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Summary Bitcoin's price has remained surprisingly resilient over the past 18 months in the face of tight financial conditions. A number of factors could support returns going forward, including the upcoming halving, looser monetary policy, and potential ETF approvals. A broad range of assets have moved significantly in response to an expectation of no further rate rises. In the short term, this move appears overdone. Bitcoin has a history of price momentum though, and the recent move may be nearing a point where price and demand create a positive feedback loop. Bitcoin ( BTC-USD ) has demonstrated considerable strength over the past 12 months, despite relatively tight financial conditions and elevated economic and geopolitical uncertainty. This strength could be attributed to the next halving approaching in 2024, stimulative fiscal policy or an expectation of looser monetary policy. I had previously suggested that Bitcoin’s price was likely to face pressure from quantitative tightening. This proved to be completely wrong, as the Fed has done little to reduce liquidity in 2023 and expectations of interest rate cuts are rising. The potential approval of a Bitcoin ETF is also possible providing support, with speculation rising in anticipation of increased institutional demand. Large asset managers, like BlackRock and Fidelity, have submitted Bitcoin spot ETF applications to the SEC. Grayscale is also trying to convert its Bitcoin trust into a spot ETF. A decision regarding potential approval is expected to come in early January . Halving Bitcoin's next halving is approaching in early 2024, which again raises the question of whether there is a causal relationship between halvings and Bitcoin's price. I have written about this previously , although I am not convinced that halvings are particularly important. Figure 1: Bitcoin Price (source: Created by author using data from blockchain.com) At the margin, a reduction in new supply could help to create price momentum, which goes on to form a positive feedback loop between price and demand. Investors should bear in mind that the supply of new Bitcoin is now low relative to the total existing supply. Given that the halving is a known event, rational investors should be expected to front-run the halving, and yet price has generally followed the halving rather than preceding it. Supply is only part of the equation though, and given the fixed production schedule of Bitcoin, demand is likely a more important driver of price. Both supply and demand based models can be constructed to predict Bitcoin's price, which I have detailed here . While these models appear accurate based on past data, I don't have much confidence in their predictive power. Figure 2: Bitcoin Value Estimate (source: Created by author using data from blockchain.com) Financial Conditions I tend to think that the general macro environment is more important than the supply of new Bitcoin. Bitcoin is a risk-on asset, and in the past has tended to behave like a liquidity proxy. With this being the case, an easing of monetary policy could be a catalyst for a sustained move higher. The rapid rise in long-term interest rates in 2021 and 2022 likely contributed to the recent bear market. Given the extent to which monetary policy was tightened, and how much growth stocks were impacted, Bitcoin’s price actually held up surprisingly well. Figure 3: Bitcoin Price and 10 Year Treasury Yields (source: Created by author using data from blockchain.com and The Federal Reserve) While the Fed rapidly raised interest rates over the past 18 months to try and reduce inflation, markets have never really bought into the higher for longer narrative. The yield curve slope has been highly inverted for the better part of a year and a half, which could be interpreted as predicting a recession, or simply that rates cannot be sustained at current levels due to the amount of debt in the economy. In recent years, Bitcoin has tended to move higher when the yield curve has been steepening and move lower when the yield curve slope has been falling. While this could be related to expectations of future economic conditions, I believe it is primarily due to the impact of liquidity. Figure 4: Bitcoin Price and Treasury Yield Slope (source: Created by author using data from blockchain.com and The Federal Reserve) Bitcoin has tended to move in tandem with liquidity over the past few years, although Bitcoin has moved higher in 2023 while liquidity has remained fairly flat. I don't think liquidity will increase significantly without a substantial deterioration in economic conditions, but this doesn't appear to be a problem at the moment. Figure 5: Bitcoin Price and Liquidity (source: Created by author using data from blockchain.com and The Federal Reserve) The Chicago Fed’s National Financial Conditions Index is another measure that indicates easing financial conditions have been driving Bitcoin's returns. This index was created to help demonstrate the relative tightness of financial conditions when the Fed funds rate is zero. It measures financial conditions in US money markets, debt and equity markets, and the traditional and “shadow” banking systems. It includes inputs related to market depth, yield spreads and volatility, amongst others. During normal periods, Bitcoin's price is uncorrelated with this index, but when the financial conditions index changes rapidly, Bitcoin's price also tends to move sharply. While Bitcoin's recent move higher may seem significant in isolation, it appears to primarily be the result of a rapid easing of financial conditions. Figure 6: Financial Conditions and Bitcoin Returns (source: Created by author using data from Blockchain.com and The Federal Reserve) Conclusion Investors finally seem to be realizing that inflation is returning to relatively low levels, and as a result, the expectation is now that the Federal Reserve will cut interest rates in 2024. The subsequent easing of financial conditions has had a dramatic impact on a number of assets, including Bitcoin. While a "soft landing" could be a boon for Bitcoin, a deterioration in macro conditions is likely to be a negative, as investors will seek safe havens. This may be short lived though, as a rapid loosening of monetary policy in response to economic weakness would likely drive Bitcoin higher. Outside of factors impacting crypto as an asset class, innovation in terms of things like scalability and programmability tends to be greater on other blockchains. Longer-term, Bitcoin continues to face the prospect of declining financial security as its block reward declines. For these reasons, I find it difficult to be bullish regarding Bitcoin's prospects, outside of it being a speculative financial asset. Given the confluence of Bitcoin’s halving, a potential easing of monetary policy and the prospect of a Bitcoin ETF driving institutional demand, Bitcoin’s price could be set to move higher. The recent price rise across a range of assets could suggest the current run is overdone, although speculating on short-term price moves is a difficult task. Ultimately, I think Bitcoin continues to move higher in the long run, albeit with far lower returns than in the past.