10 Jul Bitfinex Alpha | Bitcoin indicators increasingly bullish as inflation risk continues
Unclear economic picture, but watch out for China
In what is becoming a customary story, we saw another week of data providing a mixed picture for the economy and hence a still unclear prognosis on inflation.
US manufacturing continues to decline, with layoffs and contraction in the sector observed for the eighth consecutive month, indicating a struggling economy – at least for this sector. While there are pockets of growth in certain industries – such as transportation- concerns remain about declining sales and potential inventory buildup.
The construction industry however, has experienced moderate growth, buoyed by increased public and private sector spending. Notably, construction spending in May edged up 0.9 percent to a total of $1.925 trillion, surpassing consensus forecasts.
The service sector too, continues to thrive, with new orders pushing the ISM’s business conditions index to 53.9 percent, above expectations and well into the expansionary zone. This growth was driven by a surge in employment across 15 out of 18 industries. The US job market in contrast, reported its slowest growth in 30 months, but despite this, wage growth remains resilient, underscoring labour market strength.
While we believe this points to stickier inflation, the market view does not seem to support this. While rates are expected to rise again this year, there is still a broad expectation that inflation will begin to subside in 2024 and rates will come down. However, in our view, this underestimates a number of important inflationary factors and we look in particular at China.
While investors are showing renewed enthusiasm for sectors like tech hardware, software services, and semiconductors, supporting a view that business and consumer spending will remain buoyant – and unconstrained by high long term rates – we believe that sectors such as energy and utilities, which can leverage the inflationary environment should drive investor focus. Why? China’s gradual re-opening post-Covid, will fuel renewed inflationary pressures.
As China starts to stimulate its economy, we should see a surge in activity as students resume studying abroad, tourists start travelling, and business executives re-start international travel. Concurrently, China’s recovering housing market will also further boost consumer spending, creating a significant economic resurgence.
US inflation is historically closely tied to China’s recovery, and a rising China Producer Price Index (PPI) will push up the US Consumer Price Index (CPI), and in turn keep the Fed’s hopes of reaching its two percent target inflation rate, a distant dream.
The extent and timing of China’s reopening in the coming year, for sure remains uncertain. However, it is evident that a pivot is underway. To ignore the potential impact of China on inflation, and therefore interest rate trajectory, is misguided in our view.
We see some institutional investors recognising this, with a growing number increasing their exposure to Bitcoin, with a correspondingly positive impact on the price.
Bitcoin indicators decidedly bullish
This comes against the backdrop of Bitcoin’s unmoved supply reaching a new peak with data from Ark Invest revealing that approximately 70 percent of the circulating Bitcoin supply has remained static for at least a year, a clear indication of a solidifying holder base and a vote of confidence from long-term Bitcoin investors.
Meanwhile, the narrowing discount of the Grayscale Bitcoin Trust signals renewed institutional optimism for the leading cryptocurrency. Since BlackRock’s spot Bitcoin ETF filing, GBTC’s discount to NAV has reduced from 42 to 26.7 percent, indicating market expectation of Blackrock’s ETF getting approved.
Furthermore, the balance of Bitcoin held on over-the-counter (OTC) desks reached a one-year high in June, suggesting increasing interest from institutional players and large capital allocators. However, the escalating open interest since BlackRock’s first ETF filing points towards a dominance of derivatives traders, a trend worth monitoring due to potential for short-term price movements.
Meanwhile, there has been a significant surge in USDt (Tether) reserves on exchanges, indicating an increase in liquidity from the most sizable stablecoin within the cryptocurrency markets. This suggests a growing demand for stable assets, possibly driven by an uncertain economic climate and trust in crypto as an easily fungible safe haven. However, exchange reserves for all stablecoins have witnessed a 52 percent decrease this year, an effect possibly influenced by Binance’s legal challenges and the subsequent outflow from the BNB chain and the BUSD stablecoin.
Bitcoin liquidity has also seen a decrease, possibly due to the trend of long-term holding among investors, indicating confidence in Bitcoin’s enduring value despite market volatility.
We welcome the unmoved supply of Bitcoin and growing institutional interest as a bullish indicator, potential economic challenges coupled with a shift from spot to futures trading in the past few weeks could introduce short-term volatility in the global crypto landscape.