Further increase in bond yields key for crypto market

By Eryk Szmyd

Seasonally, the last quarter of the year was quite strong for the cryptocurrency market, and Bitcoin welcomed October with dynamic increases. It seems that the key to maintaining this state of affairs in the coming months will be not so much factors related to the crypto industry itself, but global moods. The key risk factor for cryptocurrencies is the further increase in bond yields, which have recently approached 16-year highs again, and the overall strength of the US dollar. If both of these trends continue in the fall, it will be very difficult for Bitcoin to break this year’s highs. However, there is a clear potential for their reversal, which could be a tailwind for the cryptocurrency industry, which has been weakening in recent months.

In the third quarter, macro data from the US, including those regarding consumer sentiment and consumption, were relatively strong, which may indicate a quite successful season and corporate profits. Of course, forecasts will remain crucial, i.e. how companies perceive holiday demand and the general business mood. If earnings season is mostly successful, tech stocks gain momentum on the Nasdaq, the economy remains strong and the Federal Reserve decides to keep rates unchanged in November (which would likely require a continued, consistent decline in inflation and lower oil prices) – we can expect Bitcoin to hit new yearly highs. There are several factors mentioned and there is a risk that not all of them will have a chance to occur.

Let us also remember that in about half a year we will be dealing with the Bitcoin halving, and interest in this event has historically driven the price of the oldest cryptocurrency. Altcoins are still clearly playing the proverbial ‘third fiddle’ and are trading in a weak mood at a time when the sentiment on global markets is still uncertain, and Bitcoin has not managed to approach USD 30,000 for several months. From the market psychology side, the US dollar may gradually reverse the upward trend as the potential for further Fed increases becomes limited and the economy will likely slow down in the coming quarters under the weight of tightening policy and the delayed effects of rate increases. In the short and medium term, a decline in the strength of the dollar may be positive for Bitcoin.

However, it is worth remembering that it is probably a matter of time before the markets start a ‘new game’ with the Fed if economic data becomes increasingly weaker and the Federal Reserve continues to maintain restrictive levels of interest rates. Such circumstances would likely significantly weaken the dollar and actually test the concept of Bitcoin as a safe haven. Although such circumstances do not seem realistic in the fourth quarter. Risks associated with, among others, with the shutdown of the US government in mid-November (after breaking the impasse, politicians gave themselves another 45 days) may accelerate the recession process in the economy. However, since this scenario seems more distant and the current data are still quite strong, the stock market will probably be getting ready for a relatively successful holiday season for thousands of companies.

An increase in risk appetite may support Bitcoin in the fourth quarter and lead it to new annual peaks. The degree of risk seems to be balanced ‘favorably’ with the potential catalysts for Bitcoin price growth. It seems positive that Bitcoin is also beginning to be perceived by many analysts as an asset that potentially reduces portfolio risk due to periods of inverse correlation or its complete lack with global markets. Overall, however, it is safe to assume that Bitcoin will gain at a time when large capital will also flow into the stock market.