Bitcoin is Not an Uncorrelated Asset
Also Two Weeks of Inflows for the Bitcoin ETFs and Hawkish Tone at the Fed
Welcome to the Friday edition of the Ecoinometrics newsletter.
Every week we bring you the three most important charts on the topics of macroeconomics, Bitcoin and digital assets.
Today we'll cover:
Bitcoin is Not an Uncorrelated Asset
Two Weeks of Inflows for the Bitcoin ETFs
Hawkish Tone at the Federal Reserve
Each topic comes with a small explanation and one big chart. So let’s dive in.
In case you missed it, here are the other topics we covered this week:
Checkout the Bitcoin Market Monitor to understand what’s driving the market in just five charts:
Read the Bitcoin Market Forecast for the probabilities of key scenarios and the essential risk metrics to manage your portfolio:
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Bitcoin Is Not An Uncorrelated Asset
The Federal Reserve made its expected move this week: a 25bps rate cut at the FOMC meeting.
But they also delivered a surprise. Looking ahead, they're signalling fewer rate cuts than previously expected (more on this in our third chart).
The stock market reacted sharply. The NASDAQ 100 dropped 4.1% from its level at the FOMC announcement.
And Bitcoin? It followed the same pattern but with even more intensity, falling 8.5%.
This reaction might seem odd. The Fed was already taking a cautious approach to rate cuts, and their planned terminal rate was high compared to the last 15 years.
So does it really matter for Bitcoin that the Fed will move even more slowly? Probably not. But is Bitcoin still affected by it? Absolutely.
The correlation is especially noticeable during "risk-off" events. When markets get spooked by hawkish policy surprises, Bitcoin often amplifies the traditional market reaction rather than providing a hedge against it.
In the big picture, this is just a blip.
But it serves as a clear reminder: Bitcoin is not an uncorrelated asset. As it becomes more integrated into the financial system, it increasingly moves in response to factors that affect other major assets.
That's why you can't ignore the macro picture.
Two Weeks of Inflows for the Bitcoin ETFs
Despite this Fed blip, the spot Bitcoin ETFs are seeing remarkable inflow momentum.
As of December 18, we've recorded 15 consecutive days of inflows.
This is the third longest streak since the ETFs launched in January, behind 19 days in June and 17 days in March. For comparison, the longest streak of outflows was 8 days.
The strong demand is especially notable given that Bitcoin was trading above $100,000 during this period. Investors are clearly eager to gain exposure.
The ETF flows have been the main driver of this upward trend.
The consistent inflows during a period of high prices suggest institutional investors have a higher price tolerance than many expected. They appear to be focusing on long-term allocation rather than timing the market.
Looking ahead, we expect activity to slow down between Christmas and New Year as institutional investors take their holiday break.
If we see reduced ETF activity in the next two weeks, it's likely just a seasonal effect. It shouldn't necessarily be interpreted as waning investor interest in Bitcoin.
We track this evolution as part of the Bitcoin Market Monitor.
Jerome Powell Strikes A Hawkish Tone
After each FOMC meeting, we compute the Fed Communications Index.
This index analyzes the text from either the FOMC press conference or the meeting minutes. It scores the language on a scale from Hawkish (positive) to Dovish (negative).
Jerome Powell's press conference after the December 18 FOMC meeting scored decisively hawkish.
But should this surprise us? I mean it did surprise the market's apparently.
I’d say not really.
At the last FOMC meeting, Powell had already shifted from his almost dovish tone in September to a much more hawkish stance in November. This is now the second press conference in a row where the Fed Chairman has delivered a stern message.
The Fed Communications Index has proven particularly useful lately. It flagged Powell's hawkish shift in November before the markets fully priced it in, giving early warning of the current policy stance.
And looking at the US economic situation, his stance makes sense:
Core inflation remains stubbornly high
The labor market stays tight
Consumer spending continues strong
The US economy grows at a healthy pace
All this is happening with the Fed Funds rate above 4.5%, a level we haven't seen since before the 2008 Great Recession.
The Fed's path seems clear at this point. Risk assets are just starting to recognize this reality.
That’s it for today. I hope you enjoyed this. We’ll be back next week with more charts.
Cheers,
Nick
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