- As the global financial landscape faces a seismic shift reminiscent of major events like the 2008 financial crisis and the bursting of the dot-com bubble, alarm bells are ringing in the bond market.
- Further complicating the situation is the behavior of the yield curve. Throughout history, an inverted yield curve has often signaled impending recessions.
- This turmoil in the bond market has profound implications for Bitcoin and cryptocurrencies as the crypto market has not previously experienced such a situation.
The similarity to the 2008 global financial landscape has raised concerns about how Bitcoin and cryptos will be affected. Here are the details!
The Global Market Situation and the Price of Bitcoin
As the global financial landscape undergoes a seismic shift reminiscent of major events like the 2008 financial crisis and the bursting of the dot-com bubble, alarm bells are ringing in the bond market, which also serves as a warning for Bitcoin and the crypto market.
Renowned Chartered Financial Analyst (CFA) Genevieve Roch-Decter, in a recent tweet, pointed out striking similarities, saying, “I can’t believe I’m saying this, but the drop in the 10-year and 30-year Treasury yields looks like it’s approaching the epic drops we saw after the 2008 financial crisis and the burst of the dot-com bubble.”
Lisa Abramowicz from Bloomberg Surveillance reinforced this grim story by stating, “The value of 10-year or longer-term Treasuries has dropped 46% after peaking in March 2020, which happened right before a 49% drop in U.S. stocks following the burst of the dot-com bubble. The drop in 30-year Treasury yields has been even worse, down 53%.”
The Onramp Bitcoin asset management platform emphasizes the historical significance of this trend. This drop, especially in bonds with maturities exceeding ten years, is reminiscent of market crashes such as the dot-com bubble collapse. The Federal Reserve’s steadfast stance on inflation and the fragile financial environment are disrupting the traditional allure of long-term debt, raising concerns about the possibility of a debt spiral.
Further complicating the situation is the behavior of the yield curve. Historically, an inverted yield curve has served as an early indicator of recessions. However, the recent correction witnessed a rare “bear curve,” which means long-term yields increased. This phenomenon, as seen before prior recessions, signals an economic contraction and heightens concerns about an impending economic transformation.
Dylan LeClair from Onramp explains, “While some question the reliability of the yield curve as a recession indicator, the current bear curve may indicate an impending economic contraction. This is particularly concerning given the Federal Reserve’s commitment to restrictive monetary policy, which sets the stage for potential market volatility and economic uncertainty.”
Meanwhile, Barclays analyst Ajay Rajadhyaksha suggests that only a stock market crash could halt the decline in the bond market. Unlike previous cycles, traditional bond supports are waning. The Federal Reserve is transitioning from a net buyer to a net seller, and foreign institutions are slowing down their purchases.
This highlights a stark disconnect between the value of equities and long-term Treasury yields, with the possibility of significant value losses in equities before prices stabilize. If stocks plummet, Bitcoin and cryptocurrencies could similarly be affected.
Impact on Bitcoin and Cryptocurrencies
The turmoil in the bond market has profound implications for Bitcoin and cryptocurrencies as the crypto market has not previously experienced such a situation. However, there are general observations about how risk assets react in such environments.
Firstly, rising Treasury yields may make risk-free returns more attractive, potentially prompting some investors to reallocate capital from risk assets like Bitcoin and crypto. This change could reduce demand and exert downward pressure on prices.
Additionally, the rapid increase in 10-year Treasury yields could signal tighter monetary policy, negatively affecting risk assets. Higher yields also mean higher borrowing costs, which could impact cryptocurrencies. When interest rates rise, yield-less assets like Bitcoin may appear less attractive compared to yield-bearing assets.
A significant increase in Treasury yield returns could reduce liquidity in Bitcoin and other financial markets. Institutional investors facing liquidity constraints may sell more liquid assets like BTC and alternative coins, potentially causing price declines.
Lastly, rapid yield increases can create volatility in various asset classes as investors seek to reduce risk or offset losses elsewhere. Bitcoin and crypto are highly influenced by market sentiment and speculative behavior. How the market interprets rising yields can influence investor behavior and cryptocurrency prices. Therefore, Charles Edwards, founder of Capriole Investments, recently made the following prediction:
“The 10-year yield rate is up by 10%! […] The Fed wants more unemployment. The job market is still very strong. They raised 2024 expectations, and the 10-year yield rates have reached ten-year highs. As the 10-year yield rate breaks higher like this, risk assets will face more difficulties.”
