Bitcoin (BTC) faced a sharp contraction on Friday following a rejection at $82,000 the prior day. Recent price movements closely resembled the US small-capitalization stock index, hinting that macroeconomic factors are the leading drivers behind the nosedive below $79,000.
The anxiety sparked a sell-off in fixed-income markets. Counterintuitively, this may help Bitcoin embark on a sustained bull run over the next few weeks.
Key takeaways:
- High correlation with US small-cap stocks and absent bullish leverage demand leave Bitcoin vulnerable to broader macro risks.
- Fixed-income outflows could ultimately drive fresh liquidity back into Bitcoin in the medium term.
Bitcoin loses $80,000 support amid high oil prices, recession risks
The US small-capitalization stock index excludes the 1,000 largest companies, avoiding the heavy concentration of tech stocks. More importantly, these stocks carry a higher risk due to smaller relative earnings and a lower financial capacity to survive worsening market conditions.
Russell 2000 Index futures (left) vs Bitcoin/USD (right). Source: TradingView
Moreover, the cost of capital for smaller companies is often higher, making them more sensitive to interest rate trends.
The strong correlation between Bitcoin and the Russell 2000 Index indicates that Bitcoin is not currently being valued as a hedge, but rather as a risk-on asset.
Bitcoin perpetual futures annualized funding rate. Source: Laevitas
The Bitcoin perpetual futures funding rate flipped deeply negative on Thursday and remained near 0% on Friday. Demand for bullish leverage has been mostly absent, as the indicator has been below the neutral 6% threshold for the past couple of weeks. Multiple attempts to break above $82,000 were not enough to instill confidence, meaning traders remained skeptical of further price gains.
Investors might have opted to reduce exposure ahead of the weekend, which is natural given the uncertainty regarding the prolonged war in Iran. There is an overall sense of increased risk as the stock market is just 5% below the peak dot-com bubble of January 2000, according to the 10-year S&P 500 inflation-adjusted Shiller price-to-earnings ratio.
Shiller inflation-adjusted 10-year S&P 500 price-to-earnings ratio. Source: Multpl
Gains in the tech sector drove the Nasdaq 100 Index to an all-time high on Thursday. However, the optimism cooled off on Friday after disappointing results from the US-China Summit in Beijing. No concrete deals on import tariffs have been announced, apart from promises to accelerate US farm goods exports “over the next three years,” according to The Guardian.
Investors flee fixed-income investments, triggering short-term anxiety
Additionally, China’s foreign ministry reportedly said that the war in Iran “should never have happened” and “has no reason to continue.” Crude Brent oil prices jumped to $106 from $99 one week prior, piling further upward pressure on inflation. This move has caused investors to flee government bonds, as central banks will likely be forced to boost liquidity to avert an economic recession.
Related: Bitcoin trades at a ‘discount’ on Coinbase: Is a $76K retest next?
Japan 10-year government bond yield. Source: TradingView
Yields on the 10-year government bond surged to their highest levels in over two decades. A similar movement occurred on Eurozone 10-year bond yields, which jumped to 3.18%, the highest mark in 15 years. Outflows from fixed-income investments will eventually seek gains elsewhere. Hence, the shaky economic conditions might ultimately benefit Bitcoin in the medium term.
For now, Bitcoin’s short-term price weakness can be pinned to its high correlation with small-cap US stocks, a lack of demand for bullish BTC leveraged positions, the war in Iran and fear of an economic crisis.