cut by China, and everything is going in huge additional liquidity
- This should greatly boost an already historically favorable Q4 for Bitcoin
- However, Bitcoin’s growth momentum is not as steaming as it should be for several reasons
The US FED decided to cut interest rates by 50 basis points, which came as a surprise to many investors.
After this, we immediately saw gold reach new and all-time highs, as investors took this rate cut as a sign of future inflation and dollar depreciation.
The S&P 500 indexes also hit new all-time highs after the US FED decision, interestingly Bitcoin hasn’t reached it.
Similarly, China followed suit, promising even more liquidity for the market, with many expecting a historically favorable Q4 for Bitcoin.
There are several reasons why this dynamic may not be as fast, ranging from the potential influence of institutional investors to the time needed for liquidity to reach the market and retail investors too.
Bitcoin’s Dynamics and Correlation with the Rest of the Market
It has been steadily declining since March 2024 and is about 15% below its previous and historical high.
This is a bit odd since usually when the S&P 500 index, and especially when gold does, Bitcoin also shows a rise. This was partly true, but in the context of lower rates, the correlation was not as strong as some expected.
We are seeing the S&P 500 rise, while Bitcoin is declining and this is not the first time we have seen this kind of divergence between the market and Bitcoin. We have seen this many times over the last five years and sometimes Bitcoin catches up to the S&P 500 and sometimes the S&P 500 declines approaching Bitcoin price levels.
This is why Bitcoin’s important dynamics need to be looked at beyond Q4, and to do that we need to look at one of the most important factors influencing the financial markets.
The US Dollar Index which shows the strength of the US Dollar against other major world currencies, has a big impact on the financial markets, and here’s what the US Dollar Index looks like lately.
Notice all the times it has declined significantly look at what has happened with bitcoin. In all of these cases, it has shown a sharp rise in price during and after these declines in the dollar index, and this is no accident.
A weak US dollar directly increases external demand for bitcoin, let’s say bitcoin is worth $60K on all major cryptocurrency exchanges, but suddenly the US dollar weakens by 5% against the Indian rupee.
This means that the same $60K bitcoin on the cryptocurrency exchanges becomes 5% cheaper for Indian investors, and this could lead to a significant number of Indian investors investing in Bitcoin which could potentially cause the price to skyrocket.
When the US dollar index falls this is not just against the Indian rupee but against all major currencies in the world and so when the US dollar weakens bitcoin becomes cheaper for the rest of the world, creating an increase in foreign investment in bitcoin.
So, recently we have noticed a slight weakening of the US dollar and if we overlay US interest rates on it we can see that now the US dollar is directly dependent on the level of interest rates which are experiencing a down cycle after the US Fed decision.
If the Federal Reserve continues to cut interest rates as they have stated they will likely lead to further weakening of the US dollar. However, despite the current weakening of the dollar bitcoin continues to bounce between $60K and $65K.
The Bitcoin price model shows that over the last six months, its price should have increased by about 100%, but in fact, it did not happen.
This price model is based on the US Ador and the S&P 500 index and gives us an idea of where Bitcoin should be right now this model shows that Bitcoin is undervalued 50%
This is not the first time that Bitcoin is undervalued according to this model and guess when it has been in the past this has already happened in January last year in September 2020 and in January 2019.
Perhaps the prolonged stagnation will continue, or there will be some volatility in the coming time, but in general, there are no critical indicators that say Bitcoin is definitely going to fall instead of the bullish rally we are all waiting for.
Why Should We Be Careful About Expecting a Bullish Rally?
Despite the reasonable optimism about Bitcoin, and the hope for the effect of China’s upcoming money printing, as well as the U.S., we should realize that it will likely take longer.
Let’s take a cold-blooded look at this point, namely that the cryptocurrency market could potentially be heavily influenced by institutional investors, so following the crowd can be risky.
After all, when everyone expects one thing, investment funds can do the opposite, and that is the key argument of counter-investors, which may now apply to the crypto market as well. So while many are saying that the fourth quarter will be highly bullish we should exercise a bit of caution first we need to talk about the main reason why everyone is so built on the fourth quarter.
China is printing money and the US looks like it will soon start too and that should mean that risk markets like stocks and cryptocurrencies need money to grow. The more money in the world, the more money will flow into risky assets, which in turn should drive up prices, so when China and the U.S. print money it can be a very bullish signal.
But printing money doesn’t work so China announces stimulus and in the same instant money appears in random crypto wallets around the country. If you think about it, it’s obvious that this isn’t how it works everything related to the government is a slow process between the announcement of stimulus plans and the widespread distribution of freshly printed money can take months.
Even then Bitcoin will be the first to feel it and then altcoins. So, we may not feel the full force of this newly printed money until 2025, and even though it may spur the market now, but rather because investors will be gaining positions in anticipation of this fresh money coming to market in 2025.
Also, consider that there is another factor, the money supply, the global M2 money supply, or the measure of money circulating in the economy. It has been rising sharply in the last six months which means that the new money is already flowing into some risk markets which is quite obvious considering that the S&P 500 continues to reach highs as well as gold.
But you have to say some risky markets because cryptocurrency is not so lucky this new money is not yet coming into cryptocurrency on the same scale as it is with stocks or gold. Bitcoin is lagging behind in this regard as you can see from the chart and there is a good reason for that, namely retail investors are not yet in the market.
This is good to see as Benjamin Cohen notes the number of views on various crypto YouTube channels remains low especially compared to 2021. YouTube crypto views are quite low and this is a key metric for assessing how many retail investors are in the market right now, although we are seeing a spike here that could be a harbinger of things to come.
New X followers for crypto pages are few too, look how much more there were in 2021, but we don’t see anything like that now.
So even if all this printed money from China miraculously ends up in the hands of retail investors overnight the question is whether they will buy cryptocurrencies.
In the end, they probably will, because the data shows that retail investors are not in cryptocurrency at the moment – at this stage of the market is not an anomaly.
And that goes for most of these indicators because retail investors are always slow relative to institutional investors.
Conclusion
So, we probably have reason to think that bitcoin, and the entire crypto sector, will grow in the coming months.
However, we need to be more realistic in assessing the factors that will contribute to this, such as additional liquidity. Also, we need to consider the factors that may hinder it, such as the influence of institutional investors.
All this requires a more comprehensive assessment, not prioritizing only desirable indicators.
