Why Bitcoin is falling, despite the positive statistics

The rate of outflow of Bitcoin to user addresses exceeded 96 thousand. BTC per month, and the total balance of cryptocurrency exchanges reached a mid–2018 low of 2.47 million BTC. Both small players and whales participate in the accumulation. So why don’t hoddle moods lead to a price increase?

The reason is that the main investment force for cryptocurrencies since 2020 is institutional investors – large companies with investments of $ 1 million. Their interest greatly influences current prices.

Due to the increase in inflation, which reached 8.5% in the US in March, the financial community expects the Fed to take more decisive action at the May meeting. The regulator will be forced to raise the key rate again (probably by 0.5% at once). For market participants, this means an increase in interest rates on loans and other borrowings, which is why interest from high-risk assets is shifting to more conservative instruments. So, the other day Pantera Capital announced the closure of accepting investments in a cryptocurrency fund, which has raised $1.3 billion in six months.

The traditional decline in the stock market during the Fed’s transition from a soft monetary policy to its tightening is indicative of the revaluation of values and the rejection of risky products: since the beginning of the year, the S&P 500 index has sunk by 7.8%.

Someone may object that it is impossible to compare the cryptocurrency and stock markets with each ot her.

However, statistics indicate the emergence of a relationship with the massive arrival of institutional investors in crypto in 2020. As of March 2022, according to Arcana Research, the correlation coefficient between the dynamics of Bitcoin and the S&P 500 was 0.497.

This is more clearly reflected in the analysis of Coinbase (NASDAQ:COIN) using z-estimates, when, to compare price dynamics, values are pre-“calibrated” relative to their own spread of indicators (standard deviations relative to average values). This approach demonstrates a more stable position of the cryptocurrency at all, since in March the shares were adjusted three times by two standard deviations, whereas Bitcoin – only by one.

As we can see, due to the expectation of further tightening of monetary policy, most risky assets are declining in price, not excluding Bitcoin. What’s more interesting is how long will it last?

According to statistics, in most cases, after the first 6-12 months from the start of the Fed’s rate hike, the markets returned to growth. The exception was the period of the early 70s with the introduction of the oil embargo.

It is difficult to say whether the current cycle will be similar to the recession of the 70s, or the “landing of inflation” will be softer. In most cases, after a short pause, interest in risky assets returned with renewed vigor.