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Bitcoin Q1 2022 Fundamental Forecast: Macro Will Influence Bitcoin (More)

Bitcoin Q1 2022 Fundamental Forecast: Macro Will Influence Bitcoin (More)

The price of bitcoin is driven by demand for digital currency throughout the world. According to specific predictions, in 2021, the market capitalization of bitcoin will rise to $1 trillion for the first time. While a modest +100 percent return may not appear to be much in today’s climate, it is pretty significant compared with traditional assets, which have existed for decades.

Throughout 2018, bitcoin’s institutional adoption, the debut of a futures ETF, and the first significant upgrade to the Bitcoin network in four years have all taken place. Bitcoin investors have had a difficult time, with frequent bouts of severe volatility. It’s an asset feature; they seem to thrive on volatility. Others find it sufficient to keep their money in cash for now.

One year spy relative performance: BTC/USD vs spy 1-year average (ADX)

Correlations between cross-assets

When it comes to bitcoin’s historical relationships with traditional assets, there is a positive correlation with the S&P 500 and commodities such as gold and crude oil. This connection between bitcoin and equities has been getting stronger for much of the year.

21-day rolling correlation between BTC/SPY

It may indicate that bitcoin is similarly influenced by the outsized effects of monetary and fiscal policy in a post-COIVD world, or it might suggest that growing intuitive adoption has brought about the same risk management procedures. Regardless of the reason, since January 2020, bitcoin’s returns have closely tracked equities more frequently than ever before.

Cross asset correlations, like any individual security within a broad-based equity index, will increase during periods of heightened volatility. Investors frequently reduce their risk exposure during volatile markets, resulting in strengthened cross-market linkages. As the Federal Reserve embarks on a strategy of monetary tightening, equity volatility is expected to stay high, making for a more complex environment for bitcoin during Q1 and into Q2.

Should the continued dollar strength of Q4 21 continue, Bitcoin is also likely to struggle. The greenback considers whether you view bitcoin as a currency or a commodity. A strong dollar may hamper performance in the future, while dollar weakness might provide a boost.

The economy engine

As a result of these trends, I anticipate that bitcoin will be enslaved by economic growth and inflation in the first quarter. The macro-environment will become more significant. In the event of a tighter monetary policy and potential growth stagnation, the market’s most volatile asset might be negatively affected. No matter how bullish we are on crypto’s long-term prospects, it’s worth considering.

A yield curve shift is a bad sign. Bitcoin has frequently shown a significant positive relationship with the U.S. Treasury yield curve, suggesting that it may be overvalued and vulnerable to future downward price swings. A flattening curve indicates that investors’ future economic growth and inflation expectations are declining, which is not good news. Bitcoin has done well when the yield curve has steepened, but it’s struggled as it flattens. If you’ve been able to correctly predict the yield curve’s slope over much of 2021, you’ve stayed on the bitcoin trade side.

If this is the case, we expect bitcoin’s price to outperform when the economy grows, and inflation rises, often coinciding with higher long-term interest rates. Similar to how equities typically underperform during economic downturns.

Making sense of volatility

Let’s examine potential outcomes through the perspective of historical volatility to set a reasonable expectation for bitcoin’s price over the next quarter.

Bitcoin historical volatility chart

The volatility of bitcoin has decreased over time as the cryptocurrency matures as an investable asset. Volatility spikes have resulted in lower subsequent highs, with bitcoin’s spring rally seeing a drop from 190 percent in 2018 to a low of 110 percent.

If we simulate an anticipated yearly movement based on previous volatility highs and a spot reference price of $47,000 BTC/USD, the following expected trading ranges for the next year emerge.

Due to its speculative nature, there is often a positive relationship between the bitcoin spot price and the underlying volatility. As a result, it’s quite conceivable that bitcoin vol could rise above 100%, although the price cannot fall below $0.

 

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