Bitcoin Is Not as Volatile as It Used to BeAlso Struggling Bitcoin Mining Stocks & The Federal Reserve Is Moderately Hawkish
Welcome to the Friday edition of the Ecoinometrics newsletter. Every week we bring you the three most important charts on the topics of macroeconomics, Bitcoin and digital assets. Today we'll cover:
Each topic comes with a small explanation and one big chart. So let’s dive in. In case you missed it, here are the other topics we covered this week:
Checkout the Bitcoin Market Monitor to understand what’s driving the market in just five charts:
Read the Bitcoin Market Forecast for the probabilities of key scenarios and the essential risk metrics to manage your portfolio:
If you aren’t subscribed yet, hit the subscribe button, to receive this email every week directly in your inbox: Bitcoin Is Not As Volatile As It Used to BeFor Bitcoin, there is really a before and after COVID. The amount of cash injected into the financial system as a response to the lockdowns likely accelerated this timeline. During the QE infinity sequence, the correlations between Bitcoin and the stock market rose dramatically and stayed high for a long time. This was probably the moment when Bitcoin became much more integrated into the financial system, leading to today's situation. One side effect of Bitcoin's financialization is that its volatility has been somewhat tamed. This taming of volatility lines up with increased institutional adoption and the rise of spot ETFs. Those are signs of a maturing market structure. Bitcoin is still a volatile asset on average. However, after the third halving (which happened shortly after the COVID crash), the extreme volatility events disappeared, as shown in the chart below. Over the last 4.5 years, the distribution of volatility has become much more compact than before, even though the median hasn't dropped significantly. Currently, volatility is even on the low end of the distribution. It feels like all the old objections about Bitcoin have faded away. We now have a legitimate asset that has found its place in the global financial system. It has largely been de-risked at this point.
Struggling Bitcoin Mining StocksSince last year, we predicted that Bitcoin miners as an asset class would outperform Bitcoin once the bull market gained momentum. That hasn't happened. The miners are barely keeping pace with Bitcoin's growth. Worse, when Bitcoin drops sharply, mining stocks take an even bigger hit. You can still make money investing in mining stocks. However, the broad investment approach that worked in 2020/2021 is no longer better than simply holding Bitcoin. Success with mining stocks now requires a longer investment horizon and careful stock selection based on specific criteria. We've started analyzing these criteria in detail in our Marathon versus Riot comparison.
The Federal Reserve Is Moderately HawkishWe track the Fed's monetary policy sentiment through our Fed Communication Index. This index analyzes official Fed transcripts and ranks them on a scale from hawkish (positive) to dovish (negative). Tracking this index is important because the Fed rarely surprises the market. By paying attention to what they say and how they say it, you can understand their plans well in advance. The recent trend shows a pivot. Until two meetings ago, the language was becoming increasingly dovish. However, with core inflation showing no signs of improvement, the Fed has become moderately more hawkish over the last couple of meetings. This shift was evident in the FOMC press conference and is now confirmed in the FOMC minutes too. This suggests limited changes from the Fed next year. The shift in trend increases the risk of no rate cuts in 2025. That's something the stock market won't appreciate. This creates a challenge for Bitcoin, given its correlation with NASDAQ's cyclical performance (as we analyzed on Monday). However, the Fed's hawkish stance might work in Bitcoin's favour by reinforcing its role as an inflation hedge, especially with core inflation remaining sticky. The optimistic view is that the Fed will maintain a path of very slow rate cuts next year, no surprises, no drama. With good overall liquidity conditions, this should be enough to support Bitcoin's continued growth.
That’s it for today. I hope you enjoyed this. We’ll be back next week with more charts. Cheers, Nick P.S. We spend the entire week, countless hours really, doing research, exploring data, surveying emerging trends, looking at charts and making infographics. Our objective? Deliver to you the most important insights in macroeconomics, Bitcoin and digital assets. Armed with those insights you can make better investment decisions. Are you a serious investor? Do you want to get the big picture to get on the big trades? Then click on the button below. You're currently a free subscriber to Ecoinometrics. For the full experience, upgrade your subscription.
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Friday, January 10, 2025
Bitcoin Is Not as Volatile as It Used to Be
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