Bitcoin prices are soaring, but there are potential factors that could end the rally.

Today’s column begins where the previous one left off, asking: Will macroeconomic narratives subside? The answer may be somewhat nuanced. Macro factors will always play a role, but certain key issues have been unfolding in a relatively predictable manner, particularly regarding inflation.

With a few exceptions, inflation projections and the Federal Open Market Committee’s (FOMC) expected response with interest rates have unfolded as anticipated.

Bitcoin (BTC) prices have increased by 87% year to date and appear to have found support around $30,000. Ether (ETH) has risen by 64%, trailing behind BTC but still impressive.

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Both cryptocurrencies have largely shrugged off the challenging period for the overall crypto industry. This is demonstrated by something called the Anchored Volume Weighted Average Price (AVWAP) of BTC.

Volume Weighted Average Price (VWAP) is a technical indicator that allows traders to determine the average price of an asset by taking volume and price into account. AVWAP does the same thing but allows traders to anchor their starting point to a specific date of their choosing.

Bitcoin’s AVWAP since the U.S. Securities and Exchange Commission’s lawsuits against Binance and Coinbase is 9.1% lower than its current trading price. The AVWAP taken from November 9, 2022, the day Binance scrapped its proposed FTX takeover, is $22,632. Anchoring from when Celsius paused withdrawals in June 2022 shows an AVWAP of $21,400.

In other words, bitcoin has recovered from a series of adverse events.

The latest catalyst in the industry seems to be BlackRock’s recent filing for a spot bitcoin ETF.

The question now is, what could go wrong? What macroeconomic developments could cause prices to decline, eroding the gains mentioned earlier?

Reading through some of the more recent speeches by Federal Reserve Chairman Jerome Powell indicates that the FOMC is determined to continue its current course of action.

The market appears to expect at least two more rate hikes in 2023, reaching a peak of around 5.6%. If that happens, it is difficult to imagine a significant shock to prices in either direction; it is likely already factored in.

However, there are a few other macro factors in the crypto markets that deserve attention:

Banks passed the most recent stress tests

One of the biggest news stories of the year was the collapse of Silvergate Bank and Silicon Valley Bank. Since both had connections to crypto, the news had a ripple effect throughout the sector. Their failure led to the belief that FOMC rate hikes had gone too far, creating excessive stress among banks.

However, recent stress tests conducted on 23 systemically important banks showed that they appear to be well-prepared to withstand a severe recession and continue lending to qualified households. The tests assumed an unemployment rate of 10%, a 40% decline in commercial real estate, and a 38% decline in housing prices.

The FOMC may believe that it has enough leeway to raise rates aggressively, despite the potential impact. Subsequent weakness in the economy would be painful but would likely bring down inflation without causing the banking system to collapse.

Consumer revolving debt continues to rise

Revolving debt is at an all-time high. This is an area that doesn’t receive much attention but is still significant.

Crypto investing continues to have a large retail component. Glassnode data shows that 1.3 million BTC is held by investors with less than 1 bitcoin, and this population has grown by 73% since 2021.

Increases in credit balances, along with higher interest rates and potentially lower employment, concern me in terms of crypto investing.

That pesky yield curve is still inverted

The spread between 2- and 10-year U.S. Treasury yields is deeply inverted, with a spread of -1.08%, the largest since 1981.

Historically, inversions are often followed by recessions. However, the FOMC’s most recent summary of economic projections does not appear to be forecasting a recession.

Still, this disconnect between economic history and economic forecast implies a degree of uncertainty that may not be priced in by markets.

As an investor with a bullish bias, it forces me to ask, “What if I’m wrong?” I don’t think I’m alone. As more investors ask this question, a reluctance could grow when it comes to deploying capital to crypto assets.

That, in and of itself, could serve as a short-term hurdle for crypto prices.

Takeaways

From blockchain Deputy Editor-in-Chief Nick Baker, here is some news worth reading:

  • BLOCK SCHOLES: It doesn’t take too long hanging around finance before you hear the words “Black-Scholes,” the famous options pricing model. I’ve even seen it argued that it’s one of the most important math formulas of the past century. Anyway, when you spot a headline with “Block Scholes,” you start wondering if that’s a typo of Black-Scholes. But, no, it’s a crypto data firm, and a recent blockchain story explains that it has determined that crypto prices have untethered from stocks. I’d argue this is either really good news for macro investors looking for uncorrelated assets or terrible news for crypto traders adrift in a sea of bad news.
  • PEPE PLAGIARISTS: Not so long ago, pepecoin (PEPE) was the hottest thing on Planet Crypto. That’s not so much the case anymore. Possibly trying to recapture the magic, though, some PEPE knockoffs have emerged, though ace blockchain reporter Shaurya Malwa argues in his coverage that past history shows any gains aren’t likely to last long.
  • POOR APES: Another formerly hot area, Bored Ape Yacht Club NFTs, are getting hit hard lately, with the floor price of the BAYC collection sinking to a 20-month low. This fits with the recent trend in crypto: while the heavyweights, bitcoin and ether, are doing great, much of the rest of the industry is struggling.
  • FLAIL WHALE: MicroStrategy, the software developer that Michael Saylor steered toward becoming a corporate bitcoin vault, recently bought more BTC. Here’s a story on how MicroStrategy’s past purchases have actually been followed by declines in bitcoin’s price.

Edited by Nick Baker.

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