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Bitcoin Market Intelligence - Issue #1

Jan Wüstenfeld
Jan Wüstenfeld
Hey Everyone, 
Welcome to the first issue of my fortnightly newsletter on Bitcoin. I am glad that you have found your way to my newsletter and I hope that you will find it useful and informative.
In this newsletter, I will write about bitcoin, macro developments, the relationship of bitcoin with financial markets, and the fundamental developments of the Bitcoin network from an on-chain and off-chain perspective. 
Today I will have a more general look at bitcoin, its performance relative to other financial assets, and macro developments.  
On November 10, 2021 bitcoins price hit a new all-time high of $68,721.9, according to messari.io data. Since then bitcoin’s price has cooled off and has been down by more than 40% from its all-time high at times. Throughout 2022 the price has been primarily trading between $33k and $46k and more recently has shown some signs of breaking out of that range.
Graph 1: Bitcoin Price USD Bitstamp  (Source: Tradingview)
Graph 1: Bitcoin Price USD Bitstamp (Source: Tradingview)
Bitcoin’s price moving in between these levels points to the undecidedness of market participants. This to my mind is not surprising as there has been a lot of uncertainty in the world. That is for instance high inflation numbers across the globe (still rising), central banks potentially tightening, and the horrible invasion of Russia in Ukraine.
At the time of writing Bitcoin’s price is slightly up this year (+1%), while the Nasdaq-100 (-7%), and the S&P 500 (-3.85%) are both down year-to-date. Considering the fact that bitcoin as an asset is usually more volatile than these indices bitcoin is holding up remarkably well.
Of course, when looking at the performance since November when bitcoin hit a fresh all-time high, and comparing the drawdowns from there onwards the picture looks different. 
Since mid-March, we have seen some positive signs. The price of bitcoin has started to cross back above $46k. 
On that matter, the Luna Foundation Guard buying bitcoin has been a hot topic lately. They have been adding more than 20k bitcoin to their wallet since the last week of March. While this might have contributed to bitcoin’s price rise the price already hit a local bottom on March 13th more than a week before the inflows to their wallet started.
Graph 2: Luna Foundation Guard Bitcoin Balance Wallet (Source: Glassnode)
Graph 2: Luna Foundation Guard Bitcoin Balance Wallet (Source: Glassnode)
So what happened around that time? 
As I mentioned before, high inflation numbers around the globe and the potential reactions of central banks to that have introduced considerable uncertainty into financial markets. This uncertainty has led to a risk-off period in 2022 for financial assets and bitcoin. 
On Wednesday, March 16, the Federal Reserve (FED) announced that they will hike the reserve rate by 25 basis points, in line with market expectations (arguably a rather small hike considering the inflation numbers). 
Bitcoin, the S&P 500, and the NASDAQ-100 all three did find a local bottom just days before the Federal Open Market Committee (FOMC) meeting of the FED and have been up since then.
That is a sign that markets had already priced in this rate hike and that it actually happening has not had adverse effects.
At least for the near term, that is one uncertainty factor out of the way, and markets appear to be trading risk-on right now.
Once again, bitcoin proves to be highly correlated with equities. How much we may not want it to be true, those currently in control of the price seem to treat bitcoin as a high-risk asset.
Graph 3: Bitcoin Price USD Bitstamp, S&P 500 and Nasdaq-100 (Source: Tradingview)
Graph 3: Bitcoin Price USD Bitstamp, S&P 500 and Nasdaq-100 (Source: Tradingview)
However, this is not highly surprising, with more and more institutional money entering the market since 2020.
Not everyone understands the value proposition of Bitcoin right away.
So what is next? 
Inflation numbers continue to climb. The YoY (Year-over-Year) inflation number for the US came in at 7.9% in February and is expected to be even higher in March. In the Euro area, inflation in March is reported at 7.5%, significantly above the expected 6.7%. 
Some member countries like the Netherlands have even hit double-digit YoY inflation numbers of 11.9% in March. 
But so far, only one of the two central banks has raised interest rates. Namely the FED. 
The war in Ukraine and the heavy sanctions on Russia that followed put upward pressure on prices and negatively affect the world economy, raising worries and the likelihood of stagflation. 
The combination of high inflation and a slowing economy would be a toxic cocktail for economies. 
A nightmare for central bankers. On the one hand, they would have to tighten monetary conditions to fight inflation, and on the other hand, they would have to loosen monetary conditions to support the economy. 
Central banks would be left with no good options. In the case of stagflation, they have to choose between fighting inflation and with that accelerating the economic downturn or supporting the economy, which would further fuel inflation.  
The big question here is what path would they choose? 
For the European Central Bank (ECB), the path seems relatively clear to me. Compared to e.g. the FED and the Bank of England, the ECB has not raised interest rates yet and does not seem too eager to do so. The last time the ECB did hike interest rates was in 2011, more than a decade ago.
While even ECB officials like Knot are speaking of risks of slowflation (slow down in growth and inflation), he is still talking about rate hikes at the earliest in September, October, or December this year. If history is a guide and the accuracy rate of ECB official statements is taken into account, the situation is probably much worse than they are saying.
LiveSquawk
ECB’s Knot: Doesn't See Recession, Sees ‘Slowflation’
- Rate Hike Can Come In Sept, Oct Or Dec
- Can't Exclude Any Scenario On ECB Rate Liftoff
With inflation numbers still rising this seems far away. It appears that they are not even pretending to fight inflation. The motto seems to be to blame anything for inflation but their own doing. 
Yes, supply-chain issues and the Russian invasion of Ukraine, and sanctions play a big role in the explosion of prices we are seeing right now, but their inaction and belief that their unprecedented expansionary monetary policies are not related to inflation at all is staggering.
With governments being heavily dependent on cheap money to finance their expenditures, tightening monetary conditions might risk triggering another sovereign debt crisis in the southern European countries in particular. I do not believe that the ECB is going to risk this. 
So the ECB is less likely than the FED to tighten into a slowing economy.
If they are trying to tighten at all, I do not expect it to last long and do not expect the measures to be of big relevance. 
Consider this, when you are thinking about holding your savings in euro. 
There are 21 million reasons not to hold your savings in euro! 
For the Federal Reserve in the short-run, I am not so sure. I would not be surprised if they continue to raise rates further in the following quarters and even start to reduce their balance sheet. 
Depending on the actions taken it might lead to a correction for equities. But more likely it will overall just lead to lower returns for equities.  
With consumer sentiment at extremely low levels and falling, the judgment is still open as to how hard the FED will push the brakes. Up until now, their reaction to high inflation numbers has been rather mild.
Lyn Alden
Imagine being the guy trying to raise rates into this.

He had a clean exit when things were smooth, but then came back for re-nomination. https://t.co/AUpdnUOPw8
As it stands now, considering the correlation of bitcoin with equities, further monetary tightening would likely negatively affect the returns of bitcoin as well. 
Caleb Franzen did lay out a concise framework on how to navigate this investment landscape in his newsletter at the beginning of this year. If you are interested in this topic, I highly recommend you to have a look at his article „Investment Outlook for 2022“.
Ultimately in the medium- to long-term I expect central banks to get off the breaks. 
Particularly should the economic situation continue to worsen. 
This might happen if the situation in Ukraine does not improve and sanctions are not rolled back and following this, economies fall into recessions or worse stagflation. 
Currently, it does not look like the situation will improve. On the contrary, more sanctions are already planned and some of the effects of the sanctions have yet to be reflected in economic numbers (inflation, economic growth, etc…).
However, there are arguments to be made that e.g. the Federal Reserve as it stands right now is putting more weight on fighting inflation than on what is going on in the labor market and the economy. 
In today’s newsletter, I have taken a look at the macro situation affecting bitcoin and financial assets. The future remains highly uncertain. But on the plus side overall markets have reacted positively to a rate hike by the FED. 
Likewise on the positive side for bitcoin is that more and more bitcoin are moving into the hands of long-term holders.
More on on-chain and off-chain fundamentals of bitcoin in the next issue.
And now all eyes are on the bitcoin2022 that starts tomorrow on Wednesday in Miami. We might get some exciting news from the conference like last year when Jack Mallers announced that El Salvador is going to make Bitcoin legal tender.
Until then stay safe out there! Don’t trust! Verify! Make up your own opinion and consider multiple sources. 
Jan Wüstenfeld
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This content is for educational purposes only. It does not constitute trading advice. Past performance does not indicate future results. Do not invest more than you can afford to lose. The author of this article may hold assets mentioned in the piece.
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Jan Wüstenfeld
Jan Wüstenfeld @JanWues

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