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.
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