As the Federal Reserve approaches the conclusion of Quantitative Tightening (QT), Bitcoin finds itself at a pivotal macroeconomic juncture. With December rate cuts becoming nearly inevitable, the environment is primed for a possible change in monetary policy that could significantly impact Bitcoin and other risk assets. Historical trends indicate that when the Fed’s balance sheet ceases to contract, Bitcoin often witnesses considerable bullish movements.
Reversals in Balance Sheet and Bitcoin Pricing
The correlation between the Fed’s balance sheet and Bitcoin reveals a fascinating trend. Throughout Bitcoin’s history, there have been only three cases where QT was halted and the federal balance sheet stabilized or expanded. The inaugural occurrence was on October 27, 2010, which was swiftly followed by a substantial Bitcoin bull run. A second instance on September 26, 2012, similarly triggered a remarkable rally leading into the 2013 double-peak cycle. The third instance emerged in 2019, albeit complicated by the COVID-19 pandemic and an initial market downturn—yet, it eventually propelled Bitcoin from approximately $3,000 to over $67,000.
The Influence of Business Cycles on Bitcoin Pricing
Bitcoin’s recent stagnation, despite an uptick in Global M2, suggests that monetary liquidity is not the sole driver of its prices. Instead, it appears increasingly linked to traditional business cycle metrics, particularly the U.S. Purchasing Managers Index (PMI). This index gauges manufacturing confidence and economic performance, with a notable correlation to yearly S&P 500 returns: as PMI ascends, equities generally yield impressive returns; conversely, when PMI declines, markets tend to enter phases of underperformance or recession.
A predictive indicator for PMI trends is the copper-to-gold ratio. Their relationship is nearly perfectly correlated, with copper often leading—bottoming out before PMI rallies and peaking ahead of PMI declines. Currently, the Copper/Gold ratio seems to be finding a bottom, aligning with the historical timing of Fed balance sheet reversals. This indicates that the traditional business cycle could shift back to a more favorable state after a period of economic softening.
Conclusion: Future Movements for Bitcoin Pricing
The conclusion of QT, along with a strengthen Copper/Gold ratio and historical evidence spanning Bitcoin’s existence, suggests that monetary conditions are set to improve significantly. Although Bitcoin has recently trailed behind traditional assets, this underperformance seems tied to waning economic confidence rather than any inherent weakness in Bitcoin itself. With both monetary policy and business cycle signals poised to shift positively, this confluence of factors could initiate a notable trend reversal. Bitcoin is well-positioned to benefit from this dual momentum, signaling that the upcoming weeks and months are crucial for observing whether these historical indications will lead to sustained price growth.
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Disclaimer: This article is intended for informational purposes only and should not be interpreted as financial advice. Always conduct your own research prior to making any investment decisions.
