Bitcoin (BTC) has made a remarkable comeback this year, with many analysts predicting continued gains in the near future. This bullish sentiment is fueled by several factors, including the anticipated approval of spot Bitcoin exchange-traded funds (ETFs) by the U.S. Securities and Exchange Commission (SEC).
With these factors converging to create a supportive environment, the question remains: what is the upside potential for Bitcoin?
Bitcoin has experienced a 120% surge in its price this year, and many analysts anticipate additional gains in the short term. This optimism is rooted in the expectation that the SEC will soon approve one or more spot ETFs, coupled with the impending halving of the Bitcoin blockchain’s mining reward scheduled for April next year.
The bullish outlook is further bolstered by positive shifts in the broader economy, indicating a favorable turnaround in the macroeconomic factors that contributed to last year’s price downturn.
The chart illustrates the balance between central banks’ tightening and loosening policies since 1947. Positive values indicate a net inclination for tighter monetary conditions, while negative values signal a preference for easing.
Loose policies involve injecting more money into the financial system through measures like interest-rate cuts and fostering risk-taking, as evident in the 18 months following the March 2020 coronavirus crash . Conversely, tight monetary policies, achieved through interest-rate hikes, aim to reduce liquidity to curb inflation, dampening risk-taking, as witnessed last year.
The plot has recently trended lower, suggesting that the global tightening cycle from the previous year, impacting financial markets, including cryptocurrencies, has peaked.
There is now a growing bias toward easing liquidity as inflation rates worldwide decelerate. With central banks having leeway to ease off tightening measures, this shift may lead to increased capital flowing into the crypto market. Bitcoin, known for its sensitivity to global liquidity changes, tends to rally when there is more money circulating.
The chart below depicts Goldman Sachs’ U.S. Financial Conditions Index (FCI) since January, revealing a significant decline from the recent high of 100.74 to just under 100. This reversal undoes the tightening observed in September and October, contrasting with the Federal Reserve’s commitment to maintaining higher interest rates for an extended period.
This shift suggests a resilient U.S. economy ahead, presenting a positive outlook for risk assets, including cryptocurrencies. Notably, the majority of Bitcoin’s year-to-date gains have occurred during U.S. trading hours.
The FCI is a composite measure that considers short-term and long-term interest rates, the trade-weighted U.S. dollar exchange rate, credit spreads, and the equity prices to earnings per share ratio. A 1% decrease (increase) in the index is known to generate a 1% positive (negative) GDP impulse in the subsequent three to four quarters.
An encouraging factor for Bitcoin is the reduction in the yield on the U.S. 10-year Treasury note, which has decreased by 50 basis points to 4.43% following the Treasury’s announcement of a more gradual pace of bond purchases at the beginning of the month.
A drop in the 10-year yield, often considered the risk-free rate, typically prompts investors to explore higher-yield alternatives such as stocks and cryptocurrencies.
There’s potential for a further decline in the 10-year yield, as indicated by the daily chart displaying a bearish head-and-shoulders technical analysis pattern.
“10-year yields delivered a lower high (as expected) and broke lower, clearing a head and shoulders top. The pattern yields a target of about 3.93%, but current levels (uptrend) and 4.33% (breakout point) are potential supports too,” noted EFG Bank’s research team stated .
The shift in Goldman’s FCI index indicating a relaxation of financial conditions may prompt a more hawkish stance in Federal Reserve communications, leading markets to reassess the likelihood of another rate hike in the near future.
This could potentially decelerate Bitcoin’s upward momentum. Bullish investors should also monitor Japan’s departure from ultra-easy monetary policy , geopolitical tensions, concerns in the U.S. commercial property sector, and the potential resurgence of inflation as factors that could contribute to price volatility in risk assets.
On November 17, the analyst ‘CryptoCon ‘ observed the increasing strength of altcoins despite significant movements in Bitcoin. They highlighted this strength through both the upward trend in altcoin strength and the breach of the 50-week SMA (simple moving average) barrier.
Historically, strong upward price action has followed the crossing of this technical indicator in previous market cycles, such as 2016 and 2017. However, this cycle’s cross has occurred a bit earlier than usual, anticipated for the following year. The analyst expects more robust price action reminiscent of 2016-2017 for both Bitcoin and altcoins, emphasizing a departure from the trends seen in 2020.
While it’s still early for altcoins, signs of increased activity are emerging. However, total capitalization has retreated to $1.43 trillion in the past 24 hours as a cooling-off period commences.
Despite the overall market decline, not all altcoins are in the red. Dogecoin (DOGE) stands out with a 5.4% gain. Avalanche (AVAX) has surged 18%, surpassing $24, while Kaspa (KAS) has seen a 20% increase on the day.