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Market Uncertainty and Decelerating Liquidity Heavily Weighing on Bitcoin

  • The sharp tightening in financial conditions combined with the risk off environment have been weighing on risky assets, particularly cryptocurrencies.
  • Bitcoin broke below the 20,000 key support in June and is down over 70% since its peak reached in November 2021.
  • We previously saw that Bitcoin (and the crypto class in general) has historically been extremely sensitive to high-volatility regimes, and returns have become increasingly correlated to tech equities (chart below).

  • As for tech equities, bitcoin has therefore been very sensitive to the liquidity metrics, therefore the significant deceleration in global liquidity in the past year has also been weighing on the cryptocurrency.
  • The chart below shows the annual change in global M2 has strongly co-moved with the annual change in Bitcoin prices in recent years.
  • Hence, as long as market uncertainty remains elevated and liquidity conditions remain ‘poor’, market should continue to remain volatile in the near term, therefore weighing on bitcoin prices.

Source: Bloomberg/MNI

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