Bitcoin prices are at a critical macroeconomic inflection point as the Federal Reserve prepares to end quantitative tightening (QT). A rate cut in December is all but certain, setting the stage for a potential shift in monetary policy that could fundamentally change the trajectory of Bitcoin and risk assets more broadly. History shows that Bitcoin typically experiences a significant bullish catalyst when the Fed’s balance sheet stops shrinking.
Balance sheet reversal and Bitcoin price
The Fed’s balance sheet and Bitcoin’s chart reveal a compelling pattern. There have only been three times in Bitcoin’s history where QT ended and the federal balance sheet remained flat or began to expand. The first one happened on October 27, 2010, and was followed almost immediately by a massive Bitcoin bull run. The second lawsuit on September 26, 2012 caused another explosive rise, entering the 2013 double peak cycle. The third signal occurred in 2019, but this time it was complicated by the COVID-19 pandemic and the initial market crash, but ultimately pushed Bitcoin from around $3,000 to over $67,000.
The impact of economic cycles on Bitcoin price
Bitcoin’s recent stagnation despite the rise in Global M2 suggests that currency liquidity is not the only thing driving prices up. Rather, the asset appears to be increasingly correlated with traditional business cycle indicators, particularly the US Purchasing Managers’ Index (PMI). This index measures manufacturing confidence and economic activity and has a significant correlation with the annual return of the S&P 500. When PMI increases, stocks usually give outsized returns. When the PMI declines, the market enters a period of underperformance or recession.
A leading indicator of the PMI trend is the copper to gold ratio. Although this relationship is almost perfectly correlated, copper often leads, bottoms before PMI increases, and peaks before PMI declines. The copper/gold ratio now appears to be bottoming out, consistent with the historical timeline of the Fed’s balance sheet reversal. This suggests that the traditional business cycle may be starting to pick up again after a period of economic weakness.
Conclusion: What’s next for Bitcoin price?
The end of QT, combined with the recovery in the copper-to-gold ratio and historical precedent throughout Bitcoin’s existence, suggests that financial conditions are becoming materially more favorable. Bitcoin has lagged traditional assets recently, but this poor performance appears to be related to deteriorating economic confidence rather than any fundamental weakness in Bitcoin itself. The confluence of these forces could mark the beginning of a significant trend reversal, as both monetary policy and business cycle indicators could turn positive. Bitcoin stands to benefit from this dual tailwind, and the coming weeks and months will be critical in monitoring whether these historic signals ultimately lead to sustained price gains.
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Disclaimer: This article is for informational purposes only and should not be considered financial advice. Please be sure to do your own research before making any investment decisions.
This article, “Pivotal Moments for Bitcoin Prices” was first published in Bitcoin Magazine and written by Matt Crosby.
