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Bitcoin might be on the verge of a major upswing as global liquidity looks to be on the rise. According to several macroeconomic analysts, the flagship cryptocurrency, which has been range-bound in recent months, might surge to new highs soon.
A combination of positive economic fundamentals and policy changes may largely drive the rally. Goldman Sachs economists reduced the odds of a U.S. recession in 2025 from 25% to 20%.
The adjustment came after the release of U.S. retail sales and jobless claims figures that indicate the U.S. economy may be stronger than initially thought. This has led to anticipation that the U.S. Federal Reserve may reduce interest rates by about 25 basis points starting in September.
Such rate cuts are possible and have already started influencing the financial markets. For instance, major US stock indexes, including S&P 500, Nasdaq Composite, and Dow Jones Industrial Average, registered their best weekly performances of the year in mid-August.
Liquidity Injection to Drive Bitcoin’s Rally
One of the most significant factors driving the current optimism around Bitcoin is the anticipated injection of liquidity into the U.S. financial system.
In a recent Medium post, Arthur Hayes, co-founder of BitMEX and a well-known personality of the crypto industry, said that the upcoming liquidity boost could take Bitcoin to as high as $73,700, its previous all-time high.
Hayes described several ways this liquidity could be provided, with the overnight reverse repurchase agreement (RRP) mechanism being one of them. The RRP balance currently stands at around $333 billion, far less than its high of over $2.5 trillion in December 2022.
According to Hayes, the RRP is the largest pool of what he calls “sterilized money” on the Federal Reserve’s balance sheet. He added that the U.S. Treasury seems ready to pump this money into the real economy, thus increasing liquidity.
He pointed out that the reduction in the overnight RRP implies that money market funds are moving their cash to T-bills, which offer slightly higher yields. T-bills can be used to create credit and asset price expansion and thus shift money from the Federal Reserve’s balance sheet.
The U.S. Treasury intends to sell $271 billion of new T-bills before the end of December. The Treasury’s general account (TGA), which currently has $750 billion, can also be used to inject more liquidity into the market. If both strategies are implemented, as much as one trillion could be injected into the financial system by the end of the year.
“That is going to create a glorious bull market in all types of risk assets, including crypto, all in time for the election,” he wrote.
Bitcoin “Forced Selling” is Over
During a recent interview, Matthew Sigel, head of digital assets research at VanEck, noted that Bitcoin tends to struggle in the months following its halving event, which occurred in April. However, Bitcoin might be ready to bounce back with the forced selling behind us.
Could #Bitcoin mining companies have a huge opportunity in AI?
VanEck's Matthew Sigel breaks down how these struggling stocks could suddenly fetch a higher valuation: pic.twitter.com/eIxOsAFXbK
— CNBC's Fast Money (@CNBCFastMoney) August 19, 2024
According to Sigel, the price of Bitcoin will be determined by the forthcoming election. He speculated that macroeconomic factors are expected to remain stable whether the current administration remains in power or a new administration comes.
Sigel also said that the market will have to “wake up” to the fact that “we are in for four more years of reckless fiscal policy” whoever wins the election. This could give more impetus to Bitcoin as investors run to decentralized stores of value in the midst of continuing economic instability.
As of now, Bitcoin is trading at around $60,750, as per the CoinMarketCap data. Despite the optimism surrounding its future prospects, the price of Bitcoin has remained relatively stable in recent weeks.
Investment strategist Lyn Alden pointed out that the absence of significant price movements is not shocking because global liquidity has stagnated in the past two years. Alden opined that Bitcoin could test its all-time high by 2025 when the market becomes more ‘pro-liquidity.’
I really enjoyed this conversation with @LynAldenContact about fiscal dominance, market volatility, Fed rate cuts, #Bitcoin price, political outcomes, and AI image tools. So much value and insightful observations. Let us know what you think.
Timecodes:
00:00 Intro and latest on… pic.twitter.com/pvbcapxXN6— Natalie Brunell ⚡️ (@natbrunell) August 19, 2024
Meanwhile, spot Bitcoin ETF trading has remained strong, with net cumulative inflows of $32 million in the past week. Although trading volumes are usually lower in August, BTC Spot ETFs had approximately $7 billion in total trading volume last week, averaging $1.4 billion in daily trades.
In contrast, spot Ethereum ETFs experienced approximately $14 million in outflows last week, continuing a trend of relatively neutral flows. However, the recent reduction in outflows from the Grayscale Ethereum ETF could signal a potential shift if market momentum turns positive.
Outlook for Bitcoin and Digital Assets
Looking ahead, the macroeconomic environment will be the key to Bitcoin’s performance. “If market momentum turns positive again, with rising prices and sustained demand, the expected decline in outflows from ETHE could lead to increased net inflows,” Matteo Greco, a research analyst at Fineqia International, said in a recent note.
Greco also said that market participants are expecting rate cuts from the Federal Reserve, with expectations of a 25 basis point cut in September and two more in November and December. If these cuts occur, they can help support Bitcoin and other digital assets even more than they currently do.
He said the Fed has adjusted the interest rate cuts because the data is better than expected. Moreover, he wrote that the chances of an emergency 50 bps cut that may trigger market turmoil are slim.
“If the FED implements three additional 25bps cuts by the end of the year, it will amount to a total 75bps reduction in 2024, below the 100bps cut early-year expectations,” Greco said. He added that although inflation remained high in the year’s first half, recent market data “suggest a more expansionary monetary policy is expected for Q4.”
The Bottom Line
Bitcoin may be poised for a breakout as global liquidity rises on solid fundamentals and expected policy actions, such as rate cuts by the Federal Reserve’s rate cuts. Analysts estimate a considerable liquidity boost in the U.S. financial market may take Bitcoin back to the previous record high of $73,700.
