Bitcoin Plunges Despite Bitcoin Strategic Reserve
In January, Bitcoin neared $110k, a Bitcoin Strategic Reserve was rumored, and investors were bullish. However, since then, in the classic “sell the news” fashion, Bitcoin has plunged to a high $70k’s. Nevertheless, despite the recent correction and short-term volatility, long-term-focused Bitcoin investors should stay the course. Below are three reasons to keep the faith:
Bitcoin and Liquidity (M2) Are Correlated
In economics, M2 represents the money supply, including cash checking deposits, saving deposits, and other easily convertible near-money assets. Fundamentally, M2 constitutes a high-level overview of liquidity, or the money circulating in the economy. Though markets have many moving parts, from a first principle’s perspective, savvy investors understand that M2, or liquidity, is the primary driver of asset prices.
“Earnings don’t move the overall market; it’s the Federal Reserve Board. Focus on the central banks and focus on the movement of liquidity. Most people in the market are looking for earnings and conventional measures. It’s liquidity that moves markets.”~Stanley Druckenmiller
M2 increases when the Federal Reserve cuts interest rates. After a lackluster February jobs report, plunging equities, and tariff uncertainties, the odds of a rate cut in June have shot up to 86.7% (according to the CME FedWatch Tool). Below is a chart that shows the correlation between M2 and Bitcoin.
Image Source: LSEG Datastream, Bloomberg - Global Macro Investor
As “RealVision” founder Raoul Pal (@raoulGMI) points out, “We had the exact same correction in 2017 caused by the same reaction to Trump policies (higher dollar and higher rates which then reversed).,”
Image Source: LSEG Datastream, Bloomberg - Global Macro Investor
Bitcoin’s Technical Confluence Zone
The iShares Bitcoin Trust ETF (IBIT) is approaching a critical technical confluence zone that should act as a high reward-to-risk zone for investors with a long-term investing time frame and the ability to stomach short-term volatility. IBIT shares are in the process of filling the November election gap, tagging the rising 40-week moving average, and testing the previous breakout zone.
Image Source: TradingView
Crypto Czar Confirms Bitcoin is Best-in-Breed
David Sacks, the Trump Administration’s “Crypto Czar” and former host of the wildly popular “All In” podcast, appeared on his old podcast last week to discuss the U.S. Strategic Bitcoin Reserve. Several times during his interview, Sacks made the critical distinction between Bitcoin and other digital assets, saying, “We’ve decided that Bitcoin is scarce, it’s valuable, and that it’s strategic for the United States to hold on to this as a long-term reserve asset.” Bitcoin’s breathtaking performance confirms that it’s in a league of its own. Since 2010, Bitcoin has averaged triple-digit percentage annual gains and has only recorded three down years.
Image Source: @charliebilello
The fact that the U.S. will HODL (hold on for dear life) to its roughly 200k Bitcoin is a welcome sign for investors and means that no additional supply from the government will flood the market.
Bottom Line
The likelihood of increasing M2, a high reward-to-risk technical zone, and the new “Strategic Bitcoin Reserve” suggest that crypto-related stocks like Coinbase (COIN), MicroStrategy (MSTR), Robinhood (HOOD), and Riot Platforms (RIOT) may be ready to bounce.
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This article originally published on Zacks Investment Research (zacks.com).
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
