Bitcoin Hits $76K But Are Bulls Trapped?
Main Receptors:
A shift to balance sheet expansion by the US Federal Reserve could provide the liquidity needed to boost Bitcoin and broader risk markets.
The war in Iran and high oil prices are pushing investors into rare assets to hedge against inflation.
On Tuesday, the price of Bitcoin (BTC) exceeded $76,000 for the first time in more than two months, which triggered $285 million in short flows. The rally closely followed the S&P 500, indicating a high probability of a macroeconomic-based event. Is the Iran War the Only Reason Behind Bitcoin's Price Gains, and What Are the Odds of a Bull Trap?
Crude oil prices settled around $95 after peaking at $104 over the weekend, a move many traders saw as positive. The inverted crude oil price chart shows a high intraday correlation area.
The impact of the Iran war on US inflation and supply chain logistics, limiting the ability of global central banks to cut interest rates and exerting negative pressure on economic growth, remains a major concern.
Similarly, gains in the S&P 500 and gold prices signaled the possibility of more stimulus measures, sending investors sheltering in scarce assets.
The gains in the S&P 500 after negotiations to reopen the Strait of Hormuz may seem strange, but the heightened threat of recession provides the biggest incentive for governments to implement expansionary measures. While the U.S. Federal Reserve chose a cautious approach, the U.S. Congress and the Trump administration could allow direct investment or provide tax credits for infrastructure projects and social programs.
Inflation concerns are aligned with investors' expectations of federal policy
Bitcoin does not need to compete with stocks or gold to capture the capital currently held by money market funds and short-term bonds. The longer oil prices stay above $90, the higher the upward pressure on inflation.
Expected declines in fixed income assets may be the main reason for Bitcoin's rise above $75,000, and governments have few options without expanding the monetary base.
The US Fed changed its strategy in January to expand its balance sheet, reversing the trend from the past two years. This move will provide significant support to risk markets as the bond market's short-term risk declines. Financial institutions and hedge funds have greater access to liquidity and face less competition to release U.S. Treasuries, providing temporary relief to the stock market.
Regardless, if Bitcoin holds above $75,000, given the minimal 10% profit margin, there is little incentive for traders to take profits after two months of trading around $68,000. Even if Bitcoin eventually returns to $80,000, that represents a modest 20% gain for those who bought it at $66,500. Unless traders recognize an imminent risk to oil prices, the odds do not support continued selling pressure on Bitcoin.
Related: Bitcoin's Struggle to Build Long-Term Growth Continues–Here's Why
Ultimately, with expansionary monetary policy and inflationary pressures, Bitcoin bears will struggle to show strength, making a successful bull trap extremely unlikely.
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