Bitcoin’s Value Soars Due to Favorable Economic Data and Prospects of Interest Rate Reductions
Bitcoin (BTC) witnessed a rise of 4.6% in its price on May 3rd, even though it remained below the $62,000 mark. This increase coincided with the release of new economic data from the U.S., indicating a potentially more lenient monetary policy by the Federal Reserve and a decrease in outflows from U.S. spot Bitcoin exchange-traded funds (ETFs).
Favorable macroeconomic indicators for riskier assets played a significant role in Bitcoin’s gains. The announcement by the U.S. Department of Labor that jobless claims remained steady at 208,000 for the week ending April 27th contributed to the positive sentiment. This figure represents the lowest level since mid-February and suggests a strong labor market.
Furthermore, the Employment Cost Index, which measures labor expenses comprehensively, showed a 4.2% year-over-year increase in the first quarter. This data has boosted investor confidence in the possibility of the Federal Reserve lowering interest rates by the end of 2024. In the past, such rate cuts have favored risk-on assets, including cryptocurrencies.
According to the CME Group’s FedWatch Tool, market participants now believe there is a 61% chance of the Federal Reserve reducing rates below 5.00% by December 18th, a significant increase from the previous week’s 40%. If this trend continues and fixed-income investment yields decline, investors are likely to seek higher returns in alternative asset classes like stocks, commodities, and cryptocurrencies.
Bitcoin’s price could also benefit from increased capital inflow. For the first time since November 2022, the U.S. M2 money supply turned positive in May. Historically, rising M2 has been associated with outperformance in cryptocurrency markets compared to traditional financial markets. Even a modest 1% allocation from money market funds, estimated to be around $6 trillion, towards Bitcoin could result in a $60 billion influx into the cryptocurrency market.
Data from Farside Investors suggests net inflows exceeding $11.2 billion since the introduction of U.S. spot ETFs in January. Additionally, there have been reports of renewed discussions about Bitcoin among sovereign wealth funds and endowments. Robert Mitchnick, head of digital assets at BlackRock, the world’s largest asset manager, has played a significant role in these discussions.
The recent surge in Bitcoin price and tech stocks, particularly after Apple announced a record-breaking stock buyback program, has raised concerns about sustainability. Apple’s move suggests a lack of confidence in near-future demand growth, potentially leading to a reluctance to invest in new product lines or expand sales channels.
However, the combination of macroeconomic indicators pointing towards potential interest rate cuts, a slowdown in stock market growth, and reduced outflows from U.S. spot Bitcoin ETFs may have instilled confidence in investors. Unlike the previous day, where various U.S. spot Bitcoin ETF funds managed by BlackRock, Fidelity, and ARK 21 Shares saw withdrawals of $564 million, only Grayscale GBTC experienced net outflows on May 2nd.
In the past, periods of fear, uncertainty, and doubt (FUD) in the cryptocurrency market have dampened investor enthusiasm. However, investors often return as they understand the network’s automatic difficulty adjustment and the potential revenue increase for remaining miners during a hash rate reduction, leading to price recoveries.
