Golden coins of bitcoin on dollar notes

The Bitcoin price has struggled lately. The BTC soared to an all-time high of almost $65,000 in April as demand for the coin rose. At its peak, the coin had a market cap of more than $1 trillion. Since then, the coin has declined by more than 24%, bringing its value to more than $880 billion. 

Bitcoin vs gold and S&P 500

Still, Bitcoin has done well overall. Furthermore, the coin was trading at less than $1 in 2009. It has also jumped by more than 360% in the past 12 months. This is notable since it has outperformed other traditional assets like gold and S&P 500 during the pandemic. The chart below shows BTC performance vs gold and S&P 500 in the past 12 months. Note the fact that BTC price has retreated sharply than the two recently.

BTC vs gold and S&P 500

Bitcoin vs S&P 500 and gold

Inflation expectations rising

The recent decline is mostly because of the rising inflation in the United States. Indeed, recent data showed that the headline consumer inflation rose by 4.2% in April while the producer price index rose by 6.2%. These numbers are significantly higher than the Federal Reserve’s target of 2.0%. 

However, they are a bit misleading since they are YoY numbers, meaning that they are comparing 2020 April when the US was in lockdown. Most importantly, inflation is partly because of the $1.9 trillion stimulus package that distributed $1,400 checks to people and boosted unemployment benefits. 

Still, the chart below shows that the five-year breakeven rate is at 2.72%, the highest level since 2008. This is signaling that the market expects that inflation will keep rising. 

5-year breakeven inflation rate

5-year breakeven rate

Fed balance sheet

Inflation is important for Bitcoin price because it means that the Federal Reserve could be forced to tighten its policy. This is an important factor since the Fed easing – using low-interest rates has been credited for the recent cryptocurrency rally. Therefore, if it tightens, we could see further weakness. (If Bitcoin prices rallied during easing, why will they not fall during tightening). The chart below shows the impact of Fed’s balance sheet. As you can see, the total assets have jumped to more than $7.8 trillion, up from $3.7 trillion in 2019.

Two things are worth mentioning here. First, the Fed has said that it won’ tighten. But that is hogwash since the Fed does not want stocks to crash like they did in 2018 December. In fact, stocks declined sharply a few weeks ago when Janet Yellen hinted at a possible gradual tightening.

Second, in the long-term, Stocks and Bitcoin prices will do well even if the Fed tightens. Remember, while stocks fell during the previous taper tantrum, they eventually bounced back. In fact, Bitcoin Hodlers should be happy if prices drop because it will get rid of speculators.

Fed balance sheet

Fed balance sheet

Rotation from growth to value

Now, with expectations of Fed tightening in place, investors have started moving from risky assets to value names. This is known as sector rotation. For example, the current Bitcoin price sell-off has coincided with the sharp decline in tech stocks like Tesla, Okta, Roku, Shopify, and Teladoc.

All these stocks have declined by more than 30% from their all-time highs. On the other hand, value stocks like ExxonMobil, Chevron, and Bank of America have rallied. The chart below shows this rotation in action. It compares the Vanguard Value ETF and Vanguard Growth ETF.

Vanguard Value ETF vs Vanguard Growth ETF


What next for Bitcoin prices?

That said, what next for BTC prices? Looking at the weekly chart, we see that things are not looking good for Bitcoin prices. The chart shows that the currency is in its weekly decline. It has dropped below the 23.6% Fibonacci retracement level and is currently eying the 38.2% retracement at $40,139. If it moves below the 38.2% Fib level, in my view, we will see further weakness to $32,592, which is the 50% retracement and is 27% below the current level.

BTC price chart

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