Here is a fun fact,
- Bitcoin is down 40% to start the year as investors sell risk assets
After its rally in March back toward its January levels, bitcoin is again biting the dust in 2022. Bit coin is down 40% on the year after falling more than 28% since May 4 alone. Much of the broader crypto world has fallowed suit.
This is a bad news for crypto believers, but I’m afraid I have more bad news – I believe bitcoin is far from reaching the bottom.
Here is why.
Evidence 1: Bitcoin vs. Stock vs Global money supply
Investors have been selling risk assets like stocks and cryptocurrencies – which trend to perform better in more liquid economic environments – in anticipation of tighter monetary policy than originally expected amid four decade high inflation, and as geopolitical turmoil constrains supply chains.
To cool off inflation, the Federal Reserve is starting to pull money out of the US economy by reducing the assets they hold, and is hiking interest rate by 50 basis points at a time, the fastest clip in 2 decades. These policy moves are designed to slow down economic activity.
Since the start of the year the S&P500 is down more than 19%, and growth stock heavy NASDAQ 100 is down more than 26%.
Bitcoin, on the other hand, is more vulnerable to de-risking and shrinking liquidity than stocks. The charts below compares stocks’ movements alongside liquidity fluctuations compared to bitcoin’s. Bitcoin moves much more dramatically when money supply changes.
Evidence 2: Bitcoin price movements are correlated with manufacturing activity indices
Bitcoin is GDP sensitive, with Bitcoin falling as the PMI manufacturing index falls, indicating a capitulatory Bitcoin drop ahead. And as the purchasing manager index for manufacturing, an excellent indicator for GDP and industrial production, weakens and due to Fed tightening, war fall-out and China’s 2021 tightening plus their 2022 COVID, the Bitcoin price may plunge, again.
GDP fell in the first quarter of 2022 for the first time since Q2 2020, and the PMI manufacturing index fell to its lowest level since Sep 2020 in April.
Below is bitcoin’s relationship with the ISM PMI index measuring manufacturing activity. The index is expected to show lackluster readings in the months ahead, and I strongly believe this could mean downside to $15,000 for bitcoin.
Evidence 3: In tight financial conditions, Bitcoin trends to underperform relative to gold
The blow chart shows bitcoin’s outperformance when the Fed turns dovish, and vice versa. Gold has started to outperform bitcoin in recent months as the Fed has increasingly become more hawkish.
How hawkish the Fed will be the rest of the year remains to be seen (btw, I think Fed’s chair Powell is leaning on hawkish side). If inflation begins to moderate – which it did slightly in April – the Fed could back off of its tightening spree in order to avoid triggering a recession.
Anyway, things are not good for bitcoin and its believers.