Could softer liquidity conditions finally pump Bitcoin?

Key Takeaways

• The US unemployment rate jumped to 3.8% last month, from 3.5% previously
• Cooling economic data has strengthened the market’s resolve that interest rate hikes could soon cease
• Implications for a pivot in policy are key for the crypto markets

Bitcoin has had a torrid time ever since the economy transitioned to a tight monetary environment for the first time since the Genesis block was mined, all the way back in January 2009. 

Throughout 2022, the tightening of liquidity conditions dragged Bitcoin down (also helped by some rather shocking events within the crypto ecosystem). From trading as high as $68,000 in Q4 of 2021, it tumbled as low as $15,500 before bouncing back somewhat thus far in 2023. 

This makes sense, given Bitcoin resides so far out on the risk spectrum. The question of whether Bitcoin can one day operate as an uncorrelated asset, or some sort of digital gold, is an intriguing one. It is evident, however, that this has not yet happened. 

Partially propelled upwards by the rampant money printing and easing of global liquidity since the financial crisis in 2008 (which just so happens to coincide with Bitcoin’s launch, a fact which did not go over the head of Satoshi Nakamoto when he/she mined the Genesis block), Bitcoin went parabolic during COVID when central banks really took things to the next level. 

But the music had to stop. And when inflation began to spiral, those same central banks were forced to reverse course, embarking on one of the most rapid tightening cycles in recent memory. Up went interest rates, dispelling the complacent notion that the new era of zero-rates was here to stay. And they kept going up – today, T-bills are paying north of 5%.

The chart below demonstrates the steep incline of the key Fed funds rate:

With economic data remarkably consistent, the Fed was forced to stay the course, rates rising ever higher and higher. Despite some wobbles along the way (the regional bank crisis led by the collapse of Silicon Valley Bank is the clearest example), the economy continued to hum along just fine. 

While this seems like good news (and it is!), it has led to a sort of good news is bad news paradox. To rein inflation in, the economy must slow down. But if the economy does not slow down, inflation remains high and hence rate projections also stay elevated. This is why we…