The bearish environment that dominated the crypto markets in early August may have set the conditions for a “tactical bottom for Bitcoin,” supported by expectations of looser monetary policy in the United States.
According to an analysis from asset manager ETC Group, sentiment around crypto assets dropped in August to its lowest point since the FTX collapse in November 2022, driven by rising concerns over a recession in the US and a sudden appreciation of the Japanese yen.
Recession fears, however, quickly evolved into expectations of a reversal in the Federal Reserve’s monetary policy. If the Fed begins easing its policy, meaning lowering interest rates or injecting more money into the economy, it could create a more favorable environment for Bitcoin (BTC), as a looser monetary policy generally encourages more risk-taking and investment in assets like cryptocurrencies.
According to André Dragosch, ETC Group’s head of research:
“[...] We think the combination of the macro and crypto sentiment capitulation in early August most likely marked a significant tactical bottom in Bitcoin and consequently also marked the beginning of a renewed bull run.”
The anticipation was reinforced when Fed Chair Jerome Powell indicated during a meeting in Jackson Hole, Wyoming that such a reversal is likely imminent. “The direction of travel is clear, and the timing and pace of rate cuts will depend on incoming data, the evolving outlook, and the balance of risks,” said the Fed chair.
Rolling partial Rˆ2 of macro factors to Bitcoin. Source: Bloomberg/ETC Group
According to Dragosch, Powell’s comments were an indication that the Fed could no longer tolerate deteriorating labor market conditions and pointed to rate cuts starting in September.
“Our own market-based measure of monetary policy expectations is now clearly signalling positive expectations for monetary policy. This is bound to provide a positive tailwind for Bitcoin and other cryptoassets over the coming month.”
Bitcoin’s price is $58,385 at the time of writing, having dropped nearly 5% over the past 30 days. In 2024, however, the asset still sees a 31% return.
Recession risk
Concerns over an economic slowdown in the US are less likely to affect Bitcoin’s price, forecasts ETC Group. According to Dragosch’s analysis, the cryptocurrency’s sensitivity to global growth expectations is decreasing and becoming more correlated with monetary policy and the performance of the US dollar.
“Our macro factor model implies that Bitcoin’s performance over the past 120 days has been explained less by changes in global growth expectations (which have been a headwind) and more by other macro factors such as monetary policy expectations or the US Dollar (which have provided tailwinds).”
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