As Bitcoin consolidates on the verge of making a new all time high it all seems somewhat inevitable in hindsight. Now ETF’s are approved and institutions are onboard where does the next Bitcoin narrative come from? Where does it go from here? Traditionally, Bitcoin has been viewed as a high risk, high reward investment, often behaving like a tech stock. However, a closer examination of its evolving relationship with traditional markets suggests a potential shift in its role as a financial instrument. This newsletter explores the trajectory of Bitcoin transforming from a risk-on to a risk-off asset over a multi-decade period.
Since the Covid meltdown in Spring 2020 and perhaps before, Bitcoin's market behavior picked up a correlation to TradFi markets. It’s price action mirrored that of tech stocks, often taking a hit when these stocks tumble. This correlation placed Bitcoin firmly in the category of a risk-on asset, characterized by its high volatility and speculative nature. I expect many investors currently look at Bitcoin as a bet on a broader market recovery and fed pivot.
Early Signs of DecouplingWe’ve started to see subtle changes on lower time frames where Bitcoin's correlation with traditional markets has parted. There are instances where Bitcoin's price movements have deviated from the patterns of tech stocks, suggesting a potential decoupling. This emerging trend, though still far from confirmed, hints at Bitcoin's capacity to act independently of the traditional financial ecosystem. If Bitcoin continues on a path towards decorrelation, it stands to become a valuable tool for portfolio diversification. As an independent asset class, it would offer investors a flight to safety that doesn't mirror the ups and downs of conventional markets. This unique position could redefine Bitcoin's role in investment strategies, shifting eventually from a high-risk option to a stabilizing force in diversified portfolios. The Absence of Counterparty RiskThe most compelling argument for Bitcoin's evolution into a risk-off asset is its inherent lack of counterparty risk. Unlike traditional financial systems, where transactions typically involve an intermediary or a counterparty, Bitcoin operates on a decentralized blockchain network. This means that in the event of a financial crisis, Bitcoin holders are not exposed to the risk of a counterparty's failure. This absence of counterparty risk presents Bitcoin as a potentially safe haven during financial turbulence, offering a level of security that is difficult to find in traditional finance. The key to Bitcoin's potential transformation lies in its ability to offer a safe refuge. As it continues to exhibit signs of decorrelation, its appeal as a diversification tool grows. This combined with the lack of counterparty risk, offers a form of financial security that is could be highly valued in the future, especially in times of crisis.
Obviously things have been going pretty well recently… The most interesting chart for me is ETH/BTC which is still threatening to break this long term downtrend. Hard to see ETH outperforming given the amount of capital flowing into Bitcoin ETF’s but the 0.05 level is proving a worthy support area. It will be telling where it goes over the next couple of weeks. Bitcoin up, Eth up more and Alts go nuts, this is the gwei.
Meanwhile we have a new dynamic in the four year cycle with Bitcoin price action accelerating into a halving event. Still time for a major pull back and we saw a little bounce back and liquidation cascade from the $69k previous ATH. This was an obvious trade but above it there doesn’t seem like obvious areas for strong selling pressure or short interest until we get closer to $100k… #hopium Social links are below and if you enjoyed this newsletter I would appreciate it if you could share this content
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