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FEB 1, 2024

FOMC and why it matters for crypto

by Meta Investor

And some latest updates
Hello Investors,
Today I want to explore with you how the recent FOMC relates to the crypto market and what other factors are affecting the cycles.
Let’s talk macro today.

FOMC and why it matters for crypto

We all tend to agree that BTC halving is the major market mover, and as it is approaching, we expect a crazy price increase, like 6-10x.
2 things:
  1. As the asset matures, each cycle is less “crazy” (read volatile).
  2. It’s not just about halving, it’s the money supply (Global M2).
Let’s explore.

Maturity

As the BTC and the whole crypto market matures, we experience lower volatility.
Below you can see that with each cycle the swings are smaller.
From + 5,189% to “only” +270% in one year.
  Source: curvo.eu
  Source: curvo.eu
It’s similar to companies: can a startup make +2,000% in one year? Of course, many of them do.
Can Apple do +2,000% in one year? Probably not.
—> The bigger the market/company the more capital it needs to make that big swing.
  Source: https://companiesmarketcap.com/assets-by-market-cap/
  Source: https://companiesmarketcap.com/assets-by-market-cap/

Considering Bitcoin is already among the biggest, it would require a lot of capital to make the 6x-10x people are talking about on YouTube and Twitter.
While it’s still possible, this is just something to have in mind.
Now let’s talk about the cycles.

Halving vs. Liquidity

The consensus among crypto folks is: Halving makes the cycle, we can calculate it, and count on it.
However, the reality is not as straightforward.
In the past the halving was tied to liquidity cycles —> soon after the halving a lot of extra money flooded the markets, resulting in:
  1. Investors having more money to invest.
  2. Currencies being weaker, forcing investors to search for higher yields.
Check the charts below to see how the crypto and BTC market cap compares with the Global money supply (M2).
Source: Raoul Pal / Global Macro Investor
Source: Raoul Pal / Global Macro Investor
On this chart, we can see a very strong correlation between the Global M2 trendline and the Crypto market.
  Source: MacroMicro.me
  Source: MacroMicro.me

A similar chart showing the money supply growth vs. the price of BTC.

Why is it happening?

This is not a random coincidence, Bitcoin was created right after the Great Financial Crisis, which started the current global macro trend of quantitative easing and tightening, which is happening in circa 4-5 year cycles as the US (and other) governments are refinancing their debts.

Why is it important?

The FED is not lowering rates just yet.
Yesterday at the FOMC meeting they maintained the funds rate in the range of 5.25% – 5.50%.
This decision aligns with market expectations, but investors were hoping for a signal of a rate cut in March - a signal that didn’t come.
FED remains cautious, focusing on the inflation numbers that are going down, but the Middle-East conflict, raising oil and energy prices, and disrupted supply chains could reverse this trend.

What am I taking out of it?

I was expecting some correction, but maybe it already happened in October last year.
Still, I feel like the end of Q1 will bring some difficult moments, because:
  • I expect the FED to keep the current rates at their next meeting on the 20th of March.
  • The growing consumer debt with resumed student loans is hitting retail investors.
  • Oil and energy prices are where we recognize inflation the easiest. If they raise further, it can spook investors into the defensive.
Liquidity is coming, it’s inevitable.
Governments need to refinance the debt.
In H2’24 we can expect this to fuel extra gains.
However, history suggests something breaks before it’s all rainbows and butterflies.
I’m slowly increasing my DCA strategies (proportionally) as I want to reduce my cash position this year (currently at 19.7% of my portfolio).
If something breaks, that’s the dip I’m waiting for to speed up that cash reduction.
Outflows are slowing down and BTC is rising again (source).
  • After 12 days of trading, we see a net positive inflow of slightly over $1B.
  • Volume in general is slowing down, new funds are trading at similar levels to GBTC, and the BTC ETF market is stabilizing.
Dencum upgrade live on Sepolia (source).
  • Dencun will improve data availability and reduce the fees associated with transacting on Layer 2.
  • It’s doing it by introducing blobs as an alternative to the expensive call data.
Swell is joining the LRT race (source).
  • From now on we can leverage their LRT to farm both Swell rewards and EigenLayer points.
  • First 30 days free, then a 10% cut on Eigen rewards.
On January 29th Google allowed crypto trusts and ETF ads (source).
The SEC postponed their review of ETH Spot ETF.
  • The next significant date is May 23rd.
  • We saw it with BTC, the time to buy is before the approval, buy the rumors, sell the news.
  • According to Daan the time to buy ETH is from January to May. Coincidence?
Source: X
Source: X
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