US Economy Determines Bitcoin's Price

Hey! Welcome to my mind and what goes on in it. Get a snippet below and be sure to leave me a comment. 

Many have always believed that Bitcoin and the wider crypto market are their own markets. Well, not anymore. Often, most market participants subconsciously forget that human psychology (especially fear and greed) is fundamental to movements in the price of any financial instrument. For example, it is literally not because of a bad jobs report that markets will move up or down but rather the interpretation of that jobs report which will lead to some form of fear or greed and the subsequent market reaction. Many have downplayed the role of the US Federal Reserve on the wider crypto market as well as the impact of economic indicators coming out of the United States. 

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I will point out just two scenarios that I believe are very fresh in the minds of many crypto investors. Let me begin by going a while back to 2020 when Bitcoin made all-time highs. One could argue that it was just time for bitcoin to hit record highs. However, we cannot turn a blind eye to the major factor behind the crypto and stock market at that time. It was a year of massive fiscal stimulus which led to free cash encouraging speculative behavior as many dashed to the financial markets to try and double their capital. 

As if people sitting at home with money coming in was not enough, the US Federal Reserve maintained historically low interest rates which only added fuel to the fire that was about to turn out to be a massive bubble. These low interest rates meant borrowing costs were cheap. Thus, leading to more cash in circulation. It was normal that Bitcoin and other cryptocurrencies should increase in their valuation due to free money in circulation creating demand.

Reality stroke when it became apparent that the world was starring at runaway inflation and central banks around the world together with the US Federal Reserve would have to reduce the money in circulation at a much faster rate than they may have anticipated. It didn't take long when in 2022, people who had their sights set on Bitcoin hitting $300,000 soon saw its price nosedive to $15,000 from a high of about $68,000. It was not only bitcoin as even other cryptocurrencies and stocks sank. 

The second scenario is just a few days back August-02-2024 when the markets came to the realization that we may be heading for a recession in the US after unemployment hit 4.3%. Leading to bitcoin and stocks dropping so hard that some sit at -10% drops. As I write (August-04-2024), Ethereum is down about 16% in just a day. Back to my point that fear and greed drive markets, it is evident that the fear of a recession is in play and many are cashing out their profits. What should be looked at with optimism is being approached with fear. Markets have been soaring on hopes that the US Federal Reserve will cut the high interest rates it put in place early on in 2022 in response to fueling the all-time highs of 2020. Now that we finally have reason to believe that they will actually cut the rates, many have begun selling their positions.

I have been long in this game to realize that this is the time for me to buy assets. When I see a 10% drop/correction, I buy and so on and so forth. I don't think those selling are stupid. I want to believe that these are those who bought in early and are taking profits to then reposition. It is wise to reposition because monetary policy coming out of the US drives markets. It fuels fear and greed in these markets. When those interest rates begin dropping, money will be injected into the economy, and with it comes investments from value investing to even more dangerous speculative behaviors. This is what will usher the next bull run because it is a cycle that repeats itself over and over. Bitcoin halved in April of 2024 and historically, after a year of halving, it almost always rises 100%  from its value at halving. 

I couldn't see a better scenario than what appears to be shaping out. I'm more altcoin-friendly because I'm not capitalized enough to be aggressive with Bitcoin. So, I conclude by saying, that with these two scenarios, you can see that Bitcoin is influenced by US monetary policy especially when it comes to interest rates. After having ETFs approved and traded on US stock exchanges, Bitcoin is now mainstream and it only means more stability in its volatility which will highly be shaped by Wall Street. It is mainstream now. 

Enjoy!!