Key Takeaways

• Bitcoin has softened fallen from $30,000 to close to $28,000
• Our head of research looks into the data, arguing the move should not be a surprise
• Bitcoin’s fixed supply and lack of dividends or earnings means price is entirely demand-driven
• Thin liquidity in the Bitcoin market exaggerates every move, with 45% of stablecoins leaving exchanges in the last 4 months
• Correlation with stocks remains high, with high UK inflation creating pause for thought
• Market has also peeled back slightly on forecasts for interest rate cuts, and Bitcoin has followed

I have lost count of the number of times I’ve been asked “Why is Bitcoin going up?”, or “what is driving this Bitcoin sell-off?”. 

For many assets, it’s clear as day as to what is driving the price action over any given trading period. Earnings forecast missed by 10%? Hello, red candle. Warren Buffett announced a mass purchase of your stock? Buckle in; we’re heading north. 

For Bitcoin, it’s a little tougher. There are no dividends or dividend forecasts; Bitcoin pays no yield. Nor are there earnings. Additionally, the supply doesn’t waver, instead it follows a pre-determined schedule set by Satoshi Nakamoto in October 2008, governing it block by block in ten-minute intervals. 

With the supply set in stone and out of the picture, and the absence of any periodic yield/forecasts derived from dividends or earnings, this means that the Bitcoin price is all about demand. And that is very difficult to predict. Bitcoin gonna Bitcoin, is often about the best reasoning that can be given. 

But there are factors we can assess. One is liquidity, which I touched on in a recent deep dive as Bitcoin surged beyond $30,000 for the first time in ten months. Order book liquidity is as thin as it has been in a year, while overall capital has fled the crypto space at large. Take a look at the balance of stablecoins on exchanges:

That is 45% of the stablecoin balance taking the exit door in the last four months, the balance as low as it has been since October 2021. 

With Bitcoin already uber-volatile (VIX metric blows that of any “normal” asset out of the water), this amps up its propensity for violent moves even further. In simple terms, thinner liquidity means it takes less action to move the price. 

Why is the Bitcoin price currently falling?

So, it is often difficult to ascertain why Bitcoin is moving, as this thin liquidity and capricious demand combine to make it very sensitive. 

But sometimes, we can make educated guesses as to what moves Bitcoin on any given day. This is one of those moments. 

Macro conditions have long been the key for Bitcoin. Again, a little chart to show this:

Despite some temporary optimism that Bitcoin was decoupling as investors fled a collapsing (fiat) bakning system for the safe haven that is Bitcoin, the orange coin is very much moving in tandem with high-risk assets, such as tech stocks listed on the Nasdaq.

I wrote a deep dive at the time of the banking crisis as to why Bitcoin’s dip in correlation with stocks was just a temporary blip. Looking at the data, it appears to have come back up.

Lot of chatter about what is driving this massive Bitcoin rally.

Spoke with @CNBC last night about whether it’s stemming from interest rate forecasts or if investors are betting on Bitcoin as an alternative to the banking turmoil👇 pic.twitter.com/o45zOOPiiw

— Dan Ashmore (@DanniiAshmore) March 21, 2023

And looking at wider financial markets in the last few days, optimism over the economic climate has pulled back. UK inflation was released yesterday, holding firm in the double digits, fuelling the expectation that the Bank of England will hike further. 

Over in the US, Atlanta Federal Reserve president said he expected another 25 bps hike, casting another bit of doubt for the market that hikes may not be done quite yet. 

Not to mention a rally can’t go on forever. Bitcoin has been on a tear this year, up 74% year-to-date. It’s an asset which has always oscillated, so it’s not a surprise that it is finally showing a bit of weakness. And a fall from $30,000 to $28,000 is merely a drop in the ocean compared to what it is capable of. 

A true Bitcoin red candle cannot be ruled out here, given the volatility and thin liquidity, just like it could suddenly surge further north. As financial markets adjust to new data all the time, like the all-important inflation readings and FOMC minutes, Bitcoin will continue to move like a levered bet on tech stocks. 

As for what direction it will move in, that is anyone’s guess. I don’t have a crystal ball, and I won’t make any predictions just for the sake of it, because I simply don’t know. Not many people do right now, with the world in a precarious state economically. Inflation is still high, yet interest rates are apparently coming to the end of the tightening cycle. 

Soft landing, hard landing, something in between? The future will tell. But whatever happens, the volatility of the world’s biggest cryptocurrency is very real, and abrupt price reversals and large swings won’t stop anytime soon. Bitcoin gonna Bitcoin.