Original Author: fejau
Original Translation: TechFlow HT
I want to write down a question I have been pondering: How might Bitcoin perform under a major shift in capital flow, a situation that Bitcoin has never experienced since its inception.
I believe that once deleveraging ends, Bitcoin will encounter an incredibly promising trading opportunity. In this article, I will elaborate on my thoughts in detail.
What Are the Historical Key Drivers of Bitcoin Price?
I will utilize Michael Howell's research on Bitcoin price historical drivers and leverage these findings to further understand how these intersecting factors might evolve in the near future.
As shown in the image above, Bitcoin's drivers include:
Overall demand for high-risk, high-beta assets by investors
Correlation with gold
Global liquidity
Since 2021, I have used a simple framework to understand risk appetite, gold performance, and global liquidity by focusing on the percentage of fiscal deficit to GDP as a convenient way to understand the fiscal stimulus that has dominated global markets since 2021.
A higher percentage of fiscal deficit to GDP mechanically leads to higher inflation, higher nominal GDP, and consequently higher total revenue for businesses, as revenue is a nominal indicator. For companies that can enjoy economies of scale, this is a boon to their profit growth.
In most cases, monetary policy plays a secondary role in risk asset activity, while fiscal stimulus has been the primary driver. As shown in the chart regularly updated by @BickerinBrattle, the US monetary stimulus is so weak compared to fiscal stimulus that I will set it aside in this discussion.
As the chart below shows, among major developed Western economies, the US fiscal deficit as a percentage of GDP is far higher than any other country.
Due to the US running such a large deficit, income growth has been dominant and led to the US stock market's outstanding performance compared to other modern economies:
Due to this dynamic, the US stock market became the primary marginal driver of risk asset growth, wealth effect, and global liquidity, thus becoming the center of global capital attraction: the United States. Due to this capital inflow to the US, coupled with a massive trade deficit, the US exchanges commodities for dollars obtained from abroad, which are then reinvested in dollar-denominated assets (such as Treasury bonds and MAG 7), making the US the primary driver of global risk appetite.
Now, returning to Michael Howell's research. Risk appetite and global liquidity have been primarily driven by the US in the past decade, and this trend has accelerated since the COVID-19 pandemic due to the US running such a massive fiscal deficit compared to other countries.
Therefore, Bitcoin, although a global liquidity asset (not just US-based), has become increasingly positively correlated with the US stock market since 2021.
Now, I believe the correlation with the US stock market is spurious. When I use the term "spurious correlation" here, I am approaching it from a statistical perspective, believing that a third dependent variable not shown in the correlation analysis is the actual driving factor. I believe this factor is global liquidity, which, as we mentioned above, has been dominated by the US in the past decade.
As we delve deeper into statistical significance, we must also establish causality, not just positive correlation. Fortunately, Michael Howell has also done excellent work in this area, establishing causality between global liquidity and Bitcoin through the Granger causality test.
So, what benchmark starting point does this provide us?
Bitcoin is primarily driven by global liquidity, and due to the US being the main driver of global liquidity increase, a spurious correlation has emerged.
[The rest of the translation continues in the same manner, maintaining the original structure and meaning.]
However, as deleveraging subsides, the next trade begins - shifting towards a more diversified portfolio: foreign stocks, foreign bonds, gold, commodities, and even Bitcoin.
On market rotation days and non-margin call days, we have already started to see this dynamic forming. The US Dollar Index (DXY) is falling, US stocks are underperforming stocks in other regions, gold is surging, and Bitcoin is surprisingly resilient compared to traditional US tech stocks.
I believe that as this occurs, the marginal increase in global liquidity will shift to a dynamic completely opposite to what we are accustomed to. Other regions will take on the task of increasing global liquidity and risk appetite.
As I contemplate the risks of this diversification in the context of global trade wars, I am concerned about the tail risks of delving too deeply into other countries' risk assets, as there are some major landmines in potential bad tariff news. Therefore, this makes gold and Bitcoin choices for global diversification during this transition.
Gold has been rising absolutely and is now setting new historical highs daily, reflecting this institutional shift. However, despite Bitcoin's surprisingly resilient performance throughout this institutional transformation, its beta correlation with risk appetite has so far limited its performance, failing to keep up with gold.
Therefore, as we move towards a rebalancing of global capital, I believe the trade after this is Bitcoin.
When I compare this framework with Howell's correlation research, I can see they come together:
US stocks cannot be influenced by global liquidity, only by liquidity measured by fiscal stimulus plus some capital inflows (but we just determined this aspect of flow may stop or even reverse). However, Bitcoin is a global asset that reflects this broader perspective of global liquidity.
As this narrative is established and risk allocators continue to rebalance, I believe risk appetite will be driven by regions other than the US.
Gold is performing very well, so for the Bitcoin portion related to gold, we can also check this box here.
Given all this, I first see the potential for Bitcoin to decouple from US tech stocks in the financial markets. I know this idea often marks a local top for Bitcoin. What's different this time is that we see the potential for significant changes in capital flows that will make it enduring.
Therefore, for a macro trader of risk appetite like myself, Bitcoin here feels like the purest trade. You can't impose tariffs on Bitcoin, it doesn't care which border it's located in, it provides high beta for the portfolio without the current tail risks associated with US tech, I don't have to opine on whether the EU can get its act together, and it provides pure exposure to global liquidity, not just US liquidity.
This market regime is precisely why Bitcoin was born. Once the dust of deleveraging settles, it will be the fastest horse, accelerating forward.
