Alpha Report: The Macro Risks For Bitcoin

Where is Bitcoin going and what are the risks?

This report is going to show WHY Bitcoin is up on a YTD basis and explain BOTH the macro liquidity drivers as well as the positioning risk that exists. When you understand these drivers, you are able to properly interpret the risk reward of the price.

Reports have already been published explaining WHERE we are in the macro environment and drawing attention to the positioning risk in Bitcoin:

• Alpha Report: Macro Liquidity and It's Impact On EVERYTHING

• Alpha Report: Flattening In The Curve

• The Bitcoin Positioning Risk

And the primer on Bitcoin has been laid out here:

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Big Picture:

The most important thing to remember when analyzing WHY an asset moves is that returns NEVER occur in a vacuum. If an asset exists in the financial system, it is cross-collateralized with the currency it is denominated in and the comparable assets that exist across the risk curve. In other words, even if the use case for Bitcoin is 100% true, this doesn’t falsify the fact that it trades in lockstep with macro liquidity and risk asset flows.

YTD Bitcoin is up 127% due to the changes in macro liquidity.

In the first part of the year, Bitcoin had a positive correlation with broad-risk assets.

Why were risk assets rallying? Because positioning was net short into a regime where growth was positive and a rate-cutting cycle was beginning.

We then saw a short-term divergence of Bitcoin from SPX due to the idiosyncratic risk during the time (this was covered on the Substack if you go look at reports during this time):

It was the August positioning unwind as the VIX hit 60 that caused the correlation to reconverge. This set the stage for a considerable rally in risk assets. (The August liquidation was bought very aggressively on the Substack because of its unrealistic pricing):

The final catalyst causing further positive returns was the election hedging unwinding which pushed all risk assets higher. It specifically pushed the Russell 2000 higher because growth was also surprising to the upside at the same time.

When growth is surprising to the upside, capital can move out the risk curve to sectors like the Russell.

The primary driver of returns in Bitcoin and broad risk assets has been an expansion in the quantity of money in the system (this was laid out here: Link). This is why cross-currency basis swaps have almost perfectly correlated with Bitcoin:

For more on this, see

Conks

recent Money Market Update:

Money Market Update

All of this begs the question, why aren't we still melting up in Bitcoin and why haven’t we hit $100,000 yet? The answer to this is positioning premiums that are currently being paid.

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Positioning Risk:

The initial positioning risk components have been broken down here. Let’s dig in further to understand WHERE we are going.