How Long Will This Bitcoin Correction Last?Also Biggest Single Day Outflow For The Bitcoin ETFs & The Comeback of Inflation
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:
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If you aren’t subscribed yet, hit the subscribe button, to receive this email every week directly in your inbox: How Long Will This Bitcoin Correction Last?Since December we went from "this is just the beginning of a Bitcoin bull market" to "how long is this drawdown going to last." Now clearly this correction isn't all about Bitcoin. It is a story of deleveraging for all risk assets at a time when the macro situation is uncertain. And looking forward, the overall trend in the stock market suggests headwinds are more likely for Bitcoin. So it is hard to say how long this correction will last if we focus on this particular case. That being said, we can look at historical examples to see how long these drawdowns typically last. The chart below breaks down drawdowns by size (peak price to bottom). For each size range, we show the average duration of the correction in days. The current drawdown is in the -20% to -40% range. So far it has lasted 38 days. On average, these last about 68 days. So we are basically half-way to a full recovery if this follows the typical pattern. What's particularly striking is the recovery speed difference between Bitcoin and Nasdaq. Even with similar sized corrections, Bitcoin tends to recover in less than one-third the time it takes the Nasdaq to regain lost ground. This volatility works both ways, but gives Bitcoin a clear advantage during recovery phases. But as long as the NASDAQ continues to push lower, Bitcoin will also move lower due to correlation. So while the bottom isn't yet clearly in, it's difficult to make any specific prediction.
Biggest Single Day Outflow For The Bitcoin ETFsNow the new thing we have since last year is the presence of the Bitcoin ETFs. In one year they have become the major driving force behind price movements for Bitcoin. If you're going to track a single metric when making investment decisions for Bitcoin, you have to track the ETF flows. We do that in the Bitcoin Market Monitor by the way and things aren’t looking great. What those flows are telling us right now is that this correction came together with some large unwinding. We went from having large net outflows on Monday to having the largest single day of outflows (expressed in Bitcoins) later in the week. You can bet that the basis trade has shrunk and that must have been a good chunk of those outflows. And more generally in the market, a good amount of leverage has left the system. This is always what happens during large and rapid moves. Now the problem is that this was not a one-day event. Overall, the net flows over the last 30 days have been the most negative since the launch of the ETFs. So there is a big trend issue. We come back to the same conclusion as before. Bitcoin has a really hard time trending counter to other risk-on assets, especially the Nasdaq 100. Which means that as long as there is no bottom to the equities market, there is no bottom for Bitcoin either. On Wednesday we discussed how our drawdown simulations showed a low 3% probability of Bitcoin heading below $75,000. But it does seem we are getting closer to this bad scenario.
The Comeback of InflationThe background for this correction in risk assets is of course a lot of uncertainty in the macro situation. So far President Trump has only focused on the kind of policies that are rattling the market. And when you combine that with a Fed that can do nothing but go more hawkish, you get the result we see in Bitcoin and the rest of the market now. The worrisome thing is that this situation could last. And soon inflation is going to become a big issue again. Since the US presidential elections, consumers are actually expecting inflation to rise. And this month it is really getting out of hand. Consumers now see inflation reaching 4.3% at one year. And if this is what they expect, then they are more likely to bring forward consumption which would itself push prices higher. Even if this is not a universal effect, there is an element of self-fulfilling prophecy in inflation. And none of the mechanisms we have to resolve this problem are good for Bitcoin or risk assets. That's starting to be a lot of headwinds BTC is facing right now.
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, February 28, 2025
How Long Will This Bitcoin Correction Last?
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