Bitcoin has been consolidating as the June rally catches its breath, coinciding with a similar pause on Wall Street for US equities. Concerns about central banks’ unwavering higher for longer stance has dented risk appetite lately, as bond yields have spiked globally, eroding the appeal of not just risk assets, but also safe havens such as gold.
Inflation is on the way down, but…
Investors have had to weigh encouraging data pointing to declining inflation and receding risks of a recession against still hawkish commentary from Fed officials as well as other central bankers. Markets continue to bet that inflation will come down rapidly in the coming months, paving the way for interest rate cuts in 2024. The latest drop in US CPI to a more than two-year drop of 3.0% y/y just reinforced those expectations.
However, as with all the recent data, there is yet to be any definitive signs that underlying inflation is headed to 2% in a sustainable manner, and until there is evidence of that, the Fed will be inclined to tighten policy further.
SEC approval for Bitcoin ETF is critical
This could be one of the reasons why there seems to be some hesitancy to push Bitcoin past the $31,000 zone. Other factors holding the bulls back may be more specific to the crypto sphere. When BlackRock announced plans last month to launch a spot Bitcoin ETF, hopes were high that it would finally secure the approval of the Securities and Exchange Commission (SEC) after previous efforts to introduce Bitcoin ETFs failed.
The excitement spurred a more than 25% rally in the price of Bitcoin and other cryptocurrencies jumped higher too. But there are doubts about whether or not the SEC will give BlackRock’s ETF the green light amid the ongoing question marks about privacy. The SEC will likely demand some kind of an information-sharing agreement with BlackRock where the regulator would be able to request the client’s trading history as well as personal data.
But even if BlackRock finds a way to satisfy the SEC’s concerns, the outcome is not clear cut. For one, spot ETFs may simply divert trading from existing futures-based ETFs rather than attract new inflows. Another danger is that by bringing in too many big players into the market, their influence may grow to the extent that Bitcoin may begin to lose its original purpose of a decentralized payment system.
Cause for optimism?
However, these are risks that may never materialize, or not in a significant way, and there is cause for optimism too. Institutional demand remains strong for cryptos, at least for Bitcoin.
In addition, the supply picture may also benefit Bitcoin in the medium term. The combination of lower electricity prices on the back of the drop in energy commodities and the close to 100% increase in Bitcoin’s price since November 2022 have made it more profitable for miners to mint new coins. Thus, miners don’t need to sell as many Bitcoins to cover their costs, potentially leading to a reduction in supply.
Bitcoin is eyeing new highs
From a technical perspective, the momentum indicators turned positive recently, although both the stochastic oscillator and the RSI suggest the upside has started to wane already. With stocks also finding their feet again after a bit of a wobble last week, a broader risk rally could provide Bitcoin the fuel it needs to break above the $31,500 level and scale fresh one-year highs.
On the downside, the threat of a major liquidity drain over the coming months hangs over cryptocurrencies as the effects of the Fed’s quantitative tightening are felt more acutely and the US Treasury replenishes its cash balance. For Bitcoin, the big test will be to hold above the $25,000 mark in the event of a sharp selloff.
