[Updated 16 May 2023]

Summary

• We look at the latest bitcoin trends, including macro risks and on-chain/flow metrics, to reveal the best time to buy bitcoin and the risks of buying BTC.
• For trading bitcoin over the next two to four weeks, we are slightly bearish. That means we expect stable to falling prices.
• However, we also think bitcoin is a good long-term investment for the next one to three years and are bullish overall. That means we expect the bitcoin price to rise in the long term.

Bitcoin had a great start to 2023, reversing the downward trend seen throughout the end of 2022. From $16,000 on 1 January, it has risen 63% to $27,152 so far this year. Last month, the BTC price even exceeded $30,000 on hopes that the Fed’s hiking cycle was nearing completion and that inflation was calming down.

However, recent weeks have seen bitcoin retrace its steps. We think the main reason for this is a deteriorating macro backdrop. The labour market remains very tight. Inflation remains way above target (April CPI showed little progress on disinflation, with core goods rising 0.6% due to a 4.4% increase in used care prices). And Fed Chair Jerome Powell recently said ‘‘the process of getting inflation back down to 2 percent has a long way to go.’

Currently, the markets are assigning merely a 5% chance of a 25 basis point increase by the Federal Open Market Committee (FOMC) in June. From our perspective, the markets are underpricing the likelihood of such a hike. Considering the ongoing inflation and growth dynamics, it is probable that a 25 basis point increase will occur in June (unless a debt ceiling crisis arises), which would have a bearish effect on bitcoin.

Should you buy BTC now? The quick answer is ‘probably not’. The macro backdrop for bitcoin is bearish. We analyse various on-chain/flow metrics for bitcoin, which are neutral. So, overall, we are slightly bearish. Therefore, if you have a two-to-four-week horizon, now may not be a good time to buy bitcoin.

Why Has the BTC Price Gone Up?

One of the primary drivers of the recent rise in bitcoin price is the goldilocks market regime that developed in early 2023. Inflation in the US has fallen from a peak of 9.1% in June 2022 to 4.9%, and consequently, the Fed has been able to slow its rate hikes. Some even believe the Fed has now stopped hiking. Markets are pricing rate cuts for 2023, bolstering risk assets such as equities and crypto. Also, crypto benefitted during the US banking crisis as investors questioned the security of TradFi.

Why Has the BTC Price Dropped?

Before the early 2023 bull run, bitcoin was having a miserable time. This was due to several events, both crypto-specific and part of the broader macro backdrop. You can see the current BTC price on the chart below and its historical progress through 2022.

The FTX Collapse: Catalyst for a BTC Price Crash

A significant event to negatively impact the BTC price was the spectacular collapse of crypto exchange FTX. Bitcoin had traded in a tight range between $18,500 and $20,000 during September and October 2022. However, it fell 26% as news of the collapse emerged, and the coin has only just recovered past those levels.

Higher Interest Rates: A Worrying Backdrop for Bitcoin

However, even the recent FTX chaos fails to detract from the longer-term decline in crypto markets. Since its all-time high of $68,789 on 12 November 2021, bitcoin has fallen 60%. Likewise, ethereum – the other major player in the crypto space – is down 60% from its 2021 high of $4,891. These declines follow the broader selloff of 2022, which extended across equities, bonds, and real estate.

The generic risk-asset rout began at the end of 2021. Central banks are largely to blame as they raise interest rates to reduce demand in overheating economies following the pandemic stimulus. By December 2022, the Federal Reserve (Fed) had raised its policy rate to the highest level in 15 years, capping off four 75bp hikes with another 50bp hike at the end of the year. After another 25bps in February 2023, the policy rate now sits at 4.75-5.00%.

Moreover, there are ongoing fears that the effects of high inflation and rising interest rates will plunge the world into a recession. Our recession probability indicator remains over 70%. Bitcoin is yet to experience a serious global recession, but we expect one would limit any potential upside in price action. This is because during times of economic uncertainty and weak growth, investors may be more inclined to sell risky assets like bitcoin and seek safer investments such as government bonds.

How Low Can Bitcoin Prices Go?

One exercise is to see how low prices could get were the NASDAQ to suffer a 2000-style crash. After all, earlier in 2021, the bitcoin and NASDAQ correlation reached highs of almost 80%. So where the NASDAQ went, bitcoin followed. The correlation has declined recently, but should it rise again, the historical drawdowns of NASDAQ could be informative.

Back in 2000, the NASDAQ suffered a 78% drawdown. As of November 2022, the NASDAQ is in a 27% drawdown. A repeat of the 2000-style drawdown would put the NASDAQ at 3,500. So where would crypto be if NASDAQ were trading at this level? We estimate a regression between bitcoin/ethereum returns and NASDAQ returns from 2020 onwards. Based on this relationship, we find:

• Bitcoin prices would reach $8,254 if the NASDAQ fell to 3,500. This implies a 72% decline from current levels.
• Ethereum prices would reach $143 if the NASDAQ fell to 3,500. This implies a 92% decline from current levels.

What Else Is Happening in Crypto?

Regulation is becoming more of a theme throughout 2023, with various executive orders signed already. Increased regulation should mean less uncertainty around crypto markets for investors, which would be bullish.

On the flip side, overregulation could stifle innovation. Coinbase flirts with move outside the US due to regulatory pressures.  Coinbase CEO Brian Armstrong recently noted at the Innovate Finance Global Summit this week that the ‘UK is our second-largest market in terms of revenue. We’re founded in the US, and I think the US has the potential to be an important market in crypto – but right now, we’re not seeing the regulatory clarity we need.’ Coinbase recently secured a licence to operate in Bermuda, too.

The ongoing regulatory backdrop will be key to monitor.

There are several events to keep track of over the coming weeks that will influence crypto prices:

1. Rising yields have mechanically increased the probability of a recession within the next 12 months to 80%.  
2. Inflation remains at the forefront of investors’ minds, with data cooling but still elevated.
3. Is crypto decoupling from equities? The moves lower in crypto markets this week disagree with traditional equity indices such as the tech-heavy NASDAQ. The NASDAQ is currently up +1% MTD compared to bitcoin and ethereum which are down -10% MTD and -6% MTD, respectively.
4. Individual wallets containing at least one bitcoin (BTC) reached one million earlier this week. This indicates that the long-term sentiment towards these tokens remains strong, despite the downward pressure on bitcoin prices caused by broader market conditions.

Summary of BTC Analysis

The bottom line is that crypto, including bitcoin, is experiencing a correction after a strong rally. It found support from the Fed’s downshift in hiking and the broader bullish sentiment towards risk assets as the US banking crisis receded. This benign macro backdrop is starting to deteriorate, and we would caution against expecting another short-term rise in prices. For long-term investors, we think some allocation to crypto makes sense – just like an allocation to equities also makes sense.

For all our latest analysis on crypto markets, click here.

Bitcoin and Crypto Price Trackers

Updated 16 May 2023

This week, all our indices are in the red, with our Bitcoin Index (-6.3% WoW) down the least and our Metaverse Index (-15.6% WoW) down the most (Chart 2).

Our Smart Contract Index remains most correlated to our Bitcoin Index (+87%). Meanwhile, our DeFi and Privacy indices are correlated +83% and +81% to our Bitcoin Index, respectively. Our Metaverse Index is correlated the least (+75%; Chart 3).

Correlation between our Bitcoin Index and all macro markets we track in this report remains positive (Chart 4). Our Bitcoin Index is +41% correlated to the NASDAQ and +44% correlated to the S&P 500, from +46% and +36% last month.Meanwhile, its correlation to gold (+7%, last month: +25%) decreased, while its correlation to 10Y yields (+34%, last month: +4%) increased. Lastly, its correlation to oil (+19%, last month: -33%) flipped positive.

All cryptocurrencies in each of our indices are down this week:

• Smart Contract Platform Index: Terra Luna Classic (LUNC) is down the most (-16.9% WoW) and Ethereum (ETH) is down the least (-4.2% WoW).
• DeFi Index: PancakeSwap (CAKE) is down the most (-26.4% WoW) and Uniswap (UNI) is down the least (-3.5% WoW).
• Metaverse Index: Ultra (UOS) is down the most (-21.4% WoW) and Axie Infinity (AXS) is down the least (-10.9% WoW).
• Privacy Index: Beam (BEAM) is down the most (-28.9% WoW) and Monero (XMR) is down the least (-1.9% WoW).
• Bitcoin Index: is down -6.3% WoW.

Should I Invest in Bitcoin? (A Beginner’s Guide)

Bitcoin and the crypto revolution are no longer nascent. With the length of the blockchain continuing to grow and decentralised finance (DeFi) gaining ground over traditional finance, this new asset class is reshaping the investment landscape.

We think bitcoin is a worthwhile long-term investment. However, we also note that bitcoin is extremely volatile. That means it experiences large price movements over short periods. Before investing, you must understand the risks involved: you could lose all or a large portion of your investment. Never invest money that you cannot afford to lose.

How to Make Money Investing in Bitcoin

It is easy to get carried away with the fear of missing out. You are probably aware of Cameron and Tyler Winklevoss, who are reputed to be the world’s first bitcoin billionaires with over 100,000 coins. Or what about Barry Silbert, the owner of Grayscale Bitcoin Trust, Coinbase and Coinbase? Success stories like these often give people FOMO – or the fear of missing out – if they do not invest immediately.

However, to invest in cryptocurrency, we must first understand it. Crypto tokens are unlike any traditional asset class. And they are all different. Just because you understand bitcoin, does not mean you know how ethereum works. Our video on bitcoin fundamentals can help you understand how bitcoin prices fluctuate and how to assess trends in important bitcoin metrics.

Each currency has different underlying protocols and technology. That impacts how they trade, their volatility, and how you can value them. Some are more like stocks, others commodities, and others currencies. And each crypto token has a unique structure of supply.

We think crypto markets are a worthwhile long-term investment. The technology can capture market share on some existing markets like payments and stock trading while creating new markets like valuable scarce digital assets.

When to Buy Bitcoin: Buying the Dip

Some say the best time to buy bitcoin is during price dips. This seems alluring at first – catching a cheap price and benefitting from the rebound. However, timing dips is notoriously tricky and frought with risk. What happens if it wasn’t a dip but the start of a long-term decline in prices?

We suggest paying attention to the long-term macro backdrop when asking yourself, should I buy bitcoin right now? Your exposure to bitcoin needs to be appropriately sized so that you can survive 50% to 80% drawdowns. Drawdowns provide good entry levels for exposure, but we would not go max long in an environment of rising central bank rates and falling global growth momentum.

Top Three Tips You Need to Know Before Investing in Bitcoin

Where to Buy Bitcoin

To buy bitcoin (BTC) or any other cryptocurrency, you need access to a crypto exchange. A crypto exchange is where buyers and sellers meet to exchange money for coins, coins for other coins, and coins for money. Many options are available such as Coinbase, Binance.com, or eToro – each come with various fee structures, so research which is best for your needs.

You also need access to a crypto wallet to store bitcoin and other cryptocurrencies. Many exchanges provide these, but not all do. You can also buy bitcoin on platforms like Paypal and Robinhood.

Dollar-Cost Averaging

Cryptocurrencies can be extremely volatile. One way to cope with the volatility is to use dollar-cost averaging. Dollar-cost averaging is a strategy where you divide the total amount you want to invest across periodic purchases of the target asset. It simply means that you would invest the same number of dollars each month or quarter, regardless of market trends.

The idea is that when prices are high, you can afford less of the asset. But when prices are low, you can afford more. When the market recovers, you benefit from having bought more shares at the lower price. Please note that using this strategy will not always result in a profit or necessarily protect you from falling prices.

Diversify Your Crypto Portfolio

With the crypto landscape so volatile and diverse, managing risk in a portfolio is critical. That essentially means position sizing and diversification – as with any other kind of investment.

One of the best pieces of investment advice we have heard recently comes from Ari Paul, co-founder and CIO of Blocktower Capital, a crypto and blockchain investment firm. As Paul says,

‘Risk is only sizing. So, if you think bitcoin is too risky, you could size it at 0.1% of your portfolio or 0.001%. Too risky is never a reason not to own an asset. If something is positive expected value, risk adjusted, and relatively low correlation, you have to own it. That’s peak portfolio management 101.’

One way to diversify your portfolio is with stablecoins, although these have also been very high-risk following the Terra debacle. Our recent analysis has explored how safe is tether and which stablecoins could fall next.

FAQs

→ Is now a good time to buy bitcoin?

For trading bitcoin over the next two to four weeks, we are slightly bearish. That means we expect falling prices. However, we think bitcoin is a good long-term investment for the next one to three years and are bullish overall. That means we expect prices to rise in the long term.

→ When was bitcoin at its lowest?

Since the start of 2021, bitcoin was at its lowest on 22 November 2022, when the BTC price was $15,711. Of course, prior to bitcoin’s major bull run in late 2020, it was much lower – under $10,000. However, bitcoin has not reverted to these lows even amid significant drawdowns.

→ Can you lose your money buying BTC now?

As with all investments, the value of bitcoin can rise as well as fall. While it is unlikely that bitcoin will suffer a complete loss of value, investors must be prepared to suffer drawdowns of between 50% and 80%. We recommend small allocations and diversification of your portfolio. Never invest what you cannot afford to lose.

→ When to sell bitcoin?

Traditional wisdom says you should buy low and sell high. But whether you should sell bitcoin depends on your investment horizon, risk appetite and financial goals. Although some websites speculate that certain days of the week are better or worse than others for selling bitcoin, we believe that any decision to buy or sell should be based on an analysis of crypto fundamentals.

→ Should I invest in crypto?

We think some cryptocurrencies like BTC and ETH are a worthwhile long-term investment. However, they are also extremely volatile. That means large price movements over short periods are common. Before investing, you must understand the risks involved: you could lose all or a large portion of your investment. Never invest money that you cannot afford to lose.

Appendix: What Are in the Four Indices?

Bitcoin: the OG of crypto markets deserves its own category and is in many ways the true benchmark for any other crypto market.  

Smart contract platforms: after bitcoin, the big innovation was to have blockchains that were more programmable. These could host smart contracts or decentralised applications and have allowed the emergence of the metaverse and defi. Ethereum (ETH) is the most popular version of a smart contract platform. As well as ethereum, we also include some key competitors. The constituents of this index are: Ethereum (ETH), Cardano (ADA), Avalanche (AVAX), Solana (SOL), Fantom (FTM), VeChain (VET), Terra (LUNA), EOS (EOS), and Chainlink (LINK). We also include Polkadot (DOT) which allows interoperability between blockchains and the use of smart contracts via parachains.  

Metaverse: coins associated with the creation of a virtual space/digital world on the internet using a combination of augmented reality, virtual reality, and social networks. The constituents of this index are Axie Infinity (AXS), The Sandbox (SAND), Decentraland (MANA), Enjin Coin (ENJ), Aavegotchi (GHST), Terra Virtua Kolect (TVK), Ultra (UOS), Phantasma (SOUL), RedFOX Labs (RFOX), and Gala (GALA).  

Decentralised Finance (DeFi): financial services built on top of blockchain networks with no central intermediaries. This can be a broad category, so we narrow this down to platforms that focus on lending/borrowing, yield farming, automated market making and decentralised exchange tokens. The constituents of this index are: Aave (AAVE), Compound (COMP), Uniswap (UNI), Yearn.finance (YFI), Loopring (LRC), PancakeSwap (CAKE), Maker (MKR), 1inch (1INCH), Thorchain (RUNE), and Terra (LUNA).  

Privacy Coins: coins that obscure transactions on the blockchain to maintain the anonymity of its users and their activity. The constituents of this index are Monero (XMR), Zcash (ZEC), Dash (DASH), Verge (XVG), Horizen (ZEN), Beam (BEAM), Secret (SCRT), Decred (DCR), Keep Network (KEEP), and Dusk Network (DUSK).  

Dalvir Mandara is a Quantitative Researcher at Macro Hive. Dalvir has a BSc Mathematics and Computer Science and an MSc Mathematical Finance both from the University of Birmingham. His areas of interest are in the applications of machine learning, deep learning and alternative data for predictive modelling of financial markets.

Bilal Hafeez is the CEO and Editor of Macro Hive. He spent over twenty years doing research at big banks – JPMorgan, Deutsche Bank, and Nomura, where he had various “Global Head” roles and did FX, rates and cross-markets research.

(The commentary contained in the above article does not constitute an offer or a solicitation, or a recommendation to implement or liquidate an investment or to carry out any other transaction. It should not be used as a basis for any investment decision or other decision. Any investment decision should be based on appropriate professional advice specific to your needs.)

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