China crypto ban made the sell-off worse, but PBOC balance sheet growth matters more than posturing and is not the only key market driver - rally remains intact
In our crypto flash Monday night, we laid out 9 reasons we thought Bitcoin was close to a bottom around $40k.
But yesterday crypto markets went for a wild ride. We got yet another sharp move lower below $30k but have since bounce back and are now at $41k.
Part of this was due to leverage liquidations, but part of the move was also sparked by negative news of China banning crypto.
Source: Fundstrat, Google
This is not the first time China has made such a move. It happened back in December 2013 and September 2017.
In 2013 it marked the top of the bull market cycle. But in 2017 it preceded a massive move higher.
We can look at the timeline of these events in the context of Bitcoin’s prior market valuation cycles using the Grider Bitcoin Book Value multiple.
Source: Fundstrat, Coinmetrics
After the Bitcoin sell off we just had one question, could this China ban cause us to enter a new bear market or is this just a correction in a bigger move higher?
We think this China news headline posturing impacted the market, but we don’t think it matters as much for the cycle as the People’s Bank of China (PBOC) balance sheet growth.
We can see there is a strong relationship between PBOC year over year balance sheet growth and Bitcoin price valuation cycles.
Source: Fundstrat, Bloomberg
China’s central bank balance sheet growth has not tapered off nearly as much as Bitcoin’s valuation, which is roughly 40% below its highs.
But China has announced news of tightening back in mid-April, which was only a week after Bitcoin hit its most recent all-time high. Maybe this has been one overlooked factor pushing the Bitcoin market lower over recent months?
Source: Fundstrat, Financial Times
But is PBOC balance sheet growth the only thing that matters for Bitcoin and crypto prices? We do not think so.
The U.S. is a key market for crypto as well, and both institutional and retail investors are sitting on huge piles of cash.
Institutional investors have been raising cash while retail investors have been deploying cash over recent months.
How could this be impacting crypto markets?
It may be that institutional crypto investors tend to gravitate towards assets like Bitcoin, while retail investors tend to gravitate towards smaller altcoins (DOGE, etc.), which could be one factor explaining the relative performance of these two groups over recent months.
Reports you may have missed
CORE STRATEGY Most of the risks that prompted us to turn cautious in early February still persist, so we believe it’s right to remain patient. However, the near-term (2–4 weeks) setup is starting to look compelling for a tactical rally as sentiment is miserable, liquidity conditions are improving on the margin, a lot of risk has already been priced in, and we’ve seen serious capitulation and deleveraging. All eyes will...
MSTR Reloading Presents Opportunity for Bounce, But Broader Picture Remains the Same
CORE STRATEGY There is a chance that MSTR flows spark a short-term bounce here, but assets further out on the risk curve continue to face headwinds from ongoing uncertainty surrounding trade and monetary policy. Although the current administration takes a pro-crypto stance, there appears to be no immediate catalyst to revive market enthusiasm. We still anticipate that crypto will outperform this year, but until we see further progress on trade/monetary...
CORE STRATEGY With lingering trade war talks and robust economic data dissuading a dovish Fed pivot, we think the potential for downside volatility remains elevated. While regulatory developments and institutional adoption continue to bolster the medium- to long-term outlook, no immediate “good news” seems likely. Nevertheless, we still expect crypto to outperform this year. Until we see flows return to crypto, raising cash/trimming altcoin positions appears prudent (BTC dominance higher)....
CORE STRATEGY With the looming threat of an escalating trade war and economic data robust enough to discourage a more dovish Fed stance, we believe the upside risk for the DXY and yields has increased in Q1. Moreover, the market remains highly volatile and headline-driven, inhibiting the crypto market from gaining meaningful momentum. While regulatory developments are a key medium- to a long-term tailwind for crypto, it is unlikely that...
Articles Read 1/2
Enjoyed the read? Subscribe now for unlimited access!
Get invaluable analysis of the market and stocks. Cancel at any time.
Already have an account? Sign In 5d5b49-8e5213-4e95aa-ea8350-3adf25
Already have an account? Sign In 5d5b49-8e5213-4e95aa-ea8350-3adf25