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(Kitco News) – It’s been a rough go for Bitcoin (BTC) and the broader cryptocurrency market over the past week as the top crypto saw its price plunge 12% on Thursday to go along with an $81 billion decline in the total crypto market capitalization.
Bloomberg Intelligence senior macro strategist Mike McGlone provided some insight into the price pullback, saying that while “Bitcoin price may be teetering on a cliff’s edge with the stock market,” it’s not surprising, “as most risk assets typically suffer if the world’s beta benchmark – the S&P 500 – falls.”
What is notable, according to McGlone, is that volatility for both Bitcoin and the S&P 500 is declining.
Volatility and liquidity: S&P 500 vs Bitcoin. Source: Twitter
“Mainstream migration is inferred from 180-day volatility on the benchmark crypto falling about 46% on Aug. 16 – the lowest ever,” McGlone said. “Market Volatility typically rises when the S&P 500 retreats.”
Delving further into the pullback, McGlone noted that “the last time the U.S. Treasury two-year note yielded about 5% was before the financial crisis and the birth of Bitcoin, which may portend the headwinds facing most risk assets.”
Based on an analysis of Bitcoin’s 100-week moving averages, McGlone said there is a “mostly downward bias, notably vs. the steepest Treasury yield competition in almost two decades.”
Bitcoin 100-week MA vs. US2Y Treasury yield. Source: Twitter
“Bitcoin appears similar to the US stock market in 1930,” he wrote. Its “100-week moving average shows a clear rollover pattern and downward trajectory.” He cited the 5% yield on U.S. Treasuries, which is “the most in crypto history,” and warned that “Bitcoin may be facing an elongated retracement period.”
“In a time of near-zero and negative interest rates, a digital version of gold can be quite attractive, but the world’s safest securities now providing about 10% total return in two years may change the landscape and pressure prices of most assets of greater risk,” McGlone said.
As for the main driver of the recent market developments, McGlone noted that the “unprecedented liquidity of 2020-21 is reversing, which may suggest risk-asset reversion toward pre-pandemic levels.”
Bitcoin vs. S&P 500 vs. Bloomberg Commodity Index vs. U.S. money supply. Source: Twitter
The above graphic “shows what has mattered for dollar-denominated stock – and commodity-market appreciation since the end of 2019 – the biggest rise in US money supply in our database since 1960,” he said. “Relative to the dollars pumped into the system to Aug. 21, both the S&P 500 and Bloomberg Commodity Spot Indexes are up about 5%. M2 money supply jumped about 40% to the 2022 peak and has been declining since. The history of liquidity-fueled asset rallies isn’t favorable when the fuel is removed.”
With the federal funds upper-bound rate currently at 5.5% and still rising, McGlone noted that since Bitcoin was an outperformer on the way up, “it may have the most reversion room.”
“Negative US money supply and T-bill rates still rising at the highest in about two decades may be headwinds,” he said. “This year’s bounce in most risk-asset prices has buoyed Fed vigilance and might do what’s typical in history when liquidity fuel is removed – revert toward enduring means.”
Harkening back to the time of the great depression, McGlone said, “The advent of revolutionary technologies, parabolic price moves, excessive liquidity and speculation are what Bitcoin has in common with the stock market as it neared the 1929 peak.”
He said the main difference between then and now “is that the Fed Bank of New York started cutting rates in 4Q29 amid plunging equity price.”
Bitcoin vs. stocks in 1930. Source: Twitter
“The Fed and most central banks in history are still tightening in 3Q,” he said. “Bitcoin’s 100-week moving average has turned downward, and it may be a question of how low-risk assets have to go for liquidity to get turned back on. In 1924, the Fed cut rates to the lowest in the world as electricity, automobiles, air travel, and telephones proliferated. Then came some reversion. Parallels can be drawn to the birth of Bitcoin in an extremely low-rate environment.”
On the topic of the significant price pumps that Bitcoin and the crypto industry have become known for, McGlone said that “Bitcoin volatility is declining along with most assets in 2023, and the mainstream migration process is likely to entail diminishing risk for the crypto – and limited price-pump potential.”
Bitcoin and gold
Speaking briefly on the topic of Bitcoin and comparisons to gold, McGlone said, “Adoption as digital gold in a world going that way is the current Bitcoin trajectory, but with volatility at about 3x that of the metal, relative crypto risk has plenty of room to fall.”
“It’s because Bitcoin volatility has more room to decline than most traditional assets that the crypto’s relative risk might continue to fall,” he said. “At about 3x that of gold, or graphic shows that Bitcoin’s 90-day volatility still relatively elevated vs. conventional store of value, but well off the peak from 2018 of around 12x.”
Bitcoin volatility vs. gold volatility. Source: Twitter
“It makes sense that volatility of most asset classes is down in 2023 due to the distortions of 2022,” he said. “Yet looking ahead, Bitcoin-risk metrics not continuing to converge with gold may portend a lack of propeller assimilation for the digital version.”
“This is part of the reason we believe the days of big Bitcoin pumps are over,” he added. “Futures, cash-and-carry arbitrage and exchange-traded funds are characteristic of the benchmark crypto’s maturation process, which might mean deterioration of its nascent vigor.”
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