Key points to remember
- Bitcoin is up nearly 50% from its lows, but is still down more than two-thirds from its all-time highs.
- Some on-chain metrics show how much the rally pales from the previous dip.
- Positive industry news remains scarce as the market prepares to welcome the new interest rate policy, which will be revealed at the FOMC meeting on Wednesday.
Let’s start with a riddle. What profit/loss have you made if an asset you own goes up 47%, after falling 77% before?
The answer is a gruesome 67% loss.
This is the predicament facing Bitcoin investors who bought the coin when it was at all-time highs at the end of 2021. As the markets started the year off with a bang, there important not to lose sight of the essentials.
Humans, however, have short memories. With Bitcoin up almost 50% from its ensuing lows the collapse of FTX, cryptocurrency markets have that giddy feeling about them again. It’s amazing what hope can do for people, huh? And by hope, I mean hope that interest rates will come down.
The Federal Reserve controls the price of Bitcoin
I wrote an article last week on how this latest rally, if anything, just proves once and for all how well Bitcoin trades as an extreme risk asset.
Bitcoin was crushed last year as central banks around the world turned hawkish for the first time in Bitcoin’s existence. With the cheap money of the past decade no longer available and the high yields available on other investments such as Treasuries, high-risk assets have plummeted.
The tech sector, also notoriously interest rate sensitive, has laid off employees left, right and center – Meta, Salesforce, Twitter, Google, and the list goes on.
This latest rally now comes as inflation begins to ease, with renewed hope that the pain of stifling monetary policy will, in fact, one day end.
The market remains devastated
While the picture undoubtedly looks rosier than two months ago, the cryptocurrency market is still in a world filled with pain.
Bankruptcies continue to flow – view the file at Genesis from last week – while there are plenty of other potential downside catalysts as the market continues to plunge into Sam Bankman-Fried’s chaotic mess: DCG still presents plenty of uncertainty, for example.
While prices are moving well, there is no particularly good news to explain this rally. Like I said, it’s all in the macro and investors are keeping their eyes fixed on the Federal Reserve.
A few charts paint a good picture of the pain still present in the markets. Despite the recent rally, the realized net profit marker, which is an on-chain metric calculated by comparing the price of recently moved coins to the price at which they were previously moving, shows how much the recent rally pales in comparison to the magnitude of the fall of last year.
In truth, there is no need to complicate things. Despite the bluster of “hedging” and “uncorrelated investing” stories that have been going on during the COVID pandemic, it is also clear that Bitcoin is currently trading on interest rate expectations.
The chart below is perhaps the most significant for any cryptocurrency in the past two years.
This small bounce at the end could reverse very quickly depending on how things play out at the next Fed meeting. It could also do the opposite if things end up being more hawkish than the market currently expected.
Either way, it’s clear what’s moving the markets right now.
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