Usually, little attention is paid to the close connection that exists between cryptocurrencies and all other markets. On the one hand, the measured correlation between the US indices and the money supply comfortably exceeds 95%. On the other hand, the BTC has correlated by more than 85% with some stock indexes, such as the S&P 500, since 2016. Bitcoin, like stock indexes, is extremely sensitive to short-term changes in the money supply.
The graph presented above shows on the left axis the weekly change (in%) of the money supply in the United States. The orange curve corresponds to the Bitcoin price. The steady expansion of the money supply can lead to the outstripping dynamics of virtual currencies. Similarly, all major corrections observed since 2018 have been synchronized with a very short-term tightening of monetary policy. Bitcoin’s extreme volatility makes liquidity sensitivity particularly high, and the emergence of the derivatives market has only intensified this phenomenon.
This graph shows the evolution of a strong Bitcoin/money supply relationship (separating Bitcoin variations by money supply variations). This correlation has been mostly relevant since the beginning of 2020 and tends to increase over time.
Thus, the development of key rates and interest rates plays an important hidden role. Periods of risk for cryptocurrencies are, as a rule, periods of stabilization of key rates, falling sovereign rates in the context of a bullish rally or, conversely, rising rates in the context of falling liquidity. The smoothing of the sovereign rate curves after the 2020 crisis of the Bitcoin price showed complete similarity. The next downturn in the market is likely to be accompanied by a comparable change in rates.
Halving and the weight of institutional investors
Finally, halving probably played an important role, but was not a decisive step. The influence of bitcoin miners on the market has plummeted from more than 90% since 2012, to less than 10% today. The most relevant indicator is the positioning of whales (holders of more than 1000BTC). Just over 2,000 addresses on the network control more than 40% of the total amount of BTC. The market is directly controlled by institutions, and almost all people have absolutely no influence in the medium and long term.
Speaking about the current trend, we can analyze Bitcoin purely statistically. The cyclical nature of the market requires that all markets, without exception, follow the so-called statistical constraints of growth. That is, markets cannot grow for an infinite number of days or weeks, growth occurs in vague statistics that are difficult to circumvent. To measure the cumulative probability of a fall, we can use the cumulative variations of Bitcoin.
The graph below provides an overview of the statistical strength of trends observed over the past 30 weeks.
The black curve corresponds to the statistical strength of Bitcoin’s movements (cumulative variations), and the dotted line indicates its price. Every time the indicator (black line) passes below the 0 line, BTC enters a bear market. Conversely, maintaining the curve above level 0 for a long time. means maintaining a bull market for a long time.
The highs and lows at the extremes also indicate a strong market reversal after their confirmation. We have recently seen a strong rebound on the 0 line. This is a binary signal that the market can either quickly fall below the $30,000 line or return to its highs.
A similar statistical manipulation is performed on this chart by summing the daily variations. When the indicator reaches the -50 line, an important buy signal appeared, the previous one was dated June 2021.
Recently, there was confirmation of a bullish signal, which pushed the previous weekly indicator to a stronger bullish signal. This significantly increases the opportunities for a bull market by December 2021.
What are the prospects for Bitcoin in the coming months
Seasonally, the best months on average are October, November and April, and the worst months are September, January and March. Thus, the study of statistical factors is combined with the study of seasonality.
In addition, it should be noted that according to Coinmarketrate.com, the average weekly performance of Bitcoin between 2016 and 2021 is +1.85%, which is clearly higher than many other assets (+ 0.2% for Dow Jones or +0.125% per week for gold). At the same time, its volatility easily exceeds 100% – 110% based on annual quarterly data. This means that every year Bitcoin has more than 2 out of 3 chances to double or fall to zero.
Purely statistically, Bitcoin has almost a 70% chance of ending up between 0, and over $110,000 by the winter of 2022. Bitcoin for $100,000 under favorable trend conditions is now statistically realistic, which was not even 10 months ago.
The recent increase in its popularity is due, in particular, to the fact that the US authorities have not banned its use, but also, above all, to the fact that a number of institutions have opted for a significant increase in their position in Bitcoin. These two factors contribute to the continuation of the structurally bullish trend. However, a likely slowdown in bullish dynamics will stimulate weakening signals, as well as more frequent risks of deterioration of the situation during 2022.
Is it possible to drop the BTC in 2022?
Several important considerations should be recalled here:
Central banks, especially the Fed and then the ECB, should reduce asset repurchases and then raise key rates at the end of 2022 (especially in the United States).
The reduction of economic risks should reach its peak. In other words, the economic recovery should be completed around the first half of 2022. This limits the growth of all markets, including cryptocurrencies.
It is not surprising that we are seeing the persistence of structural inflation, which was already threatening before the Covid-19 crisis, which is a neutral or slightly positive signal for virtual currencies.
Based on correlations, the main threats to the BTC price in the coming months will come from the fall of sovereign currencies, for example, with a slight drop in oil prices or inflation, which currently does not exist. In addition, due to the dependence of cryptocurrencies on traditional markets, the change in the upward dynamics of the indices suggests possible corrective movements for 2022, which may systematically affect Bitcoin.
But the most important factor remains the policy towards CBDC – digital currencies of central banks, which are capable of completely destroying the cryptocurrency market.
Many analyses clearly show that next year the risk of a bear market is much lower than in 2018: a drop from 70% to 80% is very unlikely due to the statistical state and the new financial structure of the virtual currency market. However, it is also very likely that the recent upward phase is less important than in the period from April 2020 to April 2021. Technically, experts find that approaching 2022 means the last phases of the bull run (RSI, MACD, etc.).
Thus, 2022 may confirm the structural upward movement, which has persisted despite the risks of falling in the summer of 2021. Nevertheless, the correlation with the markets will remain, and the risks will be mainly monetary.
In conclusion , we can say:
Firstly, virtual currencies today have a much stronger base than in 2017 or 2018, and the risks of a serious collapse are limited.
The second observation is that we are still in the bull run phase, which has remained on the verge of dangerous in recent weeks. Thus, we can first imagine a continuation of this bull run with very likely growth rates slightly lower than in late 2020 and early 2021.
Nevertheless, one should be very vigilant about monetary policy (central banks, inflation, rates), and financial parameters (stock dynamics and financial stress), which are likely to cause corrective phases or even bearish phases if key resistance thresholds are reached in the first or second half of 2022.