One of my favorite bits of wisdom is the line "what is plausible is not always probable".
Take commercial airliners as an example. We can have thousands of planes in the air at once, speeds of 500+ miles an hour, strong winds, deadly storms, birds flying close by and a number of other variables. It's plausible that this would be a very dangerous and deadly endeavor. Heck, might as well drive the car, right? Well, the numbers actually show that flying - even with all that craziness - is statistically safer than driving.
When it comes to the weakness of Bitcoin price these days, your local internet news station likely quotes the weakness in "tech stocks" or "growth stocks" as the plausible answer. They'll even sprinkle a few more pieces of knowledge to convince you:
Bitcoin is blockchain which is software which is tech. Thus, Bitcoin is just a levered play on tech
Many people who invest in Bitcoin usually invests in tech stocks too. Thus, the "pain" is spilling over to Bitcoin
Bitcoin has grown so large that it now follows the stock market. The "decoupling phase" is over. Bitcoin is now a risk asset
What if this Bitcoin and tech stocks argument was financial "misinformation"? A plausible rationale indeed, but not the largest driving factor.
What if Bitcoin was always just a risk asset with high beta?
Here's the thing, it is true that Bitcoin's correlation to tech stocks has been steady in the recent months. However, you've probably heard of the famous study that showed the high correlation between ice cream consumption and people drowning. Obviously, neither were affecting each other, it was just that summer weather led to more ice cream eating and people swimming.
There's an argument to be made that it's not the tech stocks affecting Bitcoin.
Instead, there's a much bigger market behind it. It's the U.S. dollar foreign exchange market. There's an alternative worldview where Bitcoin is not a levered play on tech stocks. Bitcoin is a levered play on the U.S. dollar. It’s also always been a risk asset where the swings were just massive during each cycle.
Side notes:
Risk appetite is typically inversely correlated to the U.S. dollar as its considered a safe haven asset. When things are not going well, people covert their holdings to U.S. dollars
It's important to say that inflections in the U.S. dollar also tend to coincide with overall cycles in the broad stock market (and they’re inversely correlated)
The argument below is that inflections in the trade-weighted U.S. dollar index (and thus risk appetite) are a better proxy for Bitcoin than US tech stocks. They are all correlated, but one pair correlates much better.
Weight of the evidence approach
Don't take my word for it though, let's look at the data points. Below is the history of Bitcoin inflection points since 2013 and what was happening with (i) the trade-weighted U.S. dollar index (FXCM Dollar Index) and (ii) the Nasdaq 100 Index (ticker: NDX).
Trade-weighted U.S. Dollar Index and Bitcoin cycle tops/lows
Bitcoin’s cycle high in December 2013
Bitcoin top: December 2013, with high of $1,200
U.S. Dollar bottom (reminder, USD is usually inverse correlated to risk appetite): October 2013, with low of $10,354
NDX top: Didn’t happen; closest significant drawdown is August 2015 (two years later)
Outcome: U.S. Dollar reverses ahead of Bitcoin; NDX tech stocks live in their own world
Bitcoin’s cycle low in 2015
Bitcoin low: January 2015, with low of $164
U.S. Dollar local top: April 2015, with high of $12,162
Note that the USD ranged for more than a year and reached a slightly higher top at $12,635 in January of 2017. If you remember, the ICO/crypto mania was about to hit full steam in just a few months that year
NDX low: August 2015, with low of $3,787
Outcome: U.S. Dollar and Bitcoin make initial inflection points that are months apart; NDX tech stocks have a very brief drawdown 4-5 months later
Bitcoin’s cycle high of 2017
Bitcoin top: December 2017, with high of $19,798
U.S. dollar low: January 2018, with low of $11,895
NDX low: Didn’t happen
Outcome: Once again, U.S. Dollar and Bitcoin inflection points are a month apart while NDX is on “stocks only go up” mode
Bitcoin’s cycle low of 2020
This one is easy: every single risk asset in the world, including Bitcoin and NDX, bottomed in March 2020. By design, the U.S. dollar also topped at the same time
Outcome: Everyone plays their part
Bitcoin’s cycle high of 2021
Bitcoin top: The first high of $64,858 was in April of 2021 (before the May crash). It did manage to make a second high of $69,000 in November of 2021
U.S. dollar low: February 2021, ahead of the May crash, with low of $11,567
NDX low: Nothing happened in May of 2021. The index peaked in November
Outcome: Both the U.S. Dollar and Bitcoin had their first reversal moves close to each other; NDX was still living in the skies and its top coincides with Bitcoin’s final high
As we can see, crypto people must care about risk appetite. Bitcoin has always been a risk asset. It’s always been the case that Bitcoin upcycles coincide with U.S. dollar downside (as a proxy for risk) and vice-versa. The difference is that Bitcoin has drawdowns of 50-70% and upside momentum that is 10x the original price. The pendulum swings with tremendous force.
On the other hand, tech stocks have generally lived in their own world of Up Only. Yes, it did happen that the double top on Bitcoin coincided with the top in tech stocks in November of 2021. In general though, they’re a bad proxy for the direction of Bitcoin.
So what can we do from here?
Well, there’s a lot of chatter on whether Bitcoin will re-test $28,000-$30,000. Perhaps it even touches the old 2017 high of $19,798.
There’s only one thing we can do: watch the trade-weighted U.S. dollar. It’s creeping towards the March 2020 highs in a slow uptrend. If the index continues to go higher and breaks the March 2020 high, it’s difficult to imagine a world where Bitcoin price is doing that well. No amount of “the intitutions are here” will make a difference.
We can argue that Bitcoin has some structural tailwinds going its way:
Deplatforming across the world and the global awareness of what decentralized money can do (see Wen Deplatform: How cancel culture fuels Bitcoin)
As directed by President Biden’s executive order on crypto, we can expect further regulatory clarity for cryto in the U.S.
The structural tailwinds are great, but the risk appetite (i.e money flow) must be on Bitcoin’s side. The past clearly shows us that Bitcoin needs it.
King Dollar, as it’s widely known on trading desks, calls the shots. If you’re in the business of praying for financial outcomes and it includes higher Bitcoin price, pray for a lower U.S. dollar.
All opinions are my own. This is not investment advice.
Additional Chart for reference:
NDX and Bitcoin cycle top/lows. Not a good indicator.