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Macroeconomic factors, not just spot ETF inflows, fuel Bitcoin's surge to $72K

Macroeconomic factors play a key role in Bitcoin's rally

Key takeaways:

  1. Bitcoin's recent surge to $72,000 is likely driven by a combination of macroeconomic factors, including persistent inflation, U.S. government stimulus initiatives, and global trade tensions, rather than solely attributable to inflows from spot Bitcoin ETFs.
  2. Investors' expectations regarding the economy and the cost of capital play a significant role in the performance of scarce assets like Bitcoin, especially during times of increased liquidity and inflationary pressures.
  3. Escalating trade tensions between the U.S. and China may have contributed to the increased interest in both gold and Bitcoin as investors seek hedges against the deteriorating state of global economic relations.

The recent surge in Bitcoin's price, which saw the cryptocurrency reach an intraday peak of $72,747 on April 8, has sparked widespread speculation about the underlying causes. While some may be quick to attribute the rally to inflows from spot Bitcoin exchange-traded funds (ETFs), it is more plausible that a range of macroeconomic factors have played a significant role in driving the price higher.

It would be misguided to suggest that the surge in BTC's value was solely due to the purchase of $500 million in Bitcoin by the Ethena stablecoin USDCe as collateral. For context, MicroStrategy's acquisition of 9,245 Bitcoin, valued at over $600 million on March 19, did not prevent a 13.7% drop in BTC price in the subsequent six days. Given Bitcoin's daily spot volumes exceeding $10 billion, such inflows are relatively insignificant in the grand scheme of things.

Investors' expectations regarding the economy and the cost of capital should not be underestimated. During periods of increased liquidity and monetary policies aimed at stimulating consumption and growth, scarce assets like Bitcoin tend to benefit. This trend is particularly pronounced during times of persistent inflation, when salaries and prices rise to match the increasing availability of money.

Inflationary pressures and global trade tensions

Jamie Dimon, CEO of JPMorgan Chase, recently suggested in a shareholder letter that the resilience of the U.S. economy could lead to more persistent inflation and higher interest rates than markets anticipate. This insight helps explain why gold ETF instruments are trading at a premium in China, as investors brace for inflationary pressures amid the U.S.'s precarious fiscal debt situation.

Eric Balcunhas, a senior ETF analyst at Bloomberg, noted that Chinese investors are eager to buy assets unlinked to their own economy and stock market, leading to gold ETFs trading at 30% above their fair value in China. The U.S. government's deficit is further strained by a $1.2 trillion spending package approved on March 23 and President Joe Biden's proposal to forgive up to $20,000 of student debt for 23 million borrowers, regardless of income, exacerbating concerns over fiscal sustainability.

Escalating trade tensions between the U.S. and China may have also contributed to the increased interest in both gold and Bitcoin. Notably, gold prices soared to a record high of $2,354 on April 8, coinciding with the U.S. Treasury 2-year yield reaching its highest level in over four months at 4.79%. This divergence from the conventional trend, where gold's value tends to wane when investors favor the yields from fixed-income investments, is particularly intriguing.

Bitcoin as a hedge against economic uncertainty

While some may argue that the aforementioned dynamics do not inherently favor Bitcoin, predicting how investors will react to heightened inflation and the potential for an economic downturn remains challenging, given Bitcoin's fluctuating correlation with traditional assets like stocks and gold.

U.S. Treasury Secretary Janet Yellen recently disclosed that the administration is considering potential tariffs on subsidized Chinese energy products, and other nations might also implement trade restrictions against China. In this context, the surge in Bitcoin's value to $72,000 on April 8 may be attributed to investors seeking a hedge against the deteriorating state of global economic relations and the ramifications of U.S. government stimulus initiatives, rather than being driven by sporadic and unpredictable Bitcoin inflows from specific investors.